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)
	June 30, 2021 (Unaudited)		December 31, 2020
ASSETS
Cash and due from banks	$	208,702	$	219,243
Interest bearing deposits with other banks and other short-term investments	240,426		118,660
Cash and cash equivalents	449,128		337,903
Time deposits in other financial institutions	3,138		3,129
Securities:

Carried at fair value (cost of $6,463,683 at June 30, 2021, and $6,024,225 at December 31, 2020)	6,543,978		6,127,975
Held to maturity, net of allowance for credit losses of $51 at June 30, 2021, and $51 at December 31, 2020 (fair value of $95,421 at June 30, 2021, and $100,041 at December 31, 2020)	85,439		88,839
Other investments, at cost	76,809		75,253
Loans held for sale	33,248		57,949
Loans receivable:
Held to maturity	10,012,014		10,023,051

Allowance for credit losses	(120,726)		(131,606)
Loans receivable, net	9,891,288		9,891,445
Premises, furniture and equipment, net	219,433		219,595
Premises, furniture and equipment held for sale	6,925		6,499
Other real estate, net	6,314		6,624
Goodwill	576,005		576,005
Core deposit intangibles and customer relationship intangibles, net	37,452		42,383
Servicing rights, net	6,201		6,052
Cash surrender value on life insurance	189,619		187,664

Other assets	246,029		281,024
TOTAL ASSETS	$	18,371,006	$	17,908,339
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	6,299,289	$	5,688,810
Savings	8,189,223		8,019,704
Time	1,126,606		1,271,391
Total deposits	15,615,118		14,979,905

Short-term borrowings	152,563		167,872
Other borrowings	271,244		457,042
Accrued expenses and other liabilities	172,295		224,289
TOTAL LIABILITIES	16,211,220		15,829,108
STOCKHOLDERS' EQUITY:


Preferred stock (par value $1 per share; authorized 6,104 shares at both June 30, 2021, and December 31, 2020; NaN issued or outstanding at both June 30, 2021, and December 31, 2020)	0		0
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; NaN issued or outstanding at both June 30, 2021, and December 31, 2020)	0		0
Series B Fixed Rate Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both June 30, 2021 and December 31, 2020; NaN issued or outstanding at both June 30, 2021 and December 31, 2020)	0		0
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both June 30, 2021, and December 31, 2020; NaN issued or outstanding at both June 30, 2021, and December 31, 2020)	0		0
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both June 30, 2021, and December 31, 2020; NaN issued or outstanding at both June 30, 2021, and December 31, 2020)	0		0
Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 shares authorized at both June 30, 2021, and December 31, 2020; 11,500 shares issued and outstanding at both June 30, 2021 and December 31, 2020)	110,705		110,705
Common stock (par value $1 per share; 60,000,000 shares authorized at both June 30, 2021, and December 31, 2020; issued 42,245,452 shares at June 30, 2021, and 42,093,862 shares at December 31, 2020)	42,245		42,094
Capital surplus	1,066,765		1,062,083
Retained earnings	883,484		791,630
Accumulated other comprehensive income	56,587		72,719



TOTAL STOCKHOLDERS' EQUITY	2,159,786		2,079,231
TOTAL LIABILITIES AND EQUITY	$	18,371,006	$	17,908,339

See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)

September 30, 2017 (Unaudited) December 31, 2016
ASSETS
Cash and due from banks $ 180,751
$ 151,290
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments 70,985
7,434
Cash and cash equivalents 251,736
158,724
Time deposits in other financial institutions 19,793
2,105
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
Other investments, at cost 23,176
21,560
Loans held for sale 35,795
61,261
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
Premises, furniture and equipment, net 174,533
163,614
Premises, furniture and equipment held for sale 4,428
414
Other real estate, net 13,226
9,744
Goodwill 236,615
127,699
Core deposit intangibles and customer relationship intangibles, net 37,028
22,775
Servicing rights, net 26,599
35,778
Cash surrender value on life insurance 142,073
112,615
Other assets 122,355
123,869
TOTAL ASSETS $ 9,755,627
$ 8,247,079
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand $ 3,009,940
$ 2,202,036
Savings 4,227,340
3,788,089
Time 994,604
857,286
Total deposits 8,231,884
6,847,411
Short-term borrowings 171,871
306,459
Other borrowings 301,473
288,534
Accrued expenses and other liabilities 68,715
63,759
TOTAL LIABILITIES 8,773,943
7,506,163
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both September 30, 2017, and December 31, 2016) —
—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both September 30, 2017, and December 31, 2016) —
—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2017, and December 31, 2016, none issued or outstanding at both September 30, 2017, and December 31, 2016) —
—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both September 30, 2017, and December 31, 2016; 745 shares issued and outstanding at September 30, 2017, and 1,078 shares issued and outstanding at December 31, 2016) 938
1,357
Common stock (par value $1 per share; 40,000,000 shares authorized at September 30, 2017, and 30,000,000 shares authorized at December 31, 2016; issued 29,946,069 shares at September 30, 2017, and 26,119,929 shares at December 31, 2016) 29,946
26,120
Capital surplus 503,262
328,376
Retained earnings 468,556
416,109
Accumulated other comprehensive loss (21,018 ) (31,046 )
Treasury stock at cost (0 shares at both September 30, 2017, and December 31, 2016) —
—
TOTAL STOCKHOLDERS' EQUITY 981,684
740,916
TOTAL LIABILITIES AND EQUITY $ 9,755,627
$ 8,247,079

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data)
	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
INTEREST INCOME:
Interest and fees on loans	$	111,915	$	107,005	$	224,354	$	213,419
Interest on securities:
Taxable	31,546		23,362		61,989		45,093
Nontaxable	4,561		3,344		9,064		5,527
Interest on federal funds sold	0		0		1		0
Interest on interest bearing deposits in other financial institutions	60		54		126		775
TOTAL INTEREST INCOME	148,082		133,765		295,534		264,814
INTEREST EXPENSE:
Interest on deposits	3,790		6,134		8,185		20,716
Interest on short-term borrowings	98		61		250		357
Interest on other borrowings (includes $(461) and $(423) of interest expense related to derivatives reclassified from accumulated other comprehensive income (loss) for the three months ended June 30, 2021 and 2020, respectively, and $(1,058) and $(613) of interest expense related to derivatives reclassified from accumulated other comprehensive income (loss) for the six months ended June 30, 2021 and 2020, respectively)	2,976		3,424		6,276		7,084
TOTAL INTEREST EXPENSE	6,864		9,619		14,711		28,157
NET INTEREST INCOME	141,218		124,146		280,823		236,657
Provision (benefit) for credit losses	(7,080)		26,796		(7,728)		48,316
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	148,298		97,350		288,551		188,341
NONINTEREST INCOME:
Service charges and fees	15,132		10,972		28,803		22,993
Loan servicing income	873		379		1,711		1,342
Trust fees	6,039		4,977		11,816		9,999
Brokerage and insurance commissions	865		595		1,718		1,328
Securities gains, net (includes $2,842 and $2,006 of net security gains reclassified from accumulated other comprehensive income (loss) for the three months ended June 30, 2021 and 2020, respectively, and $2,812 and $3,664 of net security gains reclassified from accumulated other comprehensive income (loss) for the six months ended June 30, 2021 and 2020, respectively)	2,842		2,006		2,812		3,664


Unrealized gain (loss) on equity securities, net	83		680		(27)		449
Net gains on sale of loans held for sale	4,753		7,857		11,173		12,517
Valuation adjustment on servicing rights	(526)		9		391		(1,556)
Income on bank owned life insurance	937		1,167		1,766		1,665
Other noninterest income	2,166		1,995		3,318		4,053
TOTAL NONINTEREST INCOME	33,164		30,637		63,481		56,454
NONINTEREST EXPENSES:
Salaries and employee benefits	57,332		50,118		116,394		100,075
Occupancy	7,399		6,502		15,317		12,973
Furniture and equipment	3,501		2,993		6,594		6,101
Professional fees	16,237		13,676		29,727		26,149

Advertising	1,649		995		3,118		3,200
Core deposit and customer relationship intangibles amortization	2,415		2,696		4,931		5,677
Other real estate and loan collection expenses	414		203		549		537
Loss on sales/valuations of assets, net	183		701		377		717
Acquisition, integration and restructuring costs	210		673		3,138		2,049
Partnership investment in tax credit projects	1,345		791		1,380		975
Other noninterest expenses	12,691		11,091		24,274		22,845
TOTAL NONINTEREST EXPENSES	103,376		90,439		205,799		181,298
INCOME BEFORE INCOME TAXES	78,086		37,548		146,233		63,497
Income taxes (includes $834 and $614 of income tax expense reclassified from accumulated other comprehensive income (loss) for the three months ended June 30, 2021 and 2020, respectively, and $977 and $1,080 of income tax expense reclassified from accumulated other comprehensive income (loss) for the six months ended June 30, 2021 and 2020, respectively)	16,481		7,417		31,814		13,326
NET INCOME	61,605		30,131		114,419		50,171


Preferred dividends	(2,012)		0		(4,025)		0

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	59,593	$	30,131	$	110,394	$	50,171
EARNINGS PER COMMON SHARE - BASIC	$	1.41	$	0.82	$	2.62	$	1.36
EARNINGS PER COMMON SHARE - DILUTED	$	1.41	$	0.82	$	2.61	$	1.36
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.22	$	0.20	$	0.44	$	0.40

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,
2017 2016 2017 2016
INTEREST INCOME:
Interest and fees on loans $ 82,906
$ 70,046
$ 217,898
$ 208,280
Interest on securities:
Taxable 10,394
7,917
27,246
24,604
Nontaxable 5,086
3,717
15,297
10,793
Interest on federal funds sold 34
1
37
12
Interest on interest bearing deposits in other financial institutions 558
6
1,112
13
TOTAL INTEREST INCOME 98,978
81,687
261,590

243,702
INTEREST EXPENSE:
Interest on deposits 5,073
4,001
12,966
12,195
Interest on short-term borrowings 271
235
498
1,083
Interest on other borrowings (includes $308 and $492 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended September 30, 2017 and 2016, respectively, and $1,005 and $1,463 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the nine months ended September 30, 2017 and 2016, respectively) 3,790
3,770
10,674
10,918
TOTAL INTEREST EXPENSE 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:
Service charges and fees 10,138
8,278
29,291
23,462
Loan servicing income 1,161
873
4,236
3,433
Trust fees 3,872
3,689
11,482
11,127
Brokerage and insurance commissions 950
1,006
2,962
2,914
Securities gains, net (includes $1,679 and $1,586 of net security gains reclassified from accumulated other comprehensive income for the three months ended September 30, 2017 and 2016, respectively, $5,553 and $9,964 of net security gains reclassified from accumulated other comprehensive income for the nine months ended September 30, 2017 and 2016, respectively) 1,679
1,584
5,553
9,732
Net gains on sale of loans held for sale 4,997
11,459
17,961
33,794
Valuation allowance on commercial servicing rights 5
5
29
(41 )
Income on bank owned life insurance 766
620
2,039
1,733
Other noninterest income 1,409
1,028
2,941
2,992
TOTAL NONINTEREST INCOME 24,977
28,542
76,494

89,146
NONINTEREST EXPENSES:
Salaries and employee benefits 45,225
40,733
128,118
124,432
Occupancy 6,223
5,099
16,352
15,322
Furniture and equipment 2,826
2,746
7,913
7,301
Professional fees 8,450
5,985
24,342
20,481
FDIC insurance assessments 894
1,180
2,610
3,468
Advertising 1,358
1,339
5,141
4,174
Core deposit intangibles and customer relationship intangibles amortization 1,863
1,291
4,252
4,483
Other real estate and loan collection expenses 581
640
1,774
1,871
Loss on sales/valuations of assets, net 1,342
794
1,642
1,064
Other noninterest expenses 9,997
8,620
27,653
27,160
TOTAL NONINTEREST EXPENSES 78,759
68,427
219,797

209,756
INCOME BEFORE INCOME TAXES 30,357
28,468
83,914

89,383
Income taxes (includes $511 and $408 of income tax expense reclassified from accumulated other comprehensive income for the three months ended September 30, 2017 and 2016, respectively, $1,696 and $3,171 of income tax expense reclassified from accumulated other comprehensive income for the nine months ended September 30, 2017 and 2016, respectively) 8,725
8,260
22,314
28,196
NET INCOME 21,632
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
EARNINGS PER COMMON SHARE - BASIC $ 0.73
$ 0.82
$ 2.23
$ 2.51
EARNINGS PER COMMON SHARE - DILUTED $ 0.72
$ 0.81
$ 2.21
$ 2.48
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.11
$ 0.10
$ 0.33
$ 0.30

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)
	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
NET INCOME	$	61,605	$	30,131	$	114,419	$	50,171
OTHER COMPREHENSIVE INCOME (LOSS)
Securities:
Net change in unrealized gain/(loss) on securities	70,224		81,552		(20,645)		53,224

Reclassification adjustment for net gains realized in net income	(2,842)		(2,006)		(2,812)		(3,664)

Income taxes	(17,678)		(20,729)		6,083		(12,932)
Other comprehensive gain/(loss) on securities	49,704		58,817		(17,374)		36,628
Derivatives used in cash flow hedging relationships:
Net change in unrealized gain/(loss) on derivatives	745		317		2,633		(3,363)
Reclassification adjustment for net gains on derivatives realized in net income	(461)		(423)		(1,058)		(613)
Income taxes	(61)		18		(333)		832
Other comprehensive income (loss) on cash flow hedges	223		(88)		1,242		(3,144)
Other comprehensive income (loss)	49,927		58,729		(16,132)		33,484
TOTAL COMPREHENSIVE INCOME	$	111,532	$	88,860	$	98,287	$	83,655

See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
NET INCOME $ 21,632
$ 20,208
$ 61,600
$ 61,187
OTHER COMPREHENSIVE INCOME
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
Income taxes (2,084 ) 2,871
(6,433 ) (3,364 )
Other comprehensive income (loss) on securities 3,177
(4,411 ) 10,016
4,953
Derivatives used in cash flow hedging relationships:
Net change in unrealized loss on derivatives 17
844
(656 ) (4,623 )
Reclassification adjustment for net losses on derivatives realized in net income 308
492
1,005
1,463
Income taxes (123 ) (517 ) (337 ) 1,155
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
TOTAL COMPREHENSIVE INCOME $ 25,011
$ 16,616
$ 71,628
$ 64,135

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
	Six Months Ended June 30,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	114,419	$	50,171
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,671		14,071
Provision (benefit) for credit losses	(7,728)		48,316
Net amortization of premium on securities	18,439		6,251
Securities gains, net	(2,812)		(3,664)

Unrealized (gain) loss on equity securities, net	27		(449)
Stock based compensation	4,776		3,558

Loans originated for sale	(244,752)		(271,167)
Proceeds on sales of loans held for sale	279,923		254,523
Net gains on sale of loans held for sale	(10,470)		(10,990)
(Increase) decrease in accrued interest receivable	813		(4,298)
Increase in prepaid expenses	(1,324)		(910)
Decrease in accrued interest payable	(1,342)		(1,699)

Capitalization of servicing rights	(703)		(1,527)
Valuation adjustment on servicing rights	(391)		1,556
Loss on sales/valuations of assets, net	377		717
Net excess tax benefit (expense) from stock based compensation	303		(91)
Other, net	(9,645)		(53,313)
NET CASH PROVIDED BY OPERATING ACTIVITIES	153,581		31,055
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits in other financial institutions	(9)		(7)
Proceeds from the sale of securities available for sale	630,481		511,639



Proceeds from the maturity of and principal paydowns on securities available for sale	484,958		212,538
Proceeds from the maturity of and principal paydowns on securities held to maturity	4,127		1,832
Proceeds from the maturity of time deposits in other financial institutions	0		150
Proceeds from the sale, maturity of and principal paydowns on other investments	2,498		6,135
Purchase of securities available for sale	(1,571,281)		(1,491,459)

Purchase of other investments	(4,054)		(10,273)
Net (increase) decrease in loans	5,203		(881,419)
Purchase of bank owned life insurance policies	(190)		(201)


Capital expenditures	(11,539)		(7,679)

Proceeds from the sale of equipment	3,090		3,331

Proceeds on sale of OREO and other repossessed assets	1,858		1,783
NET CASH USED BY INVESTING ACTIVITIES	$	(454,858)	$	(1,653,630)

HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

Nine Months Ended
September 30,
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 61,600
$ 61,187
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 22,738
22,975
Provision for loan losses 10,235
9,513
Net amortization of premium on securities 20,186
24,093
Securities gains, net (5,553 ) (9,732 )
Stock based compensation 3,588
3,073
Loans originated for sale (548,768 ) (863,354 )
Proceeds on sales of loans held for sale 586,202
883,758
Net gains on sale of loans held for sale (11,968 ) (23,938 )
Decrease in accrued interest receivable (1,449 ) (1,054 )
(Increase) decrease in prepaid expenses 838
(128 )
Increase in accrued interest payable 1,104
332
Capitalization of servicing rights (5,993 ) (9,856 )
Valuation allowance on commercial servicing rights (29 ) 41
Write downs and losses on sales of assets, net 1,642
1,064
Net excess tax benefit from stock based compensation 1,121
1,121
Other, net (5,637 ) (2,419 )
NET CASH PROVIDED BY OPERATING ACTIVITIES 129,857
96,676
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of securities available for sale 1,127,091
768,617
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
—
Proceeds from the maturity of and principal paydowns on securities available for sale 161,827
130,549
Proceeds from the maturity of and principal paydowns on securities held to maturity 6,645
8,271
Proceeds from the maturity of and principal paydowns on time deposits in other financial institutions 24,931
250
Proceeds from the maturity of and principal paydowns on other investments 2,574
—
Purchase of securities available for sale (1,299,492 ) (888,903 )
Purchase of other investments (1,012 ) (1,875 )
Net decrease in loans 45,139
138,725
Purchase of bank owned life insurance policies (2,000 ) —
Proceeds from bank owned life insurance policies —
111
Proceeds from sale of mortgage servicing rights 5,137
—
Capital expenditures (6,876 ) (8,318 )
Net cash and cash equivalents received in acquisitions 71,089
8,084
Proceeds from the sale of equipment 1,845
686
Proceeds on sale of OREO and other repossessed assets 7,578
3,266
NET CASH PROVIDED BY INVESTING ACTIVITIES $ 156,647
$ 168,742


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands)
	Six Months Ended June 30,
	2021		2020
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits	$	610,479	$	1,287,288
Net increase in savings deposits	169,519		502,871
Net decrease in time deposit accounts	(144,785)		(125,791)


Net decrease in short-term borrowings	(15,309)		(12,799)
Proceeds from short term advances	1,700		516,545
Repayments of short term advances	(1,700)		(597,741)
Proceeds from other borrowings	0		33,750
Repayments of other borrowings	(186,356)		(3,622)



Net proceeds from the issuance of preferred stock	0		110,705

Proceeds from issuance of common stock	1,519		928
Dividends paid	(22,565)		(14,715)
NET CASH PROVIDED BY FINANCING ACTIVITIES	412,502		1,697,419
Net increase in cash and cash equivalents	111,225		74,844
Cash and cash equivalents at beginning of year	337,903		378,734
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	449,128	$	453,578
Supplemental disclosures:
Cash paid for income/franchise taxes	$	31,735	$	12,798
Cash paid for interest	16,053		29,856
Loans transferred to OREO	1,186		1,055
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale	1,564		0
Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net	6		0


Dividends declared, not paid	2,013		0



Transfer of available for sale securities to held to maturity securities	0		462



See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
2017 2016
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits $ 181,206
$ 160,313
Net increase (decrease) in savings deposits (179,721 ) 51,530
Net decrease in time deposit accounts (8,582 ) (353,084 )
Proceeds on short-term revolving credit line 20,000
—
Repayments on short-term revolving credit line (15,000 ) —
Net decrease in short-term borrowings (168,667 ) (101,409 )
Proceeds from short term FHLB advances 186,039
243,100
Repayments of short term FHLB advances (191,405 ) (257,250 )
Proceeds from other borrowings —
40,000
Repayments of other borrowings (8,573 ) (15,562 )
Redemption of preferred stock —
(81,698 )
Purchase of treasury stock (440 ) (2,293 )
Proceeds from issuance of common stock 804
1,863
Dividends paid (9,153 ) (7,638 )
NET CASH USED BY FINANCING ACTIVITIES (193,492 ) (322,128 )
Net increase (decrease) in cash and cash equivalents 93,012
(56,710 )
Cash and cash equivalents at beginning of year 158,724
258,799
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 251,736
$ 202,089
Supplemental disclosures:
Cash paid for income/franchise taxes $ 10,775
$ 16,550
Cash paid for interest $ 23,034
$ 23,864
Loans transferred to OREO $ 4,955
$ 1,359
Purchases of securities available for sale, accrued, not settled $ 2,063
$ —
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

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)		Total Equity
Balance at March 31, 2020	$	0	$	36,807	$	842,780	$	700,298	$	(26,171)	$	1,553,714
Comprehensive income							30,131		58,729		88,860

Cash dividends declared:

Common, $0.20 per share							(7,362)				(7,362)
Issuance of 11,500 shares of Series E preferred stock	110,705										110,705

Issuance of 37,527 shares of common stock			38		86						124
Stock based compensation					1,336						1,336
Balance at June 30, 2020	$	110,705	$	36,845	$	844,202	$	723,067	$	32,558	$	1,747,377

Balance at January 1, 2020	$	0	$	36,704	$	839,857	$	702,502	$	(926)	$	1,578,137
Cumulative effect adjustment from the adoption of ASU 2016-13 on January 1, 2020							(14,891)				(14,891)
Adjusted balance on January 1, 2020	0		36,704		839,857		687,611		(926)		1,563,246
Comprehensive income							50,171		33,484		83,655



Cash dividends declared:


Common, $0.40 per share							(14,715)				(14,715)

Issuance of Series E Preferred Stock	110,705										110,705


Issuance of 140,466 shares of common stock			141		787						928
Stock based compensation					3,558						3,558
Balance at June 30, 2020	$	110,705	$	36,845	$	844,202	$	723,067	$	32,558	$	1,747,377

Balance at March 31, 2021	$	110,705	$	42,174	$	1,063,497	$	833,171	$	6,660	$	2,056,207
Comprehensive income							61,605		49,927		111,532

Cash dividends declared:
Preferred, $175.00 per share							(2,012)				(2,012)
Common, $0.22 per share							(9,280)				(9,280)

Issuance of 71,777 shares of common stock			71		1,252						1,323
Stock based compensation					2,016						2,016
Balance at June 30, 2021	$	110,705	$	42,245	$	1,066,765	$	883,484	$	56,587	$	2,159,786

Balance at January 1, 2021	$	110,705	$	42,094	$	1,062,083	$	791,630	$	72,719	$	2,079,231


Comprehensive income							114,419		(16,132)		98,287

Cash dividends declared:

Preferred, $350.00 per share							(4,025)				(4,025)
Common, $0.44 per share							(18,540)				(18,540)




Issuance of 151,590 shares of common stock			151		(94)						57
Stock based compensation					4,776						4,776
Balance at June 30, 2021	$	110,705	$	42,245	$	1,066,765	$	883,484	$	56,587	$	2,159,786

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.

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,~~2020, included in the Form 10-K of Heartland Financial USA, Inc. ("~~Heartland"~~HTLF") filed with the Securities and Exchange Commission ("SEC") on ~~March 1, 2017~~February 25, 2021. 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,~~2021, are not necessarily indicative of the results expected for the year ending December 31, ~~2017.~~2021.

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 periods~~six- months ended ~~September~~June 30, ~~2017~~2021, and ~~2016,~~2020, are shown in the table ~~below:~~

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~~below, dollars 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 totaled 12,250 shares with a weighted average exercise price of $18.60~~thousands, except 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.data:


	Three Months Ended June 30,
	2021		2020
Net income	$	61,605	$	30,131
Preferred dividends	(2,012)		0


Net income available to common stockholders	$	59,593	$	30,131

Weighted average common shares outstanding for basic earnings per share	42,243		36,881
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	117		35
Weighted average common shares for diluted earnings per share	42,360		36,916
Earnings per common share — basic	$	1.41	$	0.82
Earnings per common share — diluted	$	1.41	$	0.82
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	1		54

	Six Months Ended June 30,
	2021		2020
Net income	$	114,419	$	50,171
Preferred dividends	(4,025)		0

Net income available to stockholders	$	110,394	$	50,171

Weighted average common shares outstanding for basic earnings per share	42,210		36,851
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	147		69
Weighted average common shares for diluted earnings per share	42,357		36,920
Earnings per common share — basic	$	2.62	$	1.36
Earnings per common share — diluted	$	2.61	$	1.36
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	60		1

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~~HTLF 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

ASU 2018-16

In ~~May 2014,~~October 2018, the FASB issued ASU ~~2014-09,~~ 2018-16, "~~Revenue from Contracts with Customers."~~ ~~The amendment clarifies the principles for recognizing revenue~~Derivatives 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 principleHedging (Topic 815): Inclusion of the ~~revenue model is that “an entity recognizes revenue to depict~~Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting." In the ~~transfer~~United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of ~~promised goods or services to customers in an amount that reflects~~ the ~~consideration to which~~U.S. government, the ~~entity expects to be entitled in exchange for those goods or services.” In applying~~London Interbank Offered Rate ("LIBOR") swap rate, and the ~~revenue model to contracts within its scope, an entity should apply~~Overnight Index Swap ("OIS") Rate based on 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,~~Fed Funds Effective Rate. When the FASB issued ASU ~~2016-01,~~ ~~"Recognition~~2017-12, Derivatives and ~~Measurement of Financial Assets~~Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017, it introduced the Securities Industry and Financial ~~Liabilities."~~ ~~The amendments in~~Markets Association ("SIFMA") Municipal Swap Rate as the fourth permissible U.S. benchmark rate. ASU ~~2016-01~~2018-16 adds the OIS rate based on the Secured Overnight Financing Rate ("SOFR") as a U.S. benchmark interest rate to ~~Subtopic 825-10, Financial Instruments, make~~facilitate the ~~following changes: (1) require equity investments~~LIBOR 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 requirementSOFR transition and provide sufficient lead time for ~~public~~ entities to ~~disclose the methods~~prepare for changes to interest rate risk hedging strategies for both risk management 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 thehedge 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~~purposes. ASU ~~2016-02,~~ ~~"Leases (Topic 842)."~~ Topic 842 requires a lessee to recognize leases on its balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as financing or operating, with such classification affecting the categorization of expense recognition in the income statement. The amendment is2018-16 became effective for fiscal years beginning after December 15, 2018, ~~including~~and interim periods within those fiscal years and the financial statement impact immediately upon adoption was immaterial. The future financial statement impact will ~~be applied~~depend on any new contracts entered into using new benchmark rates, as well as any existing contracts that are migrated from LIBOR to new benchmark interest rates. HTLF has a ~~modified retrospective basis. Heartland leases certain properties~~formal working group that 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, HTLF has adjustable rate loans, several debt obligations and ~~equipment under operating leases~~securities and derivative instruments in place that reference LIBOR-based rates. The transition from LIBOR is expected to take place at the end of 2021, and management will ~~result~~continue to actively assess the related opportunities and risks involved in ~~recognition of lease assets and lease liabilities on the consolidated balance sheets under~~ this ~~ASU; however the majority of Heartland's properties and equipment are owned and not leased. Heartland intends to adopt the accounting standard in~~transition.

ASU 2019-12

In December 2019, ~~as required.~~

~~In March 2016,~~ the FASB issued ASU ~~2016-09,~~ 2019-12, "~~Compensation-Stock Compensation~~Income Taxes (Topic ~~718).~~740) - Simplifying the Accounting for Income Taxes." ~~The amendments~~ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ~~this~~ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU ~~simplify several~~2019-12 also simplifies aspects of the accounting for ~~share-based payments, including income~~franchise taxes and enacted changes in tax ~~consequences, classification~~laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption was permitted for any interim or annual period prior to the effective date. Heartlandgoodwill. HTLF adopted this ASU on January 1, 2017, as required, using a prospective transition method. The requirement to report the excess tax benefit or shortfall related to settlements of share-based payment awards in earnings as an increase or decrease to tax expense has been applied to settlements occurring on or after January 1, 2017, and the impact of applying the guidance reduced reported income tax expense by $1.1 million.

ASU 2016-09 also requires that all income tax related cash flows resulting from share-based payments be reported as an operating activity in the consolidated statements of cash 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 effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Heartland intends to adopt the accounting standard in 2020, as required. Heartland has formed a committee to review the standard, understand the potential impact of this guidance on its results of operations, financial position and liquidity, and oversee the implementation of the standard.

~~In August 2016, the FASB issued ASU 2016-15,~~ ~~"Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments."~~ The amendments in this update address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity adopts the amendments early in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this update must be applied using a retrospective transition method to each period presented. Heartland intends to adopt this ASU in 2018,2021, as required, and ~~is currently evaluating~~ the ~~potential~~adoption did not have a material impact on its results of operations, financial position and liquidity.

ASU 2020-04

In ~~October 2016,~~March 2020, the FASB issued ASU ~~2016-16,~~ 2020-04, "~~Income Taxes (Topic 740) - Intra-Entity Transfer~~Reference Rate Reform," which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For loan and lease agreements that are modified because of ~~Assets Other Than Inventory."~~ ~~The amendment requires an entity to recognize income tax consequences on an intra-entity transfer~~reference rate reform and that meet certain scope guidance (i) modifications of ~~an asset other than inventory at~~loan agreements should be accounted for by prospectively adjusting 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,interest rate, 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 shouldmodifications would 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, consistentconsidered "minor" with the ~~annual impairment test as of September 30, 2020,~~result that any existing unamortized origination fees/costs would carry forward 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 and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement, with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to ~~maturity. These amendments are effective~~apply ASU 2020-04 for ~~public business entities for fiscal years and interim periods~~contract modifications as of January 1, 2020, or prospectively from a date 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 or is subsequent to March 12, 2020, up to the ~~interim period. The amendments~~date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the ASC, ASU 2020-04 must be applied ~~on a modified retrospective basis, with a cumulative-effect adjustment~~prospectively for all eligible contract modifications for that Topic or Industry Subtopic. HTLF anticipates that ASU 2020-04 will simplify any modifications executed between the selected start date and December 31, 2022 that are directly related to ~~retained earnings as~~LIBOR transition by allowing prospective recognition of the ~~beginning~~continuation of the ~~period of adoption.~~

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

~~In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718)~~." The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met; (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used)contract, rather than extinguishment of the ~~modified award is~~old contract that would result in writing off unamortized fees/costs. Management will continue to actively assess the ~~same as~~impacts of ASU 2020-04 and 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 beforerelated opportunities and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments are effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim periods for public business entities for reporting periods for which financial statements have not yet been issued. The amendments should be applied prospectively to an award modified on or after the adoption date. Heartland intends to adopt this ASU in 2018, as required, and does not believe there will be a material impact to its results of operations, financial position, and liquidity because Heartland has not typically modified share-based payment awards after the original award has been granted.

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

NOTE 2: ACQUISITIONS

~~Citywide Banks~~Johnson Bank branches

On December 4, 2020, Arizona Bank & Trust ("AB&T"), a wholly-owned subsidiary headquartered in Phoenix, Arizona, completed its acquisition of ~~Colorado,~~certain assets and assumed substantially all of the deposits and certain other liabilities of Johnson Bank's Arizona operations, which includes four banking centers. Johnson Bank is a wholly-owned subsidiary of Johnson Financial Group, Inc., headquartered in Racine, Wisconsin. As of the closing date, AB&T acquired, at fair value, total assets of $419.7 million, which included gross loans of $150.7 million and assumed deposits of $415.5 million and certain other liabilities.

AIM Bancshares, Inc.

On ~~July 7, 2017, Heartland acquired Citywide Banks~~December 4, 2020, HTLF completed the acquisition of ~~Colorado,~~AIM Bancshares, Inc.~~, parent company of Citywide Banks,~~ ("AIM") and its wholly-owned subsidiary, AimBank, headquartered in ~~Aurora, Colorado. The transaction~~Levelland, Texas. Pursuant to the agreement, each share of AimBank common stock was converted into the right to receive 207.0 shares of HTLF common stock and $1,887.16 of cash, subject to certain hold-back provisions of the agreement. Based on the closing price of $41.89 per share of HTLF common stock on December 4, 2020, the aggregate merger consideration received by AimBank stockholders was valued at approximately ~~$211.2~~$264.5 million, of which ~~$58.6 million~~ was ~~cash, and the remainder was settled~~paid by delivery of ~~3,216,161~~HTLF common stock valued at $217.2 million and cash of $47.3 million subject to certain hold-back provisions of the merger agreement relating to the cash consideration. In addition, holders of in-the-money options to acquire shares of ~~Heartland~~AimBank common ~~stock. Simultaneous with~~stock received aggregate consideration of approximately $4.9 million in exchange for the ~~close, Citywide Banks merged into Heartland's Centennial Bank and Trust subsidiary, and the~~cancellation of such stock options. The combined entity, resulting from the merger of AimBank into First Bank & Trust, operates as ~~Citywide Banks.~~First Bank & Trust. The transaction included, at fair value, total assets of ~~$1.49~~$1.97 billion, including ~~$985.4 million of net loans outstanding, and $1.21~~$1.09 billion of ~~deposits on the acquisition date. Included in this transaction was one bank building with a fair value~~gross loans held to maturity, and $1.67 billion 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.~~deposits. The transaction ~~was~~is structured as a tax-free reorganization with respect to the stock consideration received by shareholders of AIM. On February 19, 2021, HTLF completed the ~~stockholders~~systems conversion of ~~Citywide Banks of Colorado, Inc.~~

~~The assets~~AimBank, 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 the acquisition of Citywide Banks of Colorado, Inc., which is calculated as the excess of both the consideration exchanged and the liabilities assumed as comparedsubsequent to the ~~fair value~~systems conversion, seven 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~~AimBank's twenty-five bank branches were transferred to ~~represent or be indicative of the actual~~

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

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

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

~~Acquired loans were preliminarily recorded at fair value based on a discounted cash flow valuation methodology that considers,~~

~~among other things, projected default rates, loss given defaults and recovery rates. No allowance for credit losses was carried over~~

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

~~Founders Bancorp~~

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

~~CIC Bancshares, Inc.~~

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

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,~~2021, and December 31, ~~2016,~~2020, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2021
U.S. treasuries	$	996	$	20	$	0	$	1,016
U.S. agencies	35,591		272		(492)		35,371
Obligations of states and political subdivisions	1,817,708		66,037		(11,959)		1,871,786
Mortgage-backed securities - agency	1,741,389		19,890		(20,604)		1,740,675
Mortgage-backed securities - non-agency	1,349,005		16,062		(1,775)		1,363,292
Commercial mortgage-backed securities - agency	124,441		2,439		(1,800)		125,080
Commercial mortgage-backed securities - non-agency	534,682		823		(200)		535,305
Asset-backed securities	835,476		12,640		(1,129)		846,987
Corporate bonds	3,744		71		0		3,815
Total debt securities	6,443,032		118,254		(37,959)		6,523,327
Equity securities with a readily determinable fair value	20,651		—		—		20,651
Total	$	6,463,683	$	118,254	$	(37,959)	$	6,543,978
December 31, 2020
U.S. treasuries	$	1,995	$	31	$	0	$	2,026
U.S. agencies	167,048		657		(926)		166,779
Obligations of states and political subdivisions	1,562,631		75,555		(2,959)		1,635,227
Mortgage-backed securities - agency	1,351,964		16,029		(12,723)		1,355,270
Mortgage-backed securities - non-agency	1,428,068		22,688		(1,640)		1,449,116
Commercial mortgage-backed securities - agency	171,451		3,440		(738)		174,153
Commercial mortgage-backed securities - non-agency	253,421		37		(691)		252,767
Asset-backed securities	1,064,255		9,421		(4,410)		1,069,266
Corporate bonds	3,763		8		(29)		3,742
Total debt securities	6,004,596		127,866		(24,116)		6,108,346
Equity securities with a readily determinable fair value	19,629		—		—		19,629
Total	$	6,024,225	$	127,866	$	(24,116)	$	6,127,975

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

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Allowance for Credit Losses
June 30, 2021

Obligations of states and political subdivisions	$	85,490	$	9,931	$	0	$	95,421	$	(51)
Total	$	85,490	$	9,931	$	0	$	95,421	$	(51)
December 31, 2020

Obligations of states and political subdivisions	$	88,890	$	11,151	$	0	$	100,041	$	(51)
Total	$	88,890	$	11,151	$	0	$	100,041	$	(51)

As of June 30, 2021, and December 31, 2020, HTLF had $24.6 million and $20.8 million, respectively, of accrued interest receivable, which is included in other assets on the consolidated balance sheet. HTLF does not consider accrued interest receivable in the carrying amount of financial assets held at amortized cost basis or in the allowance for credit losses calculation.

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,~~2021, 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, 2021
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	13,286	$	13,351
Due in 1 to 5 years	18,199		19,153
Due in 5 to 10 years	198,036		202,564
Due after 10 years	1,628,518		1,676,920
Total debt securities	1,858,039		1,911,988
Mortgage and asset-backed securities	4,584,993		4,611,339
Equity securities with a readily determinable fair value	20,651		20,651
Total investment securities	$	6,463,683	$	6,543,978

September 30, 2017
Amortized Cost Estimated Fair Value
Due in 1 year or less $ 185
$ 186
Due in 1 to 5 years 40,716
41,077
Due in 5 to 10 years 93,240
91,514
Due after 10 years 380,161
378,612
Total debt securities 514,302
511,389
Mortgage-backed securities 1,593,677
1,565,400
Equity securities 16,253
16,596
Total investment securities $ 2,124,232
$ 2,093,385

The amortized cost and estimated fair value of debt securities held to maturity at ~~September~~June 30, ~~2017,~~2021, 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, 2021
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	2,196	$	2,209
Due in 1 to 5 years	42,172		44,028
Due in 5 to 10 years	32,451		37,240
Due after 10 years	8,671		11,944
Total debt securities	85,490		95,421
Allowance for credit losses	(51)		0
Total investment securities	$	85,439	$	95,421

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,~~2021, and December 31, ~~2016,~~2020, securities with a ~~fair~~carrying value of ~~$758.1 million~~$1.87 billion and ~~$810.6 million,~~$2.12 billion, 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-~~three and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, are summarized as follows, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Proceeds from sales	$	423,415	$	182,749	$	630,481	$	511,639
Gross security gains	3,844		3,958		4,289		6,862
Gross security losses	1,002		1,952		1,477		3,198

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,~~table summarizes, 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~~the securities portfolio as of ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016.~~2020. 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,~~2020, and December 31, ~~2015,~~2019, respectively. ~~Securities for which Heartland has taken credit-related other-than-temporary impairment ("OTTI") write-downs are categorized as being "less than 12 months"~~


Debt securities available for sale	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count
June 30, 2021

U.S. agencies	18,983		(492)		1	0		0		0	18,983		(492)		1
Obligations of states and political subdivisions	591,597		(11,887)		107	6,719		(72)		2	598,316		(11,959)		109
Mortgage-backed securities - agency	1,025,619		(19,499)		58	37,181		(1,105)		4	1,062,800		(20,604)		62
Mortgage-backed securities - non-agency	541,131		(1,345)		12	33,988		(430)		5	575,119		(1,775)		17
Commercial mortgage-backed securities - agency	69,690		(1,800)		11	0		0		0	69,690		(1,800)		11
Commercial mortgage-backed securities - non-agency	0		0		0	15,960		(200)		2	15,960		(200)		2
Asset-backed securities	77,475		(319)		7	35,779		(810)		11	113,254		(1,129)		18
Corporate bonds	0		0		0	0		0		0	0		0		0


Total temporarily impaired securities	$	2,324,495	$	(35,342)	196	$	129,627	$	(2,617)	24	$	2,454,122	$	(37,959)	220
December 31, 2020

U.S. agencies	2,981		(8)		5	99,922		(918)		72	102,903		(926)		77
Obligations of states and political subdivisions	346,598		(2,959)		49	0		0		0	346,598		(2,959)		49
Mortgage-backed securities - agency	653,793		(12,342)		35	31,012		(381)		3	684,805		(12,723)		38
Mortgage-backed securities - non-agency	378,843		(1,639)		17	1,622		(1)		1	380,465		(1,640)		18
Commercial mortgage-backed securities - agency	46,541		(738)		6	0		0		0	46,541		(738)		6
Commercial mortgage-backed securities - non-agency	100,042		(15)		2	35,428		(676)		3	135,470		(691)		5
Asset-backed securities	141,824		(643)		9	340,452		(3,767)		24	482,276		(4,410)		33
Corporate bonds	1,908		(29)		4	0		0		0	1,908		(29)		4


Total temporarily impaired securities	$	1,672,530	$	(18,373)	127	$	508,436	$	(5,743)	103	$	2,180,966	$	(24,116)	230

HTLF had 0 securities held to maturity with unrealized losses at June 30, 2021, 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.~~December 31, 2020.

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

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
September 30, 2017
Obligations of states and political subdivisions $ 6,278
$ (43 ) $ 8,894
$ (648 ) $ 15,172
$ (691 )
Total temporarily impaired securities $ 6,278
$ (43 ) $ 8,894
$ (648 ) $ 15,172
$ (691 )
December 31, 2016
Obligations of states and political subdivisions $ 31,479
$ (884 ) $ 2,017
$ (261 ) $ 33,496
$ (1,145 )
Total temporarily impaired securities $ 31,479
$ (884 ) $ 2,017
$ (261 ) $ 33,496
$ (1,145 )

~~Heartland~~HTLF reviews the investment securities portfolio at the security level 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~~for potential credit losses, which takes into consideration numerous factors, and the relative significance of any single factor can vary by security. Some factors ~~Heartland~~HTLF 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~~HTLF 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~~HTLF 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~~HTLF's 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~~HTLF 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, no credit losses were recognized on these ~~investments are not considered other-than-temporarily impaired.~~securities during the three and six months ended June 30, 2021 and 2020.

The ~~remaining~~ unrealized losses on ~~Heartland's~~HTLF'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~~HTLF 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, no credit losses were recognized on these ~~investments are not considered other-than-temporarily impaired.~~securities during the three and six months ended June 30, 2021 and 2020.

~~There were no available for sale or~~The credit loss model under ASC 326-30, applicable to held to maturity debt securities, ~~with OTTI write-downs held as~~requires the recognition of orlifetime expected credit losses through an allowance account at the time when the security is purchased. The following tables present, in thousands, the activity in the allowance for ~~the nine-month period ended September 30, 2017. There were no gross realized gains and $85,000 of gross realized~~credit 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~~ held to maturity by obligations of states and political subdivisions securities ~~with OTTI write-downs~~ for the ~~nine-month period~~three and six months ended ~~September~~June 30, ~~2016.~~2021 and 2020:


	Three Months Ended June 30,
	2021		2020
Beginning balance	$	48	$	197
Provision (benefit) for credit losses	3		(135)
Balance at period end	$	51	$	62

	Six Months Ended June 30,
	2021		2020
Beginning balance	$	51	$	0
Impact of ASU 2016-13 adoption	0		158
Adjusted balance	51		158
Provision (benefit) for credit losses	0		(96)
Balance at period end	$	51	$	62

The following table ~~shows~~summarizes, in thousands, the ~~detail~~carrying amount of ~~OTTI write-downs on~~HTLF's held to maturity debt securities ~~included in earnings~~by investment rating as of June 30, 2021 and December 31, 2020, which are updated quarterly and used to monitor the ~~related changes in other accumulated comprehensive income ("AOCI") for~~credit quality of the ~~same securities, in thousands:~~securities:


	June 30, 2021		December 31, 2020
Rating
AAA	$	3,207	$	0
AA, AA+, AA-	62,526		64,385
A+, A, A-	15,006		18,353
BBB	4,751		4,208
Not Rated	0		1,944
Total	$	85,490	$	88,890

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 ~~at September 30, 2017, and December 31, 2016,~~ were shares of stock in ~~the~~each Federal Home Loan ~~Banks~~Bank (the ~~"FHLBs"~~"FHLB") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of ~~$14.0~~$20.8 million at June 30, 2021 and ~~$14.4~~$19.5 million ~~respectively.~~at December 31, 2020.

The ~~Heartland~~HTLF 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~~HTLF considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. ~~Heartland~~HTLF evaluates impairment in these investments based on the ultimate recoverability of the par value and, at ~~September~~June 30, ~~2017,~~2021, did not consider the investments to be ~~other than temporarily~~ impaired.

NOTE 4: LOANS

Loans as of ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, were as follows, in thousands:


	June 30, 2021		December 31, 2020
Loans receivable held to maturity:
Commercial and industrial	$	2,518,908	$	2,534,799
Paycheck Protection Program ("PPP")	829,175		957,785
Owner occupied commercial real estate	1,940,134		1,776,406
Non-owner occupied commercial real estate	1,987,369		1,921,481
Real estate construction	854,295		863,220
Agricultural and agricultural real estate	679,608		714,526
Residential real estate	800,884		840,442
Consumer	401,641		414,392
Total loans receivable held to maturity	10,012,014		10,023,051






Allowance for credit losses	(120,726)		(131,606)
Loans receivable, net	$	9,891,288	$	9,891,445

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~~As of June 30, 2021, and ~~procedures~~December 31, 2020, HTLF had $37.7 million and $42.4 million, respectively, of accrued interest receivable, which is included in place that are designed to provide for an acceptable level of credit risk. The board of directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the board with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies, nonperforming loans and potential problem loans. Diversification in the loan portfolio is also a means of managing risk associated with fluctuations in economic conditions.

The commercial and commercial real estate loan portfolio includes a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and real estate. Although most loans are made on a secured basis, loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. Commercial loans are primarily made basedother assets 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 fluctuateconsolidated balance sheet. HTLF does not consider accrued interest receivable in value. Heartland seeks to minimize these risks in a variety of ways. The underwriting analysis includes credit verification, analysis of global cash flows, appraisals and a review of the financial condition of the borrower. Personal guarantees are frequently required as a tertiary form of repayment. In addition, when underwriting loans for commercial real estate, careful consideration is given to the property's operating history, future operating projections, current and projected occupancy, location and physical condition. Heartland also utilizes government guaranteed lending through the U.S. Small Business Administration and the U.S. Department of Agriculture's Rural Development Business and Industry Program to assist customers with longer-term funding and to reduce risk.

Agricultural loans, many of which are secured by crops, machinery and real estate, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. Agricultural loans present unique credit risks relating to adverse weather conditions, loss of livestock due to disease or other reasons, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural loans is dependent upon the profitable operation or management of the agricultural entity. In underwriting agricultural loans, lending personnel work closely with their customers to review budgets and cash flow projections for crop production for the ensuing year. These budgets and cash flow projections are monitored closely during the year and reviewed with the customers at least annually. Lending personnel also work closely with governmental agencies, including the Farm Service Agency, to help agricultural customers obtain credit enhancement products such as loan guarantees or interest assistance.

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

secondary market with servicing rights retained. This practice allows Heartland to better manage interest rate risk and liquidity risk. The Heartland bank subsidiaries participate in lending programs sponsored by U.S. government agencies such as Veterans Administration and Federal Home Administration when justified by market conditions. As of 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 motor vehicle, home improvement, home equity and small personal credit lines. Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than one-to-four-family residential mortgage loans. Consumer loan collections are dependent on the borrower's continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate. Heartland's consumer finance subsidiaries, Citizens Finance Co. and Citizens Finance of Illinois Co., typically lend to borrowers with past credit problems or limited credit histories, and these loans comprise approximately 17% of Heartland's total consumer loan portfolio.

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

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~~credit losses at ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, and the related loan balances, disaggregated on the basis of ~~impairment~~measurement methodology, in thousands. ~~Loans~~If a loan no longer shares similar risk characteristics with other loans in the pool, it is evaluated ~~under ASC 310-10-35 include loans~~on an individual basis and is not included in the collective evaluation. Lending relationships with $500,000 or more of total exposure and are on nonaccrual ~~status and troubled debt restructurings, which~~ are individually ~~evaluated for impairment, and other impaired loans deemed to have similar risk characteristics.~~assessed using a collateral dependency calculation. 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.~~losses.


	Allowance For Credit Losses						Gross Loans Receivable Held to Maturity
	Individually Evaluated for Credit Losses		Collectively Evaluated for Credit Losses		Total		Loans Individually Evaluated for Credit Losses		Loans Collectively Evaluated for Credit Losses		Total
June 30, 2021
Commercial and industrial	$	4,688	$	26,644	$	31,332	$	13,658	$	2,505,250	$	2,518,908
PPP	0		0		0		0		829,175		829,175
Owner occupied commercial real estate	110		19,880		19,990		7,547		1,932,587		1,940,134
Non-owner occupied commercial real estate	3,485		19,343		22,828		19,548		1,967,821		1,987,369
Real estate construction	0		19,580		19,580		0		854,295		854,295
Agricultural and agricultural real estate	3,106		4,054		7,160		17,948		661,660		679,608
Residential real estate	0		9,741		9,741		0		800,884		800,884
Consumer	0		10,095		10,095		0		401,641		401,641

Total	$	11,389	$	109,337	$	120,726	$	58,701	$	9,953,313	$	10,012,014


														Allowance For Credit Losses						Gross Loans Receivable Held to Maturity
	Allowance For Loan Losses						Gross Loans Receivable Held to Maturity							Individually Evaluated for Credit Losses		Collectively Evaluated for Credit Losses		Total		Loans Individually Evaluated for Credit Losses		Loans Collectively Evaluated for Credit Losses		Total
	Ending Balance Under ASC 310-10-35		Ending Balance Under ASC 450-20		Total		Ending Balance Evaluated for Impairment Under ASC 310-10-35		Ending Balance Evaluated for Impairment Under ASC 450-20		Total
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
December 31, 2020													December 31, 2020
Commercial and industrial													Commercial and industrial	$	4,077	$	34,741	$	38,818	$	16,578	$	2,518,221	$	2,534,799
PPP													PPP	0		0		0		0		957,785		957,785
Owner occupied commercial real estate													Owner occupied commercial real estate	111		19,890		20,001		11,174		1,765,232		1,776,406
Non-owner occupied commercial real estate													Non-owner occupied commercial real estate	3,250		17,623		20,873		13,490		1,907,991		1,921,481
Real estate construction													Real estate construction	0		20,080		20,080		0		863,220		863,220
Agricultural and agricultural real estate	2,353		3,774		6,127		12,792		498,972		511,764		Agricultural and agricultural real estate	1,988		5,141		7,129		15,453		699,073		714,526
Residential real estate	393		1,873		2,266		29,833		605,778		635,611		Residential real estate	0		11,935		11,935		535		839,907		840,442
Consumer	1,267		7,715		8,982		6,524		443,564		450,088		Consumer	0		12,770		12,770		0		414,392		414,392

Total	$	7,043	$	47,842	$	54,885	$	84,049	$	6,291,270	$	6,375,319	Total	$	9,426	$	122,180	$	131,606	$	57,230	$	9,965,821	$	10,023,051
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~~HTLF had $13.7 million of troubled debt restructured loans at ~~September~~June 30, ~~2017,~~2021, of which $11.6 million were classified as nonaccrual and $2.1 million were accruing according to the restructured terms. HTLF had $6.2 million of troubled debt restructured loans at December 31, ~~2016, in thousands:~~2020, of which $3.8 million were classified as nonaccrual and $2.4 million were accruing according to the restructured terms.

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 periods~~six- months ended ~~September~~June 30, ~~2017,~~2021, and ~~September~~June 30, ~~2016,~~2020, dollars in thousands:


	Three Months Ended June 30,
	2021					2020
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial	0	$	0	$	0	0	$	0	$	0
PPP	0	0		0		0	0		0
Owner occupied commercial real estate	0	0		0		0	0		0
Non-owner occupied commercial real estate	2	7,850		7,850		0	0		0
Real estate construction	0	0		0		0	0		0
Agricultural and agricultural real estate	0	0		0		0	0		0
Residential real estate	0	0		0		1	60		66
Consumer	0	0		0		0	0		0
Total	2	$	7,850	$	7,850	1	$	60	$	66


	Six Months Ended June 30,
	2021					2020
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial and industrial	0	$	0	$	0	0	$	0	$	0
PPP	0	0		0		0	0		0
Owner occupied commercial real estate	0	0		0		0	0		0
Non-owner occupied commercial real estate	2	7,850		7,850		0	0		0
Real estate construction	0	0		0		0	0		0
Agricultural and agricultural real estate	0	0		0		0	0		0

Three 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 —
$ —
$ —
—
$ —
$ —
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
Consumer —
—
—
—
—
—
Total 8
$ 1,174
$ 1,174
5

$ 651
$ 651


	Six Months Ended June 30,
	2021					2020
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Residential real estate	0	0		0		2	92		98
Consumer	0	0		0		0	0		0
Total	2	$	7,850	$	7,850	2	$	92	$	98

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 pre-modification and post-modification recorded investment amounts are the same. At ~~September~~June 30, ~~2017,~~2021, there were no commitments to extend credit to any of the borrowers with an existing troubled debt ~~restructuring.~~restructured loan. The tables above do not include any loan modifications made under COVID-19 modification programs.

~~The following table shows~~There were 0 troubled debt restructured loans for which there was a payment default during the three- and ~~nine-month periods~~six- months ended ~~September~~June 30, ~~2017,~~2021, and ~~September~~June 30, ~~2016,~~2020, that had been modified during the twelve-month period prior to ~~default, in thousands:~~default.

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

~~Heartland's~~HTLF'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 and 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,~~watch, substandard, doubtful and loss loans. The ~~"special mention"~~"watch" 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~~repaying 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~~HTLF 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~~HTLF had ~~one loan relationship with a gross balance of $9.6 million included in the balance of gross~~0 loans ~~receivable held to maturity, of which $2.2 million is~~ classified as ~~a loss.~~ loss or doubtful as of June 30, 2021, and December 31, 2020.

The following tables show the risk category of loans by loan category and year of origination as of June 30, 2021, and December 31, 2020, in thousands:


As of June 30, 2021	Amortized Cost Basis of Term Loans by Year of Origination
	2021		2020		2019		2018		2017		2016 and Prior		Revolving		Total
Commercial and industrial
Pass	$	330,626	$	475,749	$	277,874	$	122,550	$	197,617	$	370,896	$	528,785	$	2,304,097
Watch	7,252		13,154		22,947		12,886		8,633		17,574		35,506		117,952
Substandard	2,171		21,377		10,899		8,780		11,706		21,646		20,280		96,859
Commercial and industrial total	$	340,049	$	510,280	$	311,720	$	144,216	$	217,956	$	410,116	$	584,571	$	2,518,908


As of June 30, 2021	Amortized Cost Basis of Term Loans by Year of Origination
	2021		2020		2019		2018		2017		2016 and Prior		Revolving		Total
PPP
Pass	$	409,922	$	327,475	$	0	$	0	$	0	$	0	$	0	$	737,397
Watch	21,880		28,769		0		0		0		0		0		50,649
Substandard	20,697		20,432		0		0		0		0		0		41,129
PPP total	$	452,499	$	376,676	$	0	$	0	$	0	$	0	$	0	$	829,175
Owner occupied commercial real estate
Pass	$	331,097	$	402,216	$	371,104	$	232,062	$	143,692	$	264,190	$	27,773	$	1,772,134
Watch	428		17,998		14,979		18,715		19,869		10,305		2,250		84,544
Substandard	743		18,083		13,464		7,908		13,903		28,201		1,154		83,456
Owner occupied commercial real estate total	$	332,268	$	438,297	$	399,547	$	258,685	$	177,464	$	302,696	$	31,177	$	1,940,134
Non-owner occupied commercial real estate
Pass	$	206,934	$	332,479	$	355,445	$	275,853	$	163,047	$	266,547	$	32,340	$	1,632,645
Watch	16,873		18,884		76,447		30,786		8,233		53,339		4,524		209,086
Substandard	16,968		13,315		20,879		23,329		24,802		46,035		310		145,638
Non-owner occupied commercial real estate total	$	240,775	$	364,678	$	452,771	$	329,968	$	196,082	$	365,921	$	37,174	$	1,987,369
Real estate construction
Pass	$	151,473	$	338,101	$	215,455	$	49,360	$	10,003	$	8,959	$	17,078	$	790,429
Watch	0		1,865		11,474		47,460		240		210		413		61,662
Substandard	0		0		28		1,993		0		183		0		2,204
Real estate construction total	$	151,473	$	339,966	$	226,957	$	98,813	$	10,243	$	9,352	$	17,491	$	854,295
Agricultural and agricultural real estate
Pass	$	115,287	$	125,764	$	79,157	$	46,698	$	28,105	$	43,350	$	134,975	$	573,336
Watch	3,480		13,591		5,746		2,197		256		3,735		4,735		33,740
Substandard	9,082		8,793		6,886		20,498		5,641		11,210		10,422		72,532
Agricultural and agricultural real estate total	$	127,849	$	148,148	$	91,789	$	69,393	$	34,002	$	58,295	$	150,132	$	679,608

Residential real estate
Pass	$	144,046	$	116,571	$	65,840	$	82,530	$	56,628	$	277,236	$	28,244	$	771,095
Watch	1,236		1,966		1,634		1,703		2,039		6,998		0		15,576
Substandard	4,147		859		299		1,889		1,259		5,760		0		14,213
Residential real estate total	$	149,429	$	119,396	$	67,773	$	86,122	$	59,926	$	289,994	$	28,244	$	800,884
Consumer
Pass	$	39,485	$	26,718	$	20,157	$	13,147	$	12,112	$	21,088	$	259,705	$	392,412
Watch	4		132		220		1,362		130		508		1,234		3,590
Substandard	848		432		612		474		371		2,104		798		5,639
Consumer total	$	40,337	$	27,282	$	20,989	$	14,983	$	12,613	$	23,700	$	261,737	$	401,641

Total Pass	$	1,728,870	$	2,145,073	$	1,385,032	$	822,200	$	611,204	$	1,252,266	$	1,028,900	$	8,973,545
Total Watch	51,153		96,359		133,447		115,109		39,400		92,669		48,662		576,799
Total Substandard	54,656		83,291		53,067		64,871		57,682		115,139		32,964		461,670
Total Loans	$	1,834,679	$	2,324,723	$	1,571,546	$	1,002,180	$	708,286	$	1,460,074	$	1,110,526	$	10,012,014


As of December 31, 2020	Amortized Cost Basis of Term Loans by Year of Origination
	2020		2019		2018		2017		2016		2015 and Prior		Revolving		Total
Commercial and industrial
Pass	$	557,853	$	340,809	$	168,873	$	215,696	$	101,010	$	337,834	$	541,627	$	2,263,702
Watch	41,574		24,676		19,672		14,262		8,072		2,474		49,432		160,162
Substandard	23,024		16,274		8,897		15,717		9,098		19,537		18,388		110,935
Commercial and industrial total	$	622,451	$	381,759	$	197,442	$	245,675	$	118,180	$	359,845	$	609,447	$	2,534,799
PPP
Pass	$	880,709	$	0	$	0	$	0	$	0	$	0	$	0	$	880,709


As of December 31, 2020	Amortized Cost Basis of Term Loans by Year of Origination
	2020		2019		2018		2017		2016		2015 and Prior		Revolving		Total
Watch	22,533		0		0		0		0		0		0		22,533
Substandard	54,543		0		0		0		0		0		0		54,543
PPP total	$	957,785	$	0	$	0	$	0	$	0	$	0	$	0	$	957,785
Owner occupied commercial real estate
Pass	$	400,662	$	369,401	$	300,242	$	167,470	$	107,234	$	213,780	$	33,759	$	1,592,548
Watch	15,345		13,764		22,488		20,811		8,717		15,282		4,311		100,718
Substandard	15,914		9,522		12,164		14,147		8,580		21,708		1,105		83,140
Owner occupied commercial real estate total	$	431,921	$	392,687	$	334,894	$	202,428	$	124,531	$	250,770	$	39,175	$	1,776,406
Non-owner occupied commercial real estate
Pass	$	334,722	$	411,301	$	305,456	$	194,101	$	108,070	$	233,153	$	24,466	$	1,611,269
Watch	22,826		55,225		24,718		18,724		20,954		45,672		5,114		193,233
Substandard	30,899		15,035		23,290		17,046		9,147		21,060		502		116,979
Non-owner occupied commercial real estate total	$	388,447	$	481,561	$	353,464	$	229,871	$	138,171	$	299,885	$	30,082	$	1,921,481
Real estate construction
Pass	$	311,625	$	309,678	$	157,171	$	12,625	$	6,954	$	5,110	$	21,431	$	824,594
Watch	2,105		26,659		2,403		332		55		388		1,295		33,237
Substandard	196		2,760		2,036		0		39		358		0		5,389
Real estate construction total	$	313,926	$	339,097	$	161,610	$	12,957	$	7,048	$	5,856	$	22,726	$	863,220
Agricultural and agricultural real estate
Pass	$	171,578	$	90,944	$	62,349	$	39,252	$	17,626	$	37,696	$	148,456	$	567,901
Watch	20,500		16,202		8,854		2,448		3,515		3,157		12,282		66,958
Substandard	17,403		7,044		23,519		6,758		3,917		9,952		11,074		79,667
Agricultural and agricultural real estate total	$	209,481	$	114,190	$	94,722	$	48,458	$	25,058	$	50,805	$	171,812	$	714,526
Residential real estate
Pass	$	153,017	$	99,440	$	118,854	$	83,534	$	63,477	$	244,852	$	33,467	$	796,641
Watch	3,986		4,507		2,188		1,896		3,117		8,525		0		24,219
Substandard	980		442		2,507		1,528		884		12,141		1,100		19,582
Residential real estate total	$	157,983	$	104,389	$	123,549	$	86,958	$	67,478	$	265,518	$	34,567	$	840,442
Consumer
Pass	$	37,037	$	27,646	$	18,811	$	15,034	$	4,009	$	19,483	$	280,996	$	403,016
Watch	168		352		647		340		82		646		1,622		3,857
Substandard	481		959		1,884		500		897		1,976		822		7,519
Consumer total	$	37,686	$	28,957	$	21,342	$	15,874	$	4,988	$	22,105	$	283,440	$	414,392

Total Pass	$	2,847,203	$	1,649,219	$	1,131,756	$	727,712	$	408,380	$	1,091,908	$	1,084,202	$	8,940,380
Total Watch	129,037		141,385		80,970		58,813		44,512		76,144		74,056		604,917
Total Substandard	143,440		52,036		74,297		55,696		32,562		86,732		32,991		477,754
Total Loans	$	3,119,680	$	1,842,640	$	1,287,023	$	842,221	$	485,454	$	1,254,784	$	1,191,249	$	10,023,051

Included in the ~~ASC 310-10-35 portion~~nonpass loans at June 30, 2021 and December 31, 2020 were $91.8 million and $77.1 million, respectively, of nonpass PPP loans as a result of risk ratings on non-PPP related credits. HTLF's risk rating methodology assigns a risk rating to the whole lending relationship. HTLF has 0 allowance recorded related to the PPP loans because of the ~~allowance as~~100% government guarantee.

As of ~~September~~June 30, ~~2017, is a $2.2~~2021, HTLF had $1.7 million ~~specific reserve associated with this loan relationship. Heartland had no~~of loans ~~classified as doubtful as of September 30, 2017. Loans are placed on "nonaccrual" when management does not expect to collect payments of principal and interest in~~

~~full or when principal or interest has been in default for a period of 90 days or more, unless the loan is both well~~ secured ~~and~~by residential real estate property that were in the process of ~~collection.~~foreclosure.

The following table ~~presents~~sets forth information regarding accruing and nonaccrual loans ~~by credit quality indicator~~ at ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, 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, 2021
Commercial and industrial	$	1,537	$	1,034	$	12	$	2,583	$	2,498,207	$	18,118	$	2,518,908
PPP	0		0		0		0		829,175		0		829,175
Owner occupied commercial real estate	1,134		0		0		1,134		1,929,086		9,914		1,940,134
Non-owner occupied commercial real estate	1,374		1,350		0		2,724		1,963,775		20,870		1,987,369
Real estate construction	2,834		0		0		2,834		851,053		408		854,295
Agricultural and agricultural real estate	2,759		1,716		0		4,475		654,135		20,998		679,608
Residential real estate	2,192		118		85		2,395		785,637		12,852		800,884
Consumer	679		222		0		901		398,632		2,108		401,641
Total gross loans receivable held to maturity	$	12,509	$	4,440	$	97	$	17,046	$	9,909,700	$	85,268	$	10,012,014
December 31, 2020
Commercial and industrial	$	5,825	$	2,322	$	720	$	8,867	$	2,504,170	$	21,762	$	2,534,799
PPP	1		0		0		1		957,784		0		957,785
Owner occupied commercial real estate	2,815		167		0		2,982		1,759,649		13,775		1,776,406
Non-owner occupied commercial real estate	2,143		2,674		0		4,817		1,902,003		14,661		1,921,481
Real estate construction	2,446		96		0		2,542		859,784		894		863,220
Agricultural and agricultural real estate	1,688		0		0		1,688		694,150		18,688		714,526
Residential real estate	1,675		83		0		1,758		825,047		13,637		840,442
Consumer	807		139		0		946		409,477		3,969		414,392
Total gross loans receivable held to maturity	$	17,400	$	5,481	$	720	$	23,601	$	9,912,064	$	87,386	$	10,023,051

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% special mention loans and 52% substandard loans as of September 30, 2017. The percent of nonpass loans on nonaccrual status as of September 30, 2017, was 17%. As of December 31, 2016, the nonpass category in the table above was comprised of approximately 47% special mention loans and 53% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, 2016, was 17%. Loans delinquent 30 to 89 days as a percent of total loans were ~~0.33%~~0.17% at ~~September~~June 30, ~~2017,~~2021, compared to ~~0.37%~~0.23% at December 31, ~~2016.~~2020. Changes in credit risk are monitored on a ~~regular~~continuous basis as part of relationship management, and changes in risk ratings are made when identified. All ~~impaired~~individually assessed loans are reviewed at least annually.

~~The following table sets forth information regarding Heartland's accruing and~~HTLF recognized $0 of interest income on nonaccrual loans ~~at September~~during the three and six months ended June 30, ~~2017,~~2021 and June 30, 2020. As of June 30, 2021, and December 31, ~~2016, 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
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~~2020, HTLF had $24.0 million and $32.5 million of ~~Heartland's impaired~~nonaccrual loans are on nonaccrual or have had their terms restructured in a troubled debt restructuring. The following tables present, by category of loan, impaired loans, the unpaid contractual loan balances at September 30, 2017, and December 31, 2016; the outstanding loan balances recorded on the consolidated balance sheets at September 30, 2017, and December 31, 2016; anywith no related allowance, recorded for those loans as of September 30, 2017, and December 31, 2016; the average outstanding loan balances recorded on the consolidated balance sheets during the three- and nine-months ended September 30, 2017, and year ended December 31, 2016; and the interest income recognized on the impaired loans during the three- and nine-month periods ended September 30, 2017, and year ended December 31, 2016, in thousands:respectively.

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
September 30, 2017
Impaired loans with a related allowance:
Commercial $ 3,190
$ 3,190
$ 2,166
$ 4,885
$ —
$ 3,829
$ 1
Commercial real estate 11,272
9,416
864
10,637
—
12,106
7
Total commercial and commercial real estate 14,462
12,606
3,030
15,522
—
15,935
8
Agricultural and agricultural real estate 10,289
10,289
2,353
3,532
—
2,140
—
Residential real estate 1,640
1,640
393
1,633
—
2,197
10
Consumer 2,179
2,179
1,267
2,155
10
2,343
32
Total impaired loans with a related allowance $ 28,570
$ 26,714
$ 7,043
$ 22,842
$ 10
$ 22,615
$ 50
Impaired loans without a related allowance:
Commercial $ 4,887
$ 3,767
$ —
$ 2,727
$ —
$ 2,017
$ 112
Commercial real estate 19,132
18,527
—
18,237
201
21,750
536
Total commercial and commercial real estate 24,019
22,294
—
20,964
201
23,767
648
Agricultural and agricultural real estate 2,503
2,503
—
8,343
—
10,858
—
Residential real estate 28,197
28,193
—
27,556
112
26,006
230
Consumer 4,345
4,345
—
4,222
19
3,849
61
Total impaired loans without a related allowance $ 59,064
$ 57,335
$ —
$ 61,085
$ 332
$ 64,480
$ 939
Total impaired loans held to maturity:
Commercial $ 8,077
$ 6,957
$ 2,166
$ 7,612
$ —
$ 5,846
$ 113
Commercial real estate 30,404
27,943
864
28,874
201
33,856
543
Total commercial and commercial real estate 38,481
34,900
3,030
36,486
201
39,702
656
Agricultural and agricultural real estate 12,792
12,792
2,353
11,875
—
12,998
—
Residential real estate 29,837
29,833
393
29,189
112
28,203
240
Consumer 6,524
6,524
1,267
6,377
29
6,192
93
Total impaired loans held to maturity $ 87,634
$ 84,049
$ 7,043
$ 83,927
$ 342
$ 87,095
$ 989

Unpaid
Contractual
Balance

Loan
Balance

Related
Allowance
Recorded

Year-to-
Date
Avg.
Loan
Balance

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

On ~~July 7, 2017, Heartland acquired Citywide Banks~~December 4, 2020, HTLF's Arizona Bank & Trust subsidiary completed the acquisition of ~~Colorado, Inc., parent company~~certain assets and substantially all of ~~Citywide Banks, based~~the deposits and certain other liabilities of Johnson Bank's Arizona operations, headquartered in ~~Denver, Colorado.~~Racine, Wisconsin. As of ~~July 7, 2017, Citywide Banks~~December 4, 2020, the Johnson Bank branches acquired had gross loans ~~of $1.00 billion, and the estimated~~with a fair value of ~~the loans acquired was $985.4~~$150.7 million.

On ~~February 28, 2017, Heartland acquired Founders Bancorp, parent company~~December 4, 2020, HTLF completed the acquisition of ~~Founders Community Bank, based~~AimBank, headquartered in ~~San Luis Obispo, California.~~Levelland, Texas. As of ~~February 28, 2017, Founders Community Bank~~December 4, 2020, AimBank had gross loans ~~of $98.9 million, and the estimated~~with a fair value of ~~the loans acquired was $96.4 million.~~$1.09 billion.

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

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

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

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

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

NOTE 5: ALLOWANCE FOR CREDIT LOSSES

Changes in ~~accretable yield~~the allowance for credit losses on ~~acquired~~ loans ~~with evidence of credit deterioration at the date of acquisition~~ for the three- and ~~nine-month periods~~six- months ended ~~September~~June 30, ~~2017,~~2021, and ~~September~~June 30, ~~2016,~~2020, were as follows, in thousands:


	Commercial and Industrial		PPP		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at March 31, 2021	$	36,095	$	0	$	19,416	$	24,694	$	19,931	$	7,111	$	11,012	$	11,913	$	130,172
Charge-offs	(842)		0		(72)		(1,637)		(10)		(357)		(70)		(509)		(3,497)
Recoveries	265		0		44		13		4		0		0		191		517
Provision	(4,186)		0		602		(242)		(345)		406		(1,201)		(1,500)		(6,466)
Balance at June 30, 2021	$	31,332	$	0	$	19,990	$	22,828	$	19,580	$	7,160	$	9,741	$	10,095	$	120,726

	Commercial and Industrial		PPP		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at December 31, 2020	$	38,818	$	0	$	20,001	$	20,873	$	20,080	$	7,129	$	11,935	$	12,770	$	131,606


Charge-offs	(1,790)		0		(113)		(1,637)		(10)		(675)		(91)		(1,307)		(5,623)
Recoveries	558		0		97		13		6		21		5		493		1,193
Provision	(6,254)		0		5		3,579		(496)		685		(2,108)		(1,861)		(6,450)
Balance at June 30, 2021	$	31,332	$	0	$	19,990	$	22,828	$	19,580	$	7,160	$	9,741	$	10,095	$	120,726

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
Balance at beginning of period $ 101
$ 168
$ 182
$ 557
Original yield discount, net, at date of acquisitions —
—
—
19
Accretion (700 ) (379 ) (1,074 ) (845 )
Reclassification from nonaccretable difference⁽¹⁾
654
331
947
389
Balance at period end $ 55
$ 120
$ 55
$ 120

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


	Commercial and Industrial				PPP		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at March 31, 2020	$	32,455			0		10,337		8,320		22,951		$	4,797	$	8,725	$	9,765	$	97,350
Charge-offs	(2,536)				0		(213)		(19)		(84)		(1)		(235)		(476)		(3,564)
Recoveries	345				0		191		8		210		0		92		298		1,144
Provision	2,254				0		13,087		1,852		5,590		905		722		597		25,007
Balance at June 30, 2020	$	32,518	$	32,531	$	0	$	23,402	$	10,161	$	28,667	$	5,701	$	9,304	$	10,184	$	119,937

	Commercial and Industrial				PPP		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at December 31, 2019	$	34,207			$	0	$	7,921	$	7,584	$	8,677	$	5,680	$	1,504	$	4,822	$	70,395
Impact of ASU 2016-13 adoption	(272)				0		(114)		(2,617)		6,335		(387)		4,817		4,309		12,071
Adjusted balance at January 1, 2020	33,935				0		7,807		4,967		15,012		5,293		6,321		9,131		82,466
Charge-offs	(7,767)				0		(213)		(19)		(105)		(254)		(314)		(1,193)		(9,865)
Recoveries	610				0		192		8		215		826		95		518		2,464
Provision	5,740				0		15,616		5,205		13,545		(164)		3,202		1,728		44,872
Balance at June 30, 2020	$	32,518			$	0	$	23,402	$	10,161	$	28,667	$	5,701	$	9,304	$	10,184	$	119,937

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 million, and the estimated fair value of these loans was $13.1 million. At September 30, 2017, a majority of these loans were valued based upon the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of such collateral, and the timing and amount of the cash flows could not be reasonably estimated. At September 30, 2017, and December 31, 2016, there was an allowance for loan losses of $132,000 and $588,000, respectively, related to these ASC 310-30 loans. Provision expense of $4,000 and $126,000 was recorded for the three-month periods ended September 30, 2017, and 2016, respectively. Provision expense of $5,000 and $517,000 was recorded for the nine-month periods ended September 30, 2017, and 2016, respectively.

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

~~NOTE 5: ALLOWANCE FOR LOAN LOSSES~~

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

Commercial
Commercial
Real Estate
Agricultural
Residential
Real Estate
Consumer Total
Balance at June 30, 2017 $ 17,168
$ 21,861
$ 3,832
$ 2,263
$ 8,927
$ 54,051
Charge-offs (1,954 ) (1,913 ) —
(142 ) (1,750 ) (5,759 )
Recoveries 347
46
14
63
418
888
Provision 1,409
546
2,281
82
1,387
5,705
Balance at September 30, 2017 $ 16,970
$ 20,540
$ 6,127
$ 2,266
$ 8,982
$ 54,885

Commercial
Commercial
Real Estate
Agricultural
Residential
Real Estate
Consumer Total
Balance at December 31, 2016 $ 14,765
$ 24,319
$ 4,210
$ 2,263
$ 8,767
$ 54,324
Charge-offs (3,310 ) (2,522 ) (888 ) (541 ) (4,982 ) (12,243 )
Recoveries 635
860
17
70
987
2,569
Provision 4,880
(2,117 ) 2,788
474
4,210
10,235
Balance at September 30, 2017 $ 16,970
$ 20,540
$ 6,127
$ 2,266
$ 8,982
$ 54,885

Commercial
Commercial
Real Estate
Agricultural
Residential
Real Estate
Consumer Total
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~~credit losses by pools of risk within each loan portfolio. The allocation of the allowance for ~~loan~~credit 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~~credit losses is available to absorb losses from any segment of the loan portfolio.

Changes in the allowance for credit losses on unfunded commitments for the three and six months ended June 30, 2021 and June 30, 2020, were as follows:


	For the Three Months Ended June 30,
	2021		2020
Balance at March 31,	$	14,619	$	15,468
Provision	(617)		1,924
Balance at June 30,	$	14,002	$	17,392


	For the Six Months Ended June 30,
	2021		2020
Balance at December 31,	$	15,280	$	248
Impact of ASU 2016-13 adoption on January 1, 2020	0		13,604
Adjusted balance at January 1,	15,280		13,852
Provision	(1,278)		3,540
Balance at June 30,	$	14,002	$	17,392

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

~~Heartland~~HTLF had goodwill of ~~$236.6~~$576.0 million at ~~September~~both June 30, ~~2017,~~2021 and ~~$127.7 million at~~ December 31, ~~2016. Heartland~~2020. HTLF conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. ~~There~~Due to the COVID-19 pandemic and economic conditions, HTLF performed an interim quantitative assessment of goodwill in the second quarter of 2020, which was ~~no goodwill impairment as of~~ the most recent ~~assessment.~~annual assessment, and there was 0 goodwill impairment.

~~Heartland~~HTLF recorded ~~$95.2~~$91.4 million of goodwill and ~~$16.0~~$3.1 million of core deposit ~~intangibles~~intangible in connection with the acquisition of ~~Citywide Banks of Colorado, Inc., parent company of Citywide Banks,~~AimBank, headquartered in ~~Aurora, Colorado~~Levelland, Texas on ~~July 7, 2017.~~December 4, 2020.

~~Heartland~~HTLF recorded ~~$13.8~~$38.4 million of goodwill and ~~$2.5~~$1.3 million of core deposit ~~intangibles~~intangible in connection with the acquisition of ~~Founders Bancorp, parent company~~certain assets and substantially all of ~~Founders Community Bank, based~~the deposits and certain other liabilities of Johnson Bank's Arizona operations, headquartered in ~~San Luis Obispo, California~~Racine, Wisconsin, on ~~February 28, 2017.~~December 4, 2020.

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

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

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

~~Heartland's~~The core deposit intangible and goodwill recorded with the Johnson Bank transaction are deductible for tax purposes, and the core deposit intangible is expected to be amortized over a period of 10 years on an accelerated basis.

HTLF'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,~~2021, and December 31, ~~2016,~~2020, are presented in the table below, in thousands:


	June 30, 2021						December 31, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	101,185	$	63,883	$	37,302	$	101,185	$	58,970	$	42,215
Customer relationship intangibles	1,177		1,027		150		1,177		1,009		168
Mortgage servicing rights	11,971		6,412		5,559		11,268		6,079		5,189
Commercial servicing rights	7,054		6,412		642		7,054		6,191		863
Total	$	121,387	$	77,734	$	43,653	$	120,684	$	72,249	$	48,435

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

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, 2021	$	4,446	$	18	$	648	$	110	$	5,222
Year ending December 31,
2022	7,702		34		1,228		194		9,158
2023	6,739		33		1,052		139		7,963
2024	5,591		33		877		96		6,597
2025	4,700		32		702		103		5,537
2026	3,533		0		526		0		4,059
Thereafter	4,591		0		526		0		5,117
Total	$	37,302	$	150	$	5,559	$	642	$	43,653

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. Heartland's~~2021. HTLF's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others were approximately ~~$3.56 billion and $4.31 billion as of September~~$719.6 million at June 30, ~~2017, and~~2021, compared to $743.3 million at December 31, ~~2016, respectively.~~2020. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately ~~$24.3~~$13.1 million at June 30, 2021, and ~~$21.4~~$5.7 million ~~as of September 30, 2017, and~~at December 31, ~~2016, respectively. The~~2020.

At June 30, 2021, the fair value of ~~Heartland's~~the mortgage servicing rights was estimated at ~~$35.0~~$5.6 million ~~at September 30, 2017, and $45.2~~ compared to $5.2 million at December 31, ~~2016.~~

Heartland's mortgage servicing rights portfolio is comprised of loans serviced for the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("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.

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.

2020. 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 the mortgage servicing rights are considered in the calculation. The average constant prepayment rate was ~~10.93%~~ ~~and 9.63%~~15.90% for the ~~September~~June 30, ~~2017, and~~2021, valuation compared to 16.20% for the December 31, ~~2016, valuations, respectively.~~2020 valuation. The discount rate was ~~9.06%~~ ~~and~~ ~~9.26%~~9.02% for ~~the September~~both June 30, ~~2017,~~2021, and December 31, ~~2016, valuations, respectively.~~2020. The average capitalization rate for the first~~nine~~ six months of ~~2017~~2021 ranged from 9179 to ~~150~~120 basis points compared to ~~the~~a range of 8876 to ~~135~~116 basis points for ~~2016.~~the first six months of 2020. Fees collected for the servicing of mortgage loans for others were ~~$2.9 million~~$459,000 and ~~$3.1 million~~$410,000 for the quarters ended ~~September~~June 30, ~~2017,~~2021 and ~~September~~June 30, ~~2016, respectively and $9.3 million and $9.0 million~~2020, respectively. Fees collected for the ~~nine~~servicing of mortgage loans for others were $923,000 and $819,000 for the six months ended ~~September~~June 30, ~~2017,~~2021 and ~~September 30, 2016,~~2020, respectively.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, and ~~September~~June 30, ~~2016:~~

2020:


	2021			2020
Balance at January 1,	$	5,189		$	5,621
Originations	703			1,490
Amortization	(724)			(1,070)



Valuation adjustment	391			(1,556)
Balance at period end	$	5,559		$	4,485

Mortgage servicing rights, net to servicing portfolio	0.77		%	0.68		%

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~~HTLF's commercial servicing portfolio is comprised of loans guaranteed by the United States Small Business Administration ("SBA") and United States Department of Agriculture that have been sold with servicing retained by ~~Heartland,~~HTLF, which totaled ~~$144.4~~$57.5 million at ~~September~~June 30, ~~2017~~2021 and ~~$164.6~~$66.2 million at December 31, ~~2016.~~2020. The commercial servicing rights portfolio is separated into two tranches at the respective ~~Heartland~~HTLF 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~~$165,000 and ~~$230,000~~$54,000 for the ~~quarter~~quarters ended ~~September~~June 30, ~~2017,~~2021 and ~~September~~June 30, ~~2016,~~2020, respectively, and ~~$1.2 million~~$294,000 and ~~$685,000~~$172,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021 and ~~September~~June 30, ~~2016,~~2020, 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%~~13.70% to ~~7.99%~~17.49% as of ~~September~~June 30, ~~2017,~~2021 compared to ~~6.96%~~14.95% to ~~7.88%~~19.25% as of December 31, ~~2016.~~2020. The discount rate range was ~~12.52%~~5.70% to ~~14.65%~~9.96% for the ~~September~~June 30, ~~2017,~~2021, valuations compared to ~~12.44%~~7.70% to ~~13.88%~~12.88% for the December 31, ~~2016,~~2020 valuations. The capitalization rate for ~~2017~~2020 ranged from 310 to 445 basis ~~points compared to 310 to 445 basis points for 2016.~~points. The total fair value of ~~Heartland's~~the commercial servicing rights was estimated at ~~$3.5~~$1.1 million as of ~~September~~June 30, ~~2017,~~2021, and ~~$4.1~~$1.3 million as of December 31, ~~2016.~~2020.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, and ~~September~~June 30, ~~2016:~~2020:


	2021			2020
Balance at January 1,	$	863		$	1,115

Originations	0			38
Amortization	(221)			(169)

Balance at period end	$	642		$	984
Fair value of commercial servicing rights	$	1,104		$	1,417
Commercial servicing rights, net to servicing portfolio	1.12		%	1.32		%

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~~capitalized 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~~HTLF 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 the carrying amount at each ~~Heartland~~HTLF subsidiary. At ~~September~~June 30, ~~2017, no~~2021, a $470,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $1.9 million valuation allowance was required on the mortgage servicing rights 30-year tranche. At December 31, 2020, a $422,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $1.4 million valuation allowance was required on the mortgage servicing rights 30-year tranche. At both June 30, 2021 and December 31, 2020, 0 valuation allowance was required on commercial servicing rights with a term less than 20 years and a $4,000 valuation allowance was required on commercial servicing rights with a term greater than 20 years. At December 31, 2016, no valuation allowance was required on commercial servicing rights with a term less than 20 years and a $33,0000 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 June 30, 2021, and December 31, 2020:


	Book Value 15-Year Tranche		Fair Value 15-Year Tranche		Valuation Allowance 15-Year Tranche		Book Value 30-Year Tranche		Fair Value 30-Year Tranche		Valuation Allowance 30-Year Tranche

June 30, 2021	$	1,627	$	1,157	$	470	$	6,287	$	4,402	$	1,885



December 31, 2020	$	1,522	$	1,100	$	422	$	5,445	$	4,089	$	1,356

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,~~2021, and December 31, ~~2016:~~2020:


	Book Value Less than 20 Years		Fair Value Less than 20 Years		Valuation Allowance 15-Year Tranche		Book Value More than 20 Years		Fair Value More than 20 Years		Valuation Allowance 30-Year Tranche



June 30, 2021	$	58	$	170	$	0	$	584	$	934	$	0




December 31, 2020	$	87	$	203	$	0	$	776	$	1,085	$	0

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~~HTLF uses derivative financial instruments as part of its interest rate risk management strategy. As part of the strategy, ~~Heartland~~HTLF 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~~HTLF's current strategy includes the use of interest rate swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, ~~Heartland~~HTLF is facilitating back-to-back loan swaps to assist customers in managing interest rate risk. ~~Heartland's~~HTLF'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~~HTLF is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. ~~Heartland~~HTLF minimizes this risk by entering into derivative contracts with counterparties that meet ~~Heartland’s~~HTLF’s credit standards, and the contracts contain collateral provisions protecting the at-risk party. ~~Heartland~~HTLF has not experienced any losses from nonperformance by these counterparties. ~~Heartland~~HTLF 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~~HTLF was required to pledge ~~$2.2~~$2.9 million of cash as collateral at June 30, 2021 compared to $3.8 million at December 31, 2020. At both ~~September~~June 30, ~~2017,~~2021 and December 31, ~~2016. No~~2020, 0 collateral was required to be pledged by ~~Heartland's counterparties at both September 30, 2017, and December 31, 2016.~~HTLF's counterparties.

~~Heartland's~~HTLF'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~~HTLF 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~~HTLF 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~~HTLF's variable-rate liabilities. For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, 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~~$1.8 million. For the next twelve months, ~~Heartland~~HTLF estimates that cash payments and reclassification from accumulated other comprehensive income to interest expense will total ~~$1.2~~$2.4 million.

~~Heartland~~HTLF entered into ~~five~~ forward starting interest rate swap transactions to effectively convert Heartland Financial Statutory Trust ~~IV, V,~~VI and VII, which total ~~$65.0 million, as well as Morrill Statutory Trust I and II, which total $20.0~~$40.0 million, from variable rate subordinated debentures to fixed rate debt. For accounting purposes, these ~~five~~ swap transactions are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on ~~$85.0~~$40.0 million of ~~Heartland's~~HTLF's subordinated debentures that reset quarterly on a

specified reset date. At inception, ~~Heartland~~HTLF 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~~2021, the interest rate swap transaction ~~relates to Heartland's $20.0 million~~associated with Heartland Financial Statutory Trust ~~VI, which~~IV, totaling $25.0 million, matured and the fixed rate debt has been converted ~~from a fixed interest rate subordinated debenture~~ to a variable rate subordinated debenture.

On May 18, 2018, HTLF acquired cash flow hedges related to OCGI Statutory Trust 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 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 replacedbeing hedged, associated with the interest ~~rate swap related to Heartland Statutory Trust VII upon its expiration~~payments made on ~~March 1, 2017.~~$9.0 million of HTLF's subordinated debentures that reset quarterly on a specified reset date. These swaps matured in June of 2021.

The table below identifies the balance sheet category and fair values of ~~Heartland's~~HTLF's derivative instruments designated as cash flow hedges at ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity
June 30, 2021







Interest rate swap	$	21,250	$	(1,636)	Other liabilities	2.591	%	5.425	%	07/24/2028
Interest rate swap	20,000		(1,107)		Other liabilities	0.119		2.390		06/15/2024
Interest rate swap	20,000		(1,049)		Other liabilities	0.135		2.352		03/01/2024


December 31, 2020
Interest rate swap	$	25,000	$	(127)	Other liabilities	0.229	%	2.255	%	03/17/2021

Interest rate swap	21,667		(91)		Other liabilities	2.649		3.674		05/10/2021
Interest rate swap	22,750		(2,220)		Other liabilities	2.643		5.425		07/24/2028
Interest rate swap	20,000		(1,482)		Other liabilities	0.217		2.390		06/15/2024
Interest rate swap	20,000		(1,385)		Other liabilities	0.225		2.352		03/01/2024
Interest rate swap	6,000		(50)		Other liabilities	0.217		1.866		06/15/2021
Interest rate swap	3,000		(25)		Other liabilities	0.241		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~~HTLF's derivative instruments designated as cash flow hedges for the three- and ~~nine-month periods~~six- months ended ~~September~~June 30, ~~2017,~~2021, and ~~September~~June 30, ~~2016,~~2020, 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, 2021












Interest rate swaps	$	291	Interest expense	$	454	Other income	$	0
Six Months Ended June 30, 2021












Interest rate swaps	$	1,588	Interest expense	$	1,045	Other income	$	0
Three Months Ended June 30, 2020
Interest rate swap	$	(100)	Interest Expense	$	417	Other Income	$	0










Six Months Ended June 30, 2020
Interest rate swap	$	(3,963)	Interest Expense	$	600	Other Income	$	0

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~~HTLF uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. ~~Heartland~~HTLF 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~~HTLF 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~~HTLF was required to pledge ~~$4.5~~$3.8 million and ~~$5.0~~$4.2 million of cash as collateral for these fair value hedges at ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, respectively.

The table below identifies the notional amount, fair value and balance sheet category of ~~Heartland's~~HTLF's fair value hedges at ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category
June 30, 2021

Fair value hedges	$	16,901	$	(1,585)	Other liabilities
December 31, 2020

Fair value hedges	$	20,841	$	(2,480)	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~~HTLF's fair value hedges for the three- and ~~nine-month periods~~six- months ended ~~September~~June 30, ~~2017,~~2021, and ~~September~~June 30, ~~2016,~~2020, in thousands:

Amount of Gain (Loss)

Income Statement Category

Three Months Ended June 30, 2021

Fair value hedges

132

Interest income

Six Months Ended June 30, 2021

Fair value hedges

895

Interest income

Three Months Ended June 30, 2020

Fair value hedges

Interest income

Six Months Ended June 30, 2020

Fair value hedges

(1,673)

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~~HTLF 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~~the embedded derivatives at ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category
June 30, 2021
Embedded derivatives	$	8,971	$	497	Other assets

December 31, 2020
Embedded derivatives	$	9,198	$	680	Other assets

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~~HTLF's embedded derivatives for the three- and ~~nine-month periods~~six- months ended ~~September~~June 30, ~~2017,~~2021, and ~~September~~June 30, ~~2016,~~2020, in thousands:

Amount of Gain (Loss)

Income Statement Category

Three Months Ended June 30, 2021

Embedded derivatives

(54)

Other noninterest income

Six Months Ended June 30, 2021

Embedded derivatives

(183)

Other noninterest income

Three Months Ended June 30, 2020

Embedded derivatives

Other noninterest income

Six Months Ended June 30, 2020

Embedded derivatives

362

Other noninterest income

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

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

At 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~~HTLF has interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan swaps, ~~Heartland~~HTLF 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~~HTLF was required to post ~~$2.0~~$30.6 million and ~~$1.8~~$46.5 million ~~at both September~~as of June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, respectively, as collateral related to these back-to-back swaps. ~~Heartland's~~HTLF's counterparties were required to pledge ~~$190,000~~$0 at ~~September~~both June 30, ~~2017,~~2021, and ~~$768,000 at~~ December 31, ~~2016.~~2020. 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~~three and six months ended ~~September~~June 30, ~~2017~~2021 and ~~September~~June 30, ~~2016, no~~2020, 0 gain or loss was recognized. The table below identifies the balance sheet category and fair values of ~~Heartland's~~the derivative instruments designated as loan swaps at ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
June 30, 2021
Customer interest rate swaps	$	438,415	$	29,394	Other assets	4.50	%	2.43	%
Customer interest rate swaps	438,415		(29,394)		Other liabilities	2.43		4.50
December 31, 2020
Customer interest rate swaps	$	440,719	$	43,422	Other assets	4.46	%	2.46	%
Customer interest rate swaps	440,719		(43,422)		Other liabilities	2.46		4.46

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~~HTLF 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~~HTLF 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~~HTLF was required to pledge 0 collateral ~~of $353,000~~ at ~~September~~both June 30, ~~2017,~~2021, and ~~$0 at~~ December 31, ~~2016. Heartland's~~2020. HTLF's counterparties were required to pledge ~~$29,000 and $2.9 million~~0 collateral at ~~September~~both June 30, ~~2017,~~2021 and December 31, ~~2016, respectively,~~2020, as collateral for these forward commitments.

~~Heartland~~HTLF 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~~HTLF's other free standing derivative instruments not designated as hedging instruments at ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, in thousands:


	Balance Sheet Category	Notional Amount		Fair Value
June 30, 2021
Interest rate lock commitments (mortgage)	Other assets	$	39,922	$	1,425

Forward commitments	Other assets	9,500		8
Forward commitments	Other liabilities	59,000		(202)
Undesignated interest rate swaps	Other liabilities	8,971		(497)

December 31, 2020
Interest rate lock commitments (mortgage)	Other assets	$	42,078	$	1,827

Forward commitments	Other assets	0		0
Forward commitments	Other liabilities	86,500		(697)
Undesignated interest rate swaps	Other liabilities	9,198		(680)

Balance Sheet
Category

Notional
Amount

Fair
Value
September 30, 2017
Interest rate lock commitments (mortgage) Other assets $ 77,910
$ 2,463
Forward commitments Other assets 75,192
237
Forward commitments Other liabilities 91,865
(261 )
Undesignated interest rate swaps Other liabilities 14,175
(923 )
December 31, 2016

Interest rate lock commitments (mortgage) Other assets $ 80,465
$ 2,790
Forward commitments Other assets 142,750
2,546
Forward commitments Other liabilities 59,276
(266 )
Undesignated interest rate swaps Other liabilities 15,564
(1,126 )

The table below identifies the income statement category of the gains and losses recognized in income on ~~Heartland's~~HTLF's other free standing derivative instruments not designated as hedging instruments for the three- and ~~nine-month periods~~six- months ended ~~September~~June 30, ~~2017,~~2021, and ~~September~~June 30, ~~2016,~~2020, in thousands:


	Income Statement Category	Gain (Loss) Recognized
Three Months Ended June 30, 2021
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	(250)
Forward commitments	Net gains on sale of loans held for sale	(1,403)
Undesignated interest rate swaps	Other noninterest income	54
Six Months Ended June 30, 2021
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	(1,735)
Forward commitments	Net gains on sale of loans held for sale	503
Undesignated interest rate swaps	Other noninterest income	183
Three Months Ended June 30, 2020
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	1,296
Forward commitments	Net gains on sale of loans held for sale	962
Undesignated interest rate swaps	Other noninterest income	(1)
Six Months Ended June 30, 2020
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	2,994

Forward commitments	Net gains on sale of loans held for sale	(184)
Undesignated interest rate swaps	Other noninterest income	(362)

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~~HTLF 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~~HTLF 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~~HTLF'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~~HTLF classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.

Loans Held to Maturity

~~Heartland~~HTLF does not record loans held to maturity at fair value on a recurring basis. However, from time to time, ~~a loan is~~certain loans are considered ~~impaired~~collateral dependent and an allowance for ~~loan~~credit 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~~individually assessed 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.~~collateral. In accordance with ASC 820, ~~impaired~~individually assessed loans measured at fair value are classified as nonrecurring Level 3 in the fair value hierarchy.

Premises, Furniture and Equipment Held for Sale

~~Heartland~~HTLF values premises, furniture and equipment held for sale based on third-party appraisals less estimated disposal costs. ~~Heartland~~HTLF considers third party appraisals, as well as independent fair value assessments from ~~Realtors~~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~~HTLF 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~~HTLF 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~~HTLF. HTLF 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~~HTLF classifies commercial servicing rights as nonrecurring with Level 3 measurement inputs.

Derivative Financial Instruments

~~Heartland's~~HTLF'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~~HTLF 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~~HTLF has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although ~~Heartland~~HTLF 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,~~2021, and December 31, ~~2016, Heartland~~2020, HTLF 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~~HTLF has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Interest rate lock commitments

~~Heartland~~HTLF 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~~HTLF 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~~HTLF 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~~HTLF 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~~HTLFs assets and liabilities that are measured at fair value on a recurring basis as of ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, 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, 2021
Assets

Securities available for sale
U.S. treasuries	$	1,016	$	1,016	$	0	$	0
U.S. agencies	35,371		0		35,371		0
Obligations of states and political subdivisions	1,871,786		0		1,871,786		0
Mortgage-backed securities - agency	1,740,675		0		1,740,675		0
Mortgage-backed securities - non-agency	1,363,292		0		1,363,292		0
Commercial mortgage-backed securities - agency	125,080		0		125,080		0
Commercial mortgage-backed securities - non-agency	535,305		0		535,305		0
Asset-backed securities	846,987		0		846,987		0
Corporate bonds	3,815		0		3,815		0
Equity securities with a readily determinable fair value	20,651		0		20,651		0
Derivative financial instruments(1)	29,891		0		29,891		0
Interest rate lock commitments	1,425		0		0		1,425
Forward commitments	8		0		8		0
Total assets at fair value	$	6,575,302	$	1,016	$	6,572,861	$	1,425
Liabilities
Derivative financial instruments(2)	$	35,268	$	0	$	35,268	$	0
Forward commitments	202		0		202		0

Total liabilities at fair value	$	35,470	$	0	$	35,470	$	0
December 31, 2020
Assets

Securities available for sale
U.S. treasuries	$	2,026	$	2,026	$	0	$	0
U.S. agencies	166,779		0		166,779		0
Obligations of states and political subdivisions	1,635,227		0		1,635,227		0
Mortgage-backed securities - agency	1,355,270		0		1,355,270		0
Mortgage-backed securities - non-agency	1,449,116		0		1,449,116		0
Commercial mortgage-backed securities - agency	174,153		0		174,153		0
Commercial mortgage-backed securities - non-agency	252,767		0		252,767		0
Asset-backed securities	1,069,266		0		1,069,266		0
Corporate bonds	3,742		0		3,742		0
Equity securities with a readily determinable fair value	19,629		0		19,629		0
Derivative financial instruments(1)	44,102		0		44,102		0
Interest rate lock commitments	1,827		0		0		1,827

Total assets at fair value	$	6,173,904	$	2,026	$	6,170,051	$	1,827
Liabilities
Derivative financial instruments(2)	$	51,962	$	0	$	51,962	$	0
Forward commitments	697		0		697		0

Total liabilities at fair value	$	52,659	$	0	$	52,659	$	0

(1) Includes embedded derivatives, back-to-back loan swaps and fair value 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~~HTLF's assets that are measured at fair value on a nonrecurring basis, in thousands:


	Fair Value Measurements at June 30, 2021
	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 individually assessed loans:
Commercial and industrial	$	8,969	$	0	$	0	$	8,969	$	214
Owner occupied commercial real estate	3,573		0		0		3,573		0
Non-owner occupied commercial real estate	14,742		0		0		14,742		1,637

Agricultural and agricultural real estate	14,161		0		0		14,161		0


Total collateral dependent individually assessed loans	$	41,445	$	0	$	0	$	41,445	$	1,851
Loans held for sale	$	33,248	$	0	$	33,248	$	0	$	(1,304)
Other real estate owned	6,314		0		0		6,314		(88)
Premises, furniture and equipment held for sale	6,925		0		0		6,925		(44)
Servicing rights	5,559		0		0		5,559		(391)

Fair Value Measurements at
September 30, 2017
Total
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Year-to-
Date (Gains)
Losses
Collateral dependent impaired loans:
Commercial $ 3,556
$ —
$ —
$ 3,556
$ 1,119
Commercial real estate 8,718
—
—
8,718
2,043
Agricultural and agricultural real estate 7,936
—
—
7,936
—
Residential real estate 1,365
—
—
1,365
—
Consumer 912
—
—
912
—
Total collateral dependent impaired loans $ 22,487
$ —
$ —
$ 22,487
$ 3,162
Other real estate owned $ 13,226
$ —
$ —
$ 13,226
$ 594
Premises, furniture and equipment held for sale $ 4,428
$ —
$ —
$ 4,428
$ 404
Commercial servicing rights $ 313
$ —
$ —
$ 313
$ (29 )


	Fair Value Measurements at December 31, 2020
	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 individually assessed loans:
Commercial and industrial	$	11,256	$	0	$	0	$	11,256	$	451
Owner occupied commercial real estate	5,874		0		0		5,874		11,631
Non-owner occupied commercial real estate	4,907		0		0		4,907		0

Agricultural and agricultural real estate	12,451		0		0		12,451		0


Total collateral dependent individually assessed loans	$	34,488	$	0	$	0	$	34,488	$	12,082
Loans held for sale	$	57,949	$	0	$	57,949	$	0	$	(982)

Other real estate owned	6,624		0		0		6,624		1,044
Premises, furniture and equipment held for sale	6,499		0		0		6,499		3,288
Servicing rights	5,189		0		0		5,189		1,778

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~~HTLF has utilized Level 3 inputs to determine fair value, in thousands:

Fair Value
at
6/30/2021

Valuation
Technique

Unobservable
Input

Range
(Weighted
Average)

Interest rate lock commitments

1,425

Discounted cash flows

Closing ratio

0-99% (88%)(1)

Other real estate owned

6,314

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Servicing rights

5,559

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

6,925

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Collateral dependent individually assessed loans:

Commercial

8,969

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%(3)

Owner occupied commercial real estate

3,573

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-7%(3)

Non-owner occupied commercial real estate

14,742

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Agricultural and agricultural real estate

14,161

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%(3)

(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) 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
12/31/2020

Valuation
Technique

Unobservable
Input

Range
(Weighted
Average)

Interest rate lock commitments

1,827

Discounted cash flows

Closing ratio

0-99% (86%)(1)

Other real estate owned

6,624

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Servicing rights

5,189

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

6,499

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Collateral dependent individually assessed loans:

Commercial and industrial

11,256

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%(3)

Fair Value at
9/30/17
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⁾
Premises, furniture and equipment held for sale 4,428
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%
Collateral dependent impaired loans:
Commercial 3,556
Modified appraised value Third party appraisal (2)
Appraisal discount
0-15%⁽⁴⁾
Commercial real estate 8,718
Modified appraised value Third party appraisal (2)
Appraisal discount
0-14%⁽⁴⁾
Agricultural and agricultural real estate 7,936
Modified appraised value Third party appraisal (2)
Appraisal discount
0-6%⁽⁴⁾
Residential real estate 1,365
Modified appraised value Third party appraisal (2)
Appraisal discount
0-13%⁽⁴⁾
Consumer 912
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.

Fair Value
at
12/31/2020

Valuation
Technique

Unobservable
Input

Range
(Weighted
Average)

Owner occupied commercial real estate

5,874

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-12%(3)

Non-owner occupied commercial real estate

4,907

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Agricultural and agricultural real estate

12,451

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

(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
12/31/16
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, 2021		For the Year Ended December 31, 2020
Balance at January 1,	$	1,827	$	681

Total net gains included in earnings	(1,735)		2,803
Issuances	8,892		17,221
Settlements	(7,559)		(18,878)
Balance at period end	$	1,425	$	1,827

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,~~2021, and December 31, ~~2016,~~2020, were ~~$2.5~~$1.4 million and ~~$2.8~~$1.8 million, respectively.

The ~~tables~~table below ~~summarize~~is a summary of the estimated fair value of ~~Heartland's~~HTLF's financial instruments as(as defined by ASC ~~825~~825) as of ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, 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~~HTLF does not believe that the estimated information presented herein is representative of the earnings power or value of ~~Heartland.~~HTLF. 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~~HTLF to create value through loan origination, deposit gathering or fee generating activities. Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.


					Fair Value Measurements at June 30, 2021
	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	$	449,128	$	449,128	$	449,128	$	0	$	0
Time deposits in other financial institutions	3,138		3,138		3,138		0		0
Securities:

Carried at fair value	6,543,978		6,543,978		1,016		6,542,962		0
Held to maturity	85,439		95,421		0		95,421		0
Other investments	76,809		76,809		0		76,809		0
Loans held for sale	33,248		33,248		0		33,248		0
Loans, net:
Commercial and industrial	2,487,576		2,469,136		0		2,460,167		8,969
PPP	829,175		829,175		0		829,175		0
Owner occupied commercial real estate	1,920,144		1,901,531		0		1,897,958		3,573
Non-owner occupied commercial real estate	1,964,541		1,953,264		0		1,938,522		14,742
Real estate construction	834,715		838,001		0		838,001		0
Agricultural and agricultural real estate	672,448		660,650		0		646,489		14,161
Residential real estate	791,143		789,274		0		789,274		0
Consumer	391,546		394,337		0		394,337		0
Total Loans, net	9,891,288		9,835,368		0		9,793,923		41,445
Cash surrender value on life insurance	189,619		189,619		0		189,619		0
Derivative financial instruments(1)	29,891		29,891		0		29,891		0
Interest rate lock commitments	1,425		1,425		0		0		1,425
Forward commitments	8		8		0		8		0
Financial liabilities:
Deposits
Demand deposits	6,299,289		6,299,289		0		6,299,289		0
Savings deposits	8,189,223		8,189,223		0		8,189,223		0
Time deposits	1,126,606		1,126,788		0		1,126,788		0

Short term borrowings	152,563		152,563		0		152,563		0
Other borrowings	271,244		274,631		0		274,631		0
Derivative financial instruments(2)	35,268		35,368		0		35,368		0
Forward commitments	202		202		0		202		0

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


					Fair Value Measurements at September 30, 2017											Fair Value Measurements at December 31, 2020
	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:											Financial assets:
Cash and cash equivalents	$	251,736	$	251,736	$	251,736	$	—	$	—	Cash and cash equivalents	$	337,903	$	337,903	$	337,903	$	0	$	0
Time deposits in other financial institutions	19,793		19,793		19,793		—		—		Time deposits in other financial institutions	3,129		3,129		3,129		0		0
Securities:											Securities:
Available for sale	2,093,385		2,093,385		3,505		2,089,880		—

Carried at fair value											Carried at fair value	6,127,975		6,127,975		2,026		6,125,949		0
Held to maturity	256,355		270,386		—		270,386		—		Held to maturity	88,839		100,041		0		100,041		0
Other investments	23,176		23,176		—		22,981		195		Other investments	75,253		75,523		0		75,523		0
Loans held for sale	35,795		35,795		—		35,795		—		Loans held for sale	57,949		57,949		0		57,949		0
Loans, net:											Loans, net:
Commercial	1,596,934		1,601,351		—		1,597,795		3,556
Commercial real estate	3,143,414		3,117,829		—		3,109,111		8,718
Commercial and industrial											Commercial and industrial	2,495,981		2,391,041		0		2,379,785		11,256
PPP											PPP	957,785		957,785		0		957,785		0
Owner occupied commercial real estate											Owner occupied commercial real estate	1,756,405		1,745,397		0		1,739,523		5,874
Non-owner occupied commercial real estate											Non-owner occupied commercial real estate	1,900,608		1,892,213		0		1,887,306		4,907
Real estate construction											Real estate construction	843,140		849,224		0		849,224		0
Agricultural and agricultural real estate	506,388		507,974		—		500,038		7,936		Agricultural and agricultural real estate	707,397		697,729		0		685,278		12,451
Residential real estate	632,306		622,698		—		621,333		1,365		Residential real estate	828,507		828,366		0		828,366		0
Consumer	441,079		444,384		—		443,472		912		Consumer	401,622		407,914		0		407,914		0
Total Loans, net	6,320,121		6,294,236		—		6,271,749		22,487		Total Loans, net	9,891,445		9,769,669		0		9,735,181		34,488
Cash surrender value on life insurance											Cash surrender value on life insurance	187,664		187,664		0		187,664		0
Derivative financial instruments⁽¹⁾	3,386		3,386		—		3,386		—		Derivative financial instruments(1)	44,102		44,102		0		44,102		0
Interest rate lock commitments	2,463		2,463		—		—		2,463		Interest rate lock commitments	1,827		1,827		0		0		1,827
Forward commitments	237		237		—		237		—

Financial liabilities:											Financial liabilities:
Deposits											Deposits
Demand deposits	3,009,940		3,009,940		—		3,009,940		—		Demand deposits	5,688,810		5,688,810		0		5,688,810		0
Savings deposits	4,227,340		4,227,340		—		4,227,340		—		Savings deposits	8,019,704		8,019,704		0		8,019,704		0
Time deposits	994,604		994,604		—		994,604		—		Time deposits	1,271,391		1,273,468		0		1,273,468		0

Short term borrowings	171,871		171,871		—		171,871		—		Short term borrowings	167,872		167,872		0		167,872		0
Other borrowings	301,473		305,741		—		305,741		—		Other borrowings	457,042		458,806		0		458,806		0
Derivative financial instruments⁽²⁾	6,309		6,309		—		6,309		—
Derivative financial instruments(1)											Derivative financial instruments(1)	51,962		51,962		0		51,962		0
Forward commitments	261		261		—		261		—		Forward commitments	697		697		0		697		0

(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 and fair value hedges.											(1) Includes embedded derivatives, back-to-back loan swaps and fair value hedges.
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps and free standing derivative instruments.											(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps 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~~HTLF 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 by discounting~~methodology. 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 individually assessed or 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, HTLF classifies the estimated fair value of the cash surrender value on life insurance as Level 2.

Derivative Financial Instruments — The fair value of all derivatives is estimated based on the amount that HTLF 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.

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

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

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

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

NOTE 9: ~~SEGMENT REPORTING~~REVENUE

~~Heartland has identified two operating segments~~Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, requires revenue to be recognized at an amount that reflects the consideration to which HTLF expects to be entitled in exchange for ~~purposes~~transferring goods or services to a customer. ASC 606 applies to all contracts with customers to provide goods or services in the ordinary course of ~~financial reporting: community~~business, except for contracts that are specifically excluded from its scope. The majority of HTLF's revenue streams including interest income, loan servicing income, net securities gain, net unrealized gains and losses on equity securities, net gains on sale of loans held for sale, valuation adjustment on servicing rights, income from bank owned life insurance and other ~~banking,~~noninterest income are outside the scope of ASC 606. Revenue streams including service charges and ~~retail mortgage banking. These segments~~fees, interchange fees on credit and debit cards, trust fees and brokerage and insurance commissions are within the scope of ASC 606.

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 and other service charges, 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. HTLF'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 transaction 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. HTLF'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 HTLF's banks or a non-bank cardholder uses a HTLF-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. HTLF'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. HTLF does not earn performance-based incentives. HTLF'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 HTLF 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. HTLF acts as an insurance agent between the customer and the insurance carrier. HTLF'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 table 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, 2021, and 2020, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
In-scope of Topic 606
Service charges and fees
Service charges and fees on deposit accounts	$	4,014	$	3,476	$	7,950	$	6,913
Overdraft fees	2,549		1,634		5,141		4,443
Customer service and other service fees	54		35		100		94
Credit card fee income	5,854		4,067		10,162		7,967
Debit card income	2,661		1,760		5,450		3,576

Total service charges and fees	15,132		10,972		28,803		22,993
Trust fees	6,039		4,977		11,816		9,999
Brokerage and insurance commissions	865		595		1,718		1,328
Total noninterest income in-scope of Topic 606	22,036		16,544		42,337		34,320

Out-of-scope of Topic 606
Loan servicing income	$	873	$	379	$	1,711	$	1,342
Securities gains, net	2,842		2,006		2,812		3,664
Unrealized gain/ (loss) on equity securities, net	83		680		(27)		449
Net gains on sale of loans held for sale	4,753		7,857		11,173		12,517
Valuation adjustment on servicing rights	(526)		9		391		(1,556)
Income on bank owned life insurance	937		1,167		1,766		1,665
Other noninterest income	2,166		1,995		3,318		4,053
Total noninterest income out-of-scope of Topic 606	11,128		14,093		21,144		22,134
Total noninterest income	$	33,164	$	30,637	$	63,481	$	56,454

Contract Balances

HTLF does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2021, and December 31, 2020, HTLF did not have any significant contract balances or capitalized contract acquisition costs.

NOTE 10: STOCK COMPENSATION

HTLF may grant, through its Nominating, Compensation and Corporate Governance 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 2020 Long-Term Incentive Plan (the "Plan"). The Plan was approved by stockholders in May 2020 and replaces the 2012 Long-Term Incentive Plan. The Plan increased the number of shares of common stock authorized for issuance to 1,460,000 and made certain other changes to the Plan. As of June 30, 2021, 1,200,807 shares of common stock were ~~determined~~available for issuance under future awards that may be granted under the Plan to employees and directors of, and service providers to, HTLF or its subsidiaries.

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.

HTLF's income tax expense included $303,000 of tax benefit during the six months ended June 30, 2021 and ~~services provided~~a tax expense of $91,000 during the six months ended June 30, 2020, related to the exercise, vesting and forfeiture of equity-based awards.

Restricted Stock Units

The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). In the first quarter of 2021, the Compensation Committee granted time-based RSUs with respect to 104,462 shares of common stock, and in the first quarter of 2020, the Compensation Committee granted time-based RSUs with respect to 114,944 shares of common stock to selected officers and employees. The time-based RSUs represent the right, without payment, to receive shares of HTLF common stock on a specified date in the future. The time-based RSUs granted in 2021 and 2020 vest over three years in equal installments in March 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 60,339 shares and 50,787 shares of ~~customers served~~common stock in the first quarter of 2021 and 2020, respectively. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance period ended December 31, 2023, and December 31, 2022, respectively. These performance-based RSUs or a portion thereof may vest in 2024 and 2023, 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 2021 and 2020 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 HTLF'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~~non-employee HTLF and subsidiary bank 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, 2021, and June 30, 2020, 41,974 and 46,613 time-based RSUs, respectively, were granted to directors and new employees.

A summary of the RSUs outstanding as of June 30, 2021, and June 30, 2020, and changes during the six months ended June 30, 2021 and 2020, follows:


	2021			2020
	Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value
Outstanding at January 1,	348,275	$	38.22	254,383	$	46.76
Granted	208,513	51.63		212,344	32.00
Vested	(146,381)	40.89		(118,686)	44.52
Forfeited	(18,861)	42.88		(14,648)	47.00
Outstanding at June 30,	391,546	$	44.08	333,393	$	38.55

Total compensation costs recorded for ~~Heartland's operating segments~~RSUs were $4.6 million and $3.4 million for the ~~three-~~six months ended June 30, 2021 and ~~nine-month periods ended September~~2020. As of June 30, ~~2017, and September 30, 2016, in thousands:~~2021, there were $11.3 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2024.

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. ("HTLF") and its management may contain, forward-looking statements within the meaning of ~~such term in~~Section 27A of the ~~Private~~ Securities ~~Litigation Reform~~ Act of ~~1995,~~1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to the business, financial condition, results of operations, plans, objectives and future performance of ~~Heartland. Forward-looking~~HTLF.

Any statements ~~which~~about HTLF's expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be ~~based upon beliefs, expectations and assumptions of Heartland's management and on information currently available to management,~~forward-looking. These forward-looking statements are generally ~~identifiable~~identified by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "project," "may," "will," "would," "could," ~~"should"~~"should," "opportunity," "potential" or other similar ~~expressions.~~or negative expressions of these words or phrases. Although ~~Heartland~~HTLF has made these statements based on management's experience, beliefs, expectations, assumptions and best estimate of future events, the ability of the company to predict results or the actual effect or outcomes of plans or strategies is inherently uncertain, and there may be events or factors that management has not ~~anticipated, and~~anticipated. Therefore, the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, many of which are beyond the ability of management to control or predict, that could cause actual results to differ materially from those in its forward-looking statements. These factors, which the company currently believes could have a material effect on its operations and future prospects include, among others, those described below and in the risk factors in HTLF's reports filed with the Securities and Exchange Commission ("SEC"), including ~~those identified in our~~the "Risk Factors" section under Item 1A of Part I of the company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020:

•COVID-19 Pandemic Risks, including risks related to the ongoing COVID-19 pandemic and measures enacted by the U.S. federal and state governments and adopted by private businesses in response to the COVID-19 pandemic;

•Economic and Market Conditions Risks, including risks related to changes in the U.S. economy in general and in the local economies in which HTLF conducts its operations and future civil unrest, natural disasters, terrorist threats or acts of war;

•Credit Risks, including risks of increasing credit losses due to deterioration in the financial condition of HTLF's borrowers, changes in asset and collateral values and climate and other borrower industry risks which may impact the provision for credit losses and net charge-offs;

•Liquidity and Interest Rate Risks, including the impact of capital market conditions and changes in monetary policy on our borrowings and net interest income;

•Operational Risks, including processing, information systems, cybersecurity, vendor, business interruption, and fraud risks;

•Strategic and External Risks, including competitive forces impacting our business and strategic acquisition risks;

•Legal, Compliance and Reputational Risks, including regulatory and litigation risks; and

•Risks of Owning Stock in HTLF, including stock price volatility and dilution as a result of future equity offerings and acquisitions.

These risks and uncertainties should be considered in evaluating forward-looking statements made by HTLF or on its behalf, and undue reliance should not be placed on these statements. There can be no assurance that other factors not currently anticipated by HTLF will not materially and adversely affect the company's business, financial condition and results of operations. In addition, many of these risks and uncertainties are currently amplified by and may continue to be amplified by the COVID-19 pandemic and the impact of varying governmental responses that affect HTLF’s customers and the economies where they operate. Additionally, all statements in this ~~document,~~Quarterly Report on Form 10-Q, including forward-looking statements, speak only as of the date they are ~~made,~~made. HTLF does not undertake and ~~Heartland undertakes no~~specifically disclaims any obligation to publicly release the results of any revisions which may be made or to correct or update any forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events or to otherwise update any statement in light of new information or future events. Further information concerning HTLF and its business, including additional factors that could materially affect HTLF’s financial results, is included in the company’s filings with the SEC.

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~~HTLF's reported financial position and results of operations are described as critical accounting policies in ~~Heartland's~~the company's Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020. 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.~~2020.

OVERVIEW

~~Heartland's~~Heartland Financial USA, Inc. is a financial services company operating under the brand name HTLF. HTLF's banks serve communities in Arizona, California, Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, New Mexico, Texas and Wisconsin. HTLF is committed to its core commercial business supported by a strong retail operation and provides a diversified line of financial services including residential mortgage, wealth management, investments and insurance. As of June 30, 2021, HTLF has eleven banking subsidiaries with 132 locations.

HTLF'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~~the results of operations. ~~Heartland's~~HTLF's principal operating expenses, aside from interest expense, consist of the provision for ~~loan~~credit 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~~HTLF reported the following results for the quarter ended June 30, 2021, compared to the quarter ended June 30, 2020:

•net income available to common stockholders ~~for the quarter ended September 30, 2017, was $21.6~~of $59.6 million ~~or $0.72~~compared to $30.1 million,

•earnings per diluted common share of $1.41 compared to ~~$20.2 million, or $0.81 per diluted common share, for the quarter ended September 30, 2016. Return~~$0.82,

•return on average common equity was ~~8.99% and~~ 12.07% compared to 7.69,%

•return on average assets was ~~0.89%~~1.35% compared to 0.84%, and

•return on average tangible common equity (non-GAAP) was 18.05% compared to 11.97%.

HTLF reported the following results for the ~~third quarter of 2017,~~six months ended June 30, 2021, compared to ~~11.64% and 0.98%, respectively, for~~ the ~~same quarter in 2016.~~six months ended June 30, 2020:

~~Net~~•net income available to common stockholders ~~for the first nine months~~ of ~~2017 was $61.6~~$110.4 million ~~or $2.21~~compared to $50.2 million,

•earnings per diluted common share of $2.61 compared to ~~$61.0 million, or $2.48 per diluted common share, for the first nine months of 2016. Return~~$1.36,

•return on average common equity was ~~9.88% and~~ 11.29% compared to 6.32%,

•return on average assets was ~~0.94% for the first nine months of 2017,~~1.27% compared to ~~12.28%~~0.73%, and ~~1.00%, respectively, for the same period in 2016.~~

•return on average tangible common equity (non-GAAP) was 16.99% compared to 9.95%.

For the ~~third~~second quarter of ~~2017, Heartland's~~2021, net interest margin was ~~4.08% (4.26%~~3.37% (3.41% on a fully tax-equivalent ~~basis) compared~~basis, non-GAAP), which compares to ~~3.97% (4.14%~~3.44% (3.48% on a fully tax-equivalent ~~basis)~~basis, non-GAAP) and 3.81% (3.85% on a fully-tax equivalent basis, non-GAAP) for the first quarter of 2021 and second quarter of 2020, respectively. For the first six months of 2021, net interest margin was 3.40% (3.45% on a fully tax-equivalent basis, non-GAAP), which compares to 3.81% (3.85% on a fully tax-equivalent basis, non-GAAP), for the first six months of 2020.

The efficiency ratio on a fully tax-equivalent basis (non-GAAP) was 57.11% for the second quarter of 2021 compared to 55.75% for the same quarter ~~in 2016, and~~of 2020. For the first six months of 2021, the efficiency ratio ~~was 64.54% and 63.88% for the third quarter of 2017 and 2016, respectively. For the nine-month period ended September 30, 2017, Heartland's net interest margin was 4.00% (4.19%~~ on a fully tax-equivalent ~~basis)~~basis (non-GAAP) was 56.86% compared to ~~3.98% (4.15% on a fully tax-equivalent basis)~~58.64% for the ~~same period in 2016. Heartland's efficiency ratio increased to 66.58% for the nine~~first six months ~~ended September 30, 2017 compared to 66.23% for the same period in 2016.~~of 2020.

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~~$18.37 billion at ~~September~~June 30, ~~2017,~~2021, an increase of $1.51 billion or 18% 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$462.7 million or 2%3% since December 31, ~~2016.~~2020. Securities represented ~~24%~~37% of total assets at ~~September~~June 30, ~~2017,~~2021, and ~~26%~~35% of total assets at December 31, ~~2016.~~

2020. Total loans held to maturity were ~~$6.37~~$10.01 billion at ~~September~~June 30, ~~2017,~~2021 compared to ~~$5.35~~$10.02 billion at ~~year-end 2016, an increase~~December 31, 2020, which was a decrease of ~~$1.02 billion. This change includes $96.4~~$11.0 million of

or less than 1%. Excluding total Paycheck Protection Program ("PPP") loans, total loans held to maturity ~~acquired at fair value in the Founders Bancorp transaction and $985.4~~increased $117.6 million or 1.30% since year-end 2020.

The total allowance for lending related credit losses was $134.7 million or 1.35% of total loans ~~held~~at June 30, 2021, compared to ~~maturity acquired at fair value in the Citywide Banks~~$146.9 million or 1.47% of ~~Colorado, Inc. transaction. Exclusive of these transactions,~~ total loans ~~held to maturity decreased $60.2 million or 1% since~~at December 31, ~~2016.~~2020. Excluding total PPP loans, the allowance for lending related credit losses as percentage of loans was 1.47% and 1.62% as of June 30, 2021, and December 31, 2020, respectively.

Total deposits were ~~$8.23~~$15.62 billion as of ~~September~~June 30, ~~2017,~~2021, compared to ~~$6.85~~$14.98 billion at ~~year-end 2016,~~December 31, 2020, 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$635.2 million or ~~less than 1% since~~4%.

Total equity was $2.16 billion at June 30, 2021, compared to $2.08 billion at December 31, ~~2016.~~

~~Common stockholders' equity was $980.7 million at September 30, 2017, compared to $739.6 million at year-end 2016.~~2020. Book value per common share was ~~$32.75~~$48.50 at ~~September~~June 30, ~~2017,~~2021, compared to ~~$28.31~~$46.77 at year-end ~~2016. Heartland's~~2020. The unrealized ~~loss~~gain on securities available for sale, net of applicable taxes, was ~~$20.1~~$59.4 million at ~~September~~June 30, ~~2017,~~2021, compared to an unrealized ~~loss~~gain of ~~$30.2~~$76.8 million, net of applicable taxes, at December 31, ~~2016.~~2020.

~~FINANCIAL HIGHLIGHTS~~

Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of the foregoing non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures.

2021 Developments

AimBank Systems Conversion

On February 19, 2021, HTLF successfully completed the systems conversion of AimBank, which was acquired by HTLF in the fourth quarter of 2020 and merged into HTLF's Texas subsidiary, First Bank & Trust. Subsequent to the systems conversion, seven of AimBank's twenty-five bank branches were transferred to HTLF's New Mexico Bank & Trust subsidiary.

Paycheck Protection Program Loans

HTLF originated a second round of Paycheck Protection Program loans ("PPP II") totaling $473.9 million since the beginning of 2021. PPP II loans are 100% United States Small Business Administration ("SBA") guaranteed, and borrowers may be eligible to have an amount up to the entire principal balance forgiven and paid by the SBA.

As of June 30, 2021, approximately 95% of the PPP loans originated in 2020 ("PPP I") have been forgiven or are in the process of being forgiven.

Branch Optimization

During the first six months of 2021, HTLF consolidated six legacy bank branches and three AimBank branches as it continues to respond to customer preferences and closely manage expenses. HTLF will continue to review its branch network for optimization and consolidation opportunities and anticipates reducing branch locations by approximately 10%, which may result in additional write-downs of fixed assets in future periods.

Branding Change

On April 14, 2021, a branding change from Heartland Financial to HTLF was announced and rolled out across the organization. The branding was refreshed to better reflect the strength of the diverse footprint and continued growth of the company.

Common Stock Dividend Increase

Subsequent to June 30, 2021, the HTLF Board of Directors approved a 14% increase in its quarterly common share dividend to $0.25 from $0.22. The dividend was increased to $0.22 per common share in January 2021 from $0.20 per common share in each quarter of 2020.


FINANCIAL HIGHLIGHTS													FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)	Three Months Ended September 30,						Nine Months Ended September 30,						(Dollars in thousands, except per share data)	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016				2021			2020			2021			2020
STATEMENT OF INCOME DATA													STATEMENT OF INCOME DATA
Interest income	$	98,978		$	81,687		$	261,590		$	243,702		Interest income	$	148,082		$	133,765		$	295,534		$	264,814
Interest expense	9,134			8,006			24,138			24,196			Interest expense	6,864			9,619			14,711			28,157
Net interest income	89,844			73,681			237,452			219,506			Net interest income	141,218			124,146			280,823			236,657
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
Provision (benefit) for credit losses													Provision (benefit) for credit losses	(7,080)			26,796			(7,728)			48,316
Net interest income after provision for credit losses													Net interest income after provision for credit losses	148,298			97,350			288,551			188,341
Noninterest income	24,977			28,542			76,494			89,146			Noninterest income	33,164			30,637			63,481			56,454
Noninterest expenses	78,759			68,427			219,797			209,756			Noninterest expenses	103,376			90,439			205,799			181,298
Income taxes	8,725			8,260			22,314			28,196			Income taxes	16,481			7,417			31,814			13,326
Net income	21,632			20,208			61,600			61,187			Net income	61,605			30,131			114,419			50,171
Preferred dividends	(13		)	(53		)	(45		)	(273		)	Preferred dividends	(2,012)			—			(4,025)			—
Interest expense on convertible preferred debt	3			17			12			48

Net income available to common stockholders	$	21,622		$	20,172		$	61,567		$	60,962		Net income available to common stockholders	$	59,593		$	30,131		$	110,394		$	50,171

Key Performance Ratios
KEY PERFORMANCE RATIOS													KEY PERFORMANCE RATIOS
Annualized return on average assets	0.89		%	0.98		%	0.94		%	1.00		%	Annualized return on average assets	1.35		%	0.84		%	1.27		%	0.73		%
Annualized return on average common equity (GAAP)	8.99		%	11.64		%	9.88		%	12.28		%	Annualized return on average common equity (GAAP)	12.07			7.69			11.29			6.32
Annualized return on average tangible common equity (non-GAAP)⁽¹⁾	12.41		%	14.93		%	12.90		%	15.87		%	Annualized return on average tangible common equity (non-GAAP)(1)	18.05			11.97			16.99			9.95

Annualized ratio of net charge-offs to average loans	0.31		%	0.17		%	0.23		%	0.09		%	Annualized ratio of net charge-offs to average loans	0.12			0.11			0.09			0.17
Annualized net interest margin (GAAP)													Annualized net interest margin (GAAP)	3.37			3.81			3.40			3.81
Annualized net interest margin, fully tax-equivalent (non-GAAP)(1)													Annualized net interest margin, fully tax-equivalent (non-GAAP)(1)	3.41			3.85			3.45			3.85
Efficiency ratio, fully tax-equivalent (non-GAAP)(1)													Efficiency ratio, fully tax-equivalent (non-GAAP)(1)	57.11			55.75			56.86			58.64


Dollars in thousands, expect per share data	As Of and For the Quarter Ended
	6/30/2021			3/31/2021			12/31/2020			9/30/2020			6/30/2020
BALANCE SHEET DATA
Investments	$	6,706,226		$	6,530,723		$	6,292,067		$	5,075,338		$	4,252,832
Loans held for sale	33,248			43,037			57,949			65,969			54,382
Loans receivable held to maturity	10,012,014			10,050,456			10,023,051			9,099,646			9,246,830
Allowance for credit losses	120,726			130,172			131,606			103,377			119,937
Total assets	18,371,006			18,244,427			17,908,339			15,612,664			15,026,153
Total deposits	15,615,118			15,559,051			14,979,905			12,767,110			12,708,699
Long-term obligations	271,244			349,514			457,042			524,045			306,459

Common equity	2,049,081			1,945,502			1,968,526			1,700,899			1,636.672

COMMON SHARE DATA
Book value per common share (GAAP)	$	48.50		$	46.13		$	46.77		$	46.11		$	44.42
Tangible book value per common share (non-GAAP)(1)	$	33.98		$	31.53		$	32.07		$	32.91		$	31.14

Common shares outstanding, net of treasury stock	42,245,452			42,173,675			42,093,862			36,885,390			36,844,744
Tangible common equity ratio (non-GAAP)(1)	8.08		%	7.54		%	7.81		%	8.03		%	7.89		%

(1) Refer to "Non-GAAP Financial Measures" 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.

(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%.


Non-GAAP Reconciliations (Dollars in thousands, except per share data)
	As Of and For the Quarter Ended
	6/30/2021			3/31/2021			12/31/2020			9/30/2020			6/30/2020
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common stockholders (GAAP)	$	59,593		$	50,801		$	37,795		$	45,521		$	30,131
Plus core deposit and customer relationship intangibles amortization, net of tax(1)	1,907			1,988			1,975			1,969			2,130
Net income excluding intangible amortization (non-GAAP)	$	61,500		$	52,789		$	39,770		$	47,490		$	32,261

Average common equity (GAAP)	$	1,980,904		$	1,963,674		$	1,769,575		$	1,661,381		$	1,574,902
Less average goodwill	576,005			576,005			488,151			446,345			446,345
Less average core deposit and customer relationship intangibles, net	38,614			41,399			42,733			42,145			44,723
Average tangible common equity (non-GAAP)	$	1,366,285		$	1,346,270		$	1,238,691		$	1,172,891		$	1,083,834
Annualized return on average common equity (GAAP)	12.07		%	10.49		%	8.50		%	10.90		%	7.69		%
Annualized return on average tangible common equity (non-GAAP)	18.05		%	15.90		%	12.77		%	16.11		%	11.97		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net Interest Income (GAAP)	$	141,218		$	139,605		$	132,575		$	122,497		$	124,146
Plus tax-equivalent adjustment(1)	1,762			1,761			1,529			1,390			1,416
Net interest income, fully tax-equivalent (non-GAAP)	$	142,980		$	141,366		$	134,104		$	123,887		$	125,562

Average earning assets	$	16,819,978		$	16,460,124		$	15,042,079		$	13,868,360		$	13,103,159

Annualized net interest margin (GAAP)	3.37		%	3.44		%	3.51		%	3.51		%	3.81		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)	3.41			3.48			3.55			3.55			3.85
Net purchase accounting discount accretion on loans included in annualized net interest margin	0.09			0.12			0.10			0.10			0.16


	As Of and For the Quarter Ended
	6/30/2021			3/31/2021			12/31/2020			9/30/2020			6/30/2020
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)
Common equity (GAAP)	$	2,049,081		$	1,945,502		$	1,968,526		$	1,700,899		$	1,636,672
Less goodwill	576,005			576,005			576,005			446,345			446,345
Less core deposit and customer relationship intangibles, net	37,452			39,867			42,383			40,520			43,011
Tangible common equity (non-GAAP)	$	1,435,624		$	1,329,630		$	1,350,138		$	1,214,034		$	1,147,316

Common shares outstanding, net of treasury stock	42,245,452			42,173,675			42,093,862			36,885,390			36,844,744
Common equity (book value) per share (GAAP)	$	48.50		$	46.13		$	46.77		$	46.11		$	44.42
Tangible book value per common share (non-GAAP)	$	33.98		$	31.53		$	32.07		$	32.91		$	31.14

Reconciliation of Tangible Common Equity Ratio (non-GAAP)
Tangible common equity (non-GAAP)	$	1,435,624		$	1,329,630		$	1,350,138		$	1,214,034		$	1,147,316

Total assets (GAAP)	$	18,371,006		$	18,244,427		$	17,908,339		$	15,612,664		$	15,026,153
Less goodwill	576,005			576,005			576,005			446,345			446,345
Less core deposit and customer relationship intangibles, net	37,452			39,867			42,383			40,520			43,011
Total tangible assets (non-GAAP)	$	17,757,549		$	17,628,555		$	17,289,951		$	15,125,799		$	14,536,797
Tangible common equity ratio (non-GAAP)	8.08		%	7.54		%	7.81		%	8.03		%	7.89		%

(1) 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
9/30/2017 6/30/2017 3/31/2017 12/31/2016 9/30/2016
BALANCE SHEET DATA
Investments $ 2,372,916
$ 2,070,121
$ 2,175,701
$ 2,131,086
$ 1,943,080
Loans held for sale 35,795
48,848
49,009
61,261
78,317
Total loans receivable⁽¹⁾
6,373,415
5,325,082
5,361,604
5,351,719
5,438,715
Allowance for loan losses 54,885
54,051
54,999
54,324
54,653
Total assets 9,755,627
8,204,721
8,361,845
8,247,079
8,202,215
Total deposits 8,231,884
6,930,169
7,089,861
6,847,411
6,912,693
Long-term obligations 301,473
281,096
282,051
288,534
294,493
Preferred equity 938
938
938
1,357
1,357
Common stockholders’ equity 980,746
805,032
780,374
739,559
703,031

Common Share Data
Book value per common share (GAAP) $ 32.75
$ 30.15
$ 29.26
$ 28.31
$ 28.48
Tangible book value per common share (non-GAAP)⁽²⁾
$ 23.61
$ 24.00
$ 23.05
$ 22.55
$ 22.34
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
Tangible common equity ratio (non-GAAP)⁽³⁾
7.46 % 7.97 % 7.50 % 7.28 % 6.85 %

Reconciliation of Tangible Book Value Per Common Share (non-GAAP)⁽⁴⁾

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

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

Reconciliation of Tangible Common Equity Ratio (non-GAAP)⁽⁵⁾

Total assets (GAAP) $ 9,755,627
$ 8,204,721
$ 8,361,845
$ 8,247,079
$ 8,202,215
    Less goodwill 236,615
141,461
141,461
127,699
127,699
    Less core deposit intangibles and customer relationship
intangibles, net 37,028
22,850
24,068
22,775
23,922
Total tangible assets (non-GAAP) $ 9,481,984
$ 8,040,410
$ 8,196,316
$ 8,096,605
$ 8,050,594
Tangible common equity ratio (non-GAAP) 7.46 % 7.97 % 7.50 % 7.28 % 6.85 %

(1) Excludes loans held for sale.
(2) Refer to the "Reconciliation of Tangible Book Value Per Common Share (non-GAAP)" table.
(3) Refer to the "Reconciliation of Tangible Common Equity Ratio (non-GAAP)" table.
(4) Tangible book value per common share is total common stockholders' equity less goodwill and core deposit and customer relationship intangibles, net, divided by common shares outstanding, net of treasury. This amount is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate the financial condition and capital strength of Heartland. This measure should not be considered a substitute for operating results determined in accordance with GAAP.
(5) The tangible common equity ratio is total common stockholders' equity less goodwill and core deposit intangibles, net divided by total assets less goodwill and core deposit intangibles, net. This ratio is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate the financial condition and capital strength of Heartland. This measure should not be considered a substitute for operating results determined in accordance with GAAP.


Reconciliation of Efficiency Ratio (non-GAAP)	For the Quarter Ended
	6/30/2021			3/31/2021			12/31/2020			9/30/2020			6/30/2020
Net interest income (GAAP)	$	141,218		$	139,605		$	132,575		$	122,497		$	124,146
Tax-equivalent adjustment(1)	1,762			1,761			1,529			1,390			1,416
Fully tax-equivalent net interest income	142,980			141,366			134,104			123,887			125,562
Noninterest income	33,164			30,317			32,621			31,216			30,637
Securities (gains)/losses, net	(2,842)			30			(2,829)			(1,300)			(2,006)
Unrealized (gain)/loss on equity securities, net	(83)			110			(36)			(155)			(680)

Valuation adjustment on servicing rights	526			(917)			102			120			(9)
Adjusted revenue (non-GAAP)	$	173,745		$	170,906		$	163,962		$	153,768		$	153,504

Total noninterest expenses (GAAP)	$	103,376		$	102,423		$	99,269		$	90,396		$	90,439
Less:
Core deposit and customer relationship intangibles amortization	2,415			2,516			2,501			2,492			2,696
Partnership investment in tax credit projects	1,345			35			1,899			927			791
Loss on sales/valuation of assets, net	183			194			2,621			1,763			701
Acquisition, integration and restructuring costs	210			2,928			2,186			1,146			673
Adjusted noninterest expenses (non-GAAP)	$	99,223		$	96,750		$	90,062		$	84,068		$	85,578
Efficiency ratio, fully tax-equivalent (non-GAAP)	57.11		%	56.61		%	54.93		%	54.67		%	55.75		%

Acquisition, integration and restructuring costs
Salaries and employee benefits	$	44		$	534		$	232		$	—		$	122
Occupancy	1			9			—			—			—
Furniture and equipment	41			607			423			496			15
Professional fees	63			670			1,422			476			505
Advertising	6			156			42			8			4

Other noninterest expenses	55			952			67			166			27
Total acquisition, integration and restructuring costs	$	210		$	2,928		$	2,186		$	1,146		$	673
After tax impact on diluted earnings per common share(1)	$	—		$	0.05		$	0.04		$	0.02		$	0.01
















(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.




DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
	For the Quarter Ended June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common stockholders (GAAP)	$	59,593		$	30,131		$	110,394		$	50,171
Plus core deposit and customer relationship intangibles amortization, net of tax(1)	1,907			2,130			3,895			4,485
Net income available to common stockholders excluding intangible amortization (non-GAAP)	$	61,500		$	32,261		$	114,289		$	54,656

Average common equity (GAAP)	$	1,980,904		$	1,574,902		$	1,972,337		$	1,597,292
Less average goodwill	576,005			446,345			576,005			446,345
Less average core deposit and customer relationship intangibles, net	38,614			44,723			39,999			46,177
Average tangible common equity (non-GAAP)	$	1,366,285		$	1,083,834		$	1,356,333		$	1,104,770
Annualized return on average common equity (GAAP)	12.07		%	7.69		%	11.29		%	6.32		%
Annualized return on average tangible common equity (non-GAAP)	18.05		%	11.97		%	16.99		%	9.95		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net Interest Income (GAAP)	$	141,218		$	124,146		$	280,823		$	236,657
Plus tax-equivalent adjustment(1)	1,762			1,416			3,523			2,547
Net interest income, fully tax-equivalent (non-GAAP)	$	142,980		$	125,562		$	284,346		$	239,204

Average earning assets	$	16,819,978		$	13,103,159		$	16,641,045		$	12,497,307

Annualized net interest margin (GAAP)	3.37		%	3.81		%	3.40		%	3.81		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)	3.41			3.85			3.45			3.85
Net purchase accounting discount accretion on loans included in annualized net interest margin	0.09			0.16			0.11			0.10

(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.




DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
Reconciliation of Efficiency Ratio (non-GAAP)	For the Quarter Ended June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020
Net interest income (GAAP)	$	141,218		$	124,146		$	280,823		$	236,657
Tax-equivalent adjustment(1)	1,762			1,416			3,523			2,547
Fully tax-equivalent net interest income	142,980			125,562			284,346			239,204
Noninterest income	33,164			30,637			63,481			56,454
Securities gains, net	(2,842)			(2,006)			(2,812)			(3,664)
Unrealized (gain)/loss on equity securities, net	(83)			(680)			27			(449)

Valuation adjustment on servicing rights	526			(9)			(391)			1,556
Adjusted revenue (non-GAAP)	$	173,745		$	153,504		$	344,651		$	293,101

Total noninterest expenses (GAAP)	$	103,376		$	90,439		$	205,799		$	181,298
Less:
Core deposit and customer relationship intangibles amortization	2,415			2,696			4,931			5,677
Partnership investment in tax credit projects	1,345			791			1,380			975
Loss on sales/valuation of assets, net	183			701			377			717
Acquisition, integration and restructuring costs	210			673			3,138			2,049
Adjusted noninterest expenses (non-GAAP)	$	99,223		$	85,578		$	195,973		$	171,880
Efficiency ratio, fully tax-equivalent (non-GAAP)	57.11		%	55.75		%	56.86		%	58.64		%

Acquisition, integration and restructuring costs
Salaries and employee benefits	$	44		$	122		$	578		$	166
Occupancy	1			—			10			—
Furniture and equipment	41			15			648			39
Professional fees	63			505			733			1,501
Advertising	6			4			162			93

Other noninterest expenses	55			27			1,007			250
Total acquisition, integration and restructuring costs	$	210		$	673		$	3,138		$	2,049
After tax impact on diluted earnings per common share(1)	$	—		$	0.01		$	0.06		$	0.04
















(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.

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 HTLF'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 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 the reconciliation contained in this Quarterly Report on Form 10-Q.

•Net interest income, fully tax equivalent, is net income adjusted 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.

•Tangible book value per common share is total common 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 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 financial condition and capital strength.

•Annualized return on average tangible common equity is net income excluding intangible amortization calculated as (1) net income excluding tax-effected core deposit and customer relationship intangibles amortization, divided by (2) average common 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 use of equity, financial condition and capital strength.

RESULTS OF OPERATIONS

Net Interest Margin and Net Interest Income

Management closely monitors and manages net interest income and net interest margin, the results of which are shared with investors because they are important indicators of the company's profitability and growth of earning assets.

Net interest income is the difference between interest income on earning assets and interest expense paid on interest bearing liabilities. As such, net interest income is affected by changes in volumes and yields on earning assets and the volume and rates paid on interest bearing liabilities. Net interest margin ~~expressed as a percentage~~is the ratio of net interest income to 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~~assets.

HTLF's success in maintaining competitive net interest margin despite the low-interest rate environment has been the result of ~~improved yield on~~an increase in average earning assets and ~~continuous loan and~~a favorable deposit ~~pricing discipline.~~mix. Also contributing to ~~Heartland's~~HTLF's ability to maintain its net interest margin has been the amortization of purchase accounting discounts associated with acquisitions completed since 2015.

For the Quarters ended June 30, 2021 and 2020

Net interest margin, expressed as a percentage of average earning assets, was 3.37% (3.41% on a fully tax-equivalent basis, non-GAAP) during the second quarter of 2021, compared to 3.81% (3.85% on a fully tax-equivalent basis, non-GAAP) during the second quarter of 2020. For the quarters ended June 30, 2021 and 2020, net interest margin included 9 basis points and 16 basis points, respectively, of net purchase accounting discount amortization.

Total interest income and average earning asset changes for the second quarter of 2021 compared to the second quarter of 2020 were:

•Total interest income was $148.1 million, which was an increase of $14.3 million or 11% from $133.8 million and primarily attributable to an increase in average earning assets partially offset by ~~Heartland.~~ lower yields.

•Total interest income on a tax-equivalent basis (non-GAAP) was $149.8 million, which was an increase of $14.7 million or 11% from $135.2 million.

•Average earning assets increased $3.72 billion or 28% to $16.82 billion compared to $13.10 billion, which was primarily attributable to recent acquisitions and loan growth, including PPP loans.

•The average rate on earning assets decreased 58 basis points to 3.57% compared to 4.15%, which was primarily due to recent decreases in market interest rates and a shift in earning asset mix. Total average securities were 39% of total average earning assets compared to 29%.

Total interest expense and average interest bearing liability changes for the second quarter of 2021 compared to the second quarter of 2020 were:

•Total interest expense was $6.9 million, a decrease of $2.8 million or 29% from $9.6 million, based on a decrease in the average interest rate paid, which was partially offset by an increase in average interest bearing liabilities.

•The average interest rate paid on interest bearing liabilities decreased to 0.28% compared to 0.47%, which was primarily due to recent decreases in market interest rates.

•Average interest bearing deposits increased $1.62 billion or 21% to $9.41 billion from $7.79 billion which was primarily attributable to recent acquisitions and deposit growth, including deposits related to government stimulus payments and other COVID-19 relief programs.

•The average interest rate paid on interest bearing deposits decreased 16 basis points to 0.16% compared to 0.32%.

•Average borrowings increased $97.0 million or 26% to $465.9 million from $368.9 million, which was primarily attributable to outstanding advances from the PPP lending fund used to fund PPP loans to borrowers. The average interest rate paid on borrowings was 2.65% compared to 3.80%.

Net interest income increased for the second quarter of 2021 compared to the second quarter of 2020:

•Net interest income totaled $141.2 million compared to $124.1 million, which was an increase of $17.1 million or 14%.

•Net interest income on a tax-equivalent basis (non-GAAP) totaled $143.0 million compared to $125.6 million, which was an increase of $17.4 million or 14%.

For the Six Months ended June 30, 2021 and 2020

Net interest margin, expressed as a percentage of average earning assets, was 3.40% (3.45% on a fully tax-equivalent basis, non-GAAP) during the first six months of 2021, compared to 3.81% (3.85% on a fully tax-equivalent basis, non-GAAP) during the first six months of 2020. For the six months ended June 30, 2021 and 2020, net interest margin included 11 basis points and 10 basis points, respectively, of net purchase accounting discount amortization.

Total interest income and average earning asset changes for the first six months of 2021 compared to the first six months of 2020 were:

•Total interest income was $295.5 million, which was an increase of $30.7 million or 12% from $264.8 million, primarily attributable to an increase in average earning assets partially offset by lower yields.

•Total interest income on a tax-equivalent basis (non-GAAP) was $299.1 million, which was an increase of $31.7 million or 12% from $267.4 million.

•Average earning assets increased $4.14 billion or 33% to $16.64 billion compared to $12.50 billion which was primarily attributable to recent acquisitions and loan growth, including PPP loans.

•The average rate on earning assets decreased 68 basis points to 3.62% compared to 4.30%, which was primarily due to recent decreases in market interest rates and a shift in earning asset mix. Total average securities were 39% of total average earning assets compared to 29%, and the average tax-effected rate on securities was 2.27% compared to 2.90%.

Total interest expense and average interest bearing liability changes for the first six months of 2021 compared to the first six months of 2020 were:

•Total interest expense was $14.7 million, a decrease of $13.4 million or 48% from $28.2 million, based on a decrease in the average interest rate paid, which was partially offset by an increase in average interest bearing liabilities.

•The average interest rate paid on interest bearing liabilities decreased to 0.30% compared to 0.71%, which was primarily due to recent decreases in market interest rates.

•Average interest bearing deposits increased $1.73 billion or 23% to $9.34 billion from $7.61 billion which was primarily attributable to recent acquisitions and deposit growth, including deposits related to government stimulus payments and other COVID-19 relief programs.

•The average interest rate paid on interest bearing deposits decreased 37 basis points to 0.18% compared to 0.55%.

•Average borrowings increased $164.7 million or 42% to $558.0 million from $393.3 million, which was primarily attributable to outstanding advances from the PPP lending fund used to fund PPP loans to borrowers. The average interest rate paid on borrowings was 2.36% compared to 3.80%.

Net interest income increased for the first six months of 2021 compared to the first six months of 2020:

•Net interest income totaled $280.8 million compared to $236.7 million, which was an increase of $44.2 million or 19%.

•Net interest income on a tax-equivalent basis (non-GAAP) totaled $284.3 million compared to $239.2 million, which was an increase of $45.1 million or 19%.

See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for ~~a description of our use of~~additional information relating to net interest income on a fully tax-equivalent basis, which is not defined by ~~GAAP, and a reconciliation of annualized~~GAAP.

Management believes net interest margin ~~on a fully tax-equivalent basis~~expressed in dollars will continue to ~~GAAP.~~

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

For the first nine months of 2017, interest income increased $17.9 million or 7% to $261.6 million from $243.7 million for the first nine months of 2016. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were $11.6 million and $9.4 million for the first nine months of 2017 and 2016, respectively. With these adjustments, interest income onmargin as a tax-equivalent basis was $273.2 million during the first nine months of 2017 compared to $253.1 million during the first nine months of 2016, an increase of $20.1 million or 8%. For the first nine 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 millionpercentage of average earning assets ~~attributable~~may decrease because of interest rate changes. The Federal Reserve has indicated it will closely assess economic data and be patient before moving ahead with any additional changes to the ~~acquisitions completed in 2017, average earning assets increased $52.8 million or 1% for~~Federal Funds rate; therefore, the ~~first nine months~~timing and magnitude of ~~2017 compared to the same period in 2016.~~any such changes are uncertain and will depend on domestic and global economic conditions.

Interest expense for the third quarter of 2017 was $9.1 million, an increase of $1.1 million or 14% from $8.0 million in the third quarter of 2016. For the quarter ended September 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. 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, and the average interest rate paid on time deposits was 0.79% for the nine-month period ended September 30, 2017 compared to 0.80% for the same period in 2016. The average interest rate paid on Heartland's borrowings increased 37 basis points to 3.06% for the nine months ended September 30, 2017 compared to 2.69% for the nine months ended September 30, 2016.

Net interest income increased $16.2 million or 22% to $89.8 million in the third quarter of 2017 from $73.7 million in the third quarter of 2016. 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 million during the first nine months of 2017, an increase of $20.1 million or 9% from $228.9 million recorded during the first nine months of 2016.

~~Heartland~~HTLF 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~~income. Management continues 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~~HTLF 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 HTLF 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~~the 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, 2021							March 31, 2021							June 30, 2020
	Average Balance			Interest		Rate		Average Balance			Interest		Rate		Average Balance			Interest		Rate
Earning Assets
Securities:
Taxable	$	5,862,683		$	31,546	2.16	%	$	5,693,097		$	30,443	2.17	%	$	3,375,245		$	23,362	2.78	%
Nontaxable(1)	740,601			5,773		3.13		730,565			5,700		3.16		433,329			4,233		3.93
Total securities	6,603,284			37,319		2.27		6,423,662			36,143		2.28		3,808,574			27,595		2.91
Interest on deposits with other banks and short-term investments	271,891			60		0.09		204,488			66		0.13		210,347			54		0.10
Federal funds sold	—			—		—		14,020			1		0.03		—			—		—
Loans:(2)
Commercial and industrial(1)	2,469,742			28,562		4.64		2,500,250			28,222		4.58		2,453,066			30,759		5.04
PPP loans	1,047,559			11,186		4.28		992,517			10,149		4.15		916,405			6,017		2.64
Owner occupied commercial real estate	1,858,891			20,097		4.34		1,778,829			19,565		4.46		1,426,019			17,670		4.98
Non-owner occupied commercial real estate	1,980,374			21,734		4.40		1,937,564			22,121		4.63		1,540,958			19,055		4.97
Real estate construction	815,738			9,212		4.53		806,315			9,698		4.88		1,100,514			12,589		4.60
Agricultural and agricultural real estate	672,560			7,267		4.33		681,279			8,051		4.79		532,668			6,171		4.66
Residential mortgage	827,291			9,255		4.49		849,923			9,830		4.69		795,149			9,586		4.85
Consumer	399,916			5,152		5.17		405,475			5,367		5.37		422,134			5,685		5.42
Less: allowance for credit losses-loans	(127,268)			—		—		(134,198)			—		—		(102,675)			—		—
Net loans	9,944,803			112,465		4.54		9,817,954			113,003		4.67		9,084,238			107,532		4.76
Total earning assets	16,819,978			149,844		3.57	%	16,460,124			149,213		3.68	%	13,103,159			135,181		4.15	%
Nonearning Assets	1,473,778							1,504,599							1,288,697
Total Assets	$	18,293,756						$	17,964,723						$	14,391,856
Interest Bearing Liabilities
Savings	$	8,234,151		$	2,233	0.11	%	$	8,032,308		$	2,430	0.12	%	$	6,690,504		$	2,372	0.14	%
Time deposits	1,171,266			1,557		0.53		1,233,682			1,965		0.65		1,096,386			3,762		1.38
Short-term borrowings	169,822			98		0.23		240,037			152		0.26		82,200			61		0.30
Other borrowings	296,063			2,976		4.03		411,132			3,300		3.26		286,663			3,424		4.80
Total interest bearing liabilities	9,871,302			6,864		0.28	%	9,917,159			7,847		0.32	%	8,155,753			9,619		0.47
Noninterest Bearing Liabilities
Noninterest bearing deposits	6,170,928							5,778,571							4,501,488
Accrued interest and other liabilities	159,917							194,614							153,618
Total noninterest bearing liabilities	6,330,845							5,973,185							4,655,106
Equity	2,091,609							2,074,379							1,580,997
Total Liabilities and Equity	$	18,293,756						$	17,964,723						$	14,391,856
Net interest income, fully tax-equivalent (non-GAAP)(1)(3)				$	142,980						$	141,366						$	125,562
Net interest spread(1)						3.29	%						3.36	%						3.68	%
Net interest income, fully tax-equivalent to total earning assets (non-GAAP)(1)(3)						3.41	%						3.48	%						3.85	%
Interest bearing liabilities to earning assets	58.69		%					60.25		%					62.24		%









(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) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures.

ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾
(Dollars in thousands)
For the Quarter Ended
September 30, 2017 September 30, 2016
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 %
Nontaxable⁽¹⁾
643,925
7,825
4.82
473,152
5,719
4.81
Total securities 2,311,001
18,219
3.13
1,888,598
13,636
2.87
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments 164,809
558
1.34
7,026
6
0.34
Federal funds sold 18,874
34
0.71
1,409
1
0.28
Loans:⁽²⁾

Commercial and commercial real estate⁽¹⁾
4,647,414
59,121
5.05
3,908,623
48,334
4.92
Residential mortgage 683,186
7,300
4.24
717,374
7,248
4.02
Agricultural and agricultural real estate⁽¹⁾
504,970
6,175
4.85
486,008
5,719
4.68
Consumer 450,694
9,032
7.95
426,083
8,256
7.71
Fees on loans 2,464
—
—
1,708
—
Less: allowance for loan losses (54,720 ) —
—
(52,261 ) —
—
Net loans 6,231,544
84,092
5.35
5,485,827
71,265
5.17
Total earning assets 8,726,228
102,903
4.68 % 7,382,860
84,908
4.58 %
Nonearning Assets 913,616
789,823

Total Assets $ 9,639,844
$ 8,172,683

Interest Bearing Liabilities
Savings $ 4,205,946
$ 3,162
0.30 % $ 3,697,426
$ 2,066
0.22 %
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
Short-term borrowings 209,795
271
0.51
258,783
235
0.36
Other borrowings 300,234
3,790
5.01
298,020
3,770
5.03
Total interest bearing liabilities 5,697,713
9,134
0.64 % 5,224,172
8,006
0.61 %
Noninterest Bearing Liabilities
Noninterest bearing deposits 2,912,344
2,171,965

Accrued interest and other liabilities 74,338
84,142

Total noninterest bearing liabilities 2,986,682
2,256,107

Stockholders' Equity 955,449
692,404

Total Liabilities and Stockholders' Equity $ 9,639,844
$ 8,172,683

Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾
$ 93,769
$ 76,902

Net interest spread⁽¹⁾
4.04 % 3.97 %
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 %

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.


ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) (DOLLARS IN THOUSANDS)
	For the Six Months Ended
	June 30, 2021							June 30, 2020
	Average Balance			Interest		Rate		Average Balance			Interest		Rate
Earning Assets
Securities:
Taxable	$	5,778,333		$	61,989	2.16	%	$	3,253,675		$	45,093	2.79	%
Nontaxable(1)	735,636			11,473		3.15		360,932			6,996		3.90
Total securities	6,513,969			73,462		2.27		3,614,607			52,089		2.90
Interest bearing deposits with other banks and other short-term investments	238,376			126		0.11		195,833			775		0.80
Federal funds sold	6,971			1		0.03		—			—		—
Loans:(2)
Commercial and industrial(1)	2,485,210			56,784		4.61		2,530,349			63,213		5.02
PPP loans	1,020,190			21,335		4.22		458,202			6,017		2.64
Owner occupied commercial real estate	1,818,932			39,662		4.40		1,429,560			36,251		5.10
Non-owner occupied commercial real estate	1,958,938			43,855		4.51		1,506,583			38,585		5.15
Real estate construction	811,053			18,910		4.70		1,073,175			25,434		4.77
Agricultural and agricultural real estate	676,895			15,318		4.56		542,818			13,210		4.89
Residential mortgage	838,545			19,085		4.59		807,440			20,007		4.98
Consumer	402,680			10,519		5.27		427,439			11,780		5.54

Less: allowance for loan losses	(130,714)			—		—		(88,699)			—		—
Net loans	9,881,729			225,468		4.60		8,686,867			214,497		4.97
Total earning assets	16,641,045			299,057		3.62	%	12,497,307			267,361		4.30	%
Nonearning Assets	1,489,103							1,272,708
Total Assets	$	18,130,148						$	13,770,015
Interest Bearing Liabilities
Savings	$	8,133,787		$	4,663	0.12	%	$	6,484,016		$	12,454	0.39	%
Time deposits	1,202,301			3,522		0.59		1,121,502			8,262		1.48
Short-term borrowings	204,735			250		0.25		112,004			357		0.64
Other borrowings	353,280			6,276		3.58		281,325			7,084		5.06
Total interest bearing liabilities	9,894,103			14,711		0.30	%	7,998,847			28,157		0.71	%
Noninterest Bearing Liabilities
Noninterest bearing deposits	5,975,833							4,024,267
Accrued interest and other liabilities	177,170							146,561
Total noninterest bearing liabilities	6,153,003							4,170,828
Equity	2,083,042							1,600,340
Total Liabilities and Equity	$	18,130,148						$	13,770,015
Net interest income, fully tax-equivalent (non-GAAP)(1)(3)				$	284,346						$	239,204
Net interest spread(1)						3.32	%						3.59	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(1)(3)						3.45	%						3.85	%
Interest bearing liabilities to earning assets	59.46		%					64.00		%




(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) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures.

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~~Credit Losses

The allowance for ~~loan~~credit losses is established through provision expense to provide, in ~~Heartland~~ management's opinion, an appropriate allowance for ~~loan~~credit losses. The following table shows the components of provision for ~~loan~~credit losses for the three and six months ended June 30, 2021 and 2020, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Provision (benefit) for credit losses-loans	$	(6,466)	$	25,007	$	(6,450)	$	44,872
Provision (benefit) for credit losses-unfunded commitments	(617)		1,924		(1,278)		3,540
Provision (benefit) for credit losses-held to maturity securities	3		(135)		—		(96)
Total provision expense (benefit)	$	(7,080)	$	26,796	$	(7,728)	$	48,316

The provision benefit for credit losses for loans was ~~$5.7~~$6.5 million for the ~~third~~second quarter of ~~2017~~2021, which was a decrease of $31.5 million from provision expense of $25.0 million recorded in the second quarter of 2020. The provision benefit for the second quarter of 2021 was impacted by several factors, including:

•increases in balances of loans held to maturity of $287.7 million during the second quarter excluding total PPP loans, which included an increase of $92.7 million in government guaranteed loans for which no provision was required,

•modest improvements in credit quality marked by a decrease in nonperforming loans of $6.5 million to $85.4 million and nonpass loans of 10.37% of total loans as of June 30, 2021, compared to ~~$5.3~~nonperforming loans of $91.9 million ~~for the third quarter~~and nonpass loans of ~~2016. For the first nine months~~11.47% of ~~2017, the provision for loan losses was $10.2 million~~total loans at March 31, 2021, and

•improved macroeconomic factors compared to ~~$9.5~~previous quarters.

The provision benefit for credit losses for loans was $6.5 million for the first ~~nine~~six months of ~~2016. In determining that~~2021 compared to provision expense of $44.9 million for the ~~allowance~~first six months of 2020, which was a decrease of $51.3 million. The provision benefit for ~~loan losses is appropriate, management uses~~the first six months of 2021 was impacted by several factors, ~~that include the overall composition of the loan portfolio, general economic conditions, types~~including:

•increases in balances of loans ~~loan collateral values, past loss experience, loan delinquencies, substandard credits,~~held to maturity of $117.6 million excluding total PPP loans from year-end 2020, which included an increase of $165.8 million of government guaranteed loans for which no provision was required.

•modest improvements in credit quality marked by a decrease in nonperforming loans of $2.7 million to $85.4 million and ~~doubtful credits.~~ nonpass loans of 10.37% of total loans as of June 30, 2021, compared to nonperforming loans of $88.1 million and nonpass loans of 10.80% of total loans at December 31, 2020, and

•improved macroeconomic factors compared to previous quarters.

Given the size of ~~Heartland's~~the loan portfolio, the level of organic loan growth ~~acquired~~including government guaranteed loans, ~~that move out of the purchase accounting pool,~~ changes in credit quality and the variability that can occur in the factors, such as economic conditions, considered when determining the appropriateness of the allowance for ~~loan~~credit losses, ~~Heartland's quarterly~~the provision for ~~loan~~credit losses will vary from quarter to quarter. For additional details on the specific factors considered in establishing the allowance for ~~loan~~credit 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~~HTLF's Annual Report on Form 10-K for the year ended December 31, ~~2016, and the information under the caption~~2020, "Allowance For ~~Loan~~Credit Losses" and "Provision for Credit Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 5, "Allowance for Credit Losses," 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~~Management believes the allowance for ~~loan~~credit losses as of ~~September~~June 30, ~~2017,~~2021, was at a level commensurate with the overall risk exposure of the loan portfolio. However, ifnegative changes in current economic conditions ~~should become more unfavorable,~~related to the COVID-19 pandemic could cause certain borrowers ~~may~~to experience ~~difficulty and~~difficulty. Due to the ~~level~~uncertainty of ~~nonperforming loans, charge-offs and delinquencies could rise and require further increases in~~future economic conditions resulting from the COVID-19 pandemic, including recent concerns over COVID-19 variants, the provision for ~~loan losses.~~credit losses could be volatile over the next several quarters.

Noninterest Income

The tables below show ~~Heartland's~~ noninterest income for the three- and ~~nine-month periods~~six- months ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, in thousands:


	Three Months Ended June 30,
	2021		2020		Change		% Change
Service charges and fees	$	15,132	$	10,972	$	4,160	38	%
Loan servicing income	873		379		494		130
Trust fees	6,039		4,977		1,062		21
Brokerage and insurance commissions	865		595		270		45
Securities gains, net	2,842		2,006		836		42
Unrealized gain/(loss) on equity securities, net	83		680		(597)		(88)

Net gains on sale of loans held for sale	4,753		7,857		(3,104)		(40)
Valuation adjustment on servicing rights	(526)		9		(535)		(5,944)
Income on bank owned life insurance	937		1,167		(230)		(20)
Other noninterest income	2,166		1,995		171		9
Total noninterest income	$	33,164	$	30,637	$	2,527	8	%

Three Months Ended
September 30,
2017 2016 Change % Change
Service charges and fees $ 10,138
$ 8,278
$ 1,860
22 %
Loan servicing income 1,161
873
288
33
Trust fees 3,872
3,689
183
5
Brokerage and insurance commissions 950
1,006
(56 ) (6 )
Securities gains, net 1,679
1,584
95
6
Net gains on sale of loans held for sale 4,997
11,459
(6,462 ) (56 )
Valuation adjustment on commercial servicing rights 5
5
—
—
Income on bank owned life insurance 766
620
146
24
Other noninterest income 1,409
1,028
381
37
Total noninterest income $ 24,977
$ 28,542
$ (3,565 ) (12 )%


	Six Months Ended June 30,
	2021		2020		Change		% Change
Service charges and fees	$	28,803	$	22,993	$	5,810	25	%
Loan servicing income	1,711		1,342		369		27
Trust fees	11,816		9,999		1,817		18
Brokerage and insurance commissions	1,718		1,328		390		29
Securities gains, net	2,812		3,664		(852)		(23)
Unrealized gain/(loss) on equity securities, net	(27)		449		(476)		(106)

Net gains on sale of loans held for sale	11,173		12,517		(1,344)		(11)
Valuation adjustment on servicing rights	391		(1,556)		1,947		125
Income on bank owned life insurance	1,766		1,665		101		6
Other noninterest income	3,318		4,053		(735)		(18)
Total noninterest income	$	63,481	$	56,454	$	7,027	12	%

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

~~Noninterest~~Total noninterest income totaled ~~$25.0~~$33.2 million during the ~~third~~second quarter of ~~2017~~2021 compared to ~~$28.5~~$30.6 million during the ~~third~~second quarter of ~~2016, a decrease~~2020, an increase of ~~$3.6~~$2.5 million or 8%. Total noninterest income was $63.5 million for the first six months of 2021 compared to $56.5 million for the same period of 2020, which was an increase of $7.0 million or 12%. ~~For the nine-month period ended on September 30, noninterest income totaled $76.5 million during 2017 compared to $89.1 million during 2016, a decrease of $12.7 million or 14%. Decreases~~

Notable changes in noninterest income categories for ~~both~~ the ~~quarterly~~three- and ~~nine-month periods under comparison reflected lower net gains on sale of loans held for sale, the effect of which was partially offset by increased service charges~~six months ended June 30, 2021 and ~~fees.~~2020 are as follows:

Service Charges and Fees

The following tables summarize the changes in service charges and fees for the three- and ~~nine-month periods~~six- months ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, in thousands:


	Three Months Ended June 30,
	2021		2020		Change		% Change
Service charges and fees on deposit accounts	$	4,014	$	3,476	$	538	15	%
Overdraft fees	2,549		1,634		915		56
Customer service and other service fees	54		35		19		54
Credit card fee income	5,854		4,067		1,787		44
Debit card income	2,661		1,760		901		51
Total service charges and fees	$	15,132	$	10,972	$	4,160	38	%

	Six Months Ended June 30,
	2021		2020		Change		% Change
Service charges and fees on deposit accounts	$	7,950	$	6,913	$	1,037	15	%
Overdraft fees	5,141		4,443		698		16
Customer service and other service fees	100		94		6		6
Credit card fee income	10,162		7,967		2,195		28
Debit card income	5,450		3,576		1,874		52
Total service charges and fees	$	28,803	$	22,993	$	5,810	25	%

Three Months Ended
September 30,

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

Nine Months Ended
September 30,

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

Notable changes in total service charges and fees for the second quarter of 2021 compared to the second quarter of 2020 were:

•Service charges and fees on deposit accounts totaled $4.0 million compared to $3.5 million, an increase of $538,000 or 15%.

•Overdraft fees increased ~~$1.9~~$915,000 or 56% to $2.5 million from $1.6 million.

•Credit card fee income increased $1.8 million or ~~22%~~44% to ~~$10.1~~$5.9 million ~~during the third quarter of 2017~~from $4.1 million.

•Debit card income totaled $2.7 million compared to ~~$8.3~~$1.8 million, ~~recorded during the third quarter~~an increase of ~~2016 and $5.8 million~~$901,000 or ~~25% to $29.3 million during the first nine months of 2017 compared to $23.5 million for the first nine months of 2016. Increases~~51%.

Notable changes in total service charges and fees for the first six months of 2021 compared to the first six months of 2020 were:

•Service charges and fees on deposit accounts totaled $8.0 million compared to $6.9 million, an increase of $1.0 million or 15%.

•Overdraft fees increased $698,000 or 16% to $5.1 million from $4.4 million.

•Credit card fee income increased $2.2 million or 28% to $10.2 million from $8.0 million.

•Debit card income totaled $5.5 million compared to $3.6 million, an increase of $1.9 million or 52%.

The changes detailed above were primarily attributable to aHTLF's larger ~~demand deposit~~ customer base as a ~~portion~~result of ~~which is attributable~~recent acquisitions. Additionally, HTLF was waiving retail and small business service charges and fees and transaction volumes were lower in the second quarter of 2020 due to the acquisitions completed in 2017. Fees associated with credit card services were $2.0 million during the third quarter of 2017 compared to $1.3 million during the third quarter of 2016, an increase of $704,000 or 55%. For the first nine months of 2017, these fees were $6.2 million compared to $3.4 million during the first nine months of 2016, an increase of $2.8 million or 81%. This increase resulted primarily from efforts to increase the level of commercial credit card services provided at Heartland's subsidiary banks, including at the newly acquired banks in California and Colorado. Heartland has focused on growing its card payment solutions for businesses, particularly with its expense management service that provides business customers the ability to more efficiently manage their card-based spending.COVID-19 pandemic.

Loan Servicing Income

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

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

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

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

Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which are dependent upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. ~~Loan~~The following tables show the changes in loan servicing income ~~totaled $1.2~~for the three- and six- months ended June 30, 2021, and 2020, in thousands:


	Three Months Ended June 30,
	2021		2020		Change		% Change
Commercial and agricultural loan servicing fees(1)	$	738	$	730	$	8	1	%
Residential mortgage servicing fees	459		410		49		12
Mortgage servicing rights amortization	(324)		(761)		437		57
Total loan servicing income	$	873	$	379	$	494	130	%

	Six Months Ended June 30,
	2021		2020		Change		% Change
Commercial and agricultural loan servicing fees(1)	$	1,512	$	1,591	$	(79)	(5)	%
Residential mortgage servicing fees	923		819		104		13
Mortgage servicing rights amortization	(724)		(1,068)		344		32
Total loan servicing income	$	1,711	$	1,342	$	369	27	%

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

Stable residential mortgage rates for the second quarter and first six months of 2021 compared to the same periods of 2020 caused residential mortgage loan refinancing activity to decrease, which reduced mortgage servicing rights amortization.

Trust Fees

Trust fees increased $1.1 million ~~during~~or 21% to $6.0 million for the ~~third~~second quarter of ~~2017~~2021 compared to ~~$873,000 during~~$5.0 million for the ~~third~~same quarter of ~~2016,~~2020. For the six months ended June 30, 2021 and 2020, trust fees totaled $11.8 million compared to $10.0 million, respectively, and was an increase of ~~$288,000~~$1.8 million or ~~33%~~18%. ~~On a nine-month comparative basis, loan servicing income~~The increase for both the three- and six month periods was attributable to an increase in the fair market value of assets under management.

Securities Gains, Net

For the second quarter of 2021, net securities gains totaled ~~$4.2~~$2.8 million ~~during 2017~~ compared to ~~$3.4~~$2.0 million ~~during 2016,~~for the second quarter of 2020, which was an increase of ~~$803,000~~$836,000 or 42%. For the six months ended June 30, 2021 and 2020, net securities gains totaled $2.8 million and $3.7 million, respectively, which was a decrease of $852,000 or 23%. The net unrealized gain on securities carried at fair value was $80.3 million at June 30, 2021, $12.9 million at March 31, 2021, and $103.8 million at year-end 2020.

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,~~2021, net gains on sale of loans held for sale totaled ~~$18.0~~$4.8 million compared to ~~$33.8~~$7.9 million during the same period in ~~2016,~~2020, a decrease of ~~$15.8~~$3.1 million or ~~47%~~40%. ~~These~~Loans sold to investors in the second quarter of 2021 totaled $130.2 million compared to $147.8 million during the second quarter of 2020, which was a decrease of $17.6 million or 12%.

~~gains result primarily from~~For the ~~gain or loss~~first six months of 2021, 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~~$11.2 million compared to ~~$398,000 during the third quarter~~$12.5 million, which was a decrease of ~~2016. During~~$1.3 million or 11%. Loans sold to investors for the first ~~nine~~six months of ~~2017, gains on sale of commercial and agricultural loans~~2021 totaled ~~$565,000~~$269.5 million compared to ~~$1.7~~$243.5 million, ~~during the same period in 2016.~~

~~Securities Gains, Net~~

~~Securities gains, net, totaled $1.7 million for the third quarter of 2017 compared to $1.6 million for the third quarter of 2016,~~ which iswas 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, a decrease of $4.2~~$25.9 million or ~~43%~~11%.

~~Other Noninterest Income~~

Other noninterest income totaled $1.4 million for the third quarter of 2017 compared to $1.0 million for the third quarter of 2016, an increase of $381,000 or 37%. For the nine months ended September 30, 2017, other noninterest income decreased $51,000 or 2% to $2.9 million from $3.0 million recorded in the same period in 2016. During the third quarter of 2017, $357,000 of other noninterest income was recorded related to recoveries on acquired loans that had been charged off prior to the acquisition dates.

Noninterest Expenses

The tables below show ~~Heartland's~~ noninterest expenses for the three- and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2017~~2021, and ~~2016,~~2020, 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,										Three Months Ended June 30,
	2017		2016		Change			% Change			2021		2020		Change		% Change
Salaries and employee benefits	$	128,118	$	124,432	$	3,686		3	%	Salaries and employee benefits	$	57,332	$	50,118	$	7,214	14	%
Occupancy	16,352		15,322		1,030			7		Occupancy	7,399		6,502		897		14
Furniture and equipment	7,913		7,301		612			8		Furniture and equipment	3,501		2,993		508		17
Professional fees	24,342		20,481		3,861			19		Professional fees	16,237		13,676		2,561		19
FDIC insurance assessments	2,610		3,468		(858		)	(25	)

Advertising	5,141		4,174		967			23		Advertising	1,649		995		654		66
Core deposit intangibles and customer relationship intangibles amortization	4,252		4,483		(231		)	(5	)
Core deposit and customer relationship intangibles amortization										Core deposit and customer relationship intangibles amortization	2,415		2,696		(281)		(10)
Other real estate and loan collection expenses	1,774		1,871		(97		)	(5	)	Other real estate and loan collection expenses	414		203		211		104
Loss on sales/valuations of assets, net	1,642		1,064		578			54		Loss on sales/valuations of assets, net	183		701		(518)		(74)
Acquisition, integration and restructuring costs										Acquisition, integration and restructuring costs	210		673		(463)		(69)
Partnership investment in tax credit projects										Partnership investment in tax credit projects	1,345		791		554		70
Other noninterest expenses	27,653		27,160		493			2		Other noninterest expenses	12,691		11,091		1,600		14
Total noninterest expenses	$	219,797	$	209,756	$	10,041		5	%	Total noninterest expenses	$	103,376	$	90,439	$	12,937	14	%


	Six Months Ended June 30,
	2021		2020		Change		% Change
Salaries and employee benefits	$	116,394	$	100,075	$	16,319	16	%
Occupancy	15,317		12,973		2,344		18
Furniture and equipment	6,594		6,101		493		8
Professional fees	29,727		26,149		3,578		14

Advertising	3,118		3,200		(82)		(3)
Core deposit and customer relationship intangibles amortization	4,931		5,677		(746)		(13)
Other real estate and loan collection expenses	549		537		12		2
Loss on sales/valuations of assets, net	377		717		(340)		(47)
Acquisition, integration and restructuring costs	3,138		2,049		1,089		53
Partnership investment in tax credit projects	1,380		975		405		42
Other noninterest expenses	24,274		22,845		1,429		6
Total noninterest expenses	$	205,799	$	181,298	$	24,501	14	%

For the ~~third~~second quarter of ~~2017,~~2021, noninterest expenses totaled ~~$78.8~~$103.4 million compared to ~~$68.4~~$90.4 million during the ~~third~~second quarter of ~~2016,~~2020, an increase of ~~$10.3~~$12.9 million or ~~15%~~14%. For the ~~first nine~~six months ~~of 2017,~~ended June 30, 2021, noninterest expenses totaled ~~$219.8~~$205.8 million, ~~compared to $209.8 million during the first nine months of 2016,~~which was an increase of ~~$10.0~~$24.5 million or ~~5%.~~14% from $181.3 million for the same period in 2020.

Notable changes in noninterest expense categories for the three- and six months ended June 30, 2021 and 2020 are as follows:

Salaries and ~~Employee Benefits~~employee benefits

~~The largest component of noninterest expenses, salaries~~Salaries and employee benefits increased ~~$4.5~~$7.2 million or ~~11% during~~14% to $57.3 million for the ~~third~~second quarter of ~~2017 as~~2021 compared to $50.1 million for the second quarter of 2020. For the first six months of 2021, salaries and benefits totaled $116.4 million, which was an increase of $16.3 million or 16% from $100.1 million for the same ~~quarter in 2016. The increase is~~period of 2020. Full-time equivalent employees totaled 2,091 at June 30, 2021 compared to 1,821 at June 30, 2020, which was primarily attributable to the ~~acquisition~~acquisitions completed in the fourth quarter 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, 2016.2020.

Occupancy

Occupancy expense totaled ~~$6.2~~$7.4 million for the ~~third~~second quarter of ~~2017~~2021 compared to ~~$5.1~~$6.5 million for the ~~third~~second quarter of ~~2016,~~2020, which was an increase of $897,000 or 14%. Occupancy expense totaled $15.3 million and $13.0 million for the six

months ended June 30, 2021 and 2020, respectively, which was an increase of $2.3 million or 18%. The increase for the three and six month periods was a result of acquisitions completed in the fourth quarter of 2020.

Professional Fees

Professional fees increased $2.6 million or 19% to $16.2 million for the second quarter of 2021 compared to $13.7 million for the same period of 2020. For the six months ended June 30, 2021 and 2020, professional fees totaled $29.7 million and $26.1 million, respectively, which was an increase of $3.6 million or 14%. The increase for the three and six month periods were primarily attributable to recent acquisitions. The increase was also driven by several technology and automation improvement projects that require utilization of specialized resources, including the customer service call center.

Advertising

Advertising expense totaled $1.6 million for the quarter ended June 30, 2021 compared to $995,000 for the same quarter in 2020, which was an increase of $654,000 or 66%. Advertising expense for six months ended June 30, 2021 totaled $3.1 million compared to $3.2 million for the same period of 2020, which was a decrease of $82,000 or 3%. In 2020, HTLF adjusted its advertising strategy and reduced in-person customer events in response to changes in business practices due to the COVID-19 pandemic, some of which has resumed in 2021.

Acquisition, integration and restructuring costs

Acquisition, integration and restructuring costs decreased $463,000 or 69% to $210,000 for the second quarter of 2021 compared to $673,000 for the second quarter of 2020. Acquisition, integration and restructuring costs totaled $3.1 million for the first six months of 2021 compared to $2.0 million for the same period of 2020, which was an increase of $1.1 million or ~~22%~~53%. HTLF completed the AimBank conversion in February 2021.

Other noninterest expenses

Other noninterest expenses totaled $12.7 million for the second quarter of 2021 compared to $11.1 million for the second quarter of 2020, which was an increase of $1.6 million or 14%. For the ~~nine-month~~six months ended June 30, 2021, other noninterest expenses totaled $24.3 million compared to $22.8 million for the same period ~~ending September 30, 2017, occupancy expense~~of 2020, which was ~~$16.4 million,~~ an increase of ~~$1.0~~$1.4 million or ~~7% from the same period in 2016.~~6%. The increase for ~~both~~ the ~~three-~~three and ~~nine-month~~six month periods iswas primarily attributable to the ~~additional locations acquired~~acquisitions completed in the ~~Citywide Banks of Colorado, Inc. transaction.~~

~~Professional Fees~~

~~Professional fees increased $2.5 million or 41% during the third~~fourth quarter of 2017 compared to the third quarter of 2016 and $3.9 million or 19% during the first nine months of 2017 compared to the first nine months of 2016, primarily as a result of a higher level of services provided to Heartland by third-party advisors, including services performed in connection with mergers and acquisitions and cloud-based applications.2020.

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

~~Loss on Sales/Valuations of Assets, Net~~

For the third quarter of 2017, loss on sales/valuations of assets, net totaled $1.3 million compared to $794,000 for the same quarter in 2016, which is an increase of $548,000 or 69%. For the first nine months 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.

~~Other Noninterest Expenses~~

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

Efficiency Ratio

One of ~~Heartland's~~HTLF's top priorities is to improve its efficiency ratio, on a fully tax-equivalent basis by(non-GAAP), with the goal of reducing it to ~~65% or less.~~below 57%. During the ~~third~~second quarter of ~~2017, Heartland's efficiency ratio, on a fully tax-equivalent basis, was 64.54% in comparison with 63.88% during the third quarter of 2016. For the nine-month period ended September 30, 2017,~~2021, the efficiency ratio on a fully tax-equivalent basis (non-GAAP) increased by 35136 basis points to ~~66.58% when~~57.11% in comparison with 55.75% for the quarter ended June 30, 2020. For the six months ended June 30, 2021, the efficiency ratio on a fully tax-equivalent basis, (non-GAAP) was 56.86% compared to 58.64% for the same ~~nine-month~~ period ~~in 2016. Heartland's~~of 2020, which was an improvement of 178 basis points.

Management continues to pursue opportunities to reduce expenses through the centralization and adoption of cost-efficient technologies. HTLF anticipates reducing branch locations by approximately 10%, which could lower the efficiency ratio ~~will show variability from quarter~~in future quarters. Additionally, systems conversions of newly acquired entities are completed as soon as possible after the closing of the transaction to ~~quarter as a result of acquisition activities and also from the seasonality and related revenue and expense timing differences that are inherent in the residential mortgage business.~~optimize cost savings.

Income Taxes

~~Heartland's~~The effective tax rate was ~~28.74%~~21.11% for the ~~third~~second quarter of ~~2017~~2021 compared to ~~29.02%~~19.75% for the ~~third~~second quarter of ~~2016.~~ 2020. The following items impacted the second quarter 2021 and 2020 tax calculations:

•Solar energy tax credits of $1.3 million compared to $798,000.

•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$135,000 compared to ~~21.01% during the third quarter of 2016.~~$195,000.

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 the first nine months of 2017 compared to federal low-income housing~~•New markets tax credits of $912,000 during the first nine months of 2016. Heartland's effective tax rate for the nine months ended September 30, 2017, was impacted by a state tax credit of $830,000 related to a partnership investment$75,000 in ~~a historic~~each quarterly calculation.

•Historic rehabilitation tax ~~credit project. The level~~credits of ~~tax-exempt~~$123,000 compared to $0.

•Tax-exempt interest income as a percentage of pre-tax income ~~was 25.63% during the first nine months~~ of ~~2017~~8.49% compared to ~~19.55% during the first nine months of 2016.~~14.19%.

~~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~~•Tax benefit of ~~$1.1 million~~$150,000 compared to tax expense of $66,000 resulting from the vesting of ~~outstanding~~ restricted stock unit ~~awards and the exercise of stock options.~~ awards.

The ~~majority of this tax benefit was recorded in the first quarter of 2017. Exclusive of this tax benefit, Heartland's~~ effective tax rate ~~for the first nine months of 2017~~ was ~~27.93%.~~

~~Segment Reporting~~

Heartland has two reportable segments: community and other banking and retail mortgage banking. Revenues from community and other banking operations consist primarily of interest earned on loans and investment securities, fees from deposit and ancillary services and net security gains. Retail mortgage banking operating revenues consist of interest earned on mortgage loans held21.76% 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.~~2021 compared to 20.99% for the first six months of 2020. The following items impacted HTLF's tax calculation for the first six months of 2021 and 2020:

•Solar energy tax credits of $1.4 million compared to $874,000.

•Federal low-income housing tax credits of $269,000 compared to $390,000.

•New markets tax credits of $150,000 for each six-month period.

•Historic rehabilitation tax credits of $123,000 compared to $0.

•Tax-exempt interest income as a percentage of pre-tax income of 9.06% compared to 15.09%.

•Tax benefit of $303,000 compared to tax expense of $91,000 resulting from the vesting of restricted stock unit awards.

FINANCIAL CONDITION

Total assets ~~of Heartland~~ were ~~$9.76~~$18.37 billion at ~~September~~June 30, ~~2017,~~2021, an increase of $1.51 billion or 18% 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$462.7 million or 2%3% since December 31, ~~2016.~~2020. Securities represented ~~24%~~37% and 35% of total assets at ~~September~~June 30, ~~2017,~~2021, and ~~26% of total assets at~~ December 31, ~~2016.~~2020, respectively.

LENDING ACTIVITIES

HTLF's board of directors establishes an acceptable level of credit risk appetite, and the subsidiary banks have certain lending policies and procedures in place that are designed to provide for a level of credit risk commensurate within the defined risk parameters. A reporting system supplements the review process by providing management and the board with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies, nonperforming loans and potential problem loans.

HTLF originates commercial and industrial loans and owner occupied commercial real estate loans for a wide variety of business purposes, 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 risks in the commercial and industrial portfolio include the unpredictability of the cash flow of the borrowers and the variability in the value of the collateral securing the loans. Owner occupied commercial real estate loans are dependent upon the cash flow of the borrowers and the collateral value of the real estate.

HTLF originated PPP loans in 2020 ("PPP I") totaling $1.20 billion and acquired $53.1 million of PPP loans in the AimBank transaction. Additionally, in 2021, HTLF originated $473.9 million of PPP II loans. At June 30, 2021, total PPP I loans outstanding totaled $374.2 million, which was net of $4.5 million of unamortized deferred fees. Total PPP II loans outstanding at June 30, 2021 was $455.0 million, which was net of $18.9 million of unamortized deferred fees. Both PPP I and PPP II loans are 100% SBA guaranteed, and borrowers may be eligible to have an amount up to the entire principal balance forgiven and paid by the SBA. All PPP loans also carry a zero risk rating for regulatory capital purposes and the Federal Reserve has made available a liquidity facility to facilitate funding of PPP loans held by banks. Because these loans are 100% guaranteed by the SBA, there is no allowance recorded related to the PPP loans.

Non-owner occupied commercial real estate loans provide financing for various non-owner occupied or income producing properties. Real estate construction loans are generally short-term or interim loans that provide financing for acquiring or developing commercial income properties, multi-family projects or single-family residential homes. The collateral required for most of these loans is based upon the discounted market value of the collateral. Non-owner occupied commercial real estate loans are typically dependent, in large part, on sufficient income from the properties securing the loans to cover the operating expenses and debt service. Real estate construction loans involve additional risks because funds are advanced based upon estimates of costs and the estimated value of the completed project. Additionally, real estate construction loans have a greater risk of default in a weaker economy because the source of repayment is reliant on the successful and timely sale of the project. 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.

Agricultural and agricultural real estate 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 and agricultural real estate 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 and agricultural real estate loans is dependent upon the profitable operation or management of the agricultural entity. Loans secured by farm equipment, livestock or crops may not provide an adequate source of repayment because of damage or depreciation. In underwriting agricultural and agricultural real estate 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 ~~Activities~~personnel work closely with governmental agencies, including the SBA and U.S. Department of Agriculture's Rural Development Business and Industry Program Farm Service Agency, to help agricultural customers obtain credit enhancement products, such as loan guarantees, longer-term funding or interest assistance, to reduce risk.

Residential real estate loans are originated for the purchase or refinancing of single family residential properties. Residential real estate loans are dependent upon the borrower's ability to repay the loan and the underlying collateral value. The acquisition of First Bank & Trust in Lubbock, Texas, in 2018 included its wholly owned mortgage subsidiary, PrimeWest Mortgage Corporation, which was merged into First Bank & Trust in April 2020. First Bank & Trust provides mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of customers in many of HTLF's markets. First Bank & Trust services the conventional mortgage loans it sells into the secondary market.

Consumer lending includes home equity lines and term loans, motor vehicle, home improvement 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~~$10.01 billion at ~~September~~June 30, ~~2017, compared to $5.35~~2021, and $10.02 billion at ~~year-end 2016, an increase~~December 31, 2020, a decrease of $1.02 billion or 19%. This change includes $96.4 million of total loans held to maturity, at fair value, acquired in the Founders Bancorp transaction and $985.4 million of total loans held to maturity acquired at fair value in the Citywide Banks of Colorado, Inc. transaction. Exclusive of these transactions, total loans held to maturity decreased $60.2$11.0 million or less than 1% ~~since year-end 2016.~~. Excluding ~~the~~PPP loans, ~~acquired in the Citywide Banks of Colorado, Inc. transaction,~~ total loans held to maturity increased ~~$62.9~~$117.6 million or 1.30% since year-end 2020.

The following table shows the changes in loan balances by loan category since December 31, 2020, in thousands:


	June 30, 2021		December 31, 2020		Change		% Change
Commercial and industrial	$	2,518,908	$	2,534,799	$	(15,891)	(1)	%
PPP	829,175		957,785		(128,610)		(13)	%
Owner occupied commercial real estate	1,940,134		1,776,406		163,728		9
Non-owner occupied commercial real estate	1,987,369		1,921,481		65,888		3
Real estate construction	854,295		863,220		(8,925)		(1)
Agricultural and agricultural real estate	679,608		714,526		(34,918)		(5)
Residential mortgage	800,884		840,442		(39,558)		(5)
Consumer	401,641		414,392		(12,751)		(3)
Total loans held to maturity	$	10,012,014	$	10,023,051	$	(11,037)	—	%

Notable changes in the loan portfolio include:

•PPP loans decreased $128.6 million or 13% to $829.2 million at June 30, 2021 compared to $957.8 million at year-end 2020. PPP I loans decreased $583.6 million during the ~~third quarter~~first six months of ~~2017, and six~~2021 due to forgiveness payments from the SBA. PPP II loans outstanding at June 30, 2021, totaled $455.0 million, which is exclusive of ~~the Heartland bank subsidiaries experienced net organic loan growth during the quarter. Price competition for quality~~$18.9 million of deferred fees.

•Owner occupied commercial real estate loans ~~remains intense, and Heartland remains committed~~increased $163.7 million or 9% to ~~its pricing strategy, disciplined credit approach and emphasis on the client relationship.~~$1.94 billion at June 30, 2021 compared to $1.78 billion at year-end 2020, which included an increase of $70.2 million in government guaranteed loans.

The table below presents the composition of the loan portfolio as of ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, in thousands:


	June 30, 2021				December 31, 2020
	Amount		Percent		Amount		Percent
Loans receivable held to maturity:
Commercial and industrial	$	2,518,908	25.16	%	$	2,534,799	25.29	%
PPP	829,175		8.28		957,785		9.56
Owner occupied commercial real estate	1,940,134		19.38		1,776,406		17.72
Non-owner occupied commercial real estate	1,987,369		19.85		1,921,481		19.17
Real estate construction	854,295		8.53		863,220		8.61
Agricultural and agricultural real estate	679,608		6.79		714,526		7.13
Residential mortgage	800,884		8.00		840,442		8.39
Consumer	401,641		4.01		414,392		4.13
Gross loans receivable held to maturity	10,012,014		100.00	%	10,023,051		100.00	%






Allowance for credit losses-loans	(120,726)				(131,606)
Loans receivable, net	$	9,891,288			$	9,891,445

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

Allowance for loan losses (54,885 ) (54,324 )
Loans receivable, net $ 6,318,530
$ 5,297,395

~~Loans secured by real estate, either fully or partially, totaled $4.25 billion or 67%~~The following table shows the total loans exposure as of ~~gross loans at September~~June 30, 2017. Exclusive of purchase accounting valuations and the loans acquired in the third quarter of 2017, 52% of the properties securing non-farm, nonresidential real estate loans are owner occupied. The largest categories of Heartland's real estate secured loans at September 30, 2017,2021 and December 31, ~~2016, are listed below,~~2020, to customer segment profiles that HTLF believes have been and could continue to be more heavily impact by COVID-19, dollars in thousands:


	As of June 30, 2021				As of December 31, 2020
Industry	Total Exposure(1)		% of Gross Exposure(1)		Total Exposure(1)		% of Gross Exposure(1)
Lodging	$	523,943	3.89	%	$	539,434	4.38	%
Retail trade	389,525		2.90		465,980		3.78
Retail properties	398,845		2.97		422,794		3.43
Restaurants and bars	241,654		1.80		266,053		2.16

Total	$	1,553,967	11.56	%	$	1,694,261	13.75	%

(1) Total loans outstanding and unfunded commitments excluding PPP loans

LOANS SECURED BY REAL ESTATE
September 30, 2017 December 31, 2016
Residential real estate, excluding residential construction and residential lot loans $ 989,112
$ 1,030,190
Industrial, manufacturing, business and commercial 461,281
474,632
Agriculture 254,315
255,046
Retail 350,888
332,009
Office 335,057
347,334
Land development and lots 132,625
127,700
Hotel, resort and hospitality 163,076
151,571
Multi-family 185,634
185,559
Food and beverage 107,846
102,225
Warehousing 125,231
120,471
Health services 132,785
147,412
Residential construction 93,968
143,962
All other 169,912
172,617
Loans acquired in the quarter 775,587
—
Purchase accounting valuations (30,806 ) (17,559 )
Total loans secured by real estate $ 4,246,511
$ 3,573,169

While HTLF has seen overall improvement in customers' financial position since the onset of the COVID-19 pandemic, further economic disruption resulting from COVID-19 and its variants could make it difficult for some customers to repay the principal and interest on their loans. As of June 30, 2021, of the approximately $1.09 billion of loans modified under COVID-19 relief programs, $1.00 billion of loans have returned to full payment status and $81.2 million of loans remain in the original deferral status. Additional loan modifications have been made on approximately $11.7 million of loans in the portfolio, which are primarily interest-only payment modifications.

~~Allowance For Loan Losses~~

ALLOWANCE FOR CREDIT LOSSES

The process utilized by ~~Heartland~~HTLF to determine the appropriateness of the allowance for ~~loan and~~credit losses is considered a critical accounting practice for ~~Heartland and has remained consistent over the past several years.~~HTLF. The allowance for ~~loan~~credit losses represents management's estimate of ~~identified and unidentified probable~~lifetime losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for ~~loan~~credit losses, refer to the critical accounting policies section of ~~our~~HTLF's Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2020.

~~Nonperforming~~

Total Allowance for Lending Related Credit Losses

The total allowance for lending related credit losses was $134.7 million at June 30, 2021, which was 1.35% of loans ~~were $65.8~~as of June 30, 2021, compared to $146.9 million or ~~1.03%~~1.47% of ~~total loans at September 30, 2017, compared to $64.4 million or 1.20% of total~~ loans at December 31, ~~2016. At September 30, 2017, approximately $29.6 million or 45% of Heartland's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to eight borrowers.~~2020. The ~~portion of Heartland's~~

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

~~During~~following table shows, in thousands, 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% of loans at September 30, 2017, compared to 1.02% at December 31, 2016, and 83.41% and 84.37% of nonperforming loans at September 30, 2017, and December 31, 2016, respectively. Excluding the acquired loans covered by the valuation reserves, the ratiocomponents of the allowance for ~~loan~~lending related credit losses as of June 30, 2021, and December 31, 2020:


	June 30, 2021				December 31, 2020
	Amount		% of Allowance		Amount		% of Allowance
Quantitative	$	99,170	73.61	%	$	102,398	69.71	%
Qualitative	25,798		19.15		29,101		19.81
Economic Forecast	9,760		7.24		15,387		10.48
Total	$	134,728	100.00	%	$	146,886	100.00	%

Quantitative Allowance

The quantitative allowance decreased $3.2 million to ~~outstanding loans was 1.17%~~$99.2 million or 74% of the total allowance for lending related credit losses at ~~September~~June 30, ~~2017, and 1.22%~~2021, compared to $102.4 million or 70% of the total allowance at December 31, ~~2016. At September~~2020. Positively impacting the quantitative allowance was a reduction of $44.2 million in nonpass loans and an increase of $165.8 million in government guaranteed loans, for which no provision expense is required, since year-end 2020. Included in the quantitative allowance for June 30, ~~2017, valuation~~2021, and December 31, 2020, were specific reserves ~~totaled $42.8~~of $11.4 million and ~~covered $1.75 billion~~$9.4 million, respectively.

Qualitative Allowance

The qualitative allowance totaled $25.8 million or 19% of ~~acquired loans. At December 31, 2016, valuation reserves totaled $25.3~~the total allowance for lending related credit losses at June 30, 2021, compared to $29.1 million ~~and covered $956.0 million of acquired loans.~~

~~Loans delinquent 30 to 89 days as a percent of total loans was 0.33% at September 30, 2017, in comparison with 0.37%~~or 20% at December 31, ~~2016.~~2020. Management assesses several risk factors in the qualitative calculation, and in making its assessment at June 30, 2021, decreased the level of qualitative adjustment based on improving market conditions and credit quality trends.

Economic Forecasting

The ~~table~~economic forecast allowance was $9.8 million or 7% of the total allowance for lending related credit losses at June 30, 2021, compared to $15.4 million or 10% of the total allowance for lending related credit losses at December 31, 2020. HTLF has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in the methodology. At June 30, 2021, Moody's June 7, 2021, baseline forecast scenario was utilized, which was the most currently available forecast, and HTLF continued to use a one year reasonable and supportable forecast period.

For the June 30, 2021 calculation, the economic outlook factors used to develop the allowance were upgraded to incorporate a portion of the forecasted economic improvement, but the factors still retain a measured level of caution and uncertainty that management deemed appropriate for lingering economic headwinds, such as COVID-19 variants, supply chain challenges, and workforce shortages, that are yet to be resolved.

Allowance for Credit Losses-Loans

The tables below ~~presents~~present the changes in the allowance for ~~loan~~credit losses for loans during the three- and ~~nine-month periods~~six- months ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, in thousands:


	Three Months Ended June 30,
	2021			2020
Balance at beginning of period	$	130,172		$	97,350

Provision (benefit) for credit losses	(6,466)			25,007
Recoveries on loans previously charged off	517			1,144
Charge-offs on loans	(3,497)			(3,564)
Balance at end of period	$	120,726		$	119,937
Allowance for credit losses for loans as a percent of loans	1.21		%	1.30		%
Annualized ratio of net charge offs to average loans	0.12		%	0.11		%


ANALYSIS OF ALLOWANCE FOR LOAN LOSSES	Three Months Ended September 30,
	2017			2016
Balance at beginning of period	$	54,051		$	51,756
Provision for loan losses	5,705			5,328
Recoveries on loans previously charged off	888			852
Charge-offs on loans	(5,759		)	(3,283		)
Balance at end of period	$	54,885		$	54,653
Annualized ratio of net charge offs to average loans	0.31		%	0.17		%

	Nine Months Ended September 30,							Six Months Ended June 30,
	2017			2016				2021			2020
Balance at beginning of period	$	54,324		$	48,685		Balance at beginning of period	$	131,606		$	70,395
Provision for loan losses	10,235			9,513
Impact of ASU 2016-13 adoption on January 1, 2020							Impact of ASU 2016-13 adoption on January 1, 2020	—			12,071
Adjusted balance at January 1, 2020							Adjusted balance at January 1, 2020	131,606			82,466
Provision (benefit) for credit losses							Provision (benefit) for credit losses	(6,450)			44,872
Recoveries on loans previously charged off	2,569			4,294			Recoveries on loans previously charged off	1,193			2,464
Charge-offs on loans	(12,243		)	(7,839		)	Charge-offs on loans	(5,623)			(9,865)
Balance at end of period	$	54,885		$	54,653		Balance at end of period	$	120,726		$	119,937

Allowance for credit losses for loans as a percent of loans							Allowance for credit losses for loans as a percent of loans	1.21		%	1.30		%
Annualized ratio of net charge offs to average loans	0.23		%	0.09		%	Annualized ratio of net charge offs to average loans	0.09		%	0.17		%

The allowance for credit losses for loans totaled $120.7 million at June 30, 2021, compared to $131.6 million at December 31, 2020, and $119.9 million at June 30, 2020. The allowance for credit losses for loans at June 30, 2021, was 1.21% of loans compared to 1.31% of loans at December 31, 2020. The following items have impacted the allowance for credit losses for loans for the six months ended June 30, 2021:

•Provision benefit of $6.5 million, which was primarily attributable to improved macroeconomic factors compared to prior periods.

•Net charge offs for the first six months of 2021 totaled $4.4 million compared to $7.4 million for the first six months of 2020, which was a $3.0 million decrease.

The following tables show, in thousands, the changes in the allowance for unfunded commitments for the three and six months ended June 30, 2021 and 2020:


	Three Months Ended June 30,
	2021		2020
Balance at beginning of period	14,619		15,468
Provision (benefit) for credit losses	(617)		1,924
Balance at end of period	$	14,002	$	17,392

	Six Months Ended June 30,
	2021		2020
Balance at beginning of period	$	15,280	$	248
Impact of ASU 2016-13 adoption on January 1, 2020	—		13,604
Adjusted balance at January 1, 2020	15,280		13,852
Provision (benefit) for credit losses	(1,278)		3,540
Balance at end of period	$	14,002	$	17,392

The allowance for unfunded commitments totaled $14.0 million as of June 30, 2021, compared to $15.3 million as of December 31, 2020, and $17.4 million as of June 30, 2020. Unfunded commitments increased $186.1 million to $3.43 billion at June 30, 2021 compared to $3.25 billion at December 31, 2020. Included in the increase of unfunded commitments was $59.8 million of commitments related to 100% government guaranteed lending, for which no provision expense was required.

CREDIT QUALITY AND NONPERFORMING ASSETS

The internal rating system for the credit quality of its loans 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 and 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. For more information on this internal rating system, see Note 4 of the consolidated financial statements in this Quarterly Report on Form 10-Q.

The nonpass loans totaled $1.04 billion or 10.37% of total loans as of June 30, 2021 compared to $1.08 billion or 10.80% of total loans as of December 31, 2020. As of June 30, 2021, and December 31, 2021, the nonpass loans consisted of approximately 56% watch loans and 44% substandard loans. The percent of nonpass loans on nonaccrual status as of June 30, 2021, was 8%.

Included in the nonpass loans at June 30, 2021 were $91.8 million of nonpass PPP loans as a result of risk ratings on non-PPP related credits. HTLF's risk rating methodology assigns a risk rating to the whole lending relationship. No allowance was recorded related to the PPP loans because of the 100% SBA guarantee.

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


	June 30,						December 31,
	2021			2020			2020			2019
Nonaccrual loans	$	85,268		$	91,609		$	87,386		$	76,548
Loans contractually past due 90 days or more	97			1,360			720			4,105
Total nonperforming loans	85,365			92,969			88,106			80,653
Other real estate	6,314			5,539			6,624			6,914
Other repossessed assets	50			29			240			11
Total nonperforming assets	$	91,729		$	98,537		$	94,970		$	87,578







Performing troubled debt restructured loans(1)	$	2,122		$	2,636		$	2,370		$	3,794
Nonperforming loans to total loans	0.85		%	1.01		%	0.88		%	0.96		%
Nonperforming assets to total loans plus repossessed property	0.92			1.06			0.95			1.05
Nonperforming assets to total assets	0.50			0.66			0.53			0.66

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

The performing troubled debt restructured loans above do not include any loan modifications initially made under COVID-19 modification programs. Refer to the "Lending Activities" discussion included in the "Financial Condition" section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, for further information on these modifications.

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

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

The schedules below summarize the changes in ~~Heartland's~~ nonperforming assets during the ~~third quarter~~three and six months ended June 30, 2021, in thousands:


	Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
March 31, 2021	$	91,889	$	6,236	$	239	$	98,364
Loan foreclosures	(585)		583		2		—
Net loan charge-offs	(2,980)		—		—		(2,980)

New nonperforming loans	7,989		—		—		7,989
Reduction of nonperforming loans(1)	(10,948)		—		—		(10,948)
OREO/Repossessed assets sales proceeds	—		(439)		(211)		(650)
OREO/Repossessed assets writedowns, net	—		(66)		20		(46)

June 30, 2021	$	85,365	$	6,314	$	50	$	91,729
(1) Includes principal reductions and transfers to performing status.


	Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
December 31, 2020	$	88,106	$	6,624	$	240	$	94,970
Loan foreclosures	(1,404)		1,168		236		—
Net loan charge-offs	(4,430)		—		—		(4,430)

New nonperforming loans	22,925		—		—		22,925
Reduction of nonperforming loans(1)	(19,832)		—		—		(19,832)
OREO/Repossessed assets sales proceeds	—		(1,566)		(293)		(1,859)
OREO/Repossessed assets writedowns, net	—		88		(133)		(45)

June 30, 2021	$	85,365	$	6,314	$	50	$	91,729

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

Total nonperforming assets decreased $3.2 million or 3% to $91.7 million or 0.50% of ~~2017~~total assets at June 30, 2021, compared to $95.0 million or 0.53% of total assets at December 31, 2020. Nonperforming loans were $85.4 million at June 30, 2021, compared to $88.1 million at December 31, 2020, which represented 0.85% and 0.88% of total loans at June 30, 2021, and December 31, 2020, respectively. At June 30, 2021, approximately $49.9 million or 58% of HTLF's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to sixteen borrowers. The portion of the ~~first nine months of 2017, in thousands:~~nonperforming nonresidential real estate loans covered by government guarantees totaled $13.3 million at June 30, 2021, compared to $14.6 million at December 31, 2020.

Nonperforming
Loans

Other
Real Estate
Owned

Other
Repossessed
Assets

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

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

Nonperforming
Loans

Other
Real Estate
Owned

Other
Repossessed
Assets

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

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

SECURITIES

~~Securities~~

The composition of ~~Heartland's~~the securities portfolio is managed to ~~maximize~~ ensure liquidity needs are met while maximizing the return on the portfolio ~~while considering~~within the established HTLF risk appetite parameters and in consideration of the impact it has on ~~Heartland's~~HTLF's asset/liability ~~position and liquidity needs.~~position. Securities represented ~~24%~~37% and ~~26%~~35% of total assets at ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, respectively. Total ~~available for sale~~ securities carried at fair value as of ~~September~~June 30, ~~2017,~~2021, were ~~$2.09~~$6.54 billion, an increase of ~~$247.5~~$416.0 million or ~~13%~~7% from ~~$1.85~~$6.13 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.~~2020.

The table below presents the composition of the securities portfolio, including ~~available for sale,~~securities carried at fair value, held to maturity securities, net of allowance for credit losses, and other, by major category, as of ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, in thousands:


	June 30, 2021				December 31, 2020
	Amount		Percent		Amount		Percent
U.S. treasuries	$	1,016	0.02	%	$	2,026	0.03	%
U.S. agencies	35,371		0.53		166,779		2.65
Obligations of states and political subdivisions	1,957,225		29.19		1,724,066		27.40
Mortgage-backed securities - agency	1,740,675		25.96		1,355,270		21.54
Mortgage-backed securities - non-agency	1,363,292		20.33		1,449,116		23.03
Commercial mortgage-backed securities - agency	125,080		1.87		174,153		2.77
Commercial mortgage-backed securities - non-agency	535,305		7.98		252,767		4.02
Asset-backed securities	846,987		12.63		1,069,266		16.99
Corporate bonds	3,815		0.06		3,742		0.06

Equity securities with a readily determinable fair value	20,651		0.31		19,629		0.31
Other securities	76,809		1.12		75,253		1.20
Total securities	$	6,706,226	100.00	%	$	6,292,067	100.00	%

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

The percentage of Heartland's securities portfolio comprised of mortgage-backed securities was 66% at September 30, 2017, compared to 61% at December 31, 2016. Approximately 74% of Heartland's mortgage-backed securities were issued by government-sponsored enterprises at September 30, 2017. Heartland'sHTLF's securities portfolio had an expected modified duration of ~~4.83~~5.37 years as of ~~September~~June 30, ~~2017,~~2021, compared to ~~4.34~~5.52 years ~~at year-end 2016.~~as of December 31, 2020.

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, Heartland~~2021, HTLF had ~~$23.2~~$76.8 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~~DEPOSITS

Total deposits were ~~$8.23~~$15.62 billion as of ~~September~~June 30, ~~2017,~~2021, compared to ~~$6.85~~$14.98 billion at ~~year-end 2016,~~December 31, 2020, an increase of $1.38 billion or 20%. This increase included $181.5 million of deposits, at fair value, acquired in the Founders Bancorp transaction and $1.21 billion of deposits, at fair value, acquired in the Citywide Banks of Colorado, Inc. transaction. Exclusive of these transactions, total deposits decreased $7.1$635.2 million or ~~less than 1%~~4%. Growth in non-time deposits during the first six months of 2021 was positively impacted by payments related to federal government stimulus programs and other COVID-19 relief programs.

The following table shows the changes in deposit balances by deposit type since ~~December 31, 2016.~~year-end 2020, in thousands:


	June 30, 2021		December 31, 2020		Change		% Change
Demand deposits	$	6,299,289	$	5,688,810	$	610,479	11	%
Savings deposits	8,189,223		8,019,704		169,519		2
Time deposits	1,126,606		1,271,391		(144,785)		(11)
Total	$	15,615,118	$	14,979,905	$	635,213	4	%

The table below presents ~~in thousands,~~ the composition of ~~Heartland's~~ deposits by category as of ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016:~~2020, in thousands:


	June 30, 2021				December 31, 2020
	Amount		Percent		Amount		Percent
Demand	$	6,299,289	40.35	%	$	5,688,810	37.98	%
Savings	8,189,223		52.44		8,019,704		53.54
Time	1,126,606		7.21		1,271,391		8.48
Total	$	15,615,118	100.00	%	$	14,979,905	100.00	%

DEPOSITS September 30, 2017 December 31, 2016
Amount Percent Amount Percent
Demand $ 3,009,940
36.56 % $ 2,202,036
32.16 %
Savings 4,227,340
51.36
3,788,089
55.32
Time 994,604
12.08
857,286
12.52
Total $ 8,231,884
100.00 % $ 6,847,411
100.00 %

SHORT-TERM BORROWINGS

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~~HTLF defines as borrowings with an original maturity of one year or less, were as follows as of ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, in thousands:


	June 30, 2021		December 31, 2020		Change		% Change
Securities sold under agreement to repurchase	$	106,053	$	118,293	$	(12,240)	(10)	%
Federal funds purchased	2,900		2,100		800		38

Advances from the federal discount window	30,000		35,000		(5,000)		(14)	%
Other short-term borrowings	13,610		12,479		1,131		9
Total	$	152,563	$	167,872	$	(15,309)	(9)	%

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

$ 306,459

Short-term borrowings generally include federal funds purchased, securities sold under agreements to repurchase, short-term FHLB advances and discount window borrowings from the Federal Reserve Bank. These funding alternatives are utilized in varying degrees depending on their pricing and availability. All of ~~Heartland's~~HTLF'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~~$152.6 million at ~~September~~June 30, ~~2017,~~2021, compared to ~~$306.5~~$167.9 million at year-end ~~2016,~~2020, a decrease of ~~$134.6~~$15.3 million or ~~44%~~9%.

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~~$106.1 million at ~~September~~June 30, ~~2017,~~2021, compared to ~~$229.6~~$118.3 million at December 31, ~~2016,~~2020, a decrease of ~~$95.6~~$12.2 million or ~~42%~~10%. ~~In addition to seasonal fluctuations, these balances declined as a result~~

HTLF renewed its revolving credit line agreement with an unaffiliated bank on June 14, 2021. This revolving credit line agreement, which has $75.0 million 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~~borrowing capacity, is included in short-term borrowings, ~~is a $25.0 million revolving~~and the primary purpose of this credit line agreement ~~Heartland has with an unaffiliated bank, primarily~~is to provide ~~liquidity to Heartland. The borrowing capacity~~liquidity. No advances occurred 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~~2021, 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, 2021, and December 31, ~~2016.~~2020.

OTHER BORROWINGS

~~Other Borrowings~~

The outstanding balances of other borrowings, which ~~Heartland~~HTLF 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,~~2021, and December 31, ~~2016:~~2020, in thousands:


	June 30, 2021		December 31, 2020		Change		% Change
Advances from the FHLB	$	958	$	1,018	$	(60)	(6)	%

Trust preferred securities	146,812		146,323		489		—

Note payable to unaffiliated bank	21,250		44,417		(23,167)		(52)
Contracts payable for purchase of real estate and other assets	1,779		1,983		(204)		(10)
Subordinated notes	74,500		74,429		71		—
Paycheck Protection Program Liquidity Fund	25,945		188,872		(162,927)		(86)
Total	$	271,244	$	457,042	$	(185,798)	(41)	%

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

$ 288,534

Other borrowings include all debt arrangements Heartland and its subsidiaries have entered into with original maturities that extend beyond one year, including long-term FHLB borrowings, borrowings under term notes, subordinated notes and senior notes, convertible debt, and obligations under trust preferred capital securities. As of ~~September~~June 30, ~~2017,~~2021, the amount of other borrowings was ~~$301.5~~$271.2 million, ~~an increase~~a decrease of ~~$12.9~~$185.8 million or 4%41% since year-end ~~2016.~~2020.

~~At September~~Each of HTLF's subsidiary banks had been approved by their respective Federal Reserve Bank for the Paycheck Protection Program Liquidity Fund ("PPPLF"). As of June 30, ~~2017, $137.2~~2021, $25.9 million was outstanding, which was a decrease of ~~trust preferred securities were outstanding compared to $115.2~~$162.9 million or 86% from $188.9 million outstanding atas of December 31, ~~2016, which is an increase~~2020. The PPPLF program ended on July 31, 2021, and the remainder of ~~$22.0 million or 19%. Heartland acquired $21.6 million of trust preferred securities~~the advances outstanding at ~~fair value~~June 30, 2021 were repaid in ~~the Citywide Banks of Colorado, Inc. transaction.~~July 2021.

~~Heartland~~HTLF has a non-revolving credit facility with an unaffiliated bank, ~~which provides a borrowing capacity of up to $75.0 million. At September~~and at June 30, ~~2017, $34.7~~2021, $21.3 million was outstanding on this non-revolving credit line compared to ~~$37.7~~$44.4 million outstanding at December 31, ~~2016.~~2020. The ~~balance~~decrease in this non-revolving credit line was primarily attributable to a paydown of $20.3 million in conjunction with the renewal of the ~~$34.7 million note is due~~credit line in ~~April~~the second quarter of 2021. At ~~September~~June 30, ~~2017, Heartland had $39.3~~2021, $3.5 million of borrowing capacity was 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~~HTLF's trust preferred securities outstanding excluding deferred issuance costs as of ~~September~~June 30, ~~2017,~~2021, 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 6/30/2021(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

Heartland Financial Statutory Trust IV

10,310

03/17/2004

2.75% over LIBOR

2.88%

03/17/2034

09/17/2021

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

2.63%⁽³⁾

04/07/2036

01/07/2018

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

1.51

04/07/2036

10/07/2021

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

2.80%⁽⁴⁾

09/15/2037

12/15/2017

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

1.60

(2)

09/15/2037

09/15/2021

Heartland Financial Statutory Trust VII

20,619

06/26/2007

1.48% over LIBOR

2.80%⁽⁵⁾

09/01/2037

12/01/2017

Heartland Financial Statutory Trust VII

18,042

06/26/2007

1.48% over LIBOR

1.61

(3)

09/01/2037

09/01/2021

Morrill Statutory Trust I

8,876

12/19/2002

3.25% over LIBOR

4.58%⁽⁶⁾

12/26/2032

12/26/2017

Morrill Statutory Trust I

9,229

12/19/2002

3.25% over LIBOR

3.40

12/26/2032

09/26/2021

Morrill Statutory Trust II

8,503

12/17/2003

2.85% over LIBOR

4.17%⁽⁷⁾

12/17/2033

12/17/2017

Morrill Statutory Trust II

8,920

12/17/2003

2.85% over LIBOR

2.98

12/17/2033

09/17/2021

Sheboygan Statutory Trust I

6,331

09/17/2003

2.95% over LIBOR

4.27%

09/17/2033

12/17/2017

Sheboygan Statutory Trust I

6,659

09/17/2003

2.95% over LIBOR

3.08

09/17/2033

09/17/2021

CBNM Capital Trust I

4,297

09/10/2004

3.25% over LIBOR

4.57%

12/15/2034

12/15/2017

CBNM Capital Trust I

4,483

09/10/2004

3.25% over LIBOR

3.37

12/15/2034

09/15/2021

Citywide Capital Trust III

6,313

12/19/2003

2.80% over LIBOR

4.11%

12/19/2033

01/23/2018

Citywide Capital Trust III

6,522

12/19/2003

2.80% over LIBOR

2.99

12/19/2033

10/23/2021

Citywide Capital Trust IV

4,166

09/30/2004

2.20% over LIBOR

3.51%

09/30/2034

02/23/2018

Citywide Capital Trust IV

4,382

09/30/2004

2.20% over LIBOR

2.35

09/30/2034

08/23/2021

Citywide Capital Trust V

11,241

05/31/2006

1.54% over LIBOR

2.86%

07/25/2036

12/15/2017

Citywide Capital Trust V

12,086

05/31/2006

1.54% over LIBOR

1.66

07/25/2036

09/15/2021

OCGI Statutory Trust III

3,008

06/27/2002

3.65% over LIBOR

3.83

09/30/2032

09/30/2021

OCGI Capital Trust IV

5,427

09/23/2004

2.50% over LIBOR

2.62

12/15/2034

09/15/2021

BVBC Capital Trust II

7,258

04/10/2003

3.25% over LIBOR

3.43

04/24/2033

10/24/2021

BVBC Capital Trust III

9,315

07/29/2005

1.60% over LIBOR

1.75

09/30/2035

09/30/2021

Total trust preferred costs

146,879

Less: deferred issuance costs

(67)

137,358

146,812

(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, 2021, was 3.07% due to interest rate swap transactions on the variable rate securities as discussed in Note 7 to the consolidated financial statements included herein.

(2) Effective interest rate as of June 30, 2021, was 3.87% due to an interest rate swap transaction as discussed in Note 7 to the consolidated financial statements included herein.

(3) Effective interest rate as of June 30, 2021, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to the 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~~HTLF 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~~HTLF 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~~

HTLF's capital ratios are calculated in accordance with Federal Reserve Board instructions and are required regulatory financial measures. The following table illustrates ~~Heartland's~~the 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)
June 30, 2021	15.04		%	12.36		%	11.45		%	8.50		%
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	$	12,146,479		$	12,146,479		$	12,146,479		N/A
Average assets	N/A			N/A			N/A			$	17,649,785

December 31, 2020	14.71		%	11.85		%	10.92		%	9.02		%
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	$	11,819,037		$	11,819,037		$	11,819,037		N/A
Average assets	N/A			N/A			N/A			$	15,531,884

Total
Capital
(to Risk-
Weighted
Assets)

Tier 1
Capital
(to Risk-
Weighted
Assets)

Common
Equity
Tier 1
(to Risk-
Weighted
Assets)

Tier 1
Capital
(to Average Assets)
September 30, 2017 13.58 % 11.84 % 10.01 % 9.48 %
Minimum capital requirement 8.00 % 6.00 % 4.50 % 4.00 %
Well capitalized requirement 10.00 % 8.00 % 6.50 % 5.00 %
Minimum capital requirement, including fully-phased in capital conservation buffer (2019) 10.50 % 8.50 % 7.00 % N/A
Risk-weighted assets $ 7,517,635
$ 7,517,635
$ 7,517,635
N/A
Average Assets N/A
N/A
N/A
$ 9,387,922

December 31, 2016 14.01 % 11.93 % 10.09 % 9.28 %
Minimum capital requirement 8.00 % 6.00 % 4.50 % 4.00 %
Well capitalized requirement 10.00 % 8.00 % 6.50 % 5.00 %
Minimum capital requirement, including fully-phased in capital conservation buffer (2019) 10.50 % 8.50 % 7.00 % N/A
Risk-weighted assets $ 6,335,807
$ 6,335,807
$ 6,335,807
N/A
Average Assets N/A
N/A
N/A
$ 8,147,357

At June 30, 2021, and December 31, 2020, retained earnings that could be available for the payment of dividends to meet the minimum capital requirements totaled $752.7 million and $736.5 million, respectively. Retained earnings that could be available for the payment of dividends to ~~Heartland~~HTLF from its banks totaled approximately ~~$244.6~~$509.8 million and ~~$182.1~~$500.9 million at ~~September~~June 30, ~~2017,~~2021, and December 31, ~~2016,~~2020, respectively, under the capital requirements to remain well capitalized. ~~At September 30, 2017,~~These dividends are the principal source of funds to pay dividends on HTLF's common and ~~December 31, 2016, retained earnings that could~~preferred stock and to pay interest and principal on its debt.

On June 26, 2020, HTLF issued and sold 4.6 million depositary shares, each representing a 1/400th interest in a share of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E. The depositary shares are listed on The Nasdaq Global Select Market under the symbol "HTLFP." If declared, dividends are paid quarterly in arrears at a rate of 7.00% per annum beginning on October 15, 2020. For the dividend period beginning on the first reset date of July 15, 2025, and for dividend periods beginning every fifth anniversary thereafter, each a reset date, the rate per annum will be ~~available~~reset based on a recent five-year treasury rate plus 6.675%. The earliest redemption date for the ~~payment of~~preferred shares is July 15, 2025. Dividends payable on common shares are subject to quarterly dividends ~~under~~payable on these outstanding preferred shares at the ~~most restrictive minimum capital requirements totaled $394.9 million and $308.9 million, respectively.~~applicable dividend rate.

On ~~July 29, 2016, Heartland~~August 8, 2019, HTLF filed a universal shelf registration statement with the SEC to register debt or equity securities. This shelf registration statement, which was effective immediately, provides ~~Heartland~~HTLF with the ability to raise capital, subject to market conditions and SEC rules and limitations, if ~~Heartland's~~the board of directors decides to do so. This registration statement ~~will permit Heartland,~~permits HTLF, from time to time, in one or more public offerings, to offer debt securities, subordinated notes, common stock, preferred stock, depositary shares, warrants, rights or units of any combination of these securities. The amount of securities that may be offered iswas not specified in the registration statement, and the terms of any future offerings ~~will~~are 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~~The registration ~~statement.~~statement expires on August 8, 2022.

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

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

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

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

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

Commitments and Contractual Obligations

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. ~~Heartland's~~HTLF'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~~the 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,~~2021, and December 31, ~~2016,~~2020, commitments to extend credit aggregated ~~$2.03~~$3.87 billion and ~~$1.57~~$3.26 billion, respectively. Standby letters of credit aggregated ~~$52.3~~$63.9 million at ~~September~~June 30, ~~2017,~~2021, and ~~$46.1~~$73.2 million at December 31, ~~2016.~~2020.

At June 30, 2021, and December 31, 2020, HTLF's banks had $873.2 million and $607.0 million, respectively, of standby letters of credit with the respective FHLB to secure public funds and municipal deposits.

Contractual obligations and other commitments were disclosed in ~~Heartland's~~HTLF's Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2020. On July 1, 2021, HTLF and ~~there~~Fiserv Solutions, LLC executed a master agreement that replaced an existing license and service agreement between HTLF and Fiserv Solutions, LLC. The agreement is filed as an exhibit to this Quarterly Report on Form 10-Q. There have been no other material changes ~~in Heartland's~~to HTLF's contractual obligations and other commitments since ~~that report~~the Annual Report on Form 10-K was filed.

HTLF continues to explore opportunities to expand the size of its independent community banks. In the current banking industry environment, HTLF seeks these opportunities for growth through acquisitions. HTLF 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, HTLF 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

HTLF 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 these loans. HTLF 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 included in this Quarterly Report on Form 10-Q for additional information on derivative financial instruments.

LIQUIDITY

Liquidity refers to the 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’ credit needs. The liquidity of HTLF 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.

At June 30, 2021, HTLF had $449.1 million of cash and cash equivalents, time deposits in other financial institutions of $3.1 million and securities carried at fair value of $6.54 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 growth in net interest cash flows.

Short-term borrowing balances are dependent on commercial cash management and smaller correspondent bank relationships and, as a result, will normally fluctuate. Management believes these balances, on average, to be stable sources of funds; however, HTLF intends to rely on deposit growth and additional FHLB and discount window 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, HTLF's 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, 2021, short-term borrowings outstanding totaled $152.6 million.

As of June 30, 2021, HTLF had $271.2 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure. Additionally, the subsidiary banks' FHLB memberships give them the ability to borrow funds for short-term and long-term purposes under a variety of programs. At June 30, 2021, HTLF had $1.51 billion of borrowing capacity under these programs. Additionally, at June 30, 2021, HTLF had $1.15 billion of borrowing capacity at the Federal Reserve Banks' discount window.

On a consolidated basis, ~~Heartland~~HTLF maintains a large balance of short-term securities that, when combined with cash from operations, ~~Heartland~~management 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

At June ~~14, 2017, Heartland's~~30, 2021, the parent company had cash of $108.3 million. Additionally, HTLF has a revolving credit agreement and non-revolving credit line with an unaffiliated bank, ~~was increased to $25.0 million from $20.0~~which is renewed annually, most recently on June 14, 2021. The revolving credit agreement has $75.0 million of maximum borrowing ~~capacity.~~capacity, of which none was outstanding at June 30, 2021. At ~~September~~June 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~~2021, $3.5 million was available on ~~this~~the non-revolving credit line. These credit agreements contain specific financial covenants, all of which ~~Heartland was in compliance~~HTLF complied with as of ~~September~~June 30, ~~2017.~~2021.

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

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

~~Derivative Financial Instruments~~

Heartland enters into mortgage banking derivatives, which are classified as free standing derivatives. These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such loans. We enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future interest rate changes on the commitments to fund these loans and on the residential mortgage loans held as available for sale. See Note 7 to the consolidated financial statements include in this Quarterly Report on Form 10-Q for additional information on our derivative financial instruments.

~~LIQUIDITY~~

Liquidity refers to Heartland's ability to maintain cash flow that is adequate to meet maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund operations and to provide for customers' credit needs. The liquidity of Heartland

principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and its ability to borrow funds in the money or capital markets.

~~Operating activities provided cash of $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 of $8.6 million during the first nine months of 2017 compared to using cash of $353.1 million during the first nine months of 2016. Short-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.

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market prices and rates. ~~Heartland's~~HTLF'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~~HTLF's assets, liabilities and off-balance sheet contracts. ~~Heartland's~~HTLF'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~~the bank subsidiaries and, on a consolidated basis, by ~~Heartland's~~HTLF'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~~HTLF 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~~HTLF's interest rate risk profile and net interest income. ~~Heartland believes its primary market risk exposures did not change significantly in the first nine months of 2017.~~

The core interest rate risk analysis utilized ~~by Heartland~~ examines the balance sheet under increasing and decreasing interest rate scenarios that are neither too modest nor too extreme. All rate changes are ramped over a 12-month horizon based upon a parallel shift in the yield curve and then maintained at those levels over the remainder of the simulation horizon. Using this approach, management is able to see the effect that both a gradual change of rates (year 1)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,~~2021, and ~~September~~June 30, ~~2016,~~2020, provided the following results, in thousands:


	2021				2020
	Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base
Year 1
Down 100 Basis Points	$	500,955	(1.95)	%	$	440,176	(0.92)	%
Base	510,916		—		444,243		—
Up 200 Basis Points	534,488		4.61		468,051		5.36
Year 2
Down 100 Basis Points	$	462,500	(9.48)	%	$	427,344	(3.80)	%
Base	492,979		(3.51)		442,038		(0.50)
Up 200 Basis Points	555,444		8.72		508,018		14.36

2017 2016

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 )%
Base $ 352,502
$ 286,122

Up 200 Basis Points $ 351,265
(0.35 )% $ 286,325
0.07 %
Year 2
Down 100 Basis Points $ 326,965
(7.24 )% $ 264,054
(7.71 )%
Base $ 354,238
0.49 % $ 286,429
0.11 %
Up 200 Basis Points $ 369,712
4.88 % $ 298,565
4.35 %

~~Heartland~~HTLF uses derivative financial instruments to manage the impact of changes in interest rates on its future interest income or interest expense. ~~Heartland~~HTLF 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~~HTLF 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~~HTLF 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~~the Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded ~~that Heartland's~~that:

•HTLF'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~~three months ended ~~September~~June 30, ~~2017,~~2021, 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~~the internal ~~control~~controls over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

There are ~~no material pending~~certain legal proceedings ~~to which Heartland or~~pending against HTLF and its subsidiaries at June 30, 2021, that 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.business.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors applicable to ~~Heartland~~HTLF from those disclosed in Part I, Item 1A. ~~“Risk Factors”~~"Risk Factors" in ~~Heartland's 2016~~HTLF's 2020 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~~On March 17, 2020, the board of directors ~~has~~ authorized management to acquire and hold up to ~~500,000 shares~~5% of ~~common stock~~capital or $102.5 million as of June 30, 2021, as treasury shares at any one time. ~~Heartland~~HTLF and its affiliated purchasers made no purchases of its common stock during the ~~nine months~~quarter ended ~~September~~June 30, ~~2017.~~2021.

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~~	⁽¹⁾	~~Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.~~
~~31.2~~	⁽¹⁾	~~Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.~~
~~32.1~~	⁽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~~	⁽¹⁾	~~Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
~~101~~		Financial statement formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, and (vi) the Notes to Consolidated Financial Statements.




10.1	(1)(2)	Form of Director Restricted Stock Unit Award Agreement under the Heartland Financial USA, Inc. 2020 Long-Term Incentive Plan

10.2	(2)(3)	Master Agreement between Fiserv Solutions LLC and Heartland Financial USA, Inc. dated July 1, 2021, and Amendment 1 to Agreement dated as of July 1, 2021.

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

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

32.1	(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	(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

(3) Portions of the contract have been omitted pursuant to SEC confidential treatment under 17 C.F.R. Section 229.601(b)(10)(iv)

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)


~~HEARTLAND FINANCIAL USA, INC.~~/s/ Bruce K. Lee
~~(Registrant)~~By: Bruce K. Lee


~~/s/ Lynn B. Fuller~~
~~By: Lynn B. Fuller~~
~~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 5, 2021


Title of Each Class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $1.00 per share	HTLF	Nasdaq Stock Market
Depositary Shares, each representing 1/400th interest in a share of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E	HTLFP	Nasdaq Stock Market


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


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



HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
	September 30, 2017 (Unaudited)			December 31, 2016
ASSETS
Cash and due from banks	$	180,751		$	151,290
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments	70,985			7,434
Cash and cash equivalents	251,736			158,724
Time deposits in other financial institutions	19,793			2,105
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
Other investments, at cost	23,176			21,560
Loans held for sale	35,795			61,261
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
Premises, furniture and equipment, net	174,533			163,614
Premises, furniture and equipment held for sale	4,428			414
Other real estate, net	13,226			9,744
Goodwill	236,615			127,699
Core deposit intangibles and customer relationship intangibles, net	37,028			22,775
Servicing rights, net	26,599			35,778
Cash surrender value on life insurance	142,073			112,615
Other assets	122,355			123,869
TOTAL ASSETS	$	9,755,627		$	8,247,079
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	3,009,940		$	2,202,036
Savings	4,227,340			3,788,089
Time	994,604			857,286
Total deposits	8,231,884			6,847,411
Short-term borrowings	171,871			306,459
Other borrowings	301,473			288,534
Accrued expenses and other liabilities	68,715			63,759
TOTAL LIABILITIES	8,773,943			7,506,163
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both September 30, 2017, and December 31, 2016)	—			—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both September 30, 2017, and December 31, 2016)	—			—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2017, and December 31, 2016, none issued or outstanding at both September 30, 2017, and December 31, 2016)	—			—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both September 30, 2017, and December 31, 2016; 745 shares issued and outstanding at September 30, 2017, and 1,078 shares issued and outstanding at December 31, 2016)	938			1,357
Common stock (par value $1 per share; 40,000,000 shares authorized at September 30, 2017, and 30,000,000 shares authorized at December 31, 2016; issued 29,946,069 shares at September 30, 2017, and 26,119,929 shares at December 31, 2016)	29,946			26,120
Capital surplus	503,262			328,376
Retained earnings	468,556			416,109
Accumulated other comprehensive loss	(21,018		)	(31,046		)
Treasury stock at cost (0 shares at both September 30, 2017, and December 31, 2016)	—			—
TOTAL STOCKHOLDERS' EQUITY	981,684			740,916
TOTAL LIABILITIES AND EQUITY	$	9,755,627		$	8,247,079

See accompanying notes to consolidated financial statements.



	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	—			—



	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



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
September 30, 2017
Obligations of states and political subdivisions	$	6,278	$	(43	)	$	8,894	$	(648	)	$	15,172	$	(691	)
Total temporarily impaired securities	$	6,278	$	(43	)	$	8,894	$	(648	)	$	15,172	$	(691	)
December 31, 2016
Obligations of states and political subdivisions	$	31,479	$	(884	)	$	2,017	$	(261	)	$	33,496	$	(1,145	)
Total temporarily impaired securities	$	31,479	$	(884	)	$	2,017	$	(261	)	$	33,496	$	(1,145	)



	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



	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



	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
September 30, 2017
Impaired loans with a related allowance:
Commercial	$	3,190	$	3,190	$	2,166	$	4,885	$	—	$	3,829	$	1
Commercial real estate	11,272		9,416		864		10,637		—		12,106		7
Total commercial and commercial real estate	14,462		12,606		3,030		15,522		—		15,935		8
Agricultural and agricultural real estate	10,289		10,289		2,353		3,532		—		2,140		—
Residential real estate	1,640		1,640		393		1,633		—		2,197		10
Consumer	2,179		2,179		1,267		2,155		10		2,343		32
Total impaired loans with a related allowance	$	28,570	$	26,714	$	7,043	$	22,842	$	10	$	22,615	$	50
Impaired loans without a related allowance:
Commercial	$	4,887	$	3,767	$	—	$	2,727	$	—	$	2,017	$	112
Commercial real estate	19,132		18,527		—		18,237		201		21,750		536
Total commercial and commercial real estate	24,019		22,294		—		20,964		201		23,767		648
Agricultural and agricultural real estate	2,503		2,503		—		8,343		—		10,858		—
Residential real estate	28,197		28,193		—		27,556		112		26,006		230
Consumer	4,345		4,345		—		4,222		19		3,849		61
Total impaired loans without a related allowance	$	59,064	$	57,335	$	—	$	61,085	$	332	$	64,480	$	939
Total impaired loans held to maturity:
Commercial	$	8,077	$	6,957	$	2,166	$	7,612	$	—	$	5,846	$	113
Commercial real estate	30,404		27,943		864		28,874		201		33,856		543
Total commercial and commercial real estate	38,481		34,900		3,030		36,486		201		39,702		656
Agricultural and agricultural real estate	12,792		12,792		2,353		11,875		—		12,998		—
Residential real estate	29,837		29,833		393		29,189		112		28,203		240
Consumer	6,524		6,524		1,267		6,377		29		6,192		93
Total impaired loans held to maturity	$	87,634	$	84,049	$	7,043	$	83,927	$	342	$	87,095	$	989



	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



	Commercial			Commercial Real Estate			Agricultural			Residential Real Estate			Consumer			Total
Balance at June 30, 2017	$	17,168		$	21,861		$	3,832		$	2,263		$	8,927		$	54,051
Charge-offs	(1,954		)	(1,913		)	—			(142		)	(1,750		)	(5,759		)
Recoveries	347			46			14			63			418			888
Provision	1,409			546			2,281			82			1,387			5,705
Balance at September 30, 2017	$	16,970		$	20,540		$	6,127		$	2,266		$	8,982		$	54,885

	Commercial			Commercial Real Estate			Agricultural			Residential Real Estate			Consumer			Total
Balance at December 31, 2016	$	14,765		$	24,319		$	4,210		$	2,263		$	8,767		$	54,324
Charge-offs	(3,310		)	(2,522		)	(888		)	(541		)	(4,982		)	(12,243		)
Recoveries	635			860			17			70			987			2,569
Provision	4,880			(2,117		)	2,788			474			4,210			10,235
Balance at September 30, 2017	$	16,970		$	20,540		$	6,127		$	2,266		$	8,982		$	54,885



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



	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



	Fair Value at 9/30/17		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⁾
Premises, furniture and equipment held for sale	4,428		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%
Collateral dependent impaired loans:
Commercial	3,556		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-15%⁽⁴⁾
Commercial real estate	8,718		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-14%⁽⁴⁾
Agricultural and agricultural real estate	7,936		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-6%⁽⁴⁾
Residential real estate	1,365		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-13%⁽⁴⁾
Consumer	912		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.



	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



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

Common Share Data
Book value per common share (GAAP)	$	32.75		$	30.15		$	29.26		$	28.31		$	28.48
Tangible book value per common share (non-GAAP)⁽²⁾	$	23.61		$	24.00		$	23.05		$	22.55		$	22.34
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
Tangible common equity ratio (non-GAAP)⁽³⁾	7.46		%	7.97		%	7.50		%	7.28		%	6.85		%

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

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

Reconciliation of Tangible Common Equity Ratio (non-GAAP)⁽⁵⁾
Total assets (GAAP)	$	9,755,627		$	8,204,721		$	8,361,845		$	8,247,079		$	8,202,215
Less goodwill	236,615			141,461			141,461			127,699			127,699
Less core deposit intangibles and customer relationship intangibles, net	37,028			22,850			24,068			22,775			23,922
Total tangible assets (non-GAAP)	$	9,481,984		$	8,040,410		$	8,196,316		$	8,096,605		$	8,050,594
Tangible common equity ratio (non-GAAP)	7.46		%	7.97		%	7.50		%	7.28		%	6.85		%

(1) Excludes loans held for sale.
(2) Refer to the "Reconciliation of Tangible Book Value Per Common Share (non-GAAP)" table.
(3) Refer to the "Reconciliation of Tangible Common Equity Ratio (non-GAAP)" table.
(4) Tangible book value per common share is total common stockholders' equity less goodwill and core deposit and customer relationship intangibles, net, divided by common shares outstanding, net of treasury. This amount is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate the financial condition and capital strength of Heartland. This measure should not be considered a substitute for operating results determined in accordance with GAAP.
(5) The tangible common equity ratio is total common stockholders' equity less goodwill and core deposit intangibles, net divided by total assets less goodwill and core deposit intangibles, net. This ratio is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate the financial condition and capital strength of Heartland. This measure should not be considered a substitute for operating results determined in accordance with GAAP.



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



LOANS SECURED BY REAL ESTATE
	September 30, 2017			December 31, 2016
Residential real estate, excluding residential construction and residential lot loans	$	989,112		$	1,030,190
Industrial, manufacturing, business and commercial	461,281			474,632
Agriculture	254,315			255,046
Retail	350,888			332,009
Office	335,057			347,334
Land development and lots	132,625			127,700
Hotel, resort and hospitality	163,076			151,571
Multi-family	185,634			185,559
Food and beverage	107,846			102,225
Warehousing	125,231			120,471
Health services	132,785			147,412
Residential construction	93,968			143,962
All other	169,912			172,617
Loans acquired in the quarter	775,587			—
Purchase accounting valuations	(30,806		)	(17,559		)
Total loans secured by real estate	$	4,246,511		$	3,573,169



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

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



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



	Total Capital (to Risk- Weighted Assets)			Tier 1 Capital (to Risk- Weighted Assets)			Common Equity Tier 1 (to Risk- Weighted Assets)			Tier 1 Capital (to Average Assets)
September 30, 2017	13.58		%	11.84		%	10.01		%	9.48		%
Minimum capital requirement	8.00		%	6.00		%	4.50		%	4.00		%
Well capitalized requirement	10.00		%	8.00		%	6.50		%	5.00		%
Minimum capital requirement, including fully-phased in capital conservation buffer (2019)	10.50		%	8.50		%	7.00		%	N/A
Risk-weighted assets	$	7,517,635		$	7,517,635		$	7,517,635		N/A
Average Assets	N/A			N/A			N/A			$	9,387,922

December 31, 2016	14.01		%	11.93		%	10.09		%	9.28		%
Minimum capital requirement	8.00		%	6.00		%	4.50		%	4.00		%
Well capitalized requirement	10.00		%	8.00		%	6.50		%	5.00		%
Minimum capital requirement, including fully-phased in capital conservation buffer (2019)	10.50		%	8.50		%	7.00		%	N/A
Risk-weighted assets	$	6,335,807		$	6,335,807		$	6,335,807		N/A
Average Assets	N/A			N/A			N/A			$	8,147,357