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, 2023 (Unaudited)		December 31, 2022
ASSETS
Cash and due from banks	$	317,303	$	309,045
Interest bearing deposits with other banks and other short-term investments	82,884		54,042
Cash and cash equivalents	400,187		363,087
Time deposits in other financial institutions	1,490		1,740
Securities:

Carried at fair value (cost of $6,415,588 at June 30, 2023, and $6,788,729 at December 31, 2022)	5,798,041		6,147,144
Held to maturity, net of allowance for credit losses of $0 at both June 30, 2023, and December 31, 2022 (fair value of $806,942 at June 30, 2023, and $776,557 at December 31, 2022)	834,673		829,403
Other investments, at cost	72,291		74,567
Loans held for sale	14,353		5,277
Loans receivable:
Held to maturity	11,717,974		11,428,352

Allowance for credit losses	(111,198)		(109,483)
Loans receivable, net	11,606,776		11,318,869
Premises, furniture and equipment, net	186,679		190,479
Premises, furniture and equipment held for sale	3,741		6,851
Other real estate, net	2,677		8,401
Goodwill	576,005		576,005
Core deposit intangibles and customer relationship intangibles, net	21,651		25,154
Servicing rights, net	—		7,840
Cash surrender value on life insurance	195,793		193,403

Other assets	510,359		496,008
TOTAL ASSETS	$	20,224,716	$	20,244,228
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	4,897,858	$	5,701,340
Savings	8,772,596		9,994,391
Time	3,993,089		1,817,278
Total deposits	17,663,543		17,513,009

Short-term borrowings	44,364		376,117
Other borrowings	372,403		371,753
Accrued expenses and other liabilities	285,416		248,294
TOTAL LIABILITIES	18,365,726		18,509,173
STOCKHOLDERS' EQUITY:


Preferred stock (par value $1 per share; authorized 188,500 and 6,104 shares at June 30, 2023, and December 31, 2022; none issued or outstanding at both June 30, 2023, and December 31, 2022)	—		—




Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 shares authorized at both June 30, 2023, and December 31, 2022; 11,500 shares issued and outstanding at both June 30, 2023 and December 31, 2022)	110,705		110,705
Common stock (par value $1 per share; 60,000,000 shares authorized at both June 30, 2023, and December 31, 2022; issued 42,644,544 shares at June 30, 2023, and 42,467,394 shares at December 31, 2022)	42,645		42,467
Capital surplus	1,087,358		1,080,964
Retained earnings	1,193,522		1,120,925
Accumulated other comprehensive loss	(575,240)		(620,006)



TOTAL STOCKHOLDERS' EQUITY	1,858,990		1,735,055
TOTAL LIABILITIES AND EQUITY	$	20,224,716	$	20,244,228

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,
	2023		2022		2023		2022
INTEREST INCOME:
Interest and fees on loans	$	168,899	$	108,718	$	322,742	$	211,087
Interest on securities:
Taxable	58,172		38,098		114,148		70,718
Nontaxable	6,378		5,508		12,406		11,710

Interest on interest bearing deposits in other financial institutions	2,051		563		3,182		634
TOTAL INTEREST INCOME	235,500		152,887		452,478		294,149
INTEREST EXPENSE:
Interest on deposits	81,975		6,530		138,873		9,507
Interest on short-term borrowings	848		88		3,270		134
Interest on other borrowings (includes $(63) and $182 of interest (income) expense related to derivatives reclassified from accumulated other comprehensive income (loss) for the three months ended June 30, 2023 and 2022, respectively, and $701 and $363 of interest expense related to derivatives reclassified from accumulated other comprehensive income (loss) for the six months ended June 30, 2023 and 2022, respectively)	5,545		3,808		10,991		7,368
TOTAL INTEREST EXPENSE	88,368		10,426		153,134		17,009
NET INTEREST INCOME	147,132		142,461		299,344		277,140
Provision for credit losses	5,379		3,246		8,453		6,491
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	141,753		139,215		290,891		270,649
NONINTEREST INCOME:
Service charges and fees	19,627		18,066		36,763		33,317
Loan servicing income	411		834		1,125		1,120
Trust fees	5,419		5,679		11,076		11,758
Brokerage and insurance commissions	677		839		1,373		1,708
Capital markets fees	4,037		4,871		6,486		7,910
Securities (losses) gains, net (includes $325 and $2,641 of net security losses reclassified from accumulated other comprehensive income (loss) for the three months ended June 30, 2023 and 2022, respectively, and $1,429 and $650 of net security losses reclassified from accumulated other comprehensive income (loss) for the six months ended June 30, 2023 and 2022, respectively)	(314)		(2,089)		(1,418)		783


Unrealized gain (loss) on equity securities, net	(41)		(121)		152		(404)
Net gains on sale of loans held for sale	1,050		2,901		2,881		6,312
Valuation adjustment on servicing rights	—		—		—		1,658
Income on bank owned life insurance	1,220		523		2,184		1,047
Other noninterest income	407		3,036		1,870		3,899
TOTAL NONINTEREST INCOME	32,493		34,539		62,492		69,108
NONINTEREST EXPENSES:
Salaries and employee benefits	62,099		64,032		124,248		130,206
Occupancy	6,691		7,094		13,900		14,456
Furniture and equipment	3,063		3,033		5,978		6,552
Professional fees	15,194		14,457		27,991		27,997
FDIC insurance assessments	3,035		1,530		6,314		3,146
Advertising	3,052		1,283		5,037		2,838
Core deposit and customer relationship intangibles amortization	1,715		2,083		3,503		4,137
Other real estate and loan collection expenses	348		78		503		273
Gain on sales/valuations of assets, net	(3,372)		(3,230)		(2,257)		(3,184)
Acquisition, integration and restructuring costs	1,892		2,412		3,565		2,988
Partnership investment in tax credit projects	154		737		692		814
Other noninterest expenses	15,575		12,970		31,015		27,053
TOTAL NONINTEREST EXPENSES	109,446		106,479		220,489		217,276
INCOME BEFORE INCOME TAXES	64,800		67,275		132,894		122,481
Income taxes (includes $63 and $667 of income tax benefit reclassified from accumulated other comprehensive income (loss) for the three months ended June 30, 2023 and 2022, respectively, and $535 and $164 of income tax benefit reclassified from accumulated other comprehensive income (loss) for the six months ended June 30, 2023 and 2022, respectively)	15,384		15,402		30,702		27,519
NET INCOME	49,416		51,873		102,192		94,962


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

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	47,404	$	49,861	$	98,167	$	90,937
EARNINGS PER COMMON SHARE - BASIC	$	1.11	$	1.17	$	2.30	$	2.14
EARNINGS PER COMMON SHARE - DILUTED	$	1.11	$	1.17	$	2.30	$	2.14
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.30	$	0.27	$	0.60	$	0.54

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,
	2023		2022		2023		2022
NET INCOME	$	49,416	$	51,873	$	102,192	$	94,962
OTHER COMPREHENSIVE INCOME (LOSS)
Changes in available for sale ("AFS") securities:
Net change in unrealized gain (loss) on securities	(43,558)		(263,212)		22,609		(641,902)
Reclassification adjustment for net losses on hedged AFS securities	29,510		—		29,510		—
Reclassification adjustment for net losses realized in net income	325		2,641		1,429		650
Income tax (expense) benefit	3,366		60,429		(14,555)		159,799
Other comprehensive income (loss) on available for sale securities	(10,357)		(200,142)		38,993		(481,453)
Changes in securities held to maturity:

Net amortization of unrealized losses on securities transferred from AFS	2,768		—		5,508		—
Income tax expense	(693)		—		(1,753)		—
Other comprehensive income on held to maturity securities	2,075		—		3,755		—
Change in cash flow hedges:
Net change in unrealized gain on derivatives	—		—		1,952		—
Reclassification adjustment for net losses (gains) on derivatives realized in net income	(63)		182		701		363
Income taxes	24		(37)		(635)		(76)
Other comprehensive income (loss) on cash flow hedges	(39)		145		2,018		287
Other comprehensive income (loss)	(8,321)		(199,997)		44,766		(481,166)
TOTAL COMPREHENSIVE INCOME (LOSS)	$	41,095	$	(148,124)	$	146,958	$	(386,204)

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,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	102,192	$	94,962
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	10,519		12,964
Provision for credit losses	8,453		6,491
Net amortization of premium on securities	14,848		38,332
Securities losses (gains), net	1,418		(783)

Unrealized (gain) loss on equity securities, net	(152)		404
Stock based compensation	6,893		5,090

Loans originated for sale	(86,860)		(180,072)
Proceeds on sales of loans held for sale	80,641		188,317
Net gains on sale of loans held for sale	(2,857)		(5,408)
Increase in accrued interest receivable	(2,135)		(280)
Decrease (increase) in prepaid expenses	2,647		(2,194)
Increase (decrease) in accrued interest payable	30,446		(91)

Capitalization of servicing rights	(24)		(904)
Valuation adjustment on servicing rights	—		(1,658)
Gain on sales/valuations of assets, net	(2,257)		(139)
Net excess tax benefit (expense) from stock based compensation	(75)		129
Other, net	21,028		33,327
NET CASH PROVIDED BY OPERATING ACTIVITIES	184,725		188,487
CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from the sale of securities available for sale	286,738		973,911
Proceeds from the sale of securities held to maturity	—		2,337


Proceeds from the maturity of and principal paydowns on securities available for sale	336,175		565,196
Proceeds from the maturity of and principal paydowns on securities held to maturity	298		1,286
Proceeds from the maturity of time deposits in other financial institutions	250		1,039
Proceeds from the sale, maturity of, redemption of and principal paydowns on other investments	6,761		6,715
Purchase of securities available for sale	(265,959)		(1,788,922)

Purchase of other investments	(4,474)		(8,714)
Net increase in loans	(307,920)		(752,767)
Purchase of bank owned life insurance policies	(206)		(201)
Proceeds from bank owned life insurance policies	—		502
Proceeds from sale of mortgage servicing rights	6,714		—
Capital expenditures	(3,043)		(8,181)

Proceeds from the sale of equipment	1,321		4,264
Net cash expended in divestitures	—		(50,616)
Proceeds on sale of OREO and other repossessed assets	5,077		1,927
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES	$	61,732	$	(1,052,224)

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,
	2023		2022
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits	$	(803,482)	$	(392,811)
Net (decrease) increase in savings deposits	(1,221,795)		1,203,729
Net increase in time deposit accounts	2,175,811		61,228


Net decrease in short-term borrowings	(281,753)		(33,848)
Proceeds from short term advances	51,000		141,000
Repayments of short term advances	(101,000)		(141,000)

Repayments of other borrowings	(60)		(168)





Proceeds from issuance of common stock	1,456		1,682
Dividends paid	(29,534)		(26,880)
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES	(209,357)		812,932
Net increase (decrease) in cash and cash equivalents	37,100		(50,805)
Cash and cash equivalents at beginning of year	363,087		435,599
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	400,187	$	384,794
Supplemental disclosures:
Cash paid for income/franchise taxes	$	40,303	$	17,457
Cash paid for interest	122,688		17,100
Loans transferred to OREO	239		4,684
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale	3,741		4,061
Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net	5,825		—


Dividends declared, not paid	2,074		2,013
Purchases of securities available for sale, accrued, not settled	—		7,420






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, 2022	$	110,705	$	42,370	$	1,073,048	$	992,655	$	(286,921)	$	1,931,857
Comprehensive income (loss)							51,873		(199,997)		(148,124)

Cash dividends declared:
Preferred, $175.00 per share							(2,012)				(2,012)
Common, $0.27 per share							(11,440)				(11,440)


Issuance of 69,531 shares of common stock			69		1,332						1,401
Stock based compensation					2,386						2,386
Balance at June 30, 2022	$	110,705	$	42,439	$	1,076,766	$	1,031,076	$	(486,918)	$	1,774,068

Balance at January 1, 2022	$	110,705	$	42,275	$	1,071,956	$	962,994	$	(5,752)	$	2,182,178


Comprehensive income (loss)							94,962		(481,166)		(386,204)



Cash dividends declared:
Preferred, $350.00 per share							(4,025)				(4,025)

Common, $0.54 per share							(22,855)				(22,855)




Issuance of 164,175 shares of common stock			164		(280)						(116)
Stock based compensation					5,090						5,090
Balance at June 30, 2022	$	110,705	$	42,439	$	1,076,766	$	1,031,076	$	(486,918)	$	1,774,068

Balance at March 31, 2023	$	110,705	$	42,559	$	1,084,112	$	1,158,948	$	(566,919)	$	1,829,405
Comprehensive income (loss)							49,416		(8,321)		41,095

Cash dividends declared:
Preferred, $175.00 per share							(2,012)				(2,012)
Common, $0.30 per share							(12,830)				(12,830)

Issuance of 85,818 shares of common stock			86		1,072						1,158
Stock based compensation					2,174						2,174
Balance at June 30, 2023	$	110,705	$	42,645	$	1,087,358	$	1,193,522	$	(575,240)	$	1,858,990

Balance at January 1, 2023	$	110,705	$	42,467	$	1,080,964	$	1,120,925	$	(620,006)	$	1,735,055


Comprehensive income (loss)							102,192		44,766		146,958

Cash dividends declared:

Preferred, $350.00 per share							(4,025)				(4,025)
Common, $0.60 per share							(25,570)				(25,570)




Issuance of 177,150 shares of common stock			178		(499)						(321)
Stock based compensation					6,893						6,893
Balance at June 30, 2023	$	110,705	$	42,645	$	1,087,358	$	1,193,522	$	(575,240)	$	1,858,990

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,~~2022, included in the Annual Report on Form 10-K of Heartland Financial USA, Inc. ("~~Heartland"~~HTLF") filed with the Securities and Exchange Commission ("SEC") on ~~March 1, 2017~~February 23, 2023. 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,~~2023, are not necessarily indicative of the results expected for the year ending December 31, ~~2017.~~2023.

During the first quarter of 2023, HTLF reclassified swap and loan syndication income (collectively, "capital markets fees") to capital markets fees from other noninterest income on the consolidated statements of income, and all prior periods have been adjusted.

During the second quarter of 2023, HTLF reclassified Federal Deposit Insurance Corporation ("FDIC") insurance premiums to FDIC insurance assessments from professional fees on the consolidated statements of income, and all prior periods have been adjusted.

In the second quarter of 2023, HTLF amended and restated its Certificate of Incorporation and filed Certificates of Elimination with the state of Delaware with respect to Series A, B, C, and D preferred stock issuances, which returned these previously designated shares to authorized but unissued. The following shows the details of Series A, B, C and D preferred stock at December 31, 2022:

•Series A Junior Participating preferred stock-par value $1 per share; authorized 16,000 shares; none issued or outstanding at December 31, 2022

•Series B Fixed Rate Cumulative Perpetual Preferred Stock-par value $1 per share; 81,698 shares authorized at December 31, 2022; none issued or outstanding at December 31, 2022

•Series C Senior Non-Cumulative Perpetual Preferred Stock-par value $1 per share; 81,698 shares authorized at December 31, 2022; none issued or outstanding at December 31, 2022

•Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock-par value $1 per share; 3,000 shares authorized at December 31, 2022; none issued or outstanding at December 31, 2022

After the cancellation of Series A, B, C and D preferred shares, total preferred shares authorized increased to 188,500 from 6,104 at December 31, 2022, of which none were issued or outstanding at both June 30, 2023 and December 31, 2022.

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~~2023 and ~~2016,~~2022, 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,
	2023		2022
Net income	$	49,416	$	51,873
Preferred dividends	(2,012)		(2,012)


Net income available to common stockholders	$	47,404	$	49,861

Weighted average common shares outstanding for basic earnings per share	42,696		42,475
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	62		91
Weighted average common shares for diluted earnings per share	42,758		42,566
Earnings per common share — basic	$	1.11	$	1.17
Earnings per common share — diluted	$	1.11	$	1.17
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	59		172
Number of antidilutive stock options excluded from diluted earnings per share computation	221		—

	Six Months Ended June 30,
	2023		2022
Net income	$	102,192	$	94,962
Preferred dividends	(4,025)		(4,025)

Net income available to stockholders	$	98,167	$	90,937

Weighted average common shares outstanding for basic earnings per share	42,655		42,418
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	98		145
Weighted average common shares for diluted earnings per share	42,753		42,563
Earnings per common share — basic	$	2.30	$	2.14
Earnings per common share — diluted	$	2.30	$	2.14
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	95		76
Number of antidilutive stock options excluded from diluted earnings per share computation	62		—

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 2022-01

In ~~May 2014,~~March 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method," which expands the current last-of-layer method by allowing multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. HTLF adopted this ASU on January 1, 2023, and these amendments were applied prospectively.

ASU 2022-02

In March 2022, the FASB issued ASU ~~2014-09,~~ 2022-02, "~~Revenue from Contracts~~Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." These amendments eliminate the troubled debt restructurings ("TDR") recognition and measurement guidance and, instead, require that an entity evaluate (consistent with ~~Customers."~~ ~~The amendment clarifies~~ the ~~principles for recognizing revenue and develops a common revenue standard. The amendment outlines a single comprehensive model for entities to use in~~ accounting for ~~revenue arising from contracts with customers~~other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and ~~supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle~~introduce new requirements related to certain modifications of ~~the revenue model is~~receivables made

to borrowers experiencing financial difficulty. Additionally, these amendments require that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In applying the revenue model to contracts within its scope, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance does not apply to certain contractsdisclose current-period gross charge-offs by year of origination for loans receivable 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~~Subtopic 326-20. The guidance was effective for 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 tothat have ~~a significant effect on Heartland's results of operations, financial position and liquidity other than expanded disclosure requirements.~~

~~In January 2016, the FASB issued~~adopted ASU ~~2016-01,~~ ~~"Recognition and Measurement of Financial Assets and Financial Liabilities."~~ The amendments in ASU 2016-01 to Subtopic 825-10, Financial Instruments, make the following changes: (1) require equity investments to be measured at fair value with changes in fair value recognized in net income; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) eliminate the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (4) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements; (7) clarify that the entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets. The amendments are effective2016-13 for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Except for the early application of the amendment noted in item (5) above, early adoption of the amendments in this update is not permitted. Heartland intends to adopt the accounting standard in 2018, as required, and is currently evaluating the potential impact of this guidance on its results of operations, financial position and liquidity.

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

~~In March 2016, the FASB issued ASU 2016-09,~~ ~~"Compensation-Stock Compensation (Topic 718)."~~ The amendments in this ASU simplify several aspects of the accounting for share-based payments, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption was permitted for any interim or annual period prior to the effective date. Heartland adopted this ASU on January 1, 2017, as required, using a prospective transition method. The requirement to report the excess tax benefit or shortfall related to settlements of share-based payment awards in earnings as an increase or decrease to tax expense has been applied to settlements occurring on or after January 1, 2017, and the impact of applying the guidance reduced reported income tax expense by $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, 2019,2022, 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,~~HTLF adopted this ASU on January 1, 2023, 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~~required, and ~~liquidity, and oversee the implementation of the standard.~~these amendments were applied prospectively.

ASU 2023-02

In ~~August 2016,~~March 2023, the FASB issued ASU ~~2016-15,~~ 2023-02 "~~Statement~~Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of ~~Cash Flows (Topic 230) - Classification~~the Emerging Issues Task Force)." ASU 2023-02 expands the permitted use of ~~Certain Cash Receipts~~the proportional amortization method, which is currently only available to low-income housing tax credit investments, to other tax equity investments if certain conditions are met. Under the proportional amortization method, the initial cost of an investment is amortized in proportion to the income tax benefits received and ~~Cash Payments."~~both the amortization of the investment and the income tax benefits received are recognized as a component of income tax expense. This ASU is effective on January 1, 2024 and may be applied on either a modified retrospective or retrospective basis or, for certain changes, on a prospective basis, and early adoption is permitted. The amendments in this ~~update address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments~~ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity adopts the amendments early in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this update must be applied using a retrospective transition method to each period presented. Heartland intends to adopt this ASU in 2018, as required, and is currently evaluating the potential impact on its results of operations, financial position, and liquidity.

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

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

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

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

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

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

~~NOTE 2: ACQUISITIONS~~

~~Citywide Banks of Colorado, Inc.~~

On July 7, 2017, Heartland acquired Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado. The transaction consideration was approximately $211.2 million, of which $58.6 million was cash, and the remainder was settled by delivery of 3,216,161 shares of Heartland common stock. Simultaneous with the close, Citywide Banks merged into Heartland's Centennial Bank and Trust subsidiary, and the combined entity operates as Citywide Banks. The transaction included, at fair value, total assets of $1.49 billion, including $985.4 million of net loans outstanding, and $1.21 billion of deposits on the acquisition date. Included in this transaction was one bank building with a fair value of $1.4 million that Heartland intends to sell and is classified as premises, furniture and equipment held for sale on the consolidated balance sheet. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Citywide Banks of Colorado, Inc.

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

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

Heartland recognized $95.2 million of goodwill in conjunction with the acquisition of Citywide Banks of Colorado, Inc., which is calculated as the excess of both the consideration exchanged and the liabilities assumed as compared to the fair value of identifiable assets acquired. Goodwill resulted from the expected operational synergies, enhanced market area, cross-selling opportunities and expanded business lines. See Note 6 for further information on goodwill.

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

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

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

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

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

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

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

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

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

~~Founders Bancorp~~

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

~~CIC Bancshares, Inc.~~

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

NOTE 3:2: 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,~~2023, and December 31, ~~2016,~~2022, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2023
U.S. treasuries	$	32,413	$	—	$	(734)	$	31,679
U.S. agencies	48,944		—		(5,908)		43,036
Obligations of states and political subdivisions	985,387		5		(136,153)		849,239
Mortgage-backed securities - agency	1,958,157		51		(271,562)		1,686,646
Mortgage-backed securities - non-agency	2,150,547		39		(154,777)		1,995,809
Commercial mortgage-backed securities - agency	99,072		—		(15,247)		83,825
Commercial mortgage-backed securities - non-agency	635,549		—		(17,557)		617,992
Asset-backed securities	425,632		—		(12,916)		412,716
Corporate bonds	59,199		—		(2,788)		56,411
Total debt securities	6,394,900		95		(617,642)		5,777,353
Equity securities with a readily determinable fair value	20,688		—		—		20,688
Total	$	6,415,588	$	95	$	(617,642)	$	5,798,041
December 31, 2022
U.S. treasuries	$	32,369	$	8	$	(678)	$	31,699
U.S. agencies	49,437		—		(6,302)		43,135
Obligations of states and political subdivisions	1,049,578		14		(170,155)		879,437
Mortgage-backed securities - agency	2,042,092		56		(270,043)		1,772,105
Mortgage-backed securities - non-agency	2,327,308		1,417		(146,849)		2,181,876
Commercial mortgage-backed securities - agency	100,518		—		(15,395)		85,123
Commercial mortgage-backed securities - non-agency	679,511		—		(20,052)		659,459
Asset-backed securities	428,397		—		(12,343)		416,054
Corporate bonds	59,205		—		(1,263)		57,942
Total debt securities	6,768,415		1,495		(643,080)		6,126,830
Equity securities with a readily determinable fair value	20,314		—		—		20,314
Total	$	6,788,729	$	1,495	$	(643,080)	$	6,147,144

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,~~

2023, and December 31, ~~2016,~~2022, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2023

Obligations of states and political subdivisions	$	834,673	$	2,775	(30,506)		$	806,942
Total	$	834,673	$	2,775	$	(30,506)	$	806,942
December 31, 2022

Obligations of states and political subdivisions	$	829,403	$	3,096	$	(55,942)	$	776,557
Total	$	829,403	$	3,096	$	(55,942)	$	776,557

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

As of June 30, 2023, and December 31, 2022, HTLF had $32.2 million and $33.0 million, respectively, of accrued interest receivable, which is included in other assets on the consolidated balance sheets. 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.

~~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,~~2023, 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, 2023
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	17,299	$	16,935
Due in 1 to 5 years	70,602		68,532
Due in 5 to 10 years	48,317		40,477
Due after 10 years	989,725		854,421
Total debt securities	1,125,943		980,365
Mortgage and asset-backed securities	5,268,957		4,796,988
Equity securities with a readily determinable fair value	20,688		20,688
Total investment securities	$	6,415,588	$	5,798,041

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,~~2023, 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, 2023
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	1,459	$	1,460
Due in 1 to 5 years	70,913		70,453
Due in 5 to 10 years	159,786		157,595
Due after 10 years	602,515		577,434
Total debt securities	$	834,673	$	806,942

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,~~2023, and December 31, ~~2016,~~2022, securities with a ~~fair~~carrying value of ~~$758.1 million~~$2.88 billion and ~~$810.6 million,~~$1.49 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~~2023 and ~~2016,~~2022, are summarized as follows, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Proceeds from sales	$	140,290	$	149,840	$	286,738	$	973,911
Gross security gains	483		357		483		7,298
Gross security losses	808		2,998		1,912		7,948

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,~~2023, and December 31, ~~2016.~~2022. 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,~~2022, and December 31, ~~2015,~~2021, respectively. Securities for which Heartland has taken credit-related other-than-temporary impairment ("OTTI") write-downs are categorized as being "less than 12 months" or "12 months or longer" in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.


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, 2023
U.S. treasuries	$	28,270	$	(652)	5	$	3,409	$	(82)	1	$	31,679	$	(734)	6
U.S. agencies	—		—		—	43,036		(5,908)		6	43,036		(5,908)		6
Obligations of states and political subdivisions	2,698		(118)		3	844,628		(136,035)		162	847,326		(136,153)		165
Mortgage-backed securities - agency	27,450		(1,774)		30	1,657,307		(269,788)		191	1,684,757		(271,562)		221
Mortgage-backed securities - non-agency	393,712		(33,619)		16	1,205,116		(121,158)		43	1,598,828		(154,777)		59
Commercial mortgage-backed securities - agency	1,795		(96)		1	82,030		(15,151)		19	83,825		(15,247)		20
Commercial mortgage-backed securities - non-agency	7,254		(262)		2	588,183		(17,295)		16	595,437		(17,557)		18
Asset-backed securities	31,941		(1,997)		1	121,281		(10,919)		10	153,222		(12,916)		11
Corporate bonds	48,966		(1,532)		2	7,445		(1,256)		6	56,411		(2,788)		8


Total temporarily impaired securities	$	542,086	$	(40,050)	60	$	4,552,435	$	(577,592)	454	$	5,094,521	$	(617,642)	514
December 31, 2022
U.S. treasuries	$	28,699	$	(678)	4	$	—	$	—	—	$	28,699	$	(678)	4
U.S. agencies	16,487		(222)		5	26,648		(6,080)		2	43,135		(6,302)		7
Obligations of states and political subdivisions	288,457		(28,378)		69	589,641		(141,777)		113	878,098		(170,155)		182
Mortgage-backed securities - agency	241,288		(21,420)		99	1,528,951		(248,623)		126	1,770,239		(270,043)		225
Mortgage-backed securities - non-agency	950,054		(70,213)		25	693,531		(76,636)		25	1,643,585		(146,849)		50
Commercial mortgage-backed securities - agency	27,732		(2,291)		12	57,392		(13,104)		7	85,124		(15,395)		19
Commercial mortgage-backed securities - non-agency	530,541		(16,830)		15	84,619		(3,222)		4	615,160		(20,052)		19
Asset-backed securities	118,613		(6,107)		7	56,621		(6,236)		6	175,234		(12,343)		13
Corporate bonds	57,544		(1,257)		7	398		(6)		1	57,942		(1,263)		8


Total temporarily impaired securities	$	2,259,415	$	(147,396)	243	$	3,037,801	$	(495,684)	284	$	5,297,216	$	(643,080)	527



Securities held to maturity	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, 2023

Obligations of states and political subdivisions	$	727,436	$	(30,464)	155	$	1,522	$	(42)	1	$	728,958	$	(30,506)	156
Total temporarily impaired securities	$	727,436	(30,464)		155	$	1,522	$	(42)	1	$	728,958	(30,506)		156
December 31, 2022

Obligations of states and political subdivisions	$	697,424	$	(55,942)	155	$	—	$	—	—	$	697,424	$	(55,942)	155
Total temporarily impaired securities	$	697,424	$	(55,942)	155	$	—	$	—	—	$	697,424	$	(55,942)	155

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 each security in the investment securities portfolio on a quarterly basis ~~to monitor its exposure to OTTI. A determination as to whether a security's decline in fair value is other-than-temporary takes~~for potential credit losses, taking 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~~and security and industry specific economic conditions. ~~In addition, with~~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 commercial mortgage, mortgage and asset-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to ~~the initial~~HTLF's 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, 2023 and 2022.

The ~~remaining~~ unrealized losses on ~~Heartland's~~HTLF's obligations of states and political subdivisions available for sale 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~~declines in fair value isare 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.~~

~~There were no available for sale or held to maturity~~ securities ~~with OTTI write-downs held as of or for~~during the ~~nine-month period~~three and six months ended ~~September~~June 30, ~~2017. There were no gross realized gains~~2023 and $85,000 of gross realized 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 securities with OTTI write-downs for the nine-month period ended September 30, 2016.

2022.

Based on HTLF's credit loss methodology applicable to held to maturity debt securities, no allowance for credit losses was required at both June 30, 2023, and December 31, 2022.

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, 2023, and December 31, 2022, 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, 2023		December 31, 2022
Rating
AAA	$	83,190	$	79,598
AA, AA+, AA-	588,448		588,354
A+, A, A-	138,122		136,624
BBB	20,618		20,623
Not Rated	4,295		4,204
Total	$	834,673	$	829,403

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,~~investments were shares of stock in ~~the~~each Federal Home Loan ~~Banks~~Bank (the ~~"FHLBs"~~"FHLB") of ~~Des Moines, Chicago, Dallas, San Francisco and Topeka~~which each of its Banks is a member at an amortized cost of ~~$14.0~~$8.1 million at June 30, 2023, and ~~$14.4~~$12.3 million ~~respectively.~~at December 31, 2022.

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,~~2023, and December 31, 2022, did not consider the investments to be ~~other than temporarily~~ impaired.

NOTE 4:3: LOANS

Loans as of ~~September~~June 30, ~~2017,~~2023, and December 31, ~~2016,~~2022, were as follows, in thousands:


	June 30, 2023		December 31, 2022
Loans receivable held to maturity:
Commercial and industrial	$	3,590,680	$	3,464,414
Paycheck Protection Program ("PPP")	4,139		11,025
Owner occupied commercial real estate	2,398,698		2,265,307
Non-owner occupied commercial real estate	2,530,736		2,330,940
Real estate construction	1,013,134		1,076,082
Agricultural and agricultural real estate	839,817		920,510
Residential real estate	828,437		853,361
Consumer	512,333		506,713
Total loans receivable held to maturity	11,717,974		11,428,352






Allowance for credit losses	(111,198)		(109,483)
Loans receivable, net	$	11,606,776	$	11,318,869

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, 2023, and ~~procedures~~December 31, 2022, HTLF had $52.1 million and $49.1 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 sheets. 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,~~2023, and December 31, ~~2016,~~2022, 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 on nonaccrual ~~status and troubled debt restructurings, which~~with $500,000 or more of total exposure 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, 2023
Commercial and industrial	$	6,817	$	22,579	$	29,396	$	16,051	$	3,574,629	$	3,590,680
PPP	—		—		—		—		4,139		4,139
Owner occupied commercial real estate	290		14,419		14,709		7,629		2,391,069		2,398,698
Non-owner occupied commercial real estate	257		17,719		17,976		14,018		2,516,718		2,530,736
Real estate construction	—		28,246		28,246		910		1,012,224		1,013,134
Agricultural and agricultural real estate	1,000		2,511		3,511		7,147		832,670		839,817
Residential real estate	—		7,644		7,644		2,254		826,183		828,437
Consumer	—		9,716		9,716		—		512,333		512,333

Total	$	8,364	$	102,834	$	111,198	$	48,009	$	11,669,965	$	11,717,974

December 31, 2022
Commercial and industrial	$	6,670	$	22,401	$	29,071	$	18,712	$	3,445,702	$	3,464,414
PPP	—		—		—		—		11,025		11,025
Owner occupied commercial real estate	376		13,572		13,948		7,932		2,257,375		2,265,307
Non-owner occupied commercial real estate	—		16,539		16,539		11,371		2,319,569		2,330,940
Real estate construction	—		29,998		29,998		1,518		1,074,564		1,076,082
Agricultural and agricultural real estate	63		2,571		2,634		3,851		916,659		920,510
Residential real estate	—		7,711		7,711		1,607		851,754		853,361
Consumer	—		9,582		9,582		—		506,713		506,713

Total	$	7,109	$	102,374	$	109,483	$	44,991	$	11,383,361	$	11,428,352

Allowance For Loan Losses Gross Loans Receivable Held to Maturity

Ending Balance
Under ASC
310-10-35

Ending Balance
Under ASC
450-20
Total
Ending Balance Evaluated for Impairment
Under ASC
310-10-35

Ending Balance Evaluated for Impairment
Under ASC
450-20
Total
September 30, 2017
Commercial $ 2,166
$ 14,804
$ 16,970
$ 6,957
$ 1,606,946
$ 1,613,903
Commercial real estate 864
19,676
20,540
27,943
3,136,010
3,163,953
Agricultural and agricultural real estate 2,353
3,774
6,127
12,792
498,972
511,764
Residential real estate 393
1,873
2,266
29,833
605,778
635,611
Consumer 1,267
7,715
8,982
6,524
443,564
450,088
Total $ 7,043
$ 47,842
$ 54,885
$ 84,049
$ 6,291,270
$ 6,375,319
December 31, 2016
Commercial $ 1,318
$ 13,447
$ 14,765
$ 3,712
$ 1,283,553
$ 1,287,265
Commercial real estate 2,671
21,648
24,319
45,217
2,493,365
2,538,582
Agricultural and agricultural real estate 816
3,394
4,210
16,730
472,588
489,318
Residential real estate 497
1,766
2,263
25,726
592,198
617,924
Consumer 1,451
7,316
8,767
5,988
414,625
420,613
Total $ 6,753
$ 47,571
$ 54,324
$ 97,373
$ 5,256,329
$ 5,353,702

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

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~~show the amortized cost basis as of June 30, 2023, of the loans ~~that were~~ modified during the three- and ~~nine-month periods~~six-months ended ~~September~~June 30, ~~2017,~~2023, to borrowers experiencing financial difficulty by loan category and ~~September 30, 2016,~~type of concession granted, dollars in ~~thousands:~~thousands.


For the Three Months Ended June 30, 2023	Loan Modifications Made to Borrowers Experiencing Financial Difficulty
	Term Extension				Term Extension and Interest Only Payments
	Amortized Cost Basis		% of Loan Category		Amortized Cost Basis		% of Loan Category
Commercial	$	1,411	0.04	%	$	—	—	%

Owner occupied commercial real estate	—		—		—		—

Real estate construction	—		—		—		—
Agricultural and agricultural real estate	1,354		0.16		—		—
Residential real estate	—		—		—		—

Total	$	2,765	0.02	%	$	—	—	%

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


For the Six Months Ended June 23, 2023	Loan Modifications Made to Borrowers Experiencing Financial Difficulty
	Term Extension				Term Extension and Interest Only Payments
	Amortized Cost Basis		% of Loan Category		Amortized Cost Basis		% of Loan Category
Commercial	$	5,073	0.14	%	$	—	—	%

Owner occupied commercial real estate	—		—		5,043		0.21

Real estate construction	1,477		0.15		—		—
Agricultural and agricultural real estate	1,354		0.16		—		—
Residential real estate	752		0.09		—		—

Total	$	8,656	0.07	%	$	5,043	0.04	%

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~~following table describes the financial effect of the ~~date of loan modification. Since~~modifications made to borrowers experiencing financial difficulty in 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. six months ending June 30, 2023.


Loan Type	Weighted Average Term Extension (months)	Weighted Average Term Extension and Interest Only Payments (months)
Commercial and industrial	9	0

Owner occupied commercial real estate	0	12

Real estate construction	6	0
Agricultural and agricultural real estate	9	0
Residential real estate	12	0

At ~~September~~June 30, ~~2017,~~2023, there were no$2.7 million in unfunded commitments to extend credit to ~~any of~~ the borrowers ~~with an existing troubled debt restructuring.~~experiencing financial difficulty.

~~The following table shows troubled debt restructured~~HTLF had no loans ~~for which there was~~to borrowers experiencing financial difficulty that had a payment default during the ~~three-~~three months and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2017, and September 30, 2016,~~2023, that had been modified ~~during~~in the twelve-month period prior to ~~default,~~the default.

HTLF closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of loans that have been modified in ~~thousands:~~the six months ended June 30, 2023, dollars in thousands.

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

$ —
Commercial real estate —
—
—

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

—
Residential real estate 5
1,221
—

—
Consumer —
—
—

—
Total 5
$ 1,221
—

$ —

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

1

$ 95
Commercial real estate —
—

—

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

—

—
Residential real estate 8
1,480

—

—
Consumer —
—

—

—
Total 8
$ 1,480
1
$ 95


	Accruing Loans
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual
June 30, 2023
Commercial and industrial	$	—	$	—	$	—	$	—	$	5,073	$	—

Owner occupied commercial real estate	—		—		—		—		5,043		—

Real estate construction	—		—		—		—		—		1,477
Agricultural and agricultural real estate	—		—		—		—		1,354		—
Residential real estate	—		—		—		—		—		752

Total	$	—	$	—	$	—	$	—	$	11,470	$	2,229

~~Heartland's~~

HTLF's internal rating system is a series of grades reflecting management's credit 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.~~ deterioration and risk rating migration analysis.

The "nonpass" category consists of ~~special mention,~~watch, substandard, doubtful and loss rated 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~~"loss" rating is assigned to loans considered uncollectible. As of September 30, 2017, Heartland had one loan relationship with a gross balance of $9.6 million included in the balance of gross loans receivable held to maturity, of which $2.2 million is classified as a loss. Included in the ASC 310-10-35 portion of the allowance as of September 30, 2017, is a $2.2 million specific reserve associated with this loan relationship. HeartlandHTLF had no loans classified as ~~doubtful~~"loss" or "doubtful" as of ~~September~~June 30, ~~2017. Loans are placed~~2023, and December 31, 2022.

The following table shows the risk category of loans by loan category, year of origination and charge-offs as of June 30, 2023, in thousands:


As of June 30, 2023	Amortized Cost Basis of Term Loans by Year of Origination
	2023		2022		2021		2020		2019		2018 and Prior		Revolving		Total
Commercial and industrial
Pass	$	347,091	$	891,309	$	375,623	$	221,147	$	88,352	$	340,468	$	1,139,264	$	3,403,254
Watch	5,500		16,536		1,431		1,764		6,012		11,266		46,907		89,416
Substandard	20,127		7,012		5,520		9,008		20,299		10,765		25,279		98,010
Commercial and industrial total	$	372,718	$	914,857	$	382,574	$	231,919	$	114,663	$	362,499	$	1,211,450	$	3,590,680
Commercial and industrial charge-offs	$	—	$	290	$	101	$	1,414	$	554	$	1,386	$	1,392	$	5,137

PPP
Pass	$	—	$	—	$	3,944	$	69	$	—	$	—	$	—	$	4,013
Watch	—		—		6		—		—		—		—		6
Substandard	—		—		120		—		—		—		—		120
PPP total	$	—	$	—	$	4,070	$	69	$	—	$	—	$	—	$	4,139
PPP charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Owner occupied commercial real estate


As of June 30, 2023	Amortized Cost Basis of Term Loans by Year of Origination
	2023		2022		2021		2020		2019		2018 and Prior		Revolving		Total
Pass	$	223,815	$	500,240	$	768,837	$	228,536	$	246,327	$	242,129	$	40,683	$	2,250,567
Watch	19,888		15,187		15,238		4,013		8,418		11,065		321		74,130
Substandard	23,518		9,897		3,665		22,093		5,154		9,322		352		74,001
Owner occupied commercial real estate total	$	267,221	$	525,324	$	787,740	$	254,642	$	259,899	$	262,516	$	41,356	$	2,398,698
Owner occupied commercial real estate charge-offs	$	—	$	—	$	—	$	5	$	—	$	14	$	—	$	19

Non-owner occupied commercial real estate
Pass	$	282,886	$	742,328	$	518,555	$	219,439	$	245,083	$	302,523	$	63,131	$	2,373,945
Watch	—		4,448		1,355		3,222		27,118		40,103		—		76,246
Substandard	—		6,873		3,757		942		26,916		42,057		—		80,545
Non-owner occupied commercial real estate total	$	282,886	$	753,649	$	523,667	$	223,603	$	299,117	$	384,683	$	63,131	$	2,530,736
Non-owner occupied commercial real estate charge-offs	$	—	$	—	$	—	$	29	$	—	$	—	$	—	$	29


Real estate construction
Pass	$	114,193	$	557,657	$	262,600	$	41,632	$	12,094	$	4,591	$	7,906	$	1,000,673
Watch	—		6,546		—		76		—		102		—		6,724
Substandard	406		4,239		665		340		17		70		—		5,737
Real estate construction total	$	114,599	$	568,442	$	263,265	$	42,048	$	12,111	$	4,763	$	7,906	$	1,013,134
Real estate construction charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


Agricultural and agricultural real estate
Pass	$	109,375	$	233,885	$	120,638	$	69,406	$	30,000	$	51,715	$	187,766	$	802,785
Watch	780		240		750		2,901		418		607		764		6,460
Substandard	1,366		9,832		3,374		54		911		14,117		918		30,572
Agricultural and agricultural real estate total	$	111,521	$	243,957	$	124,762	$	72,361	$	31,329	$	66,439	$	189,448	$	839,817
Agricultural and agricultural real estate charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	5,309	$	5,309

Residential real estate
Pass	$	41,579	$	189,390	$	256,355	$	80,165	$	44,278	$	177,741	$	19,838	$	809,346
Watch	—		2,045		3,006		48		1,441		4,632		34		11,206
Substandard	799		203		1,512		827		219		3,926		399		7,885
Residential real estate total	$	42,378	$	191,638	$	260,873	$	81,040	$	45,938	$	186,299	$	20,271	$	828,437


Residential real estate charge-offs	$	—	$	59	$	—	$	—	$	—	$	—	$	—	$	59

Consumer
Pass	$	30,129	$	70,624	$	41,217	$	9,952	$	4,700	$	15,735	$	332,789	$	505,146
Watch	625		69		829		35		44		801		1,491		3,894
Substandard	8		264		222		95		185		1,938		581		3,293
Consumer total	$	30,762	$	70,957	$	42,268	$	10,082	$	4,929	$	18,474	$	334,861	$	512,333
Consumer charge-offs	$	—	$	87	$	71	$	23	$	18	$	8	$	1,004	$	1,211

Total Pass	$	1,149,068	$	3,185,433	$	2,347,769	$	870,346	$	670,834	$	1,134,902	$	1,791,377	$	11,149,729
Total Watch	26,793		45,071		22,615		12,059		43,451		68,576		49,517		268,082
Total Substandard	46,224		38,320		18,835		33,359		53,701		82,195		27,529		300,163
Total Loans	$	1,222,085	$	3,268,824	$	2,389,219	$	915,764	$	767,986	$	1,285,673	$	1,868,423	$	11,717,974

Total Charge-offs	$	—	$	436	$	172	$	1,471	$	572	$	1,408	$	7,705	$	11,764

The following table shows the risk category of loans by loan category and year of origination as of December 31, 2022, in thousands.


As of December 31, 2022	Amortized Cost Basis of Term Loans by Year of Origination
	2022		2021		2020		2019		2018		2017 and Prior		Revolving		Total
Commercial and industrial
Pass	$	967,103	$	442,001	$	260,021	$	101,998	$	57,776	$	421,312	$	1,064,333	$	3,314,544
Watch	12,638		1,370		685		5,487		2,882		3,315		21,984		48,361
Substandard	6,691		14,366		9,369		22,171		5,546		6,758		36,608		101,509
Commercial and industrial total	$	986,432	$	457,737	$	270,075	$	129,656	$	66,204	$	431,385	$	1,122,925	$	3,464,414
PPP
Pass	$	—	$	7,807	$	526	$	—	$	—	$	—	$	—	$	8,333
Watch	—		7		—		—		—		—		—		7
Substandard	—		2,685		—		—		—		—		—		2,685
PPP total	$	—	$	10,499	$	526	$	—	$	—	$	—	$	—	$	11,025
Owner occupied commercial real estate
Pass	$	511,547	$	781,946	$	255,476	$	266,228	$	103,943	$	179,503	$	34,117	$	2,132,760
Watch	22,079		3,410		12,346		8,520		3,645		11,899		—		61,899
Substandard	2,971		23,802		26,490		6,358		2,574		7,353		1,100		70,648
Owner occupied commercial real estate total	$	536,597	$	809,158	$	294,312	$	281,106	$	110,162	$	198,755	$	35,217	$	2,265,307
Non-owner occupied commercial real estate
Pass	$	756,059	$	515,075	$	227,383	$	261,964	$	127,400	$	210,289	$	70,398	$	2,168,568
Watch	8,131		792		2,849		38,218		38,510		16,180		547		105,227
Substandard	202		6,784		1,838		16,019		22,332		9,970		—		57,145
Non-owner occupied commercial real estate total	$	764,392	$	522,651	$	232,070	$	316,201	$	188,242	$	236,439	$	70,945	$	2,330,940
Real estate construction
Pass	$	597,370	$	328,391	$	88,660	$	21,221	$	2,568	$	6,274	$	8,252	$	1,052,736
Watch	665		16,218		1,257		—		—		122		—		18,262
Substandard	2,587		356		173		446		1,478		44		—		5,084
Real estate construction total	$	600,622	$	344,965	$	90,090	$	21,667	$	4,046	$	6,440	$	8,252	$	1,076,082

Agricultural and agricultural real estate
Pass	$	324,791	$	140,252	$	79,307	$	34,447	$	22,600	$	38,672	$	239,686	$	879,755
Watch	3,795		515		3,865		641		444		672		902		10,834
Substandard	8,674		3,224		204		1,859		12,323		2,682		955		29,921
Agricultural and agricultural real estate total	$	337,260	$	143,991	$	83,376	$	36,947	$	35,367	$	42,026	$	241,543	$	920,510

Residential real estate
Pass	$	189,133	$	268,561	$	64,627	$	39,468	$	34,863	$	217,489	$	23,331	$	837,472
Watch	706		1,095		88		957		2,296		2,237		399		7,778
Substandard	28		1,273		1,024		99		792		4,895		—		8,111
Residential real estate total	$	189,867	$	270,929	$	65,739	$	40,524	$	37,951	$	224,621	$	23,730	$	853,361

Consumer
Pass	$	80,592	$	47,787	$	11,722	$	6,022	$	4,840	$	24,655	$	325,247	$	500,865
Watch	20		191		35		119		74		1,584		953		2,976
Substandard	188		331		242		303		75		1,539		194		2,872
Consumer total	$	80,800	$	48,309	$	11,999	$	6,444	$	4,989	$	27,778	$	326,394	$	506,713

Total Pass	$	3,426,595	$	2,531,820	$	987,722	$	731,348	$	353,990	$	1,098,194	$	1,765,364	$	10,895,033
Total Watch	48,034		23,598		21,125		53,942		47,851		36,009		24,785		255,344
Total Substandard	21,341		52,821		39,340		47,255		45,120		33,241		38,857		277,975
Total Loans	$	3,495,970	$	2,608,239	$	1,048,187	$	832,545	$	446,961	$	1,167,444	$	1,829,006	$	11,428,352

Included in the nonpass loans at June 30, 2023, and December 31, 2022, were $126,000 and $2.7 million, respectively, of nonpass PPP loans as a result of risk ratings on ~~"nonaccrual" when management does not expect~~non-PPP related credits. HTLF's risk rating methodology assigns a risk rating to ~~collect payments~~the whole lending relationship. HTLF has no allowance recorded related to the PPP loans because of ~~principal and interest in~~the 100% government guarantee through the United States Small Business Administration ("SBA").

~~full or when principal or interest has been in default for a period~~As of ~~90 days or more, unless the loan is both well~~June 30, 2023, HTLF had $176,000 of loans 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,~~2023, and December 31, ~~2016,~~2022, 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, 2023
Commercial and industrial	$	6,646	$	1,202	$	517	$	8,365	$	3,561,379	$	20,936	$	3,590,680
PPP	19		—		109		128		4,011		—		4,139
Owner occupied commercial real estate	137		2,290		—		2,427		2,387,931		8,340		2,398,698
Non-owner occupied commercial real estate	—		—		—		—		2,516,515		14,221		2,530,736
Real estate construction	36		—		—		36		1,010,274		2,824		1,013,134
Agricultural and agricultural real estate	108		360		1		469		829,814		9,534		839,817
Residential real estate	673		321		780		1,774		821,925		4,738		828,437
Consumer	1,499		371		52		1,922		509,048		1,363		512,333
Total gross loans receivable held to maturity	$	9,118	$	4,544	$	1,459	$	15,121	$	11,640,897	$	61,956	$	11,717,974
December 31, 2022
Commercial and industrial	$	1,099	$	356	$	131	$	1,586	$	3,440,062	$	22,766	$	3,464,414
PPP	—		—		—		—		11,006		19		11,025
Owner occupied commercial real estate	12		127		—		139		2,256,365		8,803		2,265,307
Non-owner occupied commercial real estate	—		—		—		—		2,319,282		11,658		2,330,940
Real estate construction	16		28		—		44		1,073,687		2,351		1,076,082
Agricultural and agricultural real estate	48		—		142		190		914,088		6,232		920,510
Residential real estate	1,206		152		—		1,358		846,739		5,264		853,361
Consumer	1,526		196		—		1,722		503,853		1,138		506,713
Total gross loans receivable held to maturity	$	3,907	$	859	$	273	$	5,039	$	11,365,082	$	58,231	$	11,428,352

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%~~0.12% at ~~September~~June 30, ~~2017,~~2023, compared to ~~0.37%~~0.04% at December 31, ~~2016.~~2022. 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.~~credit quality improves or deteriorates in accordance with HTLF's credit risk rating framework. 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,~~2023 and June 30, 2022. As of June 30, 2023, 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~~2022, HTLF had $28.7 million and $26.7 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
NOTE 4: ALLOWANCE FOR CREDIT LOSSES

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

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

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

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

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

~~At 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

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,~~2023, and ~~September~~June 30, ~~2016,~~2022, were as follows, in thousands:


	Commercial and Industrial		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, 2023	$	31,823	$	14,151	$	17,062	$	30,138	$	2,546	$	7,564	$	9,423	$	112,707
Charge-offs	(3,686)		(5)		(29)		—		(5,309)		(59)		(525)		(9,613)
Recoveries	118		—		—		2		1		—		154		275
Provision (benefit)	1,141		563		943		(1,894)		6,273		139		664		7,829
Balance at June 30, 2023	$	29,396	$	14,709	$	17,976	$	28,246	$	3,511	$	7,644	$	9,716	$	111,198

	Commercial and Industrial		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, 2022	$	29,071	$	13,948	$	16,539	$	29,998	$	2,634	$	7,711	$	9,582	$	109,483


Charge-offs	(5,137)		(19)		(29)		—		(5,309)		(59)		(1,211)		(11,764)
Recoveries	1,840		112		—		19		11		19		1,465		3,466
Provision (benefit)	3,622		668		1,466		(1,771)		6,175		(27)		(120)		10,013
Balance at June 30, 2023	$	29,396	$	14,709	$	17,976	$	28,246	$	3,511	$	7,644	$	9,716	$	111,198

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		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, 2022	$	25,800	$	17,975	$	16,013	$	21,397	$	2,667	$	7,875	$	8,795	$	100,522
Charge-offs	(643)		—		(193)		—		(25)		(49)		(563)		(1,473)
Recoveries	445		—		—		2		124		—		188		759
Provision (benefit)	2,066		(317)		(82)		(2,008)		182		745		959		1,545
Balance at June 30, 2022	$	27,668	$	17,658	$	15,738	$	19,391	$	2,948	$	8,571	$	9,379	$	101,353

	Commercial and Industrial		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, 2021	$	27,738	$	19,214	$	17,908	$	22,538	$	5,213	$	8,427	$	9,050	$	110,088


Charge-offs	(5,143)		—		(322)		—		(3,129)		(137)		(5,959)		(14,690)
Recoveries	651		40		33		9		577		—		472		1,782
Provision (benefit)	4,422		(1,596)		(1,881)		(3,156)		287		281		5,816		4,173
Balance at June 30, 2022	$	27,668	$	17,658	$	15,738	$	19,391	$	2,948	$	8,571	$	9,379	$	101,353

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 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 for unfunded commitments for the three- and six-months ended June 30, 2023, and June 30, 2022, were as follows:


	For the Three Months Ended June 30,
	2023		2022
Balance at March 31,	$	21,086	$	16,079
Provision (benefit)	(2,450)		1,701
Balance at June 30,	$	18,636	$	17,780


	For the Six Months Ended June 30,
	2023		2022
Balance at December 31,	$	20,196	$	15,462


Provision (benefit)	(1,560)		2,318
Balance at June 30,	$	18,636	$	17,780

NOTE 6:5: GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS

~~Heartland~~HTLF had goodwill of ~~$236.6~~$576.0 million at ~~September~~both June 30, ~~2017,~~2023, and ~~$127.7 million at~~ December 31, ~~2016. Heartland~~2022. HTLF conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries in the fourth quarter of every year as of September 30. ~~There was no~~

The sustained decline in HTLF's stock price, which management deemed to be a triggering event, caused management to perform a quantitative impairment test on its goodwill ~~impairment as~~in the second quarter of 2023. Management concluded that none of the ~~most recent assessment.~~goodwill at any of HTLF's reporting units was impaired.

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

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

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

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

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

~~Heartland's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangibles, and commercial servicing rights.~~ The gross carrying amount of ~~these~~other intangible assets, which consists of core deposit intangibles and mortgage servicing rights, and the associated accumulated amortization at ~~September~~June 30, ~~2017,~~2023, and December 31, ~~2016,~~2022, are presented in the table below, in thousands:


	June 30, 2023						December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	101,185	$	79,534	$	21,651	$	101,185	$	76,031	$	25,154

Mortgage servicing rights	—		—		—		13,700		5,860		7,840

Total	$	101,185	$	79,534	$	21,651	$	114,885	$	81,891	$	32,994

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
Six months ending December 31, 2023	$	3,236
Year ending December 31,
2024	5,591
2025	4,700
2026	3,533
2027	2,601
2028	1,287
Thereafter	703
Total	$	21,651

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~~On March 31, 2023, First Bank & Trust, a division of ~~amortization expense for~~HTLF Bank, closed on the sale of its mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of September 30, 2017. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others were approximately $3.56 billion and $4.31 billion as of September 30, 2017, and December 31, 2016, respectively. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $24.3 million and $21.4 million as of September 30, 2017, and December 31, 2016, respectively. The fair value of Heartland's mortgage servicing rights was estimated at ~~$35.0 million~~ ~~at September 30, 2017, and $45.2 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.

~~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.~~$698.5 million, to two unrelated third-parties. The transaction ~~qualifies~~qualified as a sale, and ~~$6.9~~$7.7 million of mortgage servicing rights ~~have been~~were de-recognized on the consolidated balance sheet as of ~~September 30, 2017.~~March 31, 2023. Cash of approximately ~~$5.1~~$6.7 million was received ~~during the third quarter,~~on March 31, 2023, and ~~Heartland recorded~~ an estimated loss ~~on the sale~~

of ~~this portfolio of approximately $183,000.~~$193,000 was recorded. A receivable of approximately ~~$1.6 million~~$746,000 was recorded in other assets on the consolidated balance sheet as of March 31, 2023, due to the timing of the servicing transfer per the terms of the sale ~~agreement and to address indemnification claims and mortgage loan documentation deficiencies.~~

The fair value of mortgage servicing rights is calculated based upon either a discounted cash flow analysis or market indication. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings are considered in the calculation. The average constant prepayment rate was ~~10.93%~~ ~~and 9.63% for the September 30, 2017, and December 31, 2016, valuations, respectively. The discount rate was~~ ~~9.06%~~ ~~and~~ ~~9.26%~~ ~~for the September 30, 2017, and December 31, 2016, valuations, respectively. The average capitalization rate for the firstninemonths of 2017 ranged from 91 to 150 basis points compared~~agreement. Pursuant to the ~~range of 88 to 135 basis points for 2016.~~ ~~Fees collected for the~~agreement, which includes customary terms and conditions, First Bank & Trust provided interim servicing of ~~mortgage~~the loans ~~for others were $2.9 million and $3.1 million for~~until the ~~quarters ended September 30, 2017, and September 30, 2016, respectively and $9.3 million and $9.0 million for the nine months ended September 30, 2017, and September 30, 2016, respectively.~~transfer date, which was May 1, 2023.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2023, and ~~September~~June 30, ~~2016:~~2022:


	2017			2016				2023			2022
Balance at January 1,	$	32,088		$	30,314		Balance at January 1,	$	7,840		$	6,412
Originations	5,778			9,323			Originations	24			904
Amortization	(7,184		)	(7,795		)	Amortization	(210)			(686)

Sale of mortgage servicing rights	(6,940		)	—			Sale of mortgage servicing rights	(7,654)			—

Valuation adjustment							Valuation adjustment	—			1,658
Balance at period end	$	23,742		$	31,842		Balance at period end	$	—		$	8,288
Fair value of mortgage servicing rights	$	35,002		$	38,127

Mortgage servicing rights, net to servicing portfolio	0.67		%	0.75		%	Mortgage servicing rights, net to servicing portfolio	—		%	1.13		%

Heartland's commercial servicing portfolio is comprised of loans guaranteed by the Small Business Administration and United States Department of Agriculture that have been sold with servicing retained by Heartland, which totaled $144.4 million at September 30, 2017 and $164.6 million at December 31, 2016. The commercial servicing rights portfolio is separated into two tranches at the respective Heartland subsidiary, loans with a term of less than 20 years and loans with a term of more than 20 years. Fees collected for the servicing of commercial loans for others were $394,000 and $230,000 for the quarter ended September 30, 2017, and September 30, 2016, respectively, and $1.2 million and $685,000 for the nine months ended September 30, 2017, and September 30, 2016, respectively.

The fair value of each commercial servicing rights portfolio is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds and servicing costs, are considered in the calculation. The range of average constant prepayment rates for the valuations was 6.66% to 7.99% as of September 30, 2017, compared to 6.96% to 7.88% as of December 31, 2016. The discount rate range was 12.52% to 14.65% for the September 30, 2017, valuations compared to 12.44% to 13.88% for the December 31, 2016, valuations. The capitalization rate for 2017 ranged from 310 to 445 basis points compared to 310 to 445 basis points for 2016. The total fair value of Heartland's commercial servicing rights was estimated at $3.5 million as of September 30, 2017, and $4.1 million as of December 31, 2016.

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

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

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

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

The following table summarizes, in thousands, the book value, the fair value of each tranche of the ~~commercial~~mortgage servicing rights and any recorded valuation allowance at ~~each respective subsidiary at September 30, 2017, and~~ December 31, ~~2016:~~2022.


	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





December 31, 2022	$	1,388	$	1,388	$	—	$	6,452	$	6,452	$	—

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 7:6: DERIVATIVE FINANCIAL INSTRUMENTS

~~Heartland~~HTLF considers and uses derivative financial instruments as part of its interest rate risk management ~~strategy. As part of the~~ strategy, ~~Heartland considers the use of~~which may include interest rate swaps, fair value hedges, risk participation agreements, 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 is facilitating~~HTLF facilitates back-to-back loan swaps to assist customers in managing their interest rate ~~risk. Heartland's~~risk while executing offsetting interest rate swaps with dealer counterparties.

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 million~~post $586,000 of ~~cash as~~ collateral at ~~both September~~June 30, ~~2017, and~~2023, compared to $793,000 as of December 31, ~~2016. No collateral was~~2022, related to derivative financial instruments. HTLF's counterparties were required to ~~be pledged by Heartland's counterparties~~pledge $75.2 million at ~~both September~~June 30, ~~2017, and~~2023, compared to $45.1 million at December 31, ~~2016.~~2022.

~~Heartland's~~HTLF's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note ~~8, “Fair~~7, "Fair Value,”" for additional fair value information and disclosures.

Cash Flow Hedges

Heartland has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates. To manage the interest rate risk related to the variability of interest payments, Heartland has entered into variousIn 2021, two interest rate swap ~~agreements. Amounts reported in accumulated other comprehensive income related~~transactions were terminated, and the debt was converted to ~~derivatives will be reclassified to interest~~

expense as interest payments are received or made on Heartland's variable-rate liabilities. For the nine months ended September 30, 2017, the change in net unrealized losses on cash flow hedges reflects changes in the fair value of the swaps and reclassification from accumulated other comprehensive income to interest expense totaling $1.0 million.variable rate subordinated debentures. For the next twelve months, ~~Heartland~~HTLF estimates ~~that~~ cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense related to the terminated swaps will total $596,000.

In the first quarter of 2023, HTLF terminated its interest rate swap agreement, which effectively converted $500.0 million of variable rate loans to fixed rate loans. For the next twelve months, HTLF estimates cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense will total ~~$1.2 million.~~$985,000.

Heartland entered into five forward starting interest rate swap transactions to effectively convert Heartland Financial Statutory Trust IV, V, and VII, which total $65.0 million, as well as Morrill Statutory Trust I and II, which total $20.0 million, from variable rate subordinated debentures to fixed rate debt. For accounting purposes, these five swap transactions areHTLF had no derivative instruments designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $85.0 million of Heartland's subordinated debentures that reset quarterly on a specified reset date. At inception, Heartland asserted that the underlying principal balance would remain outstanding throughout the hedge transaction, making it probable that sufficient LIBOR-based interest payments would exist through the maturity date of the swaps.

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

30, 2023. The table below identifies the balance sheet category and fair ~~values~~value of ~~Heartland's~~HTLF's derivative ~~instruments~~instrument designated as a cash flow ~~hedges~~hedge at ~~September 30, 2017, and~~ December 31, ~~2016,~~2022, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category


December 31, 2022
Interest rate swap	$	500,000	$	13	Other Assets

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 terminated derivative instruments designated as cash flow hedges for the ~~three-~~three and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2017,~~2023, and ~~September~~June 30, ~~2016,~~2022, in thousands:



	Recognized in OCI		Reclassified from AOCI into Income
	Amount of Gain (Loss)		Category	Amount of Gain (Loss)
Three Months Ended June 30, 2023
Interest rate swap	$	—	Interest income	$	63
Six Months Ended June 30, 2023
Interest rate swap	$	1,952	Interest income	$	(701)
Three Months Ended June 30, 2022
Interest rate swap	$	—	Interest income	$	—
Six Months Ended June 30, 2022
Interest rate swap	$	—	Interest income	$	—

Effective Portion Ineffective Portion
Recognized in OCI Reclassified from AOCI into Income Recognized in Income on Derivatives

Amount of
Gain (Loss)
Category
Amount of
Gain (Loss)
Category
Amount of
Gain (Loss)
Three Months Ended September 30, 2017
Interest rate swaps $ 325
Interest expense $ (308 ) Other income $ —
Nine Months Ended September 30, 2017
Interest rate swaps $ 349
Interest expense $ (1,005 ) Other income $ —
Three Months Ended September 30, 2016
Interest rate swaps $ 1,336
Interest expense $ (492 ) Other income $ —
Nine Months Ended September 30, 2016
Interest rate swaps $ (3,160 ) Interest expense $ (1,463 ) Other income $ —

Fair Value Hedges

~~Heartland~~HTLF uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. ~~Heartland~~HTLF also uses interest rate swaps to mitigate the risk of changes in the fair market value of certain municipal and mortgage-backed securities. The changes in the fair values of derivatives that have been designated and qualify for fair value hedge accounting are recorded 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~~same line item in the consolidated statements of ~~income. The ineffective portions~~income as the changes in the fair value of the ~~unrealized gains or losses, if any, are recorded in interest income and interest expense in~~hedged items attributable to the ~~consolidated statements of income. Heartland~~risk being hedged.

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 was required to pledge $4.5 million and $5.0 million~~During the second quarter of ~~cash~~2023, HTLF entered into interest rate swaps designated as ~~collateral for these~~ fair value hedges ~~at September 30, 2017,~~with initial notional amounts totaling $838.1 million primarily designed to provide protection for unrealized securities losses against the impact of higher mid-to-long term interest rates using the portfolio layer method. HTLF also executed an interest rate swap designated as a fair value hedge with an original notional amount of $500.0 million to convert certain long-term fixed rate loans to floating rates to hedge interest rate risk exposure using the portfolio layer method.

The portfolio layer method allows HTLF to designate as the hedged item a stated amount of the assets that are not expected to be affected by prepayments, defaults and ~~December 31, 2016, respectively.~~other factors that would affect the timing and amount of cash flow. The fair value portfolio level basis adjustment on the hedged securities has not been attributed to the individual available for sale security on the consolidated balance sheet.

The table below identifies the ~~notional amount,~~ fair value of the interest rate swaps designated as fair value hedges and the balance sheet category of ~~Heartland's fair value hedges at September~~the interest rate swaps as of June 30, ~~2017,~~2023 and December 31, ~~2016,~~2022, in thousands:


	Fair Value		Balance Sheet Category
June 30, 2023
Interest rate swaps-loans receivable held to maturity	$	13,643	Other assets
Interest rate swaps-securities carried at fair value	31,052		Other assets
December 31, 2022
Interest rate swaps-loans receivable held to maturity	54		Other assets

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 carrying amount of the hedged assets and cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets that are designated as a fair value hedge accounting relationship at June 30, 2023, and December 31, 2022, in thousands:


	Location in the consolidated balance sheet	Carrying Amount of the Hedged Assets		Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount of Hedged Assets
June 30, 2023

Interest rate swap	Loans receivable held to maturity	$	501,080	$	(12,938)
Interest rate swap	Securities carried at fair value	826,545		(29,584)
December 31, 2022

Interest rate swap	Loans receivable held to maturity	$	1,185	$	(54)

The table below identifies the gains and losses recognized on ~~Heartland's~~HTLF's fair value hedges and the income statement classification for the three- and ~~nine-month periods~~six- months ended ~~September~~June 30, ~~2017,~~2023, and ~~September~~June 30, ~~2016,~~2022, in ~~thousands:~~thousands. For the three- and six-months ended June 30, 2023, HTLF recorded $74,000 of interest income on taxable securities related to ineffectiveness.


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Gain recognized in interest income and fees on loans	$	13,604	$	42	$	13,589	$	1,225
Gain recognized in interest income on securities-taxable	31,052		—		31,052		—

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~~These 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,~~2023, and December 31, ~~2016,~~2022, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category
June 30, 2023
Embedded derivatives	$	5,843	$	118	Other assets

December 31, 2022
Embedded derivatives	$	6,028	$	135	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,~~2023, and ~~September~~June 30, ~~2016,~~2022, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Gain (loss) recognized in other noninterest income on embedded derivatives	$	20	$	100	$	(17)	$	325

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 loan interest rate swap ~~loan~~ relationships with customers to ~~meet~~assist them in managing their ~~financing needs.~~interest rate risk. 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 was required to post $2.0 million and $1.8 million at both September 30, 2017, and December 31, 2016, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to pledge $190,000 at September 30, 2017, and $768,000 at December 31, 2016. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~2023, and ~~September~~June 30, ~~2016,~~2022, no 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,~~2023, and December 31, ~~2016,~~2022, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
June 30, 2023
Customer interest rate swaps	$	1,325,478	$	51,876	Other assets	4.08	%	7.16	%
Customer interest rate swaps	1,325,478		(51,876)		Other liabilities	7.16		4.08
December 31, 2022
Customer interest rate swaps	$	819,662	$	46,091	Other assets	4.23	%	6.76	%
Customer interest rate swaps	819,662		(46,091)		Other liabilities	6.76		4.23

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~~and 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 no collateral ~~of $353,000~~ at ~~September~~both June 30, ~~2017,~~2023, and ~~$0 at~~ December 31, ~~2016. Heartland's~~2022. HTLF's counterparties were required to pledge ~~$29,000 and $2.9 million~~no collateral at ~~September~~both June 30, ~~2017,~~2023, and December 31, ~~2016, respectively,~~2022, 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~~sheets 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,~~2023, and December 31, ~~2016,~~2022, in thousands:


	Balance Sheet Category	Notional Amount		Fair Value
June 30, 2023
Interest rate lock commitments (mortgage)	Other assets	$	12,329	$	306

Forward commitments	Other assets	18,500		43
Forward commitments	Other liabilities	1,500		(4)
Undesignated interest rate swaps	Other liabilities	5,843		(118)

December 31, 2022
Interest rate lock commitments (mortgage)	Other assets	$	9,340	$	174

Forward commitments	Other assets	6,400		47
Forward commitments	Other liabilities	5,750		(99)
Undesignated interest rate swaps	Other liabilities	6,028		(135)

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 )

HTLF recognizes gains and losses on other free standing derivatives in two separate income statement categories. Interest rate lock commitments and forward commitments are recognized in net gains on sale of loans held for sale and undesignated interest rate swaps are recognized in other noninterest income. 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,~~2023, and ~~September~~June 30, ~~2016,~~2022, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Interest rate lock commitments (mortgage)	$	(128)	$	523	$	282	$	(672)

Forward commitments	(181)		(967)		91		68
Undesignated interest rate swaps	20		(100)		17		(325)

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 8:7: 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.~~cost. 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 values premises, furniture and equipment held for sale based on third-party~~HTLF considers third party appraisals less estimated disposal ~~costs. Heartland considers third party appraisals,~~costs, 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.~~properties held for sale. 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~~On March 31, 2023, HTLF sold its mortgage servicing rights ~~assets represent~~portfolio. The transaction qualified as a sale, and $7.7 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of March 31, 2023. The book value ~~associated with servicing commercial loans guaranteed by the Small Business Administration~~ and ~~the United States Department of Agriculture that have been sold with servicing retained by Heartland. Heartland uses the amortization method (i.e., the lower of amortized cost or estimated~~ fair value ~~measured on a nonrecurring basis), not fair value measurement accounting, to determine the carrying value~~were both $0 as of its commercial servicing rights. The fair value for servicing assets is determined through market prices for comparable servicing contracts, when available, or through a valuation model that calculates the present value of estimated future net servicing income. Inputs utilized include discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. Commercial servicing rights are subject to impairment testing, and the carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third party. If the valuation model reflects a fair value less than the carrying value, commercial servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies commercial servicing rights as nonrecurring with Level 3 measurement inputs.March 31, 2023.

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,~~2023, and December 31, ~~2016, Heartland~~2022, 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~~HTLF's assets and liabilities that are measured at fair value on a recurring basis as of ~~September~~June 30, ~~2017,~~2023, and December 31, ~~2016,~~2022, 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, 2023
Assets

Securities available for sale
U.S. treasuries	$	31,679	$	31,679	$	—	$	—
U.S. agencies	43,036		—		43,036		—
Obligations of states and political subdivisions	849,239		—		849,239		—
Mortgage-backed securities - agency	1,686,646		—		1,686,646		—
Mortgage-backed securities - non-agency	1,995,809		—		1,995,809		—
Commercial mortgage-backed securities - agency	83,825		—		83,825		—
Commercial mortgage-backed securities - non-agency	617,992		—		617,992		—
Asset-backed securities	412,716		—		412,716		—
Corporate bonds	56,411		—		56,411		—
Equity securities with a readily determinable fair value	20,688		—		20,688		—
Derivative financial instruments(1)	96,689		—		96,689		—
Interest rate lock commitments	306		—		—		306
Forward commitments	43		—		43		—
Total assets at fair value	$	5,895,079	$	31,679	$	5,863,094	$	306
Liabilities
Derivative financial instruments(2)	$	51,994	$	—	$	51,994	$	—
Forward commitments	4		—		4		—

Total liabilities at fair value	$	51,998	$	—	$	51,998	$	—
December 31, 2022
Assets

Securities available for sale
U.S. treasuries	$	31,699	$	31,699	$	—	$	—
U.S. agencies	43,135		—		43,135		—
Obligations of states and political subdivisions	879,437		—		879,437		—
Mortgage-backed securities - agency	1,772,105		—		1,772,105		—
Mortgage-backed securities - non-agency	2,181,876		—		2,181,876		—
Commercial mortgage-backed securities - agency	85,123		—		85,123		—
Commercial mortgage-backed securities - non-agency	659,459		—		659,459		—
Asset-backed securities	416,054		—		416,054		—
Corporate bonds	57,942		—		57,942		—
Equity securities with a readily determinable fair value	20,314		—		20,314		—
Derivative financial instruments(2)	46,293		—		46,293		—
Interest rate lock commitments	174		—		—		174
Forward commitments	47		—		47		—
Total assets at fair value	$	6,193,658	$	31,699	$	6,161,785	$	174
Liabilities
Derivative financial instruments(1)	$	46,226	$	—	$	46,226	$	—
Forward commitments	99		—		99		—

Total liabilities at fair value	$	46,325	$	—	$	46,325	$	—

(1) Includes interest rate swaps, embedded derivatives and back-to-back loan swaps.
(2) Includes back-to-back loan swaps and free standing derivatives.

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, 2023
	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	$	9,234	$	—	$	—	$	9,234	$	799
Owner occupied commercial real estate	7,339		—		—		7,339		—
Non-owner occupied commercial real estate	13,761		—		—		13,761		—
Real estate construction	910		—		—		910		—
Agricultural and agricultural real estate	6,147		—		—		6,147		5,309
Residential real estate	2,254		—		—		2,254		—

Total collateral dependent individually assessed loans	$	39,645	$	—	$	—	$	39,645	$	6,108
Loans held for sale	$	14,353	$	—	$	14,353	$	—	$	(266)
Other real estate owned	2,677		—		—		2,677		737
Premises, furniture and equipment held for sale	3,741		—		—		3,741		759

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, 2022
	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	$	12,042	$	—	$	—	$	12,042	$	4,186
Owner occupied commercial real estate	7,556		—		—		7,556		—
Non-owner occupied commercial real estate	11,371		—		—		11,371		—
Real estate construction	1,518		—		—		1,518		—
Agricultural and agricultural real estate	3,788		—		—		3,788		—
Residential real estate	1,607		—		—		1,607		—

Total collateral dependent individually assessed loans	$	37,882	$	—	$	—	$	37,882	$	4,186
Loans held for sale	$	5,277	$	—	$	5,277	$	—	$	(116)

Other real estate owned	8,401		—		—		8,401		180
Premises, furniture and equipment held for sale	6,851		—		—		6,851		1,562
Servicing rights	7,840		—		—		7,840		516

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
6/30/2023

Valuation
Technique

Unobservable
Input

Range (Weighted
Average)

Interest rate lock commitments

306

Discounted cash flows

Closing ratio

0-99% (89%)(1)

Other real estate owned

2,677

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Premises, furniture and equipment held for sale

3,741

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Collateral dependent individually assessed loans:

Commercial

9,234

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Owner occupied commercial real estate

7,339

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-13%(3)

Non-owner occupied commercial real estate

13,761

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-9%(3)

Real estate construction

910

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Agricultural and agricultural real estate

6,147

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%(3)

Residential real estate

2,254

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(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.

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 12/31/2022

Valuation
Technique

Unobservable
Input

Range (Weighted Average)

Interest rate lock commitments

174

Discounted cash flows

Closing ratio

0-99% (88%)(1)

Other real estate owned

8,401

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Servicing rights

7,840

Discounted cash flows

Discount rate

9.98 - 11.72% (10.02%)(4)

Constant prepayment rate

7.8 - 14.2% (7.9%)(4)

Premises, furniture and equipment held for sale

6,851

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Collateral dependent individually assessed loans:

Commercial and industrial

12,042

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Owner occupied commercial real estate

7,556

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Non-owner occupied commercial real estate

11,371

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Real estate construction

1,518

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Agricultural and agricultural real estate

3,788

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%(3)

Residential real estate

1,607

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

(4) The significant unobservable input used in the discounted cash flow analysis are the discount rate and constant prepayment rate.

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, 2023		For the Year Ended December 31, 2022
Balance at January 1,	$	174	$	1,306

Total net gains included in earnings	282		(1,828)
Issuances	1,110		3,683
Settlements	(1,260)		(2,987)
Balance at period end	$	306	$	174

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,~~2023, and December 31, ~~2016,~~2022, were ~~$2.5 million~~$306,000 and ~~$2.8 million,~~$174,000, 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,~~2023, and December 31, ~~2016,~~2022, 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, 2023
	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	$	400,187	$	400,187	$	400,187	$	—	$	—
Time deposits in other financial institutions	1,490		1,490		1,490		—		—
Securities:

Carried at fair value	5,798,041		5,798,041		31,679		5,766,362		—
Held to maturity	834,673		806,942		—		806,942		—
Other investments	72,291		72,291		—		72,291		—
Loans held for sale	14,353		14,353		—		14,353		—
Loans, net:
Commercial and industrial	3,561,284		3,380,572		—		3,371,338		9,234
PPP	4,139		4,139		—		4,139		—
Owner occupied commercial real estate	2,383,989		2,196,424		—		2,189,085		7,339
Non-owner occupied commercial real estate	2,512,760		2,370,988		—		2,357,227		13,761
Real estate construction	984,888		979,326		—		978,416		910
Agricultural and agricultural real estate	836,306		760,910		—		754,763		6,147
Residential real estate	820,793		708,992		—		706,738		2,254
Consumer	502,617		483,574		—		483,574		—
Total Loans, net	11,606,776		10,884,925		—		10,845,280		39,645
Cash surrender value on life insurance	195,793		195,793		—		195,793		—
Derivative financial instruments(1)	96,689		96,689		—		96,689		—
Interest rate lock commitments	306		306		—		—		306
Forward commitments	43		43		—		43		—
Financial liabilities:
Deposits
Demand deposits	4,897,858		4,897,858		—		4,897,858		—
Savings deposits	8,772,596		8,772,596		—		8,772,596		—
Time deposits	3,993,089		3,993,089		—		3,993,089		—

Short term borrowings	44,364		44,364		—		44,364		—
Other borrowings	372,403		374,127		—		374,127		—
Derivative financial instruments(2)	51,994		51,994		—		51,994		—
Forward commitments	4		4		—		4		—

(1) Includes interest rate swaps, embedded derivatives and back-to-back loan swaps.
(2) Includes back-to-back loan swaps and free standing derivative instruments.


					Fair Value Measurements at September 30, 2017											Fair Value Measurements at December 31, 2022
	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	$	363,087	$	363,087	$	363,087	$	—	$	—
Time deposits in other financial institutions	19,793		19,793		19,793		—		—		Time deposits in other financial institutions	1,740		1,740		1,740		—		—
Securities:											Securities:
Available for sale	2,093,385		2,093,385		3,505		2,089,880		—

Carried at fair value											Carried at fair value	6,147,144		6,147,144		31,699		6,115,445		—
Held to maturity	256,355		270,386		—		270,386		—		Held to maturity	829,403		776,557		—		776,557		—
Other investments	23,176		23,176		—		22,981		195		Other investments	74,567		74,567		—		74,567		—
Loans held for sale	35,795		35,795		—		35,795		—		Loans held for sale	5,277		5,277		—		5,277		—
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	3,435,343		3,270,127		—		3,258,085		12,042
PPP											PPP	11,025		11,025		—		11,025		—
Owner occupied commercial real estate											Owner occupied commercial real estate	2,251,359		2,084,665		—		2,077,109		7,556
Non-owner occupied commercial real estate											Non-owner occupied commercial real estate	2,314,401		2,184,796		—		2,173,425		11,371
Real estate construction											Real estate construction	1,046,084		1,039,244		—		1,037,726		1,518
Agricultural and agricultural real estate	506,388		507,974		—		500,038		7,936		Agricultural and agricultural real estate	917,876		842,637		—		838,849		3,788
Residential real estate	632,306		622,698		—		621,333		1,365		Residential real estate	845,650		741,325		—		739,718		1,607
Consumer	441,079		444,384		—		443,472		912		Consumer	497,131		480,018		—		480,018		—
Total Loans, net	6,320,121		6,294,236		—		6,271,749		22,487		Total Loans, net	11,318,869		10,653,837		—		10,615,955		37,882
Cash surrender value on life insurance											Cash surrender value on life insurance	193,403		193,403		—		193,403		—
Derivative financial instruments⁽¹⁾	3,386		3,386		—		3,386		—		Derivative financial instruments(1)	46,293		46,293		—		46,293		—
Interest rate lock commitments	2,463		2,463		—		—		2,463		Interest rate lock commitments	174		174		—		—		174
Forward commitments	237		237		—		237		—		Forward commitments	47		47		—		47		—
Financial liabilities:											Financial liabilities:
Deposits											Deposits
Demand deposits	3,009,940		3,009,940		—		3,009,940		—		Demand deposits	5,701,340		5,701,340		—		5,701,340		—
Savings deposits	4,227,340		4,227,340		—		4,227,340		—		Savings deposits	9,994,391		9,994,391		—		9,994,391		—
Time deposits	994,604		994,604		—		994,604		—		Time deposits	1,817,278		1,817,278		—		1,817,278		—

Short term borrowings	171,871		171,871		—		171,871		—		Short term borrowings	376,117		376,117		—		376,117		—
Other borrowings	301,473		305,741		—		305,741		—		Other borrowings	371,753		372,473		—		372,473		—
Derivative financial instruments⁽²⁾	6,309		6,309		—		6,309		—
Derivative financial instruments(1)											Derivative financial instruments(1)	46,226		46,226		—		46,226		—
Forward commitments	261		261		—		261		—		Forward commitments	99		99		—		99		—

(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 interest rate swaps, fair value hedges, embedded derivatives and back-to-back loan swaps.											(1) Includes interest rate swaps, fair value hedges, embedded derivatives and back-to-back loan swaps.
(2) Includes back-to-back loan swaps and undesignated interest rate swaps.											(2) Includes back-to-back loan swaps and undesignated interest rate swaps.

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 counterparty.

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~~8: STOCK COMPENSATION

~~Heartland~~Under its 2020 Long-Term Incentive Plan (the "Plan"), HTLF's Compensation and Human Capital Committee, (the "Compensation Committee"), may grant non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and cash incentive awards, . The Plan has ~~identified two operating segments~~1,460,000 shares of common stock authorized for ~~purposes~~issuance. As of ~~financial reporting: community~~June 30, 2023, 757,105 shares of common stock were available for issuance under future awards that may be granted under the Plan to employees and ~~other banking,~~directors of, and ~~retail mortgage banking. These segments were determined~~service providers to, 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 $75,000 of tax expense during the six months ended June 30, 2023, and ~~services provided or~~a tax benefit of $129,000 during the ~~type~~six months ended June 30, 2022, related to the exercise, vesting and forfeiture of ~~customers served~~equity-based awards.

Restricted Stock Units

The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). The time-based RSUs are generally granted in the first quarter of each year and ~~are consistent with~~represent the ~~information used by Heartland's key decision makers~~right, without payment, to ~~make operating decisions and to assess Heartland's performance.~~ receive shares of HTLF common stock on a specified date in the future. Generally, the time-based RSUs vest over three years in equal installments in March of each of the three years following the year of the grant.

The ~~following tables present financial information for Heartland's operating segments~~Compensation Committee has also granted three-year performance-based RSUs, generally in the first quarter of each year. These performance-based RSUs will be earned based on satisfaction of performance targets for the ~~three-~~three-year performance period as defined in the RSU agreement. These performance-based RSUs or a portion thereof vest after measurement of performance in relation to the performance targets.

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), and ~~nine-month periods~~the three-year performance-based RSUs may also vest to the extent that they are earned upon death, disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement).

All of HTLF's RSUs will be settled in common stock upon vesting. Most RSUs granted after March 2023 accrue dividends, which are paid without interest only upon vesting. Dividend equivalents with respect to RSUs forfeited are also forfeited. RSUs granted prior to 2023 are not entitled to dividend equivalents.

A summary of the RSUs outstanding as of June 30, 2023, and June 30, 2022, and changes during the six months ended ~~September~~June 30, ~~2017,~~2023 and ~~September~~2022, follows:


	2023			2022
	Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value
Outstanding at January 1,	424,086	$	46.15	389,885	$	44.19
Granted	241,347	47.30		236,120	48.47
Vested	(166,845)	42.22		(158,519)	45.03
Forfeited	(28,612)	44.27		(25,500)	46.60
Outstanding at June 30,	469,976	$	48.25	441,986	$	46.03

Total compensation costs recorded for RSUs were $6.7 million and $5.1 million for the six months ended June 30, ~~2016,~~2023 and 2022, respectively. As of June 30, 2023, there were $12.9 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2026.

Stock Options

The Plan provides the Compensation Committee the authority to grant stock options. During the year ended December 31, 2022, 64,518 options were granted, and the fair value of the options granted was determined using the Black-Scholes valuation model. The options granted generally vest over the first four years in ~~thousands:~~equal installments on the anniversary date of the grant. The options may also vest upon death, disability, upon a change in control or upon a "qualified retirement" as defined in the stock option agreement.

The exercise price of the stock options was established by the Compensation Committee, but the exercise price may not be less than the fair market value of the shares on the date the options are granted.

A summary of the status of stock options as of June 30, 2023, and changes during the six months ended June 30, 2023, is shown in the table below. There were no options outstanding at June 30, 2022.


	2023
	Shares	Weighted Average Exercise Price
Outstanding January 1,	64,518	$	48.79
Granted	—	—
Exercised	—	—
Forfeited	(6,452)	48.79
Outstanding at June 30,	58,066	48.79
Options exercisable at June 30,	—	$	—

At June 30, 2023, the options had a weighted average remaining contractual life of 9.42 years. The intrinsic value of the vested options as of June 30, 2023 was $0. The intrinsic value of the options exercised during the six months ended June 30, 2023, was $0. The total fair value of the shares that vested during the six months ended June 30, 2023, was $0. Total compensation costs recorded for stock options during the six months ended June 30, 2023 and 2022 were $109,000 and $0, respectively. As of June 30, 2023, there were $602,000 of total unrecognized compensation costs related to the Plan for options that are expected to be recognized through 2026.

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 (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") with respect to the business, financial condition, results of operations, plans, objectives and future performance of ~~Heartland.~~HTLF. Any statements about HTLF's expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. Forward-looking statements ~~which~~may include information about possible or assumed future results of HTLF's operations or performance, and may be based upon beliefs, expectations and assumptions of ~~Heartland's management and on information currently available to management,~~HTLF's management. These forward-looking statements are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "project," "may," "will," "would," "could," ~~"should"~~"should," "view," "opportunity," "potential," or other similar expressions. Although ~~Heartland~~HTLF has made these statements based on management's experience and best estimate of future events, the ability of HTLF 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 HTLF currently believes could have a material adverse effect on its operations and future prospects are detailed in the "Risk Factors" section 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. Additionally, all~~2022:

•Economic and Market Conditions Risks, including risks related to the deterioration of the U.S. economy in general and in the local economies in which HTLF conducts its operations and future civil unrest, natural disasters, pandemics and governmental measures addressing them, climate change and climate-related regulations, persistent inflation, higher interest rates, recession, supply chain issues, labor shortages, 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 due to 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, rising interest rates 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 economic, political, and competitive forces impacting our business;

•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. 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~~ESTIMATES

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.~~2022. There have

been no significant changes in the critical accounting ~~policies~~estimates or the assumptions and judgments utilized in applying these ~~policies~~estimates since ~~the year ended~~ December 31, ~~2016.~~2022.

OVERVIEW

~~Heartland's~~Heartland Financial USA, Inc. is a bank holding company operating under the brand name "HTLF". HTLF's independently branded banks (referred to herein collectively as the "Banks", "Bank Markets") 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 and products including treasury management, commercial credit cards, wealth management, investments and residential mortgages. As of June 30, 2023, HTLF had four Banks operating under 11 local bank brands through a total of 117 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,~~fees, brokerage and insurance commissions, capital markets fees, net securities ~~gains,~~gains/(losses), 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, furniture and equipment costs, professional fees, FDIC insurance assessments, advertising, core deposit and customer relationship intangibles amortization, other real estate and loan collection expenses, (gains)/losses on sales/valuation of assets, partnership investment in tax credit projects and acquisition, integration and restructuring costs.

HTLF Response to Recent Banking Industry Disruptions

The banking industry experienced significant disruptions in March 2023, including bank failures, which has since caused industry-wide concerns related to deposit outflows, liquidity, continued interest rate increases and unrealized losses on securities. In response to the concerns, management continues to:

•help customers facilitate additional FDIC insurance through Insured Cash Sweep ("ICS") products and Certificate of Deposit Registry Service ("CDARS") products,

•monitor and adjust deposit pricing to address the highly competitive deposit environment,

•maintain borrowing capacity through various federal programs, including the Federal Reserve's Bank Term Funding Program ("BTFP"), which totaled $3.30 billion as of June 30, 2023, of which no balance was drawn, and

•conduct active commercial and retail deposit campaigns, which resulted in nearly 1,300 net new commercial deposit account and over 1,400 net new retail accounts opened in the second quarter of 2023.

The shift to work-from-home and hybrid work arrangements has caused decreased utilization of and demand for office space. HTLF is actively monitoring its exposure to office space in the non-owner occupied commercial real estate portfolio and securities portfolio. As of June 30, 2023:

•Outstanding loans totaling $408.4 million were collateralized by non-owner occupied office space, which represents 3.5% of the total loans held to maturity, and the average loan size was $1.3 million.

•There were no loans collateralized by office space on nonaccrual.

•The collateral consists primarily of multi-tenant, non-central business district properties.

•The amount of office exposure in the securities portfolio was less than 1% of the total portfolio.

As of June 30, 2023:

•66% of HTLF's deposits were insured or collateralized.

•HTLF's capital ratios substantially exceeded the well-capitalized thresholds, and management believes that HTLF would remain well-capitalized in the event that regulatory rules were adopted requiring that unrealized losses in the total investment portfolio be included in the calculation of regulatory capital ratios.

Overview of Second Quarter and Year to Date results as of June 30, 2023

HTLF reported the following results for the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022:

•net income available to common stockholders of $47.4 million compared to $49.9 million, a decrease of $2.5 million or 5%,

•earnings per diluted common share of $1.11 compared to $1.17, a decrease of $0.06 or 5%,

•net interest income of $147.1 million compared to $142.5 million, an increase of $4.7 million or 3%,

•total revenue growth of $2.6 million or 1% to $179.6 million compared to $177.0 million,

•return on average assets was 0.98% compared to 1.06%,

•return on average common equity was 11.01% compared to 11.55%, and

•return on average tangible common equity (non-GAAP) was 17.33% compared to 18.35%.

HTLF reported the following results for the six months ended June 30, 2023 compared to the six months ended June 30, 2022:

•net income available to common stockholders of $98.2 million compared to $90.9 million, an increase of $7.2 million or 8%.

•earnings per diluted common share of $2.30 compared to $2.14, an increase of $0.16 or 7%,

•net interest income of $299.3 million compared to $277.1 million, an increase of $22.2 million or 8%,

•total revenue of $361.8 million compared to $346.2 million, an increase of $15.6 million or 5%,

•return on average common equity was 11.70% compared to 9.82%,

•return on average assets was 1.02% compared to 0.99%, and

•return on average tangible common equity (non-GAAP) was 18.63% compared to 15.08%.

During the second quarter of 2023, HTLF reclassified Federal Deposit Insurance Corporation ("FDIC") insurance premiums ~~advertising~~to FDIC insurance assessments from professional fees on the consolidated statements of income, and ~~other real estate and loan collection expenses.~~all prior periods have been adjusted.

~~Net income available~~For the second quarter of 2023, net interest margin was 3.19% (3.24% on a fully tax-equivalent basis, non-GAAP), which compares to ~~common stockholders~~3.36% (3.40% on a fully tax-equivalent basis, non-GAAP) for the first quarter ~~ended September 30, 2017,~~of 2023, and 3.18% (3.22% on a fully tax-equivalent basis, non-GAAP) for the second quarter of 2022. For the first six months of 2023, net interest margin was ~~$21.6 million, or $0.72 per diluted common share,~~3.27% (3.32% on a fully tax-equivalent basis, non-GAAP) which compares to 3.13% (3.17% on a fully tax equivalent basis, non-GAAP) for the first six months of 2022.

The efficiency ratio was 60.93% (59.82% on an adjusted fully tax-equivalent basis, non-GAAP) for the second quarter of 2023 compared to ~~$20.2 million, or $0.81 per diluted common share, for the quarter ended September 30, 2016. Return~~60.16% (57.66% on ~~average common equity was 8.99% and return on average assets was 0.89% for the third quarter of 2017, compared to 11.64% and 0.98%, respectively,~~an adjusted fully-tax equivalent basis, non-GAAP) for the same quarter ~~in 2016.~~

~~Net income available to common stockholders for~~of 2022. For the first ~~nine~~six months of 2017 was $61.6 million, or $2.21 per diluted common share, compared to $61.0 million, or $2.48 per diluted common share, for the first nine months of 2016. Return on average common equity was 9.88% and return on average assets was 0.94% for the first nine months of 2017, compared to 12.28% and 1.00%, respectively, for the same period in 2016.

For the third quarter of 2017, Heartland's net interest margin was 4.08% (4.26% on a fully tax-equivalent basis) compared to 3.97% (4.14% on a fully tax-equivalent basis) for the same quarter in 2016, and2023, the efficiency ratio was ~~64.54% and 63.88%~~60.94% (58.48% on an adjusted fully tax-equivalent basis, non-GAAP) compared to 62.75% (61.02% on an adjusted fully tax-equivalent basis, non-GAAP) for the ~~third quarter~~first six months 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) compared to 3.98% (4.15% on a fully tax-equivalent basis) for the same period in 2016. Heartland's efficiency ratio increased to 66.58% for the nine months ended September 30, 2017 compared to 66.23% for the same period in 2016.2022.

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~~$20.22 billion at ~~September~~June 30, ~~2017, an increase~~2023, a decrease 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 million or 2% since December 31, 2016. Securities represented 24% of total assets at September 30, 2017, and 26% of total assets at December 31, 2016.

Total loans held to maturity were $6.37 billion at September 30, 2017, compared to $5.35 billion at year-end 2016, an increase of $1.02 billion. This change includes $96.4 million of total loans held to maturity acquired at fair value 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 million or 1% since December 31, 2016.

Total deposits were $8.23 billion as of September 30, 2017, compared to $6.85 billion at year-end 2016, an increase of $1.38 billion or 20%. This increase includes $181.5 million of deposits, at fair value, acquired in the Founders Bancorp transaction and $1.21 billion of deposits, at fair value, acquired in the Citywide Banks of Colorado, Inc. transaction. Exclusive of these transactions, total deposits decreased $7.1$19.5 million or less than 1% since December 31, ~~2016.~~2022. Securities represented 33% and 35% of total assets at June 30, 2023 and December 31, 2022, respectively. Total loans held to maturity were $11.72 billion at June 30, 2023, compared to $11.43 billion at December 31, 2022, an increase of $289.6 million or 3%.

~~Common stockholders'~~

The total allowance for lending related credit losses was $129.8 million or 1.11% of total loans at June 30, 2023, compared to $129.7 million or 1.13% of total loans at December 31, 2022.

Total deposits were $17.66 billion as of June 30, 2023, compared to $17.51 billion at December 31, 2022, an increase of $150.5 million or 1%.

Total equity was ~~$980.7 million~~$1.86 billion at ~~September~~June 30, ~~2017,~~2023, compared to ~~$739.6 million~~$1.74 billion at ~~year-end 2016.~~December 31, 2022. Book value per common share was ~~$32.75~~$41.00 at ~~September~~June 30, ~~2017,~~2023, compared to ~~$28.31~~$38.25 at year-end ~~2016. Heartland's~~2022. The unrealized loss on securities available for sale, net of applicable taxes, was ~~$20.1~~$576.5 million at ~~September~~June 30, ~~2017,~~2023, compared to an unrealized loss of ~~$30.2~~$619.2 million, net of applicable taxes, at December 31, ~~2016.~~2022.

~~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.

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

Key Performance Ratios
Annualized return on average assets 0.89 % 0.98 % 0.94 % 1.00 %
Annualized return on average common equity (GAAP) 8.99 % 11.64 % 9.88 % 12.28 %
Annualized return on average tangible common equity (non-GAAP)⁽¹⁾
12.41 % 14.93 % 12.90 % 15.87 %
Annualized ratio of net charge-offs to average loans 0.31 % 0.17 % 0.23 % 0.09 %
2023 Developments

HTLF Retirement Plan Services

As of March 29, 2023, HTLF's subsidiary, Dubuque Bank & Trust, entered into an agreement to sell and transfer the recordkeeping and administration services component of HTLF’s Retirement Plan Services business to July Business Services ("July"). Through the new partnership with July, HTLF expects to augment the comprehensive retirement plan solutions offered to clients with enhanced technology and an expanded suite of product offerings that clients expect from a top retirement services provider. The transaction was completed and recordkeeping and administration services were transferred in the second quarter of 2023. The transaction resulted in a gain of $4.3 million.

First Bank & Trust Mortgage Servicing Rights

On March 31, 2023, First Bank & Trust, a division of HTLF Bank, closed on the sale of its mortgage servicing rights portfolio, which consisted of approximately 4,500 loans serviced for others with an unpaid principal balance of $698.5 million. In the agreement, which includes customary terms and conditions, First Bank & Trust provided interim servicing of the loans until the transfer date of May 1, 2023.

Goodwill Impairment Testing

The sustained decline in HTLF's stock price, which management deemed to be a triggering event, caused management to perform impairment testing on its goodwill in the second quarter of 2023. Management concluded that none of the goodwill at any of HTLF's reporting units was impaired.

Fair Value Hedges

During the second quarter of 2023, HTLF entered into interest rate swaps designated as fair value hedges with initial notional amounts of $838.1 million primarily designed to provide protection against unrealized securities losses due to the impact of higher mid-to-long term interest rates. HTLF also executed an interest rate swap designated as a fair value hedge with an original notional amount of $500.0 million to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure.

Charter Consolidation Update

During the second quarter of 2023, Bank of Blue Valley and First Bank & Trust were consolidated into HTLF Bank. Subsequent to June 30, 2023, Rocky Mountain Bank was consolidated into HTLF Bank. Citywide Banks, Premier Valley Bank, Minnesota Bank & Trust, Arizona Bank & Trust, Illinois Bank & Trust, Wisconsin Bank & Trust, Bank of Blue Valley, First Bank & Trust and Rocky Mountain Bank are now operating as divisions of HTLF Bank. The remaining two charters are expected to be consolidated by the end of 2023. Charter consolidation follows a template that retains the current brands, local leadership and local decision making.

Consolidation restructuring costs are projected to be $19-$20 million with approximately $6-$7 million of expenses remaining to be incurred in 2023. Total costs incurred since the project started in the fourth quarter of 2021 through June 30, 2023, were $12.9 million, of which $1.9 million was incurred in the second quarter of 2023. Total charter consolidation costs for the first six months of 2023 totaled $3.6 million. Charter consolidation is designed to eliminate redundancies and improve HTLF’s operating efficiency and capacity to support ongoing product and service enhancements, as well as current and future growth. HTLF has realized some operating efficiencies and financial benefits with the completion of nine charter consolidations. The resulting efficiencies and expansion in capacity are projected to generate benefits of approximately $20 million annually when the project is completed with core operating expenses expected to decline to 2.10% or less of average assets.

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

Reconciliation of Return on Average Tangible Common Equity (non-GAAP)⁽⁴⁾

Net income available to common shareholders (GAAP) $ 21,622
$ 20,172
$ 61,567
$ 60,962

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

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

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

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

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

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

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

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


FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
STATEMENT OF INCOME DATA
Interest income	$	235,500		$	152,887		$	452,478		$	294,149
Interest expense	88,368			10,426			153,134			17,009
Net interest income	147,132			142,461			299,344			277,140
Provision for credit losses	5,379			3,246			8,453			6,491
Net interest income after provision for credit losses	141,753			139,215			290,891			270,649
Noninterest income	32,493			34,539			62,492			69,108
Noninterest expenses	109,446			106,479			220,489			217,276
Income taxes	15,384			15,402			30,702			27,519
Net income	49,416			51,873			102,192			94,962
Preferred dividends	(2,012)			(2,012)			(4,025)			(4,025)

Net income available to common stockholders	$	47,404		$	49,861		$	98,167		$	90,937

KEY PERFORMANCE RATIOS
Annualized return on average assets	0.98		%	1.06		%	1.02		%	0.99		%
Annualized return on average common equity (GAAP)	11.01			11.55			11.70			9.82
Annualized return on average tangible common equity (non-GAAP)(1)	17.33			18.35			18.63			15.08

Annualized ratio of net charge-offs/(recoveries) to average loans	0.32			0.03			0.15			0.25
Annualized net interest margin (GAAP)	3.19			3.18			3.27			3.13
Annualized net interest margin, fully tax-equivalent (non-GAAP)(1)	3.24			3.22			3.32			3.17
Efficiency ratio (GAAP)	60.93			60.16			60.94			62.75
Adjusted efficiency ratio, fully tax-equivalent (non-GAAP)(1)	59.82			57.66			58.48			61.02
Total noninterest expenses to average assets	2.17			2.18			2.20			2.26
Core noninterest expenses to average assets (non-GAAP)(1)	2.16			2.14			2.15			2.21


Dollars in thousands, expect per share data	As Of and For the Quarter Ended
	6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
BALANCE SHEET DATA
Investments	$	6,705,005		$	7,001,119		$	7,051,114		$	6,970,864		$	7,274,056
Loans held for sale	14,353			10,425			5,277			9,570			18,803
Loans receivable held to maturity	11,717,974			11,495,353			11,428,352			10,923,532			10,678,218
Allowance for credit losses	111,198			112,707			109,483			105,715			101,353
Total assets	20,224,716			20,182,544			20,244,228			19,682,950			19,658,399
Total deposits	17,663,543			17,681,346			17,513,009			17,267,121			17,225,550
Long-term obligations	372,403			372,097			371,753			371,446			372,538

Common equity	1,748,285			1,718,700			1,624,350			1,545,253			1,663,363

COMMON SHARE DATA
Book value per common share (GAAP)	$	41.00		$	40.38		$	38.25		$	36.41		$	39.19
Tangible book value per common share (non-GAAP)(1)	$	26.98		$	26.30		$	24.09		$	22.20		$	24.94
ASC 320 effect on book value per common share	$	(14.04)		$	(13.35)		$	(14.58)		$	(15.31)		$	(11.43)
Common shares outstanding, net of treasury stock	42,644,544			42,558,726			42,467,394			42,444,106			42,439,439
Tangible common equity ratio (non-GAAP)(1)	5.86		%	5.72		%	5.21		%	4.94		%	5.56		%
Adjusted tangible common equity ratio (non-GAAP)(1)	8.79		%	8.61		%	8.37		%	8.35		%	8.11		%

(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.

~~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.


Non-GAAP Reconciliations (Dollars in thousands, except per share data)
	As Of and For the Quarter Ended
	6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)
Common equity (GAAP)	$	1,748,285		$	1,718,700		$	1,624,350		$	1,545,253		$	1,663,363
Less goodwill	576,005			576,005			576,005			576,005			576,005
Less core deposit and customer relationship intangibles, net	21,651			23,366			25,154			26,995			28,851
Tangible common equity (non-GAAP)	$	1,150,629		$	1,119,329		$	1,023,191		$	942,253		$	1,058,507

Common shares outstanding, net of treasury stock	42,644,544			42,558,726			42,467,394			42,444,106			42,439,439
Common equity (book value) per share (GAAP)	$	41.00		$	40.38		$	38.25		$	36.41		$	39.19
Tangible book value per common share (non-GAAP)	$	26.98		$	26.30		$	24.09		$	22.20		$	24.94

Reconciliation of Tangible Common Equity Ratio (non-GAAP)
Tangible common equity (non-GAAP)	$	1,150,629		$	1,119,329		$	1,023,191		$	942,253		$	1,058,507

Total assets (GAAP)	$	20,224,716		$	20,182,544		$	20,244,228		$	19,682,950		$	19,658,399
Less goodwill	576,005			576,005			576,005			576,005			576,005
Less core deposit and customer relationship intangibles, net	21,651			23,366			25,154			26,995			28,851
Total tangible assets (non-GAAP)	$	19,627,060		$	19,583,173		$	19,643,069		$	19,079,950		$	19,053,543
Tangible common equity ratio (non-GAAP)	5.86		%	5.72		%	5.21		%	4.94		%	5.56		%

Reconciliation of Adjusted Tangible Common Equity Ratio (non-GAAP)
Tangible common equity (non-GAAP)	$	1,150,629		$	1,119,329		$	1,023,191		$	942,253		$	1,058,507
Accumulated other comprehensive loss	575,240			566,919			620,006			650,636			486,918
Adjusted tangible common equity (non-GAAP)	$	1,725,869		$	1,686,248		$	1,643,197		$	1,592,889		$	1,545,425

Total tangible assets (non-GAAP)	$	19,627,060		$	19,583,173		$	19,643,069		$	19,079,950		$	19,053,543
Adjusted tangible common equity ratio (non-GAAP)	8.79		%	8.61		%	8.37		%	8.35		%	8.11		%

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


Non-GAAP Reconciliations (Dollars in thousands, except per share data)	For the Quarter Ended June 30,						For the Six Months Ended June 30,
	2023			2022			2023			2022
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common stockholders (GAAP)	$	47,404		$	49,861		$	98,167		$	90,937
Plus core deposit and customer relationship intangibles amortization, net of tax(1)	1,354			1,645			2,767			3,268
Net income available to common stockholders excluding intangible amortization (non-GAAP)	$	48,758		$	51,506		$	100,934		$	94,205

Average common equity (GAAP)	$	1,727,013		$	1,731,393		$	1,691,633		$	1,866,657
Less average goodwill	576,005			576,005			576,005			576,005
Less average core deposit and customer relationship intangibles, net	22,481			29,845			23,355			30,883
Average tangible common equity (non-GAAP)	$	1,128,527		$	1,125,543		$	1,092,273		$	1,259,769
Annualized return on average common equity (GAAP)	11.01		%	11.55		%	11.70		%	9.82		%
Annualized return on average tangible common equity (non-GAAP)	17.33		%	18.35		%	18.63		%	15.08		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net interest income (GAAP)	$	147,132		$	142,461		$	299,344		$	277,140
Plus tax-equivalent adjustment(1)	2,314			1,977			4,523			4,096
Net interest income, fully tax-equivalent (non-GAAP)	$	149,446		$	144,438		$	303,867		$	281,236

Average earning assets	$	18,523,552		$	17,987,734		$	18,458,462		$	17,873,037

Annualized net interest margin (GAAP)	3.19		%	3.18		%	3.27		%	3.13		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)	3.24			3.22			3.32			3.17
Net purchase accounting discount accretion on loans included in annualized net interest margin	0.03			0.07			0.02			0.06





Reconciliation of Adjusted Efficiency Ratio (non-GAAP)
Net interest income (GAAP)	$	147,132		$	142,461		$	299,344		$	277,140
Tax-equivalent adjustment(1)	2,314			1,977			4,523			4,096
Fully tax-equivalent net interest income	149,446			144,438			303,867			281,236
Noninterest income (GAAP)	32,493			34,539			62,492			69,108
Securities (gains)/losses, net	314			2,089			1,418			(783)
Unrealized (gain)/loss on equity securities, net	41			121			(152)			404

Valuation adjustment on servicing rights	—			—			—			(1,658)
Adjusted revenue (non-GAAP)	$	182,294		$	181,187		$	367,625		$	348,307

Total noninterest expenses (GAAP)	$	109,446		$	106,479		$	220,489		$	217,276
Less:
Core deposit and customer relationship intangibles amortization	1,715			2,083			3,503			4,137
Partnership investment in tax credit projects	154			737			692			814
(Gain)/loss on sales/valuation of assets, net	(3,372)			(3,230)			(2,257)			(3,184)
Acquisition, integration and restructuring costs	1,892			2,412			3,565			2,988
Core expenses (non-GAAP)	$	109,057		$	104,477		$	214,986		$	212,521
Efficiency ratio (GAAP)	60.93		%	60.16		%	60.94		%	62.75		%
Adjusted efficiency ratio, fully tax-equivalent (non-GAAP)	59.82		%	57.66		%	58.48		%	61.02		%

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





Non-GAAP Reconciliations (Dollars in thousands, except per share data)	For the Quarter Ended June 30,						For the Six Months Ended June 30,
	2023			2022			2023			2022
Reconciliation of Annualized Ratio of Core Expenses to Average Assets (non-GAAP)
Total noninterest expenses (GAAP)	$	109,446		$	106,479		$	220,489		$	217,276
Core expenses (non-GAAP)	109,057			104,477			214,986			212,521

Average assets	$	20,221,511		$	19,559,091		$	20,170,044		$	19,395,391
Total noninterest expenses to average assets (GAAP)	2.17		%	2.18		%	2.20		%	2.26		%
Core expenses to average assets (non-GAAP)	2.16		%	2.14		%	2.15		%	2.21		%

Acquisition, integration and restructuring costs
Salaries and employee benefits	$	93		$	275		$	167		$	615


Professional fees	1,068			1,779			2,002			2,015
Advertising	222			156			344			156

Other noninterest expenses	509			202			1,052			202
Total acquisition, integration and restructuring costs	$	1,892		$	2,412		$	3,565		$	2,988
After tax impact on diluted earnings per common share(1)	$	0.03		$	0.04		$	0.07		$	0.06
















(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.

•Adjusted efficiency ratio, fully tax equivalent, expresses noninterest expenses as a percentage of fully tax-equivalent net interest income and noninterest income. This adjusted 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.

•Adjusted tangible common equity ratio is total common equity less goodwill, core deposit and customer relationship intangibles, net, and accumulated other comprehensive loss 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 excluding the variability of accumulated other comprehensive income (loss).

•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.

•Annualized ratio of core expenses to average assets adjusts noninterest expenses to exclude specific items noted in the reconciliation. Management includes this measure as it is considered to be a critical metric to analyze and evaluate controllable expenses related to primary business operations.

RESULTS OF OPERATIONS

Net Interest Margin and Net Interest Income

HTLF's management seeks to optimize net interest income and net interest margin through the growth of earning assets and customer deposits while managing asset and liability positions because they are key indicators of HTLF's profitability.

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 is the ratio of net interest income to average earning assets.

For the Quarters ended June 30, 2023 and 2022

Net interest margin, expressed as a percentage of average earning assets, was ~~4.08% (4.26%~~3.19% (3.24% on a fully tax-equivalent ~~basis)~~basis, non-GAAP) during the ~~third~~second quarter of ~~2017,~~2023 compared to ~~3.97% (4.14%~~3.18% (3.22% on a fully tax-equivalent ~~basis)~~basis, non-GAAP) during the ~~third~~second quarter of ~~2016. Heartland's success in maintaining~~2022. For the quarters ended June 30, 2023 and 2022, net interest margin ~~has been the~~included 3 basis points and 7 basis points, respectively, of net purchase accounting discount amortization. HTLF's net interest margin may be impacted in future periods as a result of ~~improved yield~~market pressures to increase deposit pricing. Management anticipates utilizing the cash flow from the investment portfolio to pay down wholesale deposits, which would positively impact net interest margin.

Total interest income and average earning asset changes for the second quarter of 2023 compared to the second quarter of 2022 were:

•Total interest income was $235.5 million compared to $152.9 million, an increase of $82.6 million or 54% and primarily attributable to an increase in average earning assets and higher yields.

•Total interest income on a tax-equivalent basis (non-GAAP) was $237.8 million, an increase of $83.0 million or 54% from $154.9 million.

•Average earning assets increased $535.8 million or 3% to $18.52 billion compared to $17.99 billion.

•The average rate on earning assets increased 170 basis points to 5.15% compared to 3.45%, primarily due to recent interest rate increases.

Total interest expense and ~~continuous loan~~average interest bearing liability changes for the second quarter of 2023 compared to the second quarter of 2022 were:

•Total interest expense was $88.4 million, an increase of $77.9 million from $10.4 million, due to increases in the average interest rate paid and ~~deposit pricing discipline. Also contributing~~average interest bearing liabilities.

•The average interest rate paid on interest bearing liabilities increased 232 basis points to ~~Heartland's ability~~2.68% compared to ~~maintain its~~0.36%.

•Average interest bearing deposits increased $1.66 billion or 15% to $12.75 billion from $11.08 billion, including an increase of $1.94 billion in wholesale and institutional deposits.

•The average interest rate paid on interest bearing deposits increased 234 basis points to 2.58% compared to 0.24%.

•Average borrowings decreased $29.4 million or 6% to $461.7 million from $491.1 million, and the average interest rate paid on borrowings was 5.55% compared to 3.18%.

Net interest income changes for the second quarter of 2023 compared to the second quarter of 2022 were:

•Net interest income totaled $147.1 million compared to $142.5 million, an increase of $4.7 million or 3%.

•Net interest income on a tax-equivalent basis (non-GAAP) totaled $149.4 million compared to $144.4 million, which was an increase of $5.0 million or 3%.

For the Six Months ended June 30, 2023 and 2022

Net interest margin, expressed as a percentage of average earning assets, was 3.27% (3.32% on a fully tax-equivalent basis, non-GAAP) during the first six months of 2023, compared to 3.13% (3.17% on a fully tax-equivalent basis, non-GAAP) during the first six months of 2022. For the six months ended June 30, 2023 and 2022, net interest margin ~~has been the amortization~~included 2 basis points and 6 basis points, respectively, of net purchase accounting ~~discounts associated with acquisitions completed by Heartland.~~ discount amortization.

Total interest income and average earning asset changes for the first six months of 2023 compared to the first six months of 2022 were:

•Total interest income was $452.5 million, an increase of $158.3 million or 54% from $294.1 million.

•Total interest income on a tax-equivalent basis (non-GAAP) was $457.0 million, an increase of $158.8 million or 53% from $298.2 million.

•Average earning assets increased $585.4 million or 3% to $18.46 billion compared to $17.87 billion.

Total interest expense and average interest bearing liability changes for the first six months of 2023 compared to the first six months of 2022 were:

•Total interest expense was $153.1 million, an increase of $136.1 million from $17.0 million, due to increases in the average interest rate paid and average interest bearing liabilities.

•The average interest rate paid on interest bearing liabilities increased to 2.39% compared to 0.31%.

•Average interest bearing deposits increased $1.84 billion or 18% to $12.37 billion from $10.53 billion which was primarily attributable to an increase in wholesale and institutional deposits. Average wholesale and institutional deposits totaled $2.78 billion for the first six months of 2023 compared to $826.1 million for the first six months of 2022.

•The average interest rate paid on interest bearing deposits was 2.26% for the first six months of 2023 compared to 0.18% for the first six months of 2022.

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 net interest margin on a fully tax-equivalent basis to~~ GAAP.

Interest income for the third quarter 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 average interest rate earned on average earning assets increased 10 basis points to 4.68% for the third quarter of 2017 compared to 4.58% for the same quarter in 2016.

For the first 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 on 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 million of average earning assets attributable to the acquisitions completed in 2017, average earning assets increased $52.8 million or 1% for the first nine months of 2017 compared to the same period in 2016.

Interest expense for the 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 models and reviews simulations using various improving and deteriorating 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 76 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)

	For the Quarter Ended
	June 30, 2023						March 31, 2023						June 30, 2022
	Average Balance		Interest		Rate		Average Balance		Interest		Rate		Average Balance		Interest		Rate
Earning Assets
Securities:
Taxable	$	5,962,207	$	58,172	3.91	%	$	6,096,888	$	55,976	3.72	%	$	6,419,615	$	38,098	2.38	%
Nontaxable(1)	895,458		8,074		3.62		922,676		7,630		3.35		915,880		6,972		3.05
Total securities	6,857,665		66,246		3.87		7,019,564		63,606		3.67		7,335,495		45,070		2.46
Interest on deposits with other banks and short-term investments	153,622		2,051		5.41		105,400		1,131		4.35		277,773		563		0.81
Federal funds sold	—		—		—		—		—		—		—		—		—
Loans:(2)
Commercial and industrial(1)	3,565,449		56,644		6.37		3,459,317		49,907		5.85		3,002,822		30,441		4.07
PPP loans	6,302		24		1.53		9,970		26		1.06		41,370		1,801		17.46
Owner occupied commercial real estate	2,366,107		28,031		4.75		2,289,002		26,769		4.74		2,294,524		22,863		4.00
Non-owner occupied commercial real estate	2,462,098		35,583		5.80		2,331,318		30,749		5.35		2,179,048		22,871		4.21
Real estate construction	1,028,109		18,528		7.23		1,099,026		18,131		6.69		878,555		10,015		4.57
Agricultural and agricultural real estate	848,554		12,256		5.79		835,648		11,353		5.51		782,610		7,933		4.07
Residential mortgage	840,741		9,383		4.48		852,561		9,273		4.41		849,174		8,358		3.95
Consumer	508,082		9,068		7.16		501,236		8,242		6.67		449,265		4,949		4.42
Less: allowance for credit losses-loans	(113,177)		—		—		(110,393)		—		—		(102,902)		—		—
Net loans	11,512,265		169,517		5.91		11,267,685		154,450		5.56		10,374,466		109,231		4.22
Total earning assets	18,523,552		237,814		5.15	%	18,392,649		219,187		4.83	%	17,987,734		154,864		3.45	%
Nonearning Assets	1,697,959						1,725,356						1,571,357
Total Assets	$	20,221,511					$	20,118,005					$	19,559,091
Interest Bearing Liabilities
Savings	$	8,935,775	$	41,284	1.85	%	$	9,730,494	$	37,893	1.58	%	$	9,995,497	$	5,372	0.22	%
Time deposits	3,812,330		40,691		4.28		2,257,047		19,005		3.41		1,088,765		1,158		0.43
Short-term borrowings	89,441		848		3.80		222,772		2,422		4.41		118,646		88		0.30
Other borrowings	372,248		5,545		5.97		371,921		5,446		5.94		372,411		3,808		4.10
Total interest bearing liabilities	13,209,794		88,368		2.68	%	12,582,234		64,766		2.09	%	11,575,319		10,426		0.36	%
Noninterest Bearing Liabilities
Noninterest bearing deposits	4,941,033						5,518,326						5,960,217
Accrued interest and other liabilities	232,966						250,880						181,457
Total noninterest bearing liabilities	5,173,999						5,769,206						6,141,674
Equity	1,837,718						1,766,565						1,842,098
Total Liabilities and Equity	$	20,221,511					$	20,118,005					$	19,559,091
Net interest income, fully tax-equivalent (non-GAAP)(1)(3)			$	149,446					$	154,421					$	144,438
Net interest spread(1)					2.47	%					2.74	%					3.09	%
Net interest income, fully tax-equivalent to total earning assets (non-GAAP)(1)(3)					3.24	%					3.40	%					3.22	%










(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)
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1)																	ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1)
	For the Quarter Ended																	For the Six Months Ended
	September 30, 2017								September 30, 2016									June 30, 2023							June 30, 2022
	Average Balance			Interest			Rate		Average Balance			Interest			Rate			Average Balance			Interest		Rate		Average Balance			Interest		Rate
Earning Assets																	Earning Assets
Securities:																	Securities:
Taxable	$	1,667,076		$	10,394		2.47	%	$	1,415,446		$	7,917		2.23	%	Taxable	$	6,029,175		$	114,148	3.82	%	$	6,460,412		$	70,718	2.21	%
Nontaxable⁽¹⁾	643,925			7,825			4.82		473,152			5,719			4.81		Nontaxable(1)	908,992			15,704		3.48		1,010,888			14,823		2.96
Total securities	2,311,001			18,219			3.13		1,888,598			13,636			2.87		Total securities	6,938,167			129,852		3.77		7,471,300			85,541		2.31
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments	164,809			558			1.34		7,026			6			0.34
Interest bearing deposits with other banks and other short-term investments																	Interest bearing deposits with other banks and other short-term investments	129,645			3,182		4.95		247,281			634		0.52
Federal funds sold	18,874			34			0.71		1,409			1			0.28		Federal funds sold	—			—		—		6			—		—
Loans:⁽²⁾																	Loans:(2)
Commercial and commercial real estate⁽¹⁾	4,647,414			59,121			5.05		3,908,623			48,334			4.92
Commercial and industrial(1)																	Commercial and industrial(1)	3,512,807			106,551		6.12		2,874,694			57,494		4.03
PPP loans																	PPP loans	8,126			50		1.24		86,460			6,124		14.28
Owner occupied commercial real estate																	Owner occupied commercial real estate	2,327,702			54,800		4.75		2,268,963			44,141		3.92
Non-owner occupied commercial real estate																	Non-owner occupied commercial real estate	2,397,004			66,332		5.58		2,119,925			44,034		4.19
Real estate construction																	Real estate construction	1,063,372			36,659		6.95		862,989			19,291		4.51
Agricultural and agricultural real estate																	Agricultural and agricultural real estate	842,136			23,609		5.65		764,082			14,939		3.94
Residential mortgage	683,186			7,300			4.24		717,374			7,248			4.02		Residential mortgage	846,618			18,656		4.44		846,542			16,443		3.92
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		Consumer	504,678			17,310		6.92		438,024			9,604		4.42
Fees on loans				2,464			—		—			1,708			—

Less: allowance for loan losses	(54,720		)	—			—		(52,261		)	—			—		Less: allowance for loan losses	(111,793)			—		—		(107,229)			—		—
Net loans	6,231,544			84,092			5.35		5,485,827			71,265			5.17		Net loans	11,390,650			323,967		5.74		10,154,450			212,070		4.21
Total earning assets	8,726,228			102,903			4.68	%	7,382,860			84,908			4.58	%	Total earning assets	18,458,462			457,001		4.99	%	17,873,037			298,245		3.37	%
Nonearning Assets	913,616								789,823								Nonearning Assets	1,711,582							1,522,354
Total Assets	$	9,639,844							$	8,172,683							Total Assets	$	20,170,044						$	19,395,391
Interest Bearing Liabilities																	Interest Bearing Liabilities
Savings	$	4,205,946		$	3,162		0.30	%	$	3,697,426		$	2,066		0.22	%	Savings	$	9,330,939		$	79,177	1.71	%	$	9,445,778		$	7,766	0.17	%
Time, $100,000 and over	408,560			787			0.76		399,498			813			0.81
Other time deposits	573,178			1,124			0.78		570,445			1,122			0.78
Time deposits																	Time deposits	3,038,985			59,696		3.96		1,080,267			1,741		0.32
Short-term borrowings	209,795			271			0.51		258,783			235			0.36		Short-term borrowings	155,738			3,270		4.23		119,115			134		0.23
Other borrowings	300,234			3,790			5.01		298,020			3,770			5.03		Other borrowings	372,085			10,991		5.96		372,299			7,368		3.99
Total interest bearing liabilities	5,697,713			9,134			0.64	%	5,224,172			8,006			0.61	%	Total interest bearing liabilities	12,897,747			153,134		2.39	%	11,017,459			17,009		0.31	%
Noninterest Bearing Liabilities																	Noninterest Bearing Liabilities
Noninterest bearing deposits	2,912,344								2,171,965								Noninterest bearing deposits	5,228,085							6,227,499
Accrued interest and other liabilities	74,338								84,142								Accrued interest and other liabilities	241,874							173,071
Total noninterest bearing liabilities	2,986,682								2,256,107								Total noninterest bearing liabilities	5,469,959							6,400,570
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
Equity																	Equity	1,802,338							1,977,362
Total Liabilities and Equity																	Total Liabilities and Equity	$	20,170,044						$	19,395,391
Net interest income, fully tax-equivalent (non-GAAP)(1)(3)																	Net interest income, fully tax-equivalent (non-GAAP)(1)(3)				$	303,867						$	281,236
Net interest spread⁽¹⁾							4.04	%							3.97	%	Net interest spread(1)						2.60	%						3.06	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets⁽³⁾							4.26	%							4.14	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(1)(3)																	Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(1)(3)						3.32	%						3.17	%
Interest bearing liabilities to earning assets	65.29		%						70.76		%						Interest bearing liabilities to earning assets	69.87		%					61.64		%

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

Average Earning Assets	$	8,726,228							$	7,382,860
Annualized net interest margin (GAAP)							4.08	%							3.97	%
Annualized net interest margin, fully tax-equivalent (non-GAAP)							4.26	%							4.14	%

(1)Computed on a tax-equivalent basis using an effective tax rate of 35%
(2) Nonaccrual loans are included in the average loans outstanding.
(3) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources. This measure should not be considered a substitute for operating results determined in accordance with GAAP.

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

The following tables present the dollar amount of changes in interest income and interest expense for the major components of interest earning assets and interest bearing liabilities, in thousands, and quantify the changes in interest income and interest expense related to changes in the average outstanding balances (volume) and those changes caused by fluctuating interest rates. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (i) changes in volume, calculated by multiplying the difference between the average balance for the current period and the average balance for the prior period by the rate for the prior period, and (ii) changes in rate, calculated by multiplying the difference between the rate for the current period and the rate for the prior period by the average balance for the prior period. The unallocated change has been allocated pro rata to volume and rate variances.

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.


	Three Months Ended
	June 30, 2023 Compared to June 30, 2022 Change Due to						June 30, 2023 Compared to March 31, 2023 Changes Due to						June 30, 2022 Compared to June 30, 2021 Change Due to
	Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Earnings Assets/Interest Income
Investment securities:
Taxable	$	(17,607)	$	37,681	$	20,074	$	(6,336)	$	8,532	$	2,196	$	3,145	$	3,407	$	6,552
Nontaxable(1)	(994)		2,096		1,102		(1,205)		1,649		444		2,078		(879)		1,199
Interest bearing deposits	(1,759)		3,247		1,488		612		308		920		1		502		503
Federal funds sold	—		—		—		—		—		—		—		—		—
Loans(1)(2)	13,011		47,275		60,286		3,889		11,178		15,067		22,722		(25,956)		(3,234)
Total earning assets	(7,349)		90,299		82,950		(3,040)		21,667		18,627		27,946		(22,926)		5,020
Liabilities/Interest Expense
Interest bearing deposits:
Savings	(4,012)		39,924		35,912		(15,977)		19,368		3,391		562		2,577		3,139
Time deposits	8,572		30,961		39,533		15,851		5,835		21,686		(104)		(295)		(399)
Short-term borrowings	(155)		915		760		(1,280)		(294)		(1,574)		(120)		110		(10)
Other borrowings	(12)		1,749		1,737		12		87		99		780		52		832
Total interest bearing liabilities	4,393		73,549		77,942		(1,394)		24,996		23,602		1,118		2,444		3,562
Net interest income	$	(11,742)	$	16,750	$	5,008	$	(1,646)	$	(3,329)	$	(4,975)	$	26,828	$	(25,370)	$	1,458

(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 average loans outstanding.


	Six Months Ended
	June 30, 2023 Compared to June 30, 2022 Change Due to						June 30, 2022 Compared to June 30, 2021 Change Due to
	Volume		Rate		Net		Volume		Rate		Net
Earnings Assets/Interest Income
Investment securities:
Taxable	$	(13,802)	$	57,232	$	43,430	$	7,444	$	1,285	$	8,729
Nontaxable(1)	(3,531)		4,412		881		5,274		(1,924)		3,350
Interest bearing deposits	(1,019)		3,567		2,548		5		503		508
Federal funds sold	—		—		—		—		(1)		(1)
Loans(1)(2)	28,170		83,727		111,897		15,635		(29,033)		(13,398)
Total earning assets	9,818		148,938		158,756		28,358		(29,170)		(812)
Liabilities/Interest Expense
Interest bearing deposits:
Savings	(287)		71,698		71,411		841		2,262		3,103
Time deposits	8,082		49,873		57,955		(328)		(1,453)		(1,781)
Short-term borrowings	54		3,082		3,136		(98)		(18)		(116)
Other borrowings	(13)		3,636		3,623		350		742		1,092
Total interest bearing liabilities	7,836		128,289		136,125		765		1,533		2,298
Net interest income	$	1,982	$	20,649	$	22,631	$	27,593	$	(30,703)	$	(3,110)

(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 average loans outstanding.

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, 2023 and 2022, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Provision expense for credit losses-loans	$	7,829	$	1,545	$	10,013	$	4,173
Provision (benefit) expense for credit losses-unfunded commitments	(2,450)		1,701		(1,560)		2,318

Total provision expense	$	5,379	$	3,246	$	8,453	$	6,491

The provision expense for credit losses for loans was ~~$5.7~~$7.8 million for the ~~third~~second quarter of ~~2017~~2023, which was an increase of $6.3 million from provision expense of $1.5 million recorded in the second quarter of 2022. The provision expense for the second quarter of 2023 compared to the second quarter of 2022 was impacted by several factors, including:

•a $5.3 million ~~for~~charge-off related to an overdraft, the ~~third quarter~~result of ~~2016. For~~a fraud incident impacting the ~~first nine months~~account of ~~2017, the provision for~~ a single long-term customer compared to net charge-offs of $714,000,

•loan ~~losses was $10.2~~growth of $222.6 million compared to ~~$9.5~~$500.8 million, and

•improvement in credit quality as indicated by nonpass loans as a percentage of total loans. Nonpass loans were 4.8% of loans at both June 30, 2023 and March 31, 2023. Nonpass loans were 5.8% of total loans at June 30, 2022 compared to 6.3% of total loans at March 31, 2022.

The provision expense for credit losses for loans was $10.0 million for the first ~~nine~~six months of ~~2016. In determining~~2023 compared to $4.2 million for the first six months of 2022. The provision expense for the first six months of 2023 and the first six months of 2022 were impacted by several factors, including:

•net charge-offs of $8.3 million, which included a $5.3 million charge-off related to an overdraft of a single long-term customer compared to net charge-offs of $12.9 million, which included two charge-offs due to customer fraud totaling $9.2 million related to two lending relationships that had collateral deficiencies,

•loan growth of $289.6 million compared to $723.6 million, and

•stable credit quality during the ~~allowance for loan losses is appropriate, management uses factors that include the overall composition~~first six months of ~~the loan portfolio, general economic conditions, types~~2023 compared to improved credit quality as indicated by nonpass loans as a percentage of total loans. Nonpass loans were 4.8% of loans ~~loan collateral values, past loss experience, loan delinquencies, substandard credits, and doubtful credits. Given the~~at June 30, 2023 compared to 4.7% at December 31, 2022. Nonpass loans were 5.8% of total loans at June 30, 2022 compared to 7.4% of total loans at December 31, 2021.

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, including the impact of economic conditions, are all considered when determining the appropriateness of the allowance for ~~loan~~credit losses ~~Heartland's quarterly~~and will contribute to the variability in 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~~estimates 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~~2022, "Allowance For ~~Loan~~Credit Losses" and "Provision for Credit Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 54, "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,~~2023, was at a level commensurate with the overall risk exposure of the loan portfolio. However, ifdeterioration in economic conditions, ~~should become more unfavorable,~~including a recession, could cause certain borrowers ~~may~~to experience difficulty and impede their ability to meet debt service. Due to the ~~level~~uncertainty of ~~nonperforming loans, charge-offs~~future economic conditions, including ongoing concerns regarding higher interest rates, supply chain challenges, workforce shortages and ~~delinquencies could rise and require further increases in~~wage pressures, the provision for ~~loan losses.~~credit losses could be volatile in future 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~~2023 and ~~2016,~~2022, in thousands:



	Three Months Ended June 30,
	2023		2022		Change		% Change
Service charges and fees	$	19,627	$	18,066	$	1,561	9	%
Loan servicing income	411		834		(423)		(51)
Trust fees	5,419		5,679		(260)		(5)
Brokerage and insurance commissions	677		839		(162)		(19)
Capital markets fees	4,037		4,871		(834)		(17)
Securities losses, net	(314)		(2,089)		1,775		85
Unrealized loss on equity securities, net	(41)		(121)		80		66

Net gains on sale of loans held for sale	1,050		2,901		(1,851)		(64)
Valuation adjustment on servicing rights	—		—		—		—
Income on bank owned life insurance	1,220		523		697		133
Other noninterest income	407		3,036		(2,629)		(87)
Total noninterest income	$	32,493	$	34,539	$	(2,046)	(6)	%

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,
	2023		2022		Change		% Change
Service charges and fees	$	36,763	$	33,317	$	3,446	10	%
Loan servicing income	1,125		1,120		5		—
Trust fees	11,076		11,758		(682)		(6)
Brokerage and insurance commissions	1,373		1,708		(335)		(20)
Capital markets fees	6,486		7,910		(1,424)		(18)
Securities (losses)/gains, net	(1,418)		783		(2,201)		(281)
Unrealized gain/(loss) on equity securities, net	152		(404)		556		138

Net gains on sale of loans held for sale	2,881		6,312		(3,431)		(54)
Valuation adjustment on servicing rights	—		1,658		(1,658)		(100)
Income on bank owned life insurance	2,184		1,047		1,137		109
Other noninterest income	1,870		3,899		(2,029)		(52)
Total noninterest income	$	62,492	$	69,108	$	(6,616)	(10)	%

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~~was $32.5 million during the ~~third~~second quarter of ~~2017~~2023 compared to ~~$28.5~~$34.5 million during the ~~third~~second quarter of ~~2016,~~2022, a decrease of ~~$3.6~~$2.0 million or ~~12%~~6%. ~~For the nine-month period ended on September 30,~~Total noninterest income ~~totaled $76.5~~was $62.5 million ~~during 2017~~for the first six months of 2023 compared to ~~$89.1~~$69.1 million ~~during 2016,~~for the first six months of 2022, a decrease of ~~$12.7~~$6.6 million or ~~14%~~10%. ~~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~~six- months ended June 30, 2023 and 2022 are as follows:

Service charges and ~~fees.~~

~~Service Charges and Fees~~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~~2023 and ~~2016,~~2022, in thousands:


	Three Months Ended June 30,
	2023		2022		Change		% Change
Service charges and fees on deposit accounts	$	5,229	$	4,672	$	557	12	%
Overdraft fees	3,094		2,982		112		4
Customer service and other service fees	93		106		(13)		(12)
Credit card fee income	8,908		7,885		1,023		13
Debit card income	2,303		2,421		(118)		(5)
Total service charges and fees	$	19,627	$	18,066	$	1,561	9	%

	Six Months Ended June 30,
	2023		2022		Change		% Change
Service charges and fees on deposit accounts	$	10,140	$	9,067	$	1,073	12	%
Overdraft fees	6,063		5,807		256		4
Customer service and other service fees	186		187		(1)		(1)
Credit card fee income	15,911		13,534		2,377		18
Debit card income	4,463		4,722		(259)		(5)
Total service charges and fees	$	36,763	$	33,317	$	3,446	10	%

Three Months Ended
September 30,

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

Nine Months Ended
September 30,

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

Service charges and fees increased $1.9 million or 22% to $10.1 million during the third quarter of 2017 compared to $8.3 million recorded during the third quarter of 2016 and $5.8 million 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. IncreasesThe increase in service charges and fees ~~were~~on deposit accounts was primarily attributable to a larger ~~demand deposit~~ customer ~~base, a portion of which is attributable to the acquisitions completed~~base. The increase in ~~2017. Fees associated with~~ credit card ~~services were $2.0 million during~~fee income was primarily the ~~third quarter~~result 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 ofa larger commercial credit card ~~services provided at Heartland's subsidiary banks, including at~~customer base and increased utilization.

Management is monitoring and assessing industry changes related to the ~~newly acquired banks in California~~consumer overdraft fees, 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.any future changes could negatively impact overdraft fee income.

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~~depend upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. ~~Loan servicing income totaled $1.2 million during~~The following tables show the ~~third quarter of 2017 compared to $873,000 during the third quarter of 2016, an increase of $288,000 or 33%. On a nine-month comparative basis,~~changes in loan servicing income ~~totaled $4.2 million during 2017 compared to $3.4 million during 2016, an increase of $803,000 or 23%.~~

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 the activity related to the net gains on sales of loans held for sale during~~ the three- and ~~nine-month periods~~six- months ended ~~September~~June 30, ~~2017,~~2023, and ~~2016,~~2022, in thousands:


	Three Months Ended June 30,
	2023		2022		Change		% Change
Commercial and agricultural loan servicing fees(1)	$	373	$	649	$	(276)	(43)	%
Residential mortgage servicing fees	38		466		(428)		(92)
Mortgage servicing rights amortization	—		(281)		281		100
Total loan servicing income	$	411	$	834	$	(423)	(51)	%

	Six Months Ended June 30,
	2023		2022		Change		% Change
Commercial and agricultural loan servicing fees(1)	$	846	$	886	$	(40)	(5)	%
Residential mortgage servicing fees	489		920		(431)		(47)
Mortgage servicing rights amortization	(210)		(686)		476		69
Total loan servicing income	$	1,125	$	1,120	$	5	—	%

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

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
Capital markets fees

For the second quarter of 2023, capital markets fees totaled $4.0 million compared to $4.9 million for the same quarter of 2022, a decrease of $834,000 or 17%. Syndication income decreased $1.3 million or 56% to $976,000 for the second quarter of 2023 from $2.2 million for the second quarter of 2022. Swap fee income increased $430,000 or 16% to $3.1 million in the second quarter of 2023 from $2.6 million for the same quarter in 2022.

For the first six months of 2023, capital markets fees totaled $6.5 million, a decrease of $1.4 million or 18% from $7.9 million for the first six months of 2022. Syndication income decreased $1.9 million or 58% to $1.4 million for the first six months of 2023 compared to $3.3 million for the same period of 2022. Swap fee income increased $526,000 or 12% to $5.1 million for the first six months of 2023 compared to $4.6 million for the first six months of 2022.

Capital markets fees vary, in part, based upon the size of the transaction and are recognized upon the closing of the transaction.

Securities losses/gains, net

For the second quarter of 2023, net security losses totaled $314,000 compared to net losses of $2.1 million for the second quarter of 2022, a decrease of $1.8 million or 85%. For the first six months of 2023, net security losses totaled $1.4 million compared to net gains for $783,000 during the first six months of 2022, a change of $2.2 million. The realized losses in 2023 for both the quarterly and year-to-date results were primarily attributable to the sustained unrealized loss position of the securities portfolio. During the second quarter of 2022, approximately $158.7 million of lower-yielding securities were sold, resulting in a net loss of $2.6 million, and the proceeds from this sale were used to purchase higher-yielding securities.

Net gains on sale of loans held for sale ~~totaled $5.0 million during~~

For 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,~~2023, net gains on sale of loans held for sale totaled ~~$18.0~~$1.1 million, ~~compared to $33.8 million during the same period in 2016,~~ a decrease of ~~$15.8~~$1.9 million or ~~47%. These~~

~~gains result primarily~~64% from $2.9 million in the gain or loss 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 thirdsame quarter of ~~2017 compared to 38% in the third quarter of 2016.~~2022. For the ~~nine months ended September 30, 2017, mortgage loan refinancings were 30% of originations compared to 37% of originations during the~~ first ~~nine~~six months of ~~2016. Net~~2023, net gains on sale of loans held for sale ~~also includes gains on~~totaled $2.9 million compared to $6.3 million for the ~~sale~~first six months of ~~commercial and agricultural loans, which~~2022, a decrease of $3.4 million or 54%.

Loans sold to investors in the second quarter of 2023 totaled ~~$176,000~~$39.7 million compared to $84.6 million during the ~~third~~second quarter of ~~2017~~2022, a decrease of $44.9 million or 53%. Loans sold to investors in the first six months of 2023 totaled $77.8 million compared to ~~$398,000~~$182.9 million during the ~~third~~first six months of 2022, a decrease of $105.1 million or 57%.

The decrease for both the quarterly and year-to-date comparisons was primarily attributable to a reduction in residential mortgage activity due to increases in residential mortgage loan interest rates.

Valuation adjustment on servicing rights

The valuation adjustment on servicing rights was $0 for both the second quarter of ~~2016. During~~2023 and 2022. For the first ~~nine~~six months of ~~2017, gains~~2023, the valuation adjustment on ~~sale of commercial and agricultural loans totaled $565,000~~servicing rights was $0 compared to $1.7 million ~~during~~for the ~~same period~~first six months of 2022. HTLF sold its mortgage servicing rights portfolio in ~~2016.~~the first quarter of 2023. HTLF recovered its valuation allowance in the first quarter of 2022 due to recent increases in residential mortgage loan interest rates.

~~Securities Gains, Net~~Income on bank owned life insurance

~~Securities gains, net,~~Income on bank owned life insurance totaled ~~$1.7~~$1.2 million for the ~~third~~second quarter of ~~2017 compared to $1.6~~2023, an increase of $697,000 from $523,000 recorded in the second quarter of 2022. For the first six months of 2023, income on bank owned life insurance totaled $2.2 million, an increase of $1.1 million from $1.1 million for the ~~third quarter of 2016, which is an increase of $95,000 or 6%. For the~~ first ~~nine~~six months of ~~2017, securities gains, net, totaled $5.6 million compared~~2022. The increase for both the quarterly and year-to-date comparisons was attributable to ~~$9.7 million during the first nine months of 2016, a decrease of $4.2 million or 43%.~~market value changes.

Other ~~Noninterest Income~~noninterest income

Other noninterest income totaled ~~$1.4~~$407,000 for the second quarter of 2023 compared to $3.0 million for the ~~third~~same quarter of ~~2017~~2022, a decrease of $2.6 million or 87%. For the first six months of 2023, other noninterest income was $1.9 million compared to ~~$1.0~~$3.9 million for the ~~third quarter~~first six months of ~~2016, an increase~~2022, a decrease of ~~$381,000~~$2.0 million or ~~37%~~52%. ~~For~~The decrease for both the ~~nine months ended September 30, 2017, other noninterest income decreased $51,000 or 2%~~quarterly and year-to-date comparisons was primarily attributable to ~~$2.9 million from $3.0~~gains of $1.9 million recorded in the ~~same period in 2016. During the third~~second quarter of ~~2017, $357,000~~2022 on the sale of ~~other noninterest income was recorded related to recoveries on acquired loans that had been charged off prior to the acquisition dates.~~all VISA Class B shares held by two subsidiary banks.

Noninterest Expenses

The tables below show ~~Heartland's~~ noninterest expenses for the three- and ~~nine-month periods~~six- months ended ~~September~~June 30, ~~2017~~2023, and ~~2016,~~2022, 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			2023		2022		Change		% Change
Salaries and employee benefits	$	128,118	$	124,432	$	3,686		3	%	Salaries and employee benefits	$	62,099	$	64,032	$	(1,933)	(3)	%
Occupancy	16,352		15,322		1,030			7		Occupancy	6,691		7,094		(403)		(6)
Furniture and equipment	7,913		7,301		612			8		Furniture and equipment	3,063		3,033		30		1
Professional fees	24,342		20,481		3,861			19		Professional fees	15,194		14,457		737		5
FDIC insurance assessments	2,610		3,468		(858		)	(25	)	FDIC insurance assessments	3,035		1,530		1,505		98
Advertising	5,141		4,174		967			23		Advertising	3,052		1,283		1,769		138
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	1,715		2,083		(368)		(18)
Other real estate and loan collection expenses	1,774		1,871		(97		)	(5	)	Other real estate and loan collection expenses	348		78		270		346
Loss on sales/valuations of assets, net	1,642		1,064		578			54
Gain on sales/valuations of assets, net										Gain on sales/valuations of assets, net	(3,372)		(3,230)		(142)		(4)
Acquisition, integration and restructuring costs										Acquisition, integration and restructuring costs	1,892		2,412		(520)		(22)
Partnership investment in tax credit projects										Partnership investment in tax credit projects	154		737		(583)		(79)
Other noninterest expenses	27,653		27,160		493			2		Other noninterest expenses	15,575		12,970		2,605		20
Total noninterest expenses	$	219,797	$	209,756	$	10,041		5	%	Total noninterest expenses	$	109,446	$	106,479	$	2,967	3	%


	Six Months Ended June 30,
	2023		2022		Change		% Change
Salaries and employee benefits	$	124,248	$	130,206	$	(5,958)	(5)	%
Occupancy	13,900		14,456		(556)		(4)
Furniture and equipment	5,978		6,552		(574)		(9)
Professional fees	27,991		27,997		(6)		—
FDIC insurance assessments	6,314		3,146		3,168		101
Advertising	5,037		2,838		2,199		77
Core deposit and customer relationship intangibles amortization	3,503		4,137		(634)		(15)
Other real estate and loan collection expenses	503		273		230		84
Gain on sales/valuations of assets, net	(2,257)		(3,184)		927		(29)
Acquisition, integration and restructuring costs	3,565		2,988		577		19
Partnership investment in tax credit projects	692		814		(122)		(15)
Other noninterest expenses	31,015		27,053		3,962		15
Total noninterest expenses	$	220,489	$	217,276	$	3,213	1	%

For the ~~third~~second quarter of ~~2017,~~2023, total noninterest expenses ~~totaled $78.8~~were $109.4 million compared to ~~$68.4~~$106.5 million ~~during~~for the ~~third~~second quarter of ~~2016,~~2022, an increase of ~~$10.3~~$3.0 million or ~~15%~~3%. For the first ~~nine~~six months of ~~2017,~~2023, noninterest expenses totaled ~~$219.8~~$220.5 million compared to ~~$209.8~~$217.3 million during the first ~~nine~~six months of ~~2016,~~2022, an increase of ~~$10.0~~$3.2 million or 5%less than 1%.

Notable changes in noninterest expense categories for the three- and six- months ended June 30, 2023 and 2022 are as follows:

Salaries and ~~Employee Benefits~~employee benefits

~~The largest component~~Salaries and employee benefits totaled $62.1 million for the second quarter of ~~noninterest expenses,~~2023 compared to $64.0 million for the second quarter of 2022, a decrease of $1.9 million or 3%. For the first six months of 2023, salaries and employee benefits ~~increased $4.5~~totaled $124.2 million compared to $130.2 million for the first six months of 2022, a decrease of $6.0 million or ~~11% during~~5%. The decrease for both the ~~third quarter of 2017 as compared to the same quarter in 2016. The increase is~~quarterly and year-to-date comparisons was primarily attributable to ~~the acquisition~~a reduction 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.~~lower incentive compensation expense.

~~Occupancy~~

~~Occupancy expense~~FDIC insurance assessments

FDIC insurance assessments totaled ~~$6.2~~$3.0 million for the ~~third~~second quarter of ~~2017~~2023 compared to ~~$5.1~~$1.5 million for the ~~third~~second quarter of ~~2016,~~2022, an increase of ~~$1.1~~$1.5 million or 98%. For the first six months of 2023, FDIC insurance assessments totaled $6.3 million compared to $3.1 million, an increase of $3.2 million. The increase for both the quarterly and year-to-date comparisons was attributable to assessment rate changes that were effective with the first quarter 2023 assessment.

HTLF is expecting an additional FDIC assessment expense associated with the special assessment that was proposed by the FDIC in May 2023. The proposal would assess a 12.5 basis point annual special assessment on the uninsured deposits reported by HTLF at December 31, 2022, which was $7.70 billion. The special assessment excludes the first $5 billion of uninsured deposits and would be in place for two years. The full expense for the two year period would be recognized upon approval of the assessment.

Advertising

Advertising totaled $3.1 million for the second quarter of 2023, an increase of $1.8 million from $1.3 million for the second quarter of 2022. Advertising totaled $5.0 million for the first six months of 2023 compared to $2.8 million for the first six months of 2022, an increase of $2.2 million or 77%. The increase for both the quarterly and year-to-date comparisons was driven by deposit acquisition campaigns launched in 2023.

Gain on sales/valuations of assets, net

Net gains on sales/valuations of assets were $3.4 million for the second quarter of 2023 compared to $3.2 million for the second quarter of 2022. For the first six months of 2023, net gains on sales/valuations of assets totaled $2.3 million compared to $3.2 million for the first six months of 2022.

In the second quarter of 2023, HTLF recorded a gain of $4.3 million associated with the sale of HTLF's Retirement Plan Services recordkeeping and administrative services business, which was partially offset by losses on various other repossessed real estate properties. In the first quarter of 2023, HTLF recorded $813,000 of losses on fixed assets associated with branch optimization activities and a loss of $193,000 associated with the sale of the mortgage servicing rights portfolio.

During the second quarter of 2022, two branches in Illinois were sold for a gain of $3.0 million, and a gain of $413,000 was recorded in conjunction with the sale of an insurance subsidiary.

Acquisition, integration and restructuring costs

Acquisition, integration and restructuring costs totaled $1.9 million in the second quarter of 2023 compared to $2.4 million in the second quarter of 2022, a decrease of $520,000 or 22%. For the ~~nine-month~~first six months of 2023, acquisition, integration and restructuring costs totaled $3.6 million compared to $3.0 million for the same period ~~ending September 30, 2017, occupancy expense was $16.4 million,~~of 2022, an increase of ~~$1.0~~$577,000 or 19%. The change in expenses is due to the progression of the charter consolidation project which will continue through the end of 2023.

Other noninterest expenses

Other noninterest expenses totaled $15.6 million in the second quarter of 2023 compared to $13.0 million in the second quarter of 2022, an increase of $2.6 million or 7%20%. Credit card processing expenses increased $909,000 or 27% to $4.3 million from $3.4 million. Fraud losses increased $739,000 to $948,000 from $209,000.

For the ~~same period~~first six months of 2023, other noninterest expenses totaled $31.0 million compared to $27.1 million for the first six months of 2022, an increase of $4.0 million or 15%. Credit card processing expenses increased $1.5 million or 22% to $8.4 million from $6.9 million. Fraud losses increased $1.2 million to $2.3 million from $1.2 million.

The increases in ~~2016. The increase~~credit card processing expenses for both the three- and ~~nine-month periods is primarily attributable to the additional locations acquired in the Citywide Banks of Colorado, Inc. transaction.~~

~~Professional Fees~~

Professional fees increased $2.5 million or 41% during the third 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.

~~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 issix-month comparisons are primarily due to ~~the costs of a deposit campaign promotion recorded during the first quarter of 2017.~~higher volumes and increased rebate expense.

~~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 top~~HTLF's strategic priorities is to improve its adjusted efficiency ratio, on a fully tax-equivalent basis ~~by reducing~~(non-GAAP), with the goal of maintaining it ~~to 65%~~at or ~~less.~~below 57%. During the ~~third~~second quarter of ~~2017, Heartland's~~2023, the efficiency ratio was 60.93% (59.82% on aan adjusted fully tax-equivalent basis, ~~was 64.54% in comparison with 63.88% during~~non-GAAP) compared to 60.16% (57.66% on an adjusted fully tax-equivalent basis, non-GAAP) for the ~~third~~second quarter of ~~2016. For~~2022.

During the ~~nine-month period ended September 30, 2017,~~first six months of 2023, the efficiency ratio was 60.94% (58.48% on aan adjusted fully tax-equivalent basis, ~~increased by 35 basis points to 66.58% when~~non-GAAP) compared to 62.75% (61.02% on an adjusted fully tax-equivalent basis, non-GAAP) for the ~~same nine-month period~~first six months of 2022.

HTLF continues to pursue strategies to improve operational efficiency, which include the following initiatives:

Consolidation of its bank charters

Charter consolidation is designed to eliminate redundancies and improve HTLF’s operating efficiency and capacity to support ongoing product and service enhancements and current and future growth. Through the end of the second quarter of 2023, eight charters have been consolidated into HTLF Bank, and subsequent to June 30, 2023, one additional charter was consolidated. The consolidated charters are now operating as divisions of HTLF Bank. The remaining charters are expected to be consolidated by the end of October 2023.

Consolidation restructuring costs are projected to be $19-20 million with approximately $6-$7 million of expenses remaining to be incurred in ~~2016. Heartland's efficiency ratio will show variability from quarter to quarter as a result of acquisition activities and also from~~2023. Total costs incurred since the ~~seasonality and related revenue and expense timing differences that are inherent~~project started in the ~~residential mortgage business.~~fourth quarter of 2021 through June 30, 2023, were $12.9 million, of which $1.9 million was incurred in the second quarter of 2023. Total charter consolidation costs for the first six months of 2023 totaled $3.6 million. HTLF has realized some operating efficiencies and financial benefits with the completed charter consolidations. The resulting efficiencies and expansion in capacity are projected to generate benefits of approximately $20 million annually when the project is completed with core operating expenses expected to decline to 2.10% or less of average assets.

Branch optimization strategy

HTLF continues to review its branch network and physical facilities as part of its branch optimization strategy, which may result in write-downs of fixed assets in future periods.

Income Taxes

~~Heartland's~~The effective tax rate was ~~28.74%~~23.74% for the ~~third~~second quarter of ~~2017~~2023, compared to ~~29.02%~~22.89% for the ~~third~~second quarter of ~~2016.~~ 2022. The following items impacted the second quarter 2023 and 2022 tax calculations:

•Solar energy tax credits of $0 compared to $702,000.

•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$311,000 compared to ~~21.01% during the third quarter of 2016.~~$135,000.

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~~$90,000 compared to ~~a partnership investment in a historic~~$75,000.

•Historic rehabilitation tax ~~credit project. The level~~credits of ~~tax-exempt~~$167,000 compared to $63,000.

•Tax-exempt interest income as a percentage of pre-tax income ~~was 25.63% during the first nine months~~ of ~~2017~~12.40% compared to ~~19.55% during the first nine months~~11.05%.

•Tax expense of ~~2016.~~

~~As a result of the adoption of ASU 2016-09, "Compensation-Stock Compensation (Topic 718)" on January 1, 2017, Heartland's income taxes for the first nine months of 2017 included a tax benefit of $1.1 million~~$121,000 compared to $43,000 resulting from the vesting of ~~outstanding~~ restricted stock ~~unit awards~~units.

•Tax expense of $1.1 million compared to $109,000 resulting from the disallowed interest expense related to tax-exempt loans and ~~the exercise of stock options. The majority of this tax benefit was recorded~~securities, aligning with increases in ~~the first quarter of 2017. Exclusive of this tax benefit, Heartland's~~total interest expense.

The effective tax rate was 23.10% for the ~~first nine~~six 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 held for sale, gains on sale of mortgage loans into the secondary market, the servicing of mortgage loans for others and loan origination fee income. See Note 9ended June 30, 2023, compared 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~~22.47% 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 ninesix months ended ~~September~~June 30, ~~2017, were $9.7 million compared to $3.5 million~~2022. The following items impacted HTLF's tax calculation 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.~~2023 and 2022:

•Solar energy tax credits of $310,000 compared to $702,000.

•Federal low-income housing tax credits of $621,000 compared to $269,000.

•New markets tax credits of $180,000 compared to $150,000.

•Historic rehabilitation tax credits of $425,000 compared to $127,000.

•Tax-exempt interest income as a percentage of pre-tax income of 12.30% compared to 12.58%.

•Tax expense of $75,000 compared to a tax benefit of $129,000 resulting from the vesting of restricted stock units.

•Tax expense of $2.0 million compared to $167,000 resulting from the disallowed interest expense related to tax-exempt loans and securities, aligning with increases in total interest expense.

FINANCIAL CONDITION

Total assets ~~of Heartland~~ were ~~$9.76~~$20.22 billion at ~~September~~June 30, ~~2017, an increase~~2023, a decrease 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$19.5 million or ~~2% since~~less than 1% from $20.24 billion at December 31, ~~2016.~~2022. Securities represented ~~24%~~33% and 35% of total assets at ~~September~~June 30, ~~2017,~~2023, and ~~26% of total assets at~~ December 31, ~~2016.~~2022, respectively.

~~Lending Activities~~

LENDING ACTIVITIES

Total loans held to maturity were ~~$6.37~~$11.72 billion at ~~September~~June 30, ~~2017, compared to $5.35~~2023, and $11.43 billion at ~~year-end 2016,~~December 31, 2022, an increase of ~~$1.02 billion~~$289.6 million or ~~19%~~3%. ~~This change includes $96.4 million of total loans held to maturity, at fair value, acquired~~

The following table shows the changes in loan balances by loan category since December 31, 2022, in thousands:


	June 30, 2023		December 31, 2022		Change		% Change
Commercial and industrial	$	3,590,680	$	3,464,414	$	126,266	4	%
Paycheck Protection Program ("PPP")	4,139		11,025		(6,886)		(62)
Owner occupied commercial real estate	2,398,698		2,265,307		133,391		6
Non-owner occupied commercial real estate	2,530,736		2,330,940		199,796		9
Real estate construction	1,013,134		1,076,082		(62,948)		(6)
Agricultural and agricultural real estate	839,817		920,510		(80,693)		(9)
Residential mortgage	828,437		853,361		(24,924)		(3)
Consumer	512,333		506,713		5,620		1
Total loans held to maturity	$	11,717,974	$	11,428,352	$	289,622	3	%

The loan growth in the ~~Founders Bancorp transaction~~first six months of 2023 was primarily in commercial and ~~$985.4 million of total loans held~~commercial real estate, which was attributable 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 million or 1% since year-end 2016. Excluding the loans acquired in the Citywide Banks of Colorado, Inc. transaction, total loans held to maturity increased $62.9 million during the third quarter of 2017, and six of the Heartland bank subsidiaries experienced netan emphasis on organic loan growth ~~during~~and further market penetration in various HTLF growth markets. The growth was offset by decreases in real estate construction, agricultural and agricultural real estate and residential mortgage.

Notable changes in the ~~quarter. Price competition for quality~~loan portfolio include:

•Commercial and industrial loans ~~remains intense,~~increased $126.3 million or 4% to $3.59 billion at June 30, 2023, compared to $3.46 billion at December 31, 2022.

•Owner occupied commercial real estate loans increased $133.4 million or 6% to $2.40 billion at June 30, 2023, compared to $2.27 billion at December 31, 2022.

•Non-owner occupied commercial real estate loans increased $199.8 million or 9% to $2.53 billion at June 30, 2023, compared to $2.33 billion at December 31, 2022.

•Real estate construction loans decreased $62.9 million or 6% to $1.01 billion at June 30, 2023, compared to $1.08 billion at December 31, 2022.

•Agricultural and ~~Heartland remains committed~~agricultural real estate loans decreased $80.7 million or 9% to ~~its pricing strategy, disciplined credit approach and emphasis on the client relationship.~~$839.8 million at June 30, 2023 compared to $920.5 million at December 31, 2022.

The table below presents the composition of the loan portfolio as of ~~September~~June 30, ~~2017,~~2023, and December 31, ~~2016,~~2022, in thousands:


	June 30, 2023				December 31, 2022
	Amount		Percent		Amount		Percent
Loans receivable held to maturity:
Commercial and industrial	$	3,590,680	30.63	%	$	3,464,414	30.31	%
PPP	4,139		0.04		11,025		0.10
Owner occupied commercial real estate	2,398,698		20.47		2,265,307		19.82
Non-owner occupied commercial real estate	2,530,736		21.60		2,330,940		20.40
Real estate construction	1,013,134		8.65		1,076,082		9.42
Agricultural and agricultural real estate	839,817		7.17		920,510		8.05
Residential mortgage	828,437		7.07		853,361		7.47
Consumer	512,333		4.37		506,713		4.43
Gross loans receivable held to maturity	11,717,974		100.00	%	11,428,352		100.00	%






Allowance for credit losses-loans	(111,198)				(109,483)
Loans receivable, net	$	11,606,776			$	11,318,869

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

ALLOWANCE FOR CREDIT LOSSES

Loans secured by real estate, either fully or partially, totaled $4.25 billion or 67% of gross loans at September 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, and December 31, 2016, are listed below, in thousands:

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

~~Allowance For Loan 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.~~practice. 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~~estimates section of ~~our~~HTLF's Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2022.

~~Nonperforming~~Total Allowance for Lending Related Credit Losses

The total allowance for lending related credit losses was $129.8 million at June 30, 2023, which was 1.11% of loans, ~~were $65.8~~compared to $129.7 million or ~~1.03%~~1.13% of ~~total loans at September 30, 2017, compared to $64.4 million or 1.20% of total~~ loans at December 31, ~~2016. At September~~2022. The following table shows, in thousands, the components of the allowance for lending related credit losses as of June 30, ~~2017, approximately $29.6~~2023, and December 31, 2022:


	June 30, 2023				December 31, 2022
	Amount		% of Allowance		Amount		% of Allowance
Quantitative	$	82,417	63.48	%	$	84,409	65.09	%
Qualitative/Economic Forecast	47,417		36.52		45,270		34.91

Total	$	129,834	100.00	%	$	129,679	100.00	%

Quantitative Allowance

The quantitative allowance decreased $2.0 million or ~~45%~~2% to $82.4 million or 63% of ~~Heartland's nonperforming~~the total allowance for lending related credit losses at June 30, 2023, compared to $84.4 million or 65% of the total allowance at December 31, 2022. Specific reserves for individually assessed loans ~~had individual loan balances exceeding $1.0 million and represented loans to eight borrowers. The portion of Heartland's~~

~~nonperforming loans covered by government guarantees was $23.2~~totaled $8.4 million at ~~September~~June 30, ~~2017, and $17.3~~2023, an increase of $1.3 million or 18% from $7.1 million at December 31, ~~2016, which includes $16.2 million and $14.3 million, respectively, of repurchased residential real estate loans.~~2022.

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

Qualitative Allowance/Economic Forecast

The qualitative allowance totaled $47.4 million or 37% of the total allowance for ~~loan~~lending related credit losses ~~was 0.86% of loans~~ at ~~September~~June 30, ~~2017,~~2023, compared to ~~1.02%~~$45.3 million or 35% at December 31, ~~2016,~~2022.

HTLF has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in HTLF's methodology. HTLF continued to use a one year reasonable and ~~83.41%~~supportable forecast period. At June 30, 2023, Moody's June 5, 2023, baseline forecast scenario was utilized, and ~~84.37% of nonperforming loans at September 30, 2017, and December 31, 2016, respectively. Excluding~~management considered other downturn forecast scenarios, which anticipated a moderate recession developing withing the ~~acquired loans covered by~~next twelve months, in addition to the ~~valuation reserves,~~baseline forecast to support the ~~ratio of~~macroeconomic outlook used in the allowance for ~~loan~~credit losses to outstanding loans was 1.17% at September 30, 2017, and 1.22% at December 31, 2016. At September 30, 2017, valuation reserves totaled $42.8 million and covered $1.75 billion of acquired loans. At December 31, 2016, valuation reserves totaled $25.3 million and covered $956.0 million of acquired loans.calculation.

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

Allowance for Credit Losses-Loans

The ~~table~~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~~2023 and ~~2016,~~2022, in thousands:


	Three Months Ended June 30,
	2023			2022
Balance at beginning of period	$	112,707		$	100,522

Provision for credit losses	7,829			1,545
Recoveries on loans previously charged off	275			759
Charge-offs on loans	(9,613)			(1,473)
Balance at end of period	$	111,198		$	101,353
Allowance for credit losses for loans as a percent of loans	0.95		%	0.95		%
Annualized ratio of net charge-offs to average loans	0.32		%	0.03		%


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				2023			2022
Balance at beginning of period	$	54,324		$	48,685		Balance at beginning of period	$	109,483		$	110,088
Provision for loan losses	10,235			9,513

Provision for credit losses							Provision for credit losses	10,013			4,173
Recoveries on loans previously charged off	2,569			4,294			Recoveries on loans previously charged off	3,466			1,782
Charge-offs on loans	(12,243		)	(7,839		)	Charge-offs on loans	(11,764)			(14,690)
Balance at end of period	$	54,885		$	54,653		Balance at end of period	$	111,198		$	101,353
Annualized ratio of net charge offs to average loans	0.23		%	0.09		%
Allowance for credit losses for loans as a percent of loans							Allowance for credit losses for loans as a percent of loans	0.95		%	0.95		%
Annualized ratio of net charge-offs to average loans							Annualized ratio of net charge-offs to average loans	0.15		%	0.25		%

The allowance for credit losses for loans totaled $111.2 million at June 30, 2023, compared to $109.5 million at December 31, 2022, and $101.4 million at June 30, 2022. The allowance for credit losses for loans at June 30, 2023, was 0.95% of loans compared to 0.96% of loans at December 31, 2022. The following items impacted the allowance for credit losses for loans for the six months ended June 30, 2023:

•Net charge-offs for the first six months of 2023 totaled $8.3 million compared to net charge-offs of $12.9 million for the first six months of 2022, which was a decrease of $4.6 million. Included in net charge-offs for the first six months of 2023 was a $5.3 million charge-off related to an overdraft, the result of a fraud incident impacting the account of a single long-term customer. Included in net charge-offs for the first six months of 2022 were two charge-offs due to customer fraud totaling $9.2 million related to two lending relationships which had collateral deficiencies.

•Loan growth totaled $289.6 million for the first six months of 2023.

The following tables show, in thousands, the changes in the allowance for unfunded commitments for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended June 30,
	2023		2022
Balance at beginning of period	$	21,086	$	16,079
Provision (benefit) for credit losses	(2,450)		1,701
Balance at end of period	$	18,636	$	17,780

	Six Months Ended June 30,
	2023		2022
Balance at beginning of period	$	20,196	$	15,462


Provision (benefit) for credit losses	(1,560)		2,318
Balance at end of period	$	18,636	$	17,780

The allowance for unfunded commitments totaled $18.6 million as of June 30, 2023, compared to $20.2 million as of December 31, 2022, and $17.8 million as of June 30, 2022. The decrease in the allowance for unfunded commitments in the first six months of 2023 was primarily due to a reduction of $164.2 million in unfunded commitments for construction loans, which carry the highest loss rate. Total unfunded commitments increased $175.5 million or 4% to $4.91 billion at June 30, 2023, compared to $4.73 billion at December 31, 2022.

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 3, "Loans" of the consolidated financial statements in this Quarterly Report on Form 10-Q.

The nonpass loans totaled $568.2 million or 4.8% of total loans as of June 30, 2023, compared to $533.3 million or 4.7% of total loans as of December 31, 2022. As of June 30, 2023, the nonpass loans consisted of approximately 47% watch loans and 53% substandard loans compared to approximately 48% watch loans and 52% substandard loans as of December 31, 2022. The percent of nonpass loans on nonaccrual status as of June 30, 2023, was 11%.

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


														June 30,						December 31,
NONPERFORMING ASSETS	September 30,						December 31,
	2017			2016			2016			2015				2023			2022			2022			2021
Nonaccrual loans	$	63,456		$	57,799		$	64,299		$	39,655		Nonaccrual loans	$	61,956		$	62,909		$	58,231		$	69,369
Loans contractually past due 90 days or more	2,348			105			86			—			Loans contractually past due 90 days or more	1,459			95			273			550
Total nonperforming loans	65,804			57,904			64,385			39,655			Total nonperforming loans	63,415			63,004			58,504			69,919
Other real estate	13,226			10,740			9,744			11,524			Other real estate	2,677			4,528			8,401			1,927
Other repossessed assets	773			821			663			485			Other repossessed assets	5			—			26			43
Total nonperforming assets	$	79,803		$	69,465		$	74,792		$	51,664		Total nonperforming assets	$	66,097		$	67,532		$	66,931		$	71,889
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 loans to total loans	0.54		%	0.59		%	0.51		%	0.70		%
Nonperforming assets to total loans plus repossessed property	1.25		%	1.27		%	1.39		%	1.03		%	Nonperforming assets to total loans plus repossessed property	0.56			0.63			0.59			0.72
Nonperforming assets to total assets	0.82		%	0.85		%	0.91		%	0.67		%	Nonperforming assets to total assets	0.33			0.34			0.33			0.37

(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 of 2017~~three- and ~~the first nine~~six- months ~~of 2017,~~ended June 30, 2023, in thousands:


														Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
	Nonperforming Loans			Other Real Estate Owned			Other Repossessed Assets			Total Nonperforming Assets
June 30, 2017	$	66,091		$	9,269		$	675		$	76,035
March 31, 2023													March 31, 2023	$	58,240	$	7,438	$	24	$	65,702
Loan foreclosures	(425		)	408			17			—			Loan foreclosures	(39)		28		11		—
Net loan charge-offs	(4,871		)	—			—			(4,871		)	Net loan charge-offs	(9,338)		—		—		(9,338)
Acquired nonperforming assets	1,075			6,916			—			7,991

New nonperforming loans	9,117			—			—			9,117			New nonperforming loans	19,805		—		—		19,805
Reduction of nonperforming loans⁽¹⁾	(5,183		)	—			—			(5,183		)	Reduction of nonperforming loans(1)	(5,253)		—		—		(5,253)
OREO/Repossessed assets sales proceeds	—			(3,315		)	(13		)	(3,328		)	OREO/Repossessed assets sales proceeds	—		(3,915)		(26)		(3,941)
OREO/Repossessed assets writedowns, net	—			(52		)	(4		)	(56		)	OREO/Repossessed assets writedowns, net	—		(874)		(4)		(878)
Net activity at Citizens Finance Co.	—			—			98			98
September 30, 2017	$	65,804		$	13,226		$	773		$	79,803

June 30, 2023													June 30, 2023	$	63,415	$	2,677	$	5	$	66,097

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

Nonperforming
Loans

Other
Real Estate
Owned

Other
Repossessed
Assets

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

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


	Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
December 31, 2022	$	58,504	$	8,401	$	26	$	66,931
Loan foreclosures	(258)		239		19		—
Net loan charge-offs	(8,298)		—		—		(8,298)

New nonperforming loans	24,431		—		—		24,431
Reduction of nonperforming loans(1)	(10,964)		—		—		(10,964)
OREO/Repossessed assets sales proceeds	—		(5,047)		(30)		(5,077)
OREO/Repossessed assets writedowns, net	—		(916)		(10)		(926)

June 30, 2023	$	63,415	$	2,677	$	5	$	66,097

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

Total nonperforming assets decreased $834,000 or 1% to $66.1 million or 0.33% of total assets at June 30, 2023, compared to $66.9 million or 0.33% of total assets at December 31, 2022. Nonperforming loans were $63.4 million at June 30, 2023, compared to $58.5 million at December 31, 2022, which represented 0.54% and 0.51% of total loans at June 30, 2023, and December 31, 2022, respectively. At June 30, 2023, approximately $40.8 million or 64% of HTLF's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to sixteen borrowers. The portion of the nonperforming nonresidential real estate loans covered by government guarantees totaled $10.6 million and $12.5 million at June 30, 2023, and December 31, 2022, respectively.

SECURITIES

~~Securities~~

The composition of ~~Heartland's~~the securities portfolio is managed to ~~maximize~~ meet liquidity needs 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%~~33% and ~~26%~~35% of total assets at ~~September~~June 30, ~~2017,~~2023, and December 31, ~~2016,~~2022, respectively. Total ~~available for sale~~ securities carried at fair value as of ~~September~~June 30, ~~2017,~~2023, were ~~$2.09~~$5.80 billion, ~~an increase~~a decrease of ~~$247.5~~$349.1 million or ~~13%~~6% from ~~$1.85~~$6.15 billion at December 31, ~~2016. The increase is primarily attributable~~2022.

As of June 30, 2023, and December 31, 2022, securities with a carrying value of $2.88 billion and $1.49 billion, respectively, were pledged to ~~the Citywide Banks~~secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law. As of ~~Colorado, Inc. transaction completed in the third quarter~~June 30, 2023, approximately $3.73 billion of ~~2017.~~securities remained available to pledge.

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,~~2023, and December 31, ~~2016,~~2022, in thousands:


	June 30, 2023				December 31, 2022
	Amount		Percent		Amount		Percent
U.S. treasuries	$	31,679	0.47	%	$	31,699	0.45	%
U.S. agencies	43,036		0.64		43,135		0.61
Obligations of states and political subdivisions	1,683,912		25.11		1,708,840		24.24
Mortgage-backed securities - agency	1,686,646		25.16		1,772,105		25.13
Mortgage-backed securities - non-agency	1,995,809		29.76		2,181,876		30.94
Commercial mortgage-backed securities - agency	83,825		1.25		85,123		1.21
Commercial mortgage-backed securities - non-agency	617,992		9.22		659,459		9.35
Asset-backed securities	412,716		6.16		416,054		5.90
Corporate bonds	56,411		0.84		57,942		0.82

Equity securities with a readily determinable fair value	20,688		0.31		20,314		0.29
Other securities	72,291		1.08		74,567		1.06
Total securities	$	6,705,005	100.00	%	$	7,051,114	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~~6.20 years as of ~~September~~June 30, ~~2017, compared to 4.34~~2023, and 6.19 years ~~at year-end 2016.~~as of December 31, 2022.

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~~2023, HTLF had ~~$23.2~~$72.3 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~~stock. These securities ~~were classified as~~are recorded on the consolidated balance sheets in other ~~securities~~investments held at cost.

~~Deposits~~DEPOSITS

Total deposits were ~~$8.23~~$17.66 billion as of ~~September~~June 30, ~~2017,~~2023, compared to ~~$6.85~~$17.51 billion at ~~year-end 2016,~~December 31, 2022, an increase of ~~$1.38~~$150.5 million or 1%. As of June 30, 2023, 66% of HTLF's deposits were insured or collateralized.

HTLF maintains a granular and diverse deposit base. As of June 30, 2023, no Bank Market represented more than 12% of total customers deposits, and no major industry represented more than 10% of total commercial customer deposits.

The following table shows the changes in deposit balances by deposit type since year-end 2022, in thousands:


	June 30, 2023		December 31, 2022		Change		% Change
Demand-customer	$	4,897,858	$	5,701,340	$	(803,482)	(14)	%
Savings-customer	8,149,596		8,670,898		(521,302)		(6)
Savings-wholesale and institutional	623,000		1,323,493		(700,493)		(53)
Total savings	8,772,596		9,994,391		(1,221,795)		(12)
Time-customer	1,597,849		851,539		746,310		88
Time-wholesale	2,395,240		965,739		1,429,501		148
Total time	3,993,089		1,817,278		2,175,811		120
Total deposits	$	17,663,543	$	17,513,009	$	150,534	1	%

Total customer deposits	$	14,645,303	$	15,223,777	$	(578,474)	(4)	%
Total wholesale and institutional deposits	3,018,240		2,289,232		729,008		32	%
Total deposits	$	17,663,543	$	17,513,009	$	150,534	1	%

At June 30, 2023, HTLF had $3.02 billion ~~or 20%. This increase~~of wholesale and institutional deposits, of which $623.0 million was included ~~$181.5~~in savings deposits and $2.40 billion was included in time deposits. HTLF had $1.32 billion of wholesale savings and institutional deposits and $965.7 million of wholesale time deposits at fair value, acquired in the Founders Bancorp transaction and $1.21 billion of deposits, at fair value, acquired in the Citywide Banks of Colorado, Inc. transaction. Exclusive of these transactions, total deposits decreased $7.1 million or less than 1% since December 31, ~~2016.~~2022.

The table below presents ~~in thousands,~~ the composition of ~~Heartland's~~ deposits by category as of ~~September~~June 30, ~~2017,~~2023, and December 31, ~~2016:~~2022, in thousands:


	June 30, 2023				December 31, 2022
	Amount		Percent		Amount		Percent
Demand-customer	$	4,897,858	27.73	%	$	5,701,340	32.55	%
Savings-customer	8,149,596		46.13		8,670,898		49.52
Savings-wholesale and institutional	623,000		3.53		1,323,493		7.56
Time-customer	1,597,849		9.05		851,539		4.86
Time-wholesale	2,395,240		13.56		965,739		5.51
Total	$	17,663,543	100.00	%	$	17,513,009	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,~~2023, and December 31, ~~2016,~~2022, in thousands:


	June 30, 2023		December 31, 2022		Change		% Change
Securities sold under agreement to repurchase	$	35,913	$	95,303	$	(59,390)	(62)	%

Advances from the FHLB	—		50,000		(50,000)		(100)
Advances from the federal discount window	—		224,000		(224,000)		(100)
Other short-term borrowings	8,451		6,814		1,637		24
Total	$	44,364	$	376,117	$	(331,753)	(88)	%

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~~sources are utilized in varying degrees depending on their pricing and availability. ~~All of Heartland's bank subsidiaries~~The Banks own FHLB stock in ~~one of~~either the ~~Chicago,~~ Dallas or Des Moines ~~San Francisco or Topeka FHLBs,~~FHLB, 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~~Short-term borrowings ~~of Heartland was $171.9~~totaled $44.4 million at ~~September~~June 30, ~~2017,~~2023, compared to ~~$306.5~~$376.1 million at ~~year-end 2016,~~December 31, 2022, a decrease of ~~$134.6~~$331.8 million or ~~44%~~88%.

~~All~~The Banks have pledged securities that provided borrowing capacity totaling $630.4 million as of June 30, 2023, to the BTFP, a Federal Reserve Bank program created in the first quarter of 2023 to assist banks in meeting all the liquidity needs of depositors. There have been no advances from the BTFP since the inception of the ~~Heartland bank subsidiaries~~program.

The Banks 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.~~tool. 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~~$35.9 million at ~~September~~June 30, ~~2017,~~2023, compared to ~~$229.6~~$95.3 million at December 31, ~~2016,~~2022, a decrease of ~~$95.6~~$59.4 million or ~~42%~~62%. ~~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, 2022. This revolving credit line agreement, which has $100.0 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~~2023, 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, 2023, and December 31, ~~2016.~~2022.

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,~~2023, and December 31, ~~2016:~~2022, in thousands:


	June 30, 2023		December 31, 2022		Change		% Change
Advances from the FHLB	$	680	$	740	$	(60)	(8)	%

Trust preferred securities	148,806		148,284		522		—


Contracts payable	80		82		(2)		(2)
Subordinated notes	222,837		222,647		190		—

Total	$	372,403	$	371,753	$	650	—	%

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 30, 2017, the amount of other borrowings was $301.5 million, an increase of $12.9 million or 4% since year-end 2016.

At September 30, 2017, $137.2 million of trust preferred securities were outstanding compared to $115.2 million outstanding at December 31, 2016, which is an increase of $22.0 million or 19%. Heartland acquired $21.6 million of trust preferred securities at fair value in the Citywide Banks of Colorado, Inc. transaction.

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

Subordinated notes totaling $74.0 million and $73.9 million were outstanding at 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,~~2023, is as follows, in thousands:

Amount
Issued

Issuance
Date

Interest
Rate

Interest

Rate as of 6/30/2023(1)

Maturity
Date

Callable
Date

Heartland Financial Statutory Trust IV

10,310

03/17/2004

2.75% over LIBOR

8.26%

03/17/2034

09/17/2023

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

6.59

04/07/2036

10/07/2023

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

7.03

09/15/2037

09/15/2023

Heartland Financial Statutory Trust VII

18,042

06/26/2007

1.48% over LIBOR

6.98

09/01/2037

09/01/2023

Morrill Statutory Trust I

9,416

12/19/2002

3.25% over LIBOR

8.79

12/26/2032

09/26/2023

Morrill Statutory Trust II

9,143

12/17/2003

2.85% over LIBOR

8.36

12/17/2033

09/17/2023

Sheboygan Statutory Trust I

6,834

09/17/2003

2.95% over LIBOR

8.46

09/17/2033

09/17/2023

CBNM Capital Trust I

4,583

09/10/2004

3.25% over LIBOR

8.80

12/15/2034

09/15/2023

Citywide Capital Trust III

6,633

12/19/2003

2.80% over LIBOR

8.10

12/19/2033

10/23/2023

Citywide Capital Trust IV

4,497

09/30/2004

2.20% over LIBOR

7.59

09/30/2034

08/23/2023

Citywide Capital Trust V

12,536

05/31/2006

1.54% over LIBOR

7.09

07/25/2036

09/15/2023

OCGI Statutory Trust III

3,024

06/27/2002

3.65% over LIBOR

8.91

09/30/2032

09/30/2023

OCGI Capital Trust IV

5,539

09/23/2004

2.50% over LIBOR

8.05

12/15/2034

09/15/2023

BVBC Capital Trust II

7,339

04/10/2003

3.25% over LIBOR

8.55

04/24/2033

10/24/2023

BVBC Capital Trust III

9,672

07/29/2005

1.60% over LIBOR

7.14

09/30/2035

09/30/2023

Total trust preferred costs

148,806

(1) Effective weighted average interest rate as of June 30, 2023, was 8.17%.

Amount
Issued

Issuance
Date

Interest
Rate

Interest
Rate as of
9/30/17⁽¹⁾

Maturity
Date

Callable
Date
Heartland Financial Statutory Trust IV $ 25,774
03/17/2004 2.75% over LIBOR
4.07%⁽²⁾
03/17/2034 12/17/2017
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 VI 20,619
06/21/2007 1.48% over LIBOR
2.80%⁽⁴⁾
09/15/2037 12/15/2017
Heartland Financial Statutory Trust VII 20,619
06/26/2007 1.48% over LIBOR
2.80%⁽⁵⁾
09/01/2037 12/01/2017
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 II 8,503
12/17/2003 2.85% over LIBOR
4.17%⁽⁷⁾
12/17/2033 12/17/2017
Sheboygan Statutory Trust I 6,331
09/17/2003 2.95% over LIBOR 4.27% 09/17/2033 12/17/2017
CBNM Capital Trust I 4,297
09/10/2004 3.25% over LIBOR 4.57% 12/15/2034 12/15/2017
Citywide Capital Trust III 6,313
12/19/2003 2.80% over LIBOR 4.11% 12/19/2033 01/23/2018
Citywide Capital Trust IV

4,166
09/30/2004 2.20% over LIBOR 3.51% 09/30/2034 02/23/2018
Citywide Capital Trust V

11,241
05/31/2006 1.54% over LIBOR 2.86% 07/25/2036 12/15/2017
$ 137,358

(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.

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~~Banks 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, 2023	14.93		%	12.05		%	11.33		%	9.40		%
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	$	15,324,421		$	15,324,421		$	15,324,421		N/A
Average assets	N/A			N/A			N/A			$	19,633,800

December 31, 2022	14.76		%	11.81		%	11.07		%	9.13		%
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	$	14,937,128		$	14,937,128		$	14,937,128		N/A
Average assets	N/A			N/A			N/A			$	19,322,778

Total
Capital
(to Risk-
Weighted
Assets)

Tier 1
Capital
(to Risk-
Weighted
Assets)

Common
Equity
Tier 1
(to Risk-
Weighted
Assets)

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

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

Retained earnings that could be available for the payment of dividends to ~~Heartland~~HTLF from its banks totaled approximately ~~$244.6~~$788.5 million and ~~$182.1~~$702.2 million at ~~September~~June 30, ~~2017,~~2023, and December 31, ~~2016,~~2022, respectively, under the most restrictive minimum capital ~~requirements to remain well capitalized. At September 30, 2017, and December 31, 2016, retained~~requirements. Retained earnings that could be available for the payment of dividends to HTLF from its banks totaled approximately $482.8 million and $403.9 million at June 30, 2023, and December 31, 2022, respectively, under the ~~most restrictive minimum~~ capital requirements ~~totaled $394.9~~to remain well capitalized. These dividends are the principal source of funds to pay dividends on HTLF's common and preferred stock and to pay interest and principal on its debt.

As of June 30, 2023, management believes regulatory capital ratio buffers would withstand any changes in regulatory rules that require the inclusion of unrealized losses in the total investment portfolio and remain well capitalized.

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 ~~$308.9 million, respectively.~~for dividend periods beginning every fifth anniversary thereafter, each a reset date, the rate per annum will be reset based on a recent five-year treasury rate plus 6.675%. The earliest redemption date for the preferred shares is July 15, 2025. Dividends payable on common shares are subject to quarterly dividends payable on these outstanding preferred shares at the applicable dividend rate.

On ~~July 29, 2016, Heartland~~August 8, 2022, 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, 2025.

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 bank subsidiaries~~The Banks 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.~~customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees are conditional commitments issued by ~~Heartland's bank subsidiaries~~the Banks 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,~~2023, and December 31, ~~2016,~~2022, commitments to extend credit ~~aggregated $2.03~~totaled $4.91 billion and ~~$1.57~~$4.73 billion, respectively. Standby letters of credit ~~aggregated $52.3~~totaled $72.8 million at ~~September~~June 30, ~~2017,~~2023, and ~~$46.1~~$55.1 million at December 31, ~~2016.~~2022.

At June 30, 2023, and December 31, 2022, HTLF's banks had $878.3 million and $682.9 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, and there~~2022. There have been no 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.

There are certain legal proceedings pending against HTLF and its subsidiaries at June 30, 2023, that are ordinary routine litigation incidental to business.

HTLF continues to explore opportunities to expand the size of its banking footprint by opportunistically identifying acquisition targets that complement or supplement its current banking strategy. This includes transactions that increase penetration in existing geographic Bank Markets and expansion into adjacent markets, as well as acquisitions of fee income businesses that complement and build on existing businesses or further meet the needs of customers. 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 6 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, 2023, HTLF had $400.2 million of cash and cash equivalents, time deposits in other financial institutions of $1.5 million and securities carried at fair value of $5.80 billion. Management expects the securities portfolio to produce cash flows of approximately $1.3 billion over the next twelve months.

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.

The Banks' FHLB memberships give them the ability to borrow funds for short- and long-term purposes under a variety of programs. Short-term borrowing balances depend on commercial cash management and smaller correspondent bank relationships and, as a result, will normally fluctuate. Management believes these balances to be stable sources of funds. 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, including utilizing the BTFP.

Additional funding is provided by long-term debt and short-term borrowings. As of June 30, 2023, HTLF had $372.4 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure.

During the first six months of 2023, HTLF shifted out of overnight borrowings and into brokered CDs, which allowed for more immediate funding availability through various federal programs. As of June 30, 2023, pledged securities totaled $2.88 billion. As of June 30, 2023, approximately $3.73 billion of securities remained available to pledge.

The following table shows the source of funding, balance outstanding and available borrowing capacity as of June 30, 2023, dollars in thousands:


	As of June 30, 2023
Source	Outstanding		Available
Federal Reserve Discount Window	$	—	$	1,491,556
Bank Term Funding Program	—		630,400
Federal Home Loan Bank	680		1,178,830
Federal Funds	—		272,500
Wholesale deposits/brokered CDs	2,893,391		1,175,723
Total	$	2,894,071	$	4,749,009

HTLF is focused on loan growth and strives to fund loan growth with the least expensive source of deposits, sales of securities or borrowings. Management believes it is unlikely HTLF would be required to sell securities at a loss for such funding needs. The securities portfolio is expected to produce cash flows of approximately $1.3 billion over the next twelve months, which could be used to fund loan growth. Additionally, growing deposits will continue to be a focus. During the second quarter of 2023, HTLF introduced commercial and retail deposit campaigns, which resulted in the opening of nearly 1,300 net new commercial deposit account and over 1,400 net new retail accounts. HTLF offers the ICS and CDARS products accessed through the Intrafi network of financial institutions, which helps to reduce the amount of pledged securities.

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~~Banks and the issuance of debt and equity securities. On

At June ~~14, 2017, Heartland's~~30, 2023, the parent company had cash of $267.5 million. Additionally, HTLF has a revolving credit agreement with an unaffiliated bank, which was ~~increased to $25.0 million from $20.0~~renewed most recently on June 14, 2022. The revolving credit agreement has $100.0 million of maximum borrowing ~~capacity. At September~~capacity, of which none was outstanding at June 30, ~~2017, $5.0 million was outstanding. Heartland also has a non-revolving~~2023. This credit ~~line with the same unaffiliated bank. At September 30, 2017, $39.3 million was available on this non-revolving credit line. These credit agreements contain~~agreement contains specific financial covenants, all of which ~~Heartland was in compliance~~HTLF complied with as of ~~September~~June 30, ~~2017.~~2023.

The ability of ~~Heartland~~HTLF to pay dividends to its stockholders ~~is dependent~~depends upon dividends paid to HTLF by its ~~subsidiaries.~~Banks. The ~~bank subsidiaries~~Banks are subject to statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios ~~in Heartland's bank subsidiaries,~~at HTLF's Banks, 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~~HTLF has filed a universal shelf registration statement with the ~~current banking industry environment, Heartland seeks these opportunities for growth through acquisitions. Heartland is primarily focused on possible acquisitions in~~SEC that provides HTLF 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~~raise both debt and capital, subject to SEC rules and limitations, if HTLF's board of directors decides to do so. This registration statement expires in August 2025.

Management believes that 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 hand, 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 cashoperations and cash ~~equivalents received in acquisitions, which totaled $71.1 million during the first nine months of 2017 compared~~availability under existing borrower programs and facilities will be sufficient 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 growthmeet any recurring and additional ~~FHLB borrowings~~operating cash needs in ~~the future.~~2023.

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 bank subsidiaries~~the Banks, 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.~~Banks. 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,~~2023, and ~~September~~June 30, ~~2016,~~2022, provided the following results, in thousands:


	2023				2022
	Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base
Year 1
Down 100 Basis Points	$	610,231	(1.00)	%	$	596,846	(2.43)	%
Base	616,421		—		611,715		—
Up 200 Basis Points	627,222		1.75		628,011		2.66
Year 2
Down 100 Basis Points	$	614,571	(0.30)	%	$	590,415	(3.48)	%
Base	637,157		3.36		646,665		5.71
Up 200 Basis Points	650,264		5.49		680,461		11.24

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 76 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~~sheets 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,~~2023, 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, 2023, 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 2022 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 $87.4 million as of June 30, 2023, 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.~~2023.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

~~None~~On May 26, 2023 (the "Adoption Date"), Marty Schmitz, a Director of HTLF, entered into a written plan for the sale of securities of HTLF intended to satisfy SEC Rule 10b5-1(c) (a "10b5-1 Plan"). Mr. Schmitz’s 10b5-1 Plan provides for the sale of up to 17,800 shares of HTLF’s common stock commencing no earlier than 90 days after the Adoption Date, and terminating on June 15, 2024.

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.



3.1		Amended and Restated Bylaws of Heartland Financial USA, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K filed on June 20, 2023).

3.2		Amended and Restated Certificate of Incorporation of Heartland Financial USA, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on June 20, 2023).

10.1	(1)	Heartland Financial USA, Inc. Directors Deferred Compensation Plan. (incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K filed on June 20, 2023).

10.2	(2)	Amendment 2 to Agreement, dated June 9, 2023, to Master Agreement between Fiserv Solutions LLC and Heartland Financial USA, Inc. dated of July 1, 2021.

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

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

32.1	(3)	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	(3)	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 contract or compensatory plan or arrangement

(2) Certain confidential information contained in this agreement has been omitted because it is both not material and is the type that the registrant treats as private or confidential.

(3) Filed ~~herewith.~~or furnished herewith

SIGNATURES

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


HEARTLAND FINANCIAL USA, INC.
(Registrant)


~~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 4, 2023


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



	Allowance For Loan Losses						Gross Loans Receivable Held to Maturity
	Ending Balance Under ASC 310-10-35		Ending Balance Under ASC 450-20		Total		Ending Balance Evaluated for Impairment Under ASC 310-10-35		Ending Balance Evaluated for Impairment Under ASC 450-20		Total
September 30, 2017
Commercial	$	2,166	$	14,804	$	16,970	$	6,957	$	1,606,946	$	1,613,903
Commercial real estate	864		19,676		20,540		27,943		3,136,010		3,163,953
Agricultural and agricultural real estate	2,353		3,774		6,127		12,792		498,972		511,764
Residential real estate	393		1,873		2,266		29,833		605,778		635,611
Consumer	1,267		7,715		8,982		6,524		443,564		450,088
Total	$	7,043	$	47,842	$	54,885	$	84,049	$	6,291,270	$	6,375,319
December 31, 2016
Commercial	$	1,318	$	13,447	$	14,765	$	3,712	$	1,283,553	$	1,287,265
Commercial real estate	2,671		21,648		24,319		45,217		2,493,365		2,538,582
Agricultural and agricultural real estate	816		3,394		4,210		16,730		472,588		489,318
Residential real estate	497		1,766		2,263		25,726		592,198		617,924
Consumer	1,451		7,316		8,767		5,988		414,625		420,613
Total	$	6,753	$	47,571	$	54,324	$	97,373	$	5,256,329	$	5,353,702



	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



	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



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



	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.



	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	$	—



	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



	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		)



	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



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