UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For quarterly period ended ~~September 30, 2018~~

March 31, 2019

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

For transition period from __________ to __________

Commission File Number: 001-15393

HEARTLAND FINANCIAL USA, INC.

(Exact name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

42-1405748

(I.R.S. employer identification number)

1398 Central Avenue, Dubuque, Iowa 52001

(Address of principal executive offices)(Zip Code)

(563) 589-2100

(Registrant's telephone number, including area code)

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

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

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



	Large accelerated filer x	Accelerated Filer ¨
	Non-accelerated filer ¨
	Smaller reporting company ¨
Emerging growth company ¨

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

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

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



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

Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date: As of ~~November 2, 2018,~~May 6, 2019, the Registrant had outstanding ~~34,473,352~~34,604,462 shares of common stock, $1.00 par value per share.

HEARTLAND FINANCIAL USA, INC.

Form 10-Q Quarterly Report

Table of Contents



Part I
Item 1.	Financial Statements
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Mine Safety Disclosures
Item 5.	Other Information
Item 6.	Exhibits
	~~3.1 Amendment to Certificate of Incorporation of Heartland Financial USA, Inc. filed August 28, 2018~~
	~~31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.~~
	~~31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.~~
	~~32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
	~~32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~
	101 Financial statements formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, and (vi) the Notes to Consolidated Financial Statements.

PART I

ITEM 1. FINANCIAL STATEMENTS


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
	September 30, 2018 (Unaudited)			December 31, 2017			March 31, 2019 (Unaudited)			December 31, 2018
ASSETS
Cash and due from banks	$	196,847		$	168,723		$	174,198		$	223,135
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments	240,528			27,280
Interest bearing deposits with other banks and other short-term investments							318,303			50,495
Cash and cash equivalents	437,375			196,003			492,501			273,630
Time deposits in other financial institutions	5,836			9,820			4,675			4,672
Securities:
Carried at fair value (cost of $2,342,977 at September 30, 2018, and $2,248,181 at December 31, 2017)	2,274,215			2,216,753
Held to maturity, at cost (fair value of $247,394 at September 30, 2018, and $265,494 at December 31, 2017)	239,908			253,550
Carried at fair value (cost of $2,415,641 at March 31, 2019, and $2,492,620 at December 31, 2018)							2,400,460			2,450,709
Held to maturity, at cost (fair value of $95,240 at March 31, 2019, and $245,341 at December 31, 2018)							88,089			236,283
Other investments, at cost	26,656			22,563			27,506			28,396
Loans held for sale	77,727			44,560			69,716			119,801
Loans receivable:
Held to maturity	7,365,493			6,391,464			7,331,544			7,407,697
Allowance for loan and lease losses	(61,221		)	(55,686		)	(62,639		)	(61,963		)
Loans receivable, net	7,304,272			6,335,778			7,268,905			7,345,734
Premises, furniture and equipment, net	193,802			172,324			183,185			187,418
Premises, furniture and equipment held for sale	4,422			1,977			7,030			7,258
Other real estate, net	11,908			10,777			5,391			6,153
Goodwill	391,668			236,615			391,668			391,668
Core deposit intangibles and customer relationship intangibles, net	50,071			35,203			44,637			47,479
Servicing rights, net	32,039			25,857			28,968			31,072
Cash surrender value on life insurance	162,216			142,818			163,764			162,892
Other assets	123,017			106,141			136,000			114,841
TOTAL ASSETS	$	11,335,132		$	9,810,739		$	11,312,495		$	11,408,006
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	3,427,819		$	2,983,128		$	3,118,909		$	3,264,737
Savings	4,958,430			4,240,328			5,145,929			5,107,962
Time	1,125,914			923,453			1,088,104			1,023,730
Total deposits	9,512,163			8,146,909			9,352,942			9,396,429
Deposits held for sale	50,312			—			118,564			106,409
Short-term borrowings	131,139			324,691			104,314			227,010
Other borrowings	277,563			285,011			268,312			274,905
Accrued expenses and other liabilities	83,562			62,671			96,261			78,078
TOTAL LIABILITIES	10,054,739			8,819,282			9,940,393			10,082,831
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both September 30, 2018, and December 31, 2017)	—			—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both September 30, 2018, and December 31, 2017)	—			—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2018, and December 31, 2017, none issued or outstanding at both September 30, 2018, and December 31, 2017)	—			—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both September 30, 2018, and December 31, 2017; none issued or outstanding at September 30, 2018, and 745 shares issued and outstanding at December 31, 2017)	—			938
Common stock (par value $1 per share; 40,000,000 shares authorized at both September 30, 2018, and December 31, 2017; issued 34,473,029 shares at September 30, 2018, and 29,953,356 shares at December 31, 2017)	34,473			29,953
Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both March 31, 2019, and December 31, 2018)							—			—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both March 31, 2019, and December 31, 2018)							—			—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both March 31, 2019, and December 31, 2018, none issued or outstanding at both March 31, 2019, and December 31, 2018)							—			—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both March 31, 2019, and December 31, 2018; none issued or outstanding at both March 31, 2019, and December 31, 2018)							—			—
Common stock (par value $1 per share; 40,000,000 shares authorized at both March 31, 2019, and December 31, 2018; issued 34,603,611 shares at March 31, 2019, and 34,477,499 shares at December 31, 2018)							34,604			34,477
Capital surplus	742,080			503,709			745,596			743,095
Retained earnings	553,662			481,331			603,506			579,252
Accumulated other comprehensive loss	(49,822		)	(24,474		)	(11,604		)	(31,649		)
Treasury stock at cost (0 shares at both September 30, 2018, and December 31, 2017)	—			—
TOTAL STOCKHOLDERS' EQUITY	1,280,393			991,457			1,372,102			1,325,175
TOTAL LIABILITIES AND EQUITY	$	11,335,132		$	9,810,739		$	11,312,495		$	11,408,006

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data)
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
INTEREST INCOME:
Interest and fees on loans	$	105,733		$	82,906		$	288,171		$	217,898		$	100,456		$	85,651
Interest on securities:
Taxable	14,433			10,394			38,280			27,246			15,876			11,577
Nontaxable	3,490			5,086			10,653			15,297			3,093			3,579
Interest on federal funds sold	—			34			—			37			4			—
Interest on interest bearing deposits in other financial institutions	1,238			558			2,413			1,112			1,292			407
TOTAL INTEREST INCOME	124,894			98,978			339,517			261,590			120,721			101,214
INTEREST EXPENSE:
Interest on deposits	10,092			5,073			23,841			12,966			13,213			5,766
Interest on short-term borrowings	464			271			1,279			498			889			268
Interest on other borrowings (includes $242 and $308 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended September 30, 2018 and 2017, respectively, and $469 and $1,005 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the nine months ended September 30, 2018 and 2017, respectively)	3,660			3,790			10,726			10,674
Interest on other borrowings (includes $165 and $197 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended March 31, 2019 and 2018, respectively)													3,664			3,596
TOTAL INTEREST EXPENSE	14,216			9,134			35,846			24,138			17,766			9,630
NET INTEREST INCOME	110,678			89,844			303,671			237,452			102,955			91,584
Provision for loan losses	5,238			5,705			14,332			10,235			1,635			4,263
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	105,440			84,139			289,339			227,217			101,320			87,321
NONINTEREST INCOME:
Service charges and fees	12,895			10,138			35,046			29,291			12,794			10,079
Loan servicing income	1,670			1,161			5,231			4,236			1,729			1,754
Trust fees	4,499			3,872			13,794			11,482			4,474			4,680
Brokerage and insurance commissions	1,111			950			2,895			2,962			734			907
Securities gains/(losses), net (includes $145 of net security losses and $1,679 of net security gains reclassified from accumulated other comprehensive income for the three months ended September 30, 2018 and 2017, respectively, and $1,037 and $5,553 of net security gains reclassified from accumulated other comprehensive income for the nine months ended September 30, 2018 and 2017, respectively)	(145		)	1,679			1,037			5,553
Unrealized gain on equity securities, net	54			—			97			—
Securities gains, net (includes $1,575 and $1,441 of net security gains reclassified from accumulated other comprehensive income for the three months ended March 31, 2019 and 2018, respectively)													1,575			1,441
Unrealized gain/(loss) on equity securities, net													258			(28		)
Net gains on sale of loans held for sale	7,410			4,997			18,261			17,961			3,176			4,051
Valuation allowance on servicing rights	230			5			12			29			(589		)	(2		)
Income on bank owned life insurance	892			766			2,206			2,039			899			614
Other noninterest income	1,149			1,409			3,536			2,941			1,667			1,220
TOTAL NONINTEREST INCOME	29,765			24,977			82,115			76,494			26,717			24,716
NONINTEREST EXPENSES:
Salaries and employee benefits	49,921			45,225			149,389			128,118			50,285			48,710
Occupancy	6,348			6,223			18,706			16,352			6,607			6,043
Furniture and equipment	3,470			2,826			9,403			7,913			2,692			2,749
Professional fees	11,681			8,450			30,088			24,342			11,379			9,448
FDIC insurance assessments	1,119			894			2,792			2,610
Advertising	2,754			1,358			6,839			5,141			2,325			1,940
Core deposit intangibles and customer relationship intangibles amortization	2,626			1,863			6,763			4,252			2,842			1,863
Other real estate and loan collection expenses	784			581			2,464			1,774			701			732
Loss on sales/valuations of assets, net	912			1,342			2,243			1,642
Gain on sales/valuations of assets, net													(3,004		)	(197		)
Restructuring expenses	—			—			2,564			—			3,227			2,564
Other noninterest expenses	12,924			9,997			33,816			27,653			11,176			9,794
TOTAL NONINTEREST EXPENSES	92,539			78,759			265,067			219,797			88,230			83,646
INCOME BEFORE INCOME TAXES	42,666			30,357			106,387			83,914			39,807			28,391
Income taxes (includes $(26) and $511 of income tax expense/(benefit) reclassified from accumulated other comprehensive income for the three months ended September 30, 2018 and 2017, respectively, and $174 and $1,696 of income tax expense/(benefit) reclassified from accumulated other comprehensive income for the nine months ended September 30, 2018 and 2017, respectively)	8,956			8,725			21,530			22,314
Income taxes (includes $358 and $261 of income tax expense reclassified from accumulated other comprehensive income for the three months ended March 31, 2019 and 2018, respectively)													8,310			5,123
NET INCOME	33,710			21,632			84,857			61,600			31,497			23,268
Preferred dividends	(13		)	(13		)	(39		)	(45		)	—			(13		)
Interest expense on convertible preferred debt	—			3			—			12
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	33,697		$	21,622		$	84,818		$	61,567		$	31,497		$	23,255
EARNINGS PER COMMON SHARE - BASIC	$	0.98		$	0.73		$	2.61		$	2.23		$	0.91		$	0.76
EARNINGS PER COMMON SHARE - DILUTED	$	0.97		$	0.72		$	2.59		$	2.21		$	0.91		$	0.76
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.14		$	0.11		$	0.40		$	0.33		$	0.16		$	0.13

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)	HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)												HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
NET INCOME	$	33,710		$	21,632		$	84,857		$	61,600		$	31,497		$	23,268
OTHER COMPREHENSIVE INCOME (LOSS)
OTHER COMPREHENSIVE INCOME/(LOSS)
Securities:
Net change in unrealized gain (loss) on securities	(8,060		)	6,940			(36,395		)	22,002
Reclassification adjustment for net (gains)/losses realized in net income	145			(1,679		)	(1,037		)	(5,553		)
Net change in unrealized gain/(loss) on securities													29,965			(19,834		)
Reclassification adjustment for net gains realized in net income													(1,575		)	(1,441		)
Income taxes	2,078			(2,084		)	9,586			(6,433		)	(7,281		)	5,391
Other comprehensive income (loss) on securities	(5,837		)	3,177			(27,846		)	10,016
Other comprehensive income/(loss) on securities													21,109			(15,884		)
Derivatives used in cash flow hedging relationships:
Net change in unrealized gain (loss) on derivatives	395			17			2,991			(656		)
Net change in unrealized gain/(loss) on derivatives													(1,505		)	1,699
Reclassification adjustment for net losses on derivatives realized in net income	242			308			469			1,005			158			197
Income taxes	(79		)	(123		)	(682		)	(337		)	283			(708		)
Other comprehensive income on cash flow hedges	558			202			2,778			12
Other comprehensive income (loss)	(5,279		)	3,379			(25,068		)	10,028
Other comprehensive income/(loss) on cash flow hedges													(1,064		)	1,188
Other comprehensive income/(loss)													20,045			(14,696		)
TOTAL COMPREHENSIVE INCOME	$	28,431		$	25,011		$	59,789		$	71,628		$	51,542		$	8,572

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
	Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	84,857		$	61,600		$	31,497		$	23,268
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	22,647			22,738			8,155			6,802
Provision for loan losses	14,332			10,235			1,635			4,263
Net amortization of premium on securities	18,958			20,186			5,692			5,823
Securities gains, net	(1,037		)	(5,553		)	(1,575		)	(1,441		)
Unrealized gain on equity securities, net	(97		)	—
Unrealized (gain)/loss on equity securities, net							(258		)	28
Stock based compensation	3,689			3,588			2,375			1,858
Loans originated for sale	(551,328		)	(548,768		)	(61,348		)	(112,433		)
Proceeds on sales of loans held for sale	594,529			586,202			64,941			135,506
Net gains on sale of loans held for sale	(13,939		)	(11,968		)	(2,978		)	(2,889		)
Increase in accrued interest receivable	(5,422		)	(1,449		)
Decrease in prepaid expenses	2,243			838
Decrease in accrued interest payable	1,121			1,104
Decrease in accrued interest receivable							682			3,239
(Increase) decrease in prepaid expenses							(1,708		)	194
Increase in accrued interest payable							1,261			1,029
Capitalization of servicing rights	(4,404		)	(5,993		)	(266		)	(1,183		)
Valuation allowance on servicing rights	(12		)	(29		)	589			2
Loss on sales/valuations of assets, net	2,243			1,642
(Gain)/loss on sales/valuations of assets, net							1,512			(197		)
Net excess tax benefit from stock based compensation	672			1,121			336			611
Other, net	(1,979		)	(5,637		)	(16,493		)	(5,441		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	167,073			129,857			34,049			59,039
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits in other financial institutions	(1,000		)	—			(248		)	—
Proceeds from the sale of securities available for sale	694,872			1,127,091			434,154			392,246
Proceeds from the redemption of time deposits in other financial institutions	8,767			12,171			—			8,767
Proceeds from the maturity of and principal paydowns on securities available for sale	172,702			161,827			86,727			49,603
Proceeds from the maturity of and principal paydowns on securities held to maturity	13,169			6,645			2,156			3,570
Proceeds from the maturity of and principal paydowns on time deposits in other financial institutions	5,829			24,931			245			4,368
Proceeds from the maturity of and principal paydowns on other investments	2,038			2,574
Proceeds from the sale, maturity of and principal paydowns on other investments							2,730			677
Purchase of securities available for sale	(940,607		)	(1,299,492		)	(299,105		)	(244,289		)
Purchase of other investments	(2,411		)	(1,012		)	(1,779		)	(644		)
Net (increase) decrease in loans	(13,737		)	45,139			43,925			(32,314		)
Purchase of bank owned life insurance policies	(2,000		)	(2,000		)	(5		)	—
Proceeds from sale of mortgage servicing rights	—			5,137
Capital expenditures	(11,793		)	(6,876		)	(1,123		)	(2,356		)
Net cash and cash equivalents received in acquisitions	212,197			71,089			—			5,543
Proceeds from the sale of equipment	998			1,845			117			615
Net cash received in divestitures							28,142			—
Proceeds on sale of OREO and other repossessed assets	3,128			7,578			2,537			668
NET CASH PROVIDED BY INVESTING ACTIVITIES	$	142,152		$	156,647		$	298,473		$	186,454


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands)
	Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2019			2018
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits	$	156,497		$	181,206
Net increase (decrease) in savings deposits	130,704			(179,721		)
Net decrease in time deposit accounts	(122,795		)	(8,582		)
Net increase/(decrease) in demand deposits							$	(131,876	)	$	5,834
Net increase in savings deposits							74,016			100,608
Net (increase) decrease in time deposit accounts							75,141			(69,143		)
Proceeds on short-term revolving credit line	25,000			20,000			—			15,000
Repayments on short-term revolving credit line	(25,000		)	(15,000		)
Net decrease in short-term borrowings	(183,552		)	(168,667		)	(43,000		)	(168,451		)
Proceeds from short term FHLB advances	355,602			186,039			430,888			220,000
Repayments of short term FHLB advances	(365,602		)	(191,405		)	(506,725		)	(260,000		)
Proceeds from other borrowings	30,131			—			50			—
Repayments of other borrowings	(56,221		)	(8,573		)	(6,868		)	(14,995		)
Purchase of treasury stock	(97		)	(440		)	—			(97		)
Proceeds from issuance of common stock	286			804			253			14
Dividends paid	(12,806		)	(9,153		)	(5,530		)	(3,920		)
NET CASH USED BY FINANCING ACTIVITIES	(67,853		)	(193,492		)	(113,651		)	(175,150		)
Net increase in cash and cash equivalents	241,372			93,012			218,871			70,343
Cash and cash equivalents at beginning of year	196,003			158,724			273,630			196,003
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	437,375		$	251,736		$	492,501		$	266,346
Supplemental disclosures:
Cash paid for income/franchise taxes	$	14,754		$	10,775		$	84		$	2
Cash paid for interest	$	34,725		$	23,034		$	16,537		$	8,601
Loans transferred to OREO	$	5,016		$	4,955		$	1,694		$	939
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale	$	3,415		$	—		$	654		$	—
Deposits transferred to held for sale	$	50,312		$	—		$	76,968		$	—
Loans transferred to held for sale	$	31,379		$	—		$	32,111		$	—
Securities transferred from held to maturity to available for sale							$	148,030		$	—
Purchases of securities available for sale, accrued, not settled	$	3,481		$	2,063		$	2,019		$	—
Sales of securities available for sale, accrued, not settled	$	—		$	125
Conversion of convertible debt to common stock	$	—		$	558
Conversion of Series D preferred stock to common stock	$	938		$	419
Maturity of securities available for sale, accrued, not settled							$	1,000		$	—
Stock consideration granted for acquisitions	$	238,075		$	175,196		$	—		$	53,621

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, 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
Balance at January 1, 2018 $ 938
$ 29,953
$ 503,709
$ 481,331
$ (24,474 ) $ —
$ 991,457
Comprehensive income 84,857
(25,068 )

59,789
Reclassification of unrealized net gain on equity securities

280
(280 ) —
Cash dividends declared:

Series D Preferred, $52.50 per share (39 ) (39 )
Common, $0.40 per share

(12,767 )

(12,767 )
Conversion of Series D preferred stock (938 ) (938 )
Purchase of 1,761 shares of common stock

(97 )
(97 )
Issuance of 4,521,434 shares of common stock 4,520

234,682

97

239,299
Stock based compensation
3,689

3,689
Balance at September 30, 2018 $ —
$ 34,473
$ 742,080
$ 553,662
$ (49,822 ) $ —
$ 1,280,393

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, 2018	$	938	$	29,953	$	503,709	$	481,331		$	(24,474	)	$	—		$	991,457
Comprehensive income							23,268			(14,696		)				8,572
Reclassification of unrealized net gain on equity securities							280			(280		)				—
Cash dividends declared:
Series D Preferred, $17.50 per share							(13		)							(13		)
Common, $0.13 per share							(3,907		)							(3,907		)
Purchase of 1,761 shares of common stock													(97		)	(97		)
Issuance of 1,116,644 shares of common stock			1,115		52,423								97			53,635
Stock based compensation					1,858											1,858
Balance at March 31, 2018	$	938	$	31,068	$	557,990	$	500,959		$	(39,450	)	$	—		$	1,051,505
Balance at January 1, 2019	$	—	$	34,477	$	743,095	$	579,252		$	(31,649	)	$	—		$	1,325,175
Comprehensive income							31,497			20,045						51,542
Retained earnings adjustment for adoption of leasing standard							(1,713		)							(1,713		)
Cash dividends declared:
Common, $0.16 per share							(5,530		)							(5,530		)
Issuance of 126,112 shares of common stock			127		126											253
Stock based compensation					2,375											2,375
Balance at March 31, 2019	$	—	$	34,604	$	745,596	$	603,506		$	(11,604	)	$	—		$	1,372,102

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, ~~2017,~~2018, included in the Form 10-K of Heartland Financial USA, Inc. ("Heartland") filed with the Securities and Exchange Commission ("SEC") on February ~~28, 2018~~27, 2019. Footnote disclosures to the interim unaudited consolidated financial statements which would substantially duplicate the disclosure contained in the footnotes to the audited consolidated financial statements have been omitted.

The financial information of Heartland included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended ~~September 30, 2018,~~March 31, 2019, are not necessarily indicative of the results expected for the year ending December 31, ~~2018.~~

In the Annual Report on Form 10-K for the year ended December 31, 2017, Heartland reported the results of operations through two business segments: Community and Other Banking and Mortgage Banking. Effective January 1, 2018, the recently restructured mortgage banking segment is no longer a reportable segment due to the significant reduction in infrastructure and the reporting structure of the mortgage sales staff, who currently report directly to the bank president in each market. Accordingly, Heartland is no longer reporting results of operations by segment.

2019.

Earnings Per Share

Basic earnings per share is determined using net income available to common stockholders and weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average common shares and assumed incremental common shares issued. Amounts used in the determination of basic and diluted earnings per share for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and 2018, ~~and 2017,~~ are shown in the table below:

Three Months Ended
September 30,
(Dollars and number of shares in thousands, except per share data) 2018 2017
Net income $ 33,710
$ 21,632
Preferred dividends (13 ) (13 )
Interest expense on convertible preferred debt —
3
Net income available to common stockholders $ 33,697
$ 21,622
Weighted average common shares outstanding for basic earnings per share 34,452
29,648
Assumed incremental common shares issued upon vesting of outstanding restricted stock units 192
262
Weighted average common shares for diluted earnings per share 34,644
29,910
Earnings per common share — basic $ 0.98
$ 0.73
Earnings per common share — diluted $ 0.97
$ 0.72
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) 2018 2017
Net income $ 84,857
$ 61,600
Preferred dividends (39 ) (45 )
Interest expense on convertible preferred debt —
12
Net income available to common stockholders $ 84,818
$ 61,567
Weighted average common shares outstanding for basic earnings per share 32,520
27,569
Assumed incremental common shares issued upon vesting of outstanding restricted stock units 187
265
Weighted average common shares for diluted earnings per share 32,707
27,834
Earnings per common share — basic $ 2.61
$ 2.23
Earnings per common share — diluted $ 2.59
$ 2.21
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation —
—

~~Stock-Based Compensation~~

Heartland may grant, through its Nominating and Compensation Committee (the "Compensation Committee"), non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and cash incentive awards, under its 2012 Long-Term Incentive Plan (the "Plan"). The Plan was originally approved by stockholders in May 2012 and was amended effective March 8, 2016, to increase the number of shares of common stock authorized for issuance and make certain other changes to the Plan. As of September 30, 2018, 442,320 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 $672,000 and $1.1 million during the nine months ended September 30, 2018 and 2017, respectively.

~~Restricted Stock Units~~

The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). In the first quarter of 2018, the Compensation Committee granted time-based RSUs with respect to 52,153 shares of common stock, and in the first quarter of 2017, the Compensation Committee granted time-based RSUs with respect to 55,665 shares of common stock to selected officers and employees. The time-based RSUs represent the right, without payment, to receive shares of Heartland common stock on a specified date in the future. The time-based RSUs granted in 2018 vest over three years in equal installments on March 6 of each of the three years following the year of the grant, while the 2017 time-based RSUs vest in equal installments on January 19 of each of the three years following the year of the grant. The time-based RSUs may also vest upon death or disability, upon a change in control or upon a "qualified retirement" (as defined in the 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 one-year performance-based RSUs with respect to 18,988 shares of common stock in the first quarter of 2018, and 27,570 shares of common stock in the first quarter of 2017. These performance-based RSUs are earned based on satisfaction of performance targets for the fiscal years ended December 31, 2018, and December 31, 2017, respectively, and then fully vest on a specified date in the third calendar year following the year of the initial grant.

The Compensation Committee also granted three-year performance-based RSUs with respect to 16,108 shares and 9,032 shares of common stock in the first quarter of 2018 and 2017, respectively. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance period ended December 31, 2020, and December 31, 2019, respectively. These performance-based RSUs or a portion thereof may vest in 2021 and 2020, respectively, after measurement of performance in relation to the performance targets.

The one-year and three-year performance-based RSUs vest to the extent that they are earned upon death or disability or upon a "qualified retirement." Upon a change in control, performance-based RSUs shall become vested at 100% of target if the RSU obligations are not assumed by the successor company. If the successor company does assume the RSU obligations, the 2017 and 2018 performance-based RSUs will vest at 100% of target upon a "Termination of Service" within the period beginning six months prior to a change in control and ending twenty-four months after a change in control.

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

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, 2018, and September 30, 2017, 29,048 and 16,804 time-based RSUs, respectively, were granted to directors and new employees.

~~A summary of the RSUs outstanding as of September 30, 2018, and 2017, and changes during the nine months ended September 30, 2018 and 2017, follows:~~

2018 2017
Shares
Weighted-Average Grant Date
Fair Value
Shares
Weighted-Average Grant Date
Fair Value
Outstanding at January 1 301,578
$ 34.74
346,817
$ 27.61
Granted 116,297
55.26
109,071
47.21
Vested (127,429 ) 32.70
(136,428 ) 26.66
Forfeited (27,678 ) 45.58
(12,923 ) 31.57
Outstanding at September 30 262,768
$ 43.65
306,537
$ 34.72

Total compensation costs recorded for RSUs were $3.7 million and $3.6 million for the nine-month periods ended September 30, 2018 and 2017. As of September 30, 2018, there were $5.3 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2021.

~~Options~~

Although the Plan provides authority to the Compensation Committee to grant stock options, no options were granted during the first nine months of 2018 and 2017. 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, 2018 and 2017, and changes during the nine months ended September 30, 2018 and 2017, follows:

2018 2017
Shares
Weighted-Average
Exercise Price
Shares
Weighted-Average
Exercise Price
Outstanding at January 1 6,500
$ 18.60
26,400
$ 18.60
Granted —
—
—
—
Exercised (6,500 ) 18.60
(13,650 ) 18.60
Forfeited —
—
(500 ) 18.60
Outstanding at September 30 —
$ —
12,250
$ 18.60
Options exercisable at September 30 —
$ —
12,250
$ 18.60

The intrinsic value for the total of all options exercised during the nine months ended September 30, 2018, was $231,000. Cash received from options exercised was $121,000 for the nine months ended September 30, 2018, and $254,000 for the nine months ended September 30, 2017.

No compensation costs were recorded for options during the nine month periods ended September 30, 2018 and 2017. There are no unrecorded compensation costs related to options at September 30, 2018. No stock options vested during the nine-month periods ended September 30, 2018 and 2017.



	Three Months Ended March 31,
(Dollars and number of shares in thousands, except per share data)	2019		2018
Net income	$	31,497	$	23,268
Preferred dividends	—		(13		)
Net income available to common stockholders	$	31,497	$	23,255
Weighted average common shares outstanding for basic earnings per share	34,564		30,442
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	136		203
Weighted average common shares for diluted earnings per share	34,700		30,645
Earnings per common share — basic	$	0.91	$	0.76
Earnings per common share — diluted	$	0.91	$	0.76
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	2		—

Subsequent Events - Heartland has evaluated subsequent events that may require recognition or disclosure through the filing date of this Quarterly Report on Form 10-Q with the SEC. On April 26, 2019, Heartland signed an agreement to sell the mortgage servicing rights portfolio of Dubuque Bank and Trust Company, and the transaction closed on April 30, 2019. See Note 6, "Goodwill, Core Deposit Premium and Other Intangible Assets," for further details on this transaction.

Effect of New Financial Accounting Standards

~~In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers."~~ The amendment clarifies the principles for recognizing revenue and develops a common revenue standard. The amendment outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that "an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." In applying the revenue model to contracts within its scope, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. Heartland evaluates 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 adopted the accounting standard effective January 1, 2018, as required, using a modified retrospective approach. However, the adoption of these amendments did not have a significant effect on Heartland's results of operations, financial position and liquidity other than expanded disclosure requirements. See Note 9, "Revenue," for further details regarding Heartland's revenue streams subject to the accounting standard.

~~In January 2016, the FASB issued guidance ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilitie~~s." The amendments in ASU 2016-01 to Subtopic 825-10, Financial Instruments, contain the following elements: (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; and (7) clarify that the entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets. The amendments are effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Except for the early application of the amendment noted in item (5) above, early adoption of the amendments in this update is not permitted. Entities are required to and Heartland applied the amendment by means of a cumulative-effect adjustment as of the beginning of the fiscal year of adoption, with the exception of the amendment related to equity securities without readily determinable fair values, which is to be applied prospectively to equity investments that exist as of the adoption date. Heartland adopted the accounting standard on January 1, 2018, as required, and the adoption of these amendments did not have a material impact on its results of operations, financial position and liquidity. Heartland reclassified $280,000 from accumulated other comprehensive income to retained earnings on January 1, 2018, related to the fair value of its equity investments.

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." Topic 842 requires a lessee to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as financing or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and ~~will be~~is applied on a modified retrospective basis. Heartland leases certain properties and equipment under operating leases that will result in recognition of lease assets and lease liabilities on the consolidated balance sheets under the ASU; however the majority of Heartland's properties and equipment are owned, not leased. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase

the underlying asset. Early adoption is permitted. In January 2018, the FASB issued an amendment to provide entities with the optional practical expedient to not evaluate existing or expired land easements that were previously not accounted for as leases under Topic 840. In July 2018, the FASB issued ASU 2018-11, "Leases - Targeted Improvements" to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, Specifically, under the amendments in ASU 2018-11, entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02. Heartland ~~intends to adopt~~adopted the accounting standard on January 1, 2019, on a modified retrospective basis, as required, and will not restate comparative periods. Heartland ~~also expects~~adopted the practical expedients, which allow for existing leases to ~~adopt certain optional practical expedients. Heartland signed an agreement~~be accounted for under previous guidance with ~~a cloud-based lease software provider, and~~ the ~~software implementation is nearly complete. Based on Heartland's current lease portfolio, management anticipates recognizing a right-of-use asset~~exception of balance sheet recognition for lessees. The adoption of the new standard resulted in the recording of ROU assets and lease ~~liability~~liabilities of approximately $25.9 million and $27.6 million, respectively, on January 1, 2019. The difference between the ~~consolidated balance sheet, with~~lease assets and lease liabilities, which was $1.7 million, was recorded as an ~~immaterial impact~~adjustment to ~~the consolidated statement of income. However, the ultimate impact~~retained earnings. The adoption of the standard ~~will depend~~did not impact Heartland's results of operations or liquidity. See Note 11, "Leases", for more information on ~~the lease portfolio on January 1, 2019.~~Heartland's leases.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)." The amendments in this ASU ~~also referred to as "CECL,"~~ 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 amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity may adopt the amendments earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Heartland intends to adopt the accounting standard in 2020, as ~~required, and expects to recognize~~required. Upon adoption of ASU 2016-13, a ~~one-time cumulative effect~~cumulative-effect adjustment to ~~the allowance for loan losses~~retained earnings will be recorded as of the beginning of the first reporting period in which the ~~new standard~~guidance is ~~effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the results of operations, financial position and liquidity.~~effective. Heartland has formed ~~a cross-functional~~an internal committee to assess and implement the ~~standard, and the project plan calls for running a parallel CECL model during 2019 prior to adoption in 2020.~~standard. Heartland has entered into an agreement with a third party ~~software~~ vendor ~~selected CECL-compliant~~to evaluate potential methodologies and data and has started ~~implementation~~designing its financial models to estimate credit losses in accordance with the new standard. Further development, testing and evaluation of the ~~software.~~

~~In August 2016,~~models is required to determine the ~~FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.~~" The amendments in this update address eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendment is 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 early adopts

~~the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year~~impact 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 should be applied using a retrospective transition method to each period presented. Heartland adopted this ASU on January 1, 2018, as required, and the adoption of these amendments did not have a material impact on Heartland's 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 and Heartland applied these amendments using a modified retrospective basis. Heartland adopted this ASU on January 1, 2018, as required, and the adoption of this ~~amendment did not~~standard will have ~~a material impact on Heartland's results of operations, financial position and liquidity.~~

~~In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business~~," which narrows the definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset or a business. ASU 2017-01 is effective for public business entities in annual periods beginning after December 15, 2017, including interim periods therein. Heartland adopted ASU 2017-01 on January 1, 2018, as required, and the adoption did not have a material impact on Heartland's results of operations, financial position and liquidity.

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

In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fee and Other Costs (Subtopic 310-20)." These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount. Discounts continue to be amortized to maturity. These amendments are effective for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If any entity early adopts the amendments in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. The amendments must be applied and Heartland intends to apply these amendments on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Heartland ~~intends to adopt this ASU in 2019, as required, and is currently evaluating the potential impact on its results of operations, financial position and liquidity.~~

~~In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718)~~." The amendments provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (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 and Heartland applied these amendments prospectively to an award modified on or after the adoption date. Heartland adopted this ASU on January 1, ~~2018,~~2019, as required, and the adoption did not have a material impact toon 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.~~liquidity.

In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities." The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. For a closed portfolio of prepayable

financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, this ASU permits an entity to designate an amount that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows (the “last-of-layer” method). Under this designation, prepayment risk is not incorporated into the measurement of the hedged item. ASU 2017-12 requires a modified retrospective transition method in which Heartland will recognize the cumulative effect of the change on the opening balance of each affected component of equity inon the ~~consolidated~~ balance sheet as of the date of adoption. Heartland ~~intends to adopt~~adopted this ASU inon January 1, 2019, as required, and ~~does not believe there will be~~as a ~~material~~result of the adoption, $148.0 million of held to maturity securities were reclassified to available for sale debt securities carried at fair value. See Note 3, "Securities," for further details. There was no impact to ~~its~~Heartland's results of operations, ~~financial position and liquidity.~~

~~In February 2018, the FASB issued ASU 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220).~~" This ASU allows for the option to reclassify from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017, which was enacted on December 22, 2017. The legislation includedor liquidity as a ~~reduction to the corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount~~result of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted for public businesses for reporting periods for which financial statements have not yet been issued. Heartland adopted the guidance as of December 31, 2017. The adoption of this ~~ASU was accounted for as a cumulative-effect adjustment to the balance sheet resulting in a $4.5 million increase to retained earnings and a corresponding decrease to AOCI on December 31, 2017.~~amendment.

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

NOTE 2: ACQUISITIONS

Blue Valley Ban Corp.

On January 16, 2019, Heartland entered into a definitive merger agreement to acquire Blue Valley Ban Corp., and its wholly-owned subsidiary, Bank of Blue Valley, headquartered in Overland Park, Kansas. As of the announcement date, the transaction, in which all of the issued and outstanding shares of Blue Valley Ban Corp. stock will be exchanged for shares of Heartland common stock, was valued at approximately $93.9 million. Simultaneous with the closing of the transaction, Bank of Blue Valley will merge into Heartland's Kansas-based subsidiary, Morrill & Janes Bank and Trust Company, and the combined entity will operate as Bank of Blue Valley. The amount of the merger consideration is subject to fluctuations in the price of Heartland common stock and certain potential adjustments, and the transaction is subject to customary closing conditions. The transaction is expected to close in the second quarter of 2019 with a systems conversion planned for the third quarter of 2019. As of March 31, 2019, Bank of Blue Valley had total assets of approximately $711.6 million, which included approximately $564.1 million of gross loans outstanding, and approximately $587.2 million of deposits.

First Bank Lubbock Bancshares, Inc.

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

The assets and liabilities of FBLB 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 May 18, 2018:

As of May 18, 2018
Fair value of consideration paid:
Common stock (3,350,664 shares) $ 184,454
Cash 5,451
Total consideration paid 189,905
Fair value of assets acquired
Cash and cash equivalents 212,105
Securities:
Carried at fair value 1,788
Other securities 3,268
Loans held for sale 31,050
Loans held to maturity 681,080
Premises, furniture and equipment, net 23,271
Other real estate, net 379
Mortgage servicing rights 6,995
Core deposit intangibles and customer relationships, net 13,908
Cash surrender value on life insurance 14,997
Other assets 7,185
Total assets 996,026
Fair value of liabilities assumed
Deposits 893,827
Other borrowings 12,077
Other liabilities 21,580
Total liabilities assumed 927,484
Fair value of net assets acquired 68,542
Goodwill resulting from acquisition $ 121,363

Heartland recognized $121.4 million of goodwill in conjunction with the acquisition of FBLB, 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, 2018, and 2017, as if the FBLB acquisition occurred on January 1, 2018, and January 1, 2017, respectively:~~

(Dollars in thousands, except per share data), unaudited For the Nine Months Ended
September 30, 2018 September 30, 2017
Net interest income $ 317,846
$ 262,367
Net income available to common stockholders $ 69,075
$ 76,698
Basic earnings per share $ 2.02
$ 2.48
Diluted earnings per share $ 2.01
$ 2.46

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, 2018, and January 1, 2017, respectively, 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 $6.0 million of transaction costs or $13.3 million of stock appreciation rights expense recorded by FBLB in 2018 prior to the acquisition. The pro forma

results also do not include adjustment for income taxes. 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 $1.1 million of pre-tax merger related expenses in the nine months ended September 30, 2018, associated with the FBLB acquisition. The merger expenses are reflected on the consolidated statements of income for the applicable period and are reported primarily in the categories of professional fees 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 $7.6 million.

Signature Bancshares, Inc.

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

~~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 sheets. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Citywide Banks of Colorado, Inc.

~~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.

NOTE 3: SECURITIES

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2018
March 31, 2019
U.S. government corporations and agencies	$	27,112	$	—	$	(115	)	$	26,997	$	26,873	$	10	$	(115	)	$	26,768
Mortgage and asset-backed securities	1,926,803		1,341		(56,325		)	1,871,819		1,889,977		6,476		(25,055		)	1,871,398
Obligations of states and political subdivisions	372,146		239		(13,902		)	358,483		481,452		6,146		(2,643		)	484,955
Total debt securities	2,326,061		1,580		(70,342		)	2,257,299		2,398,302		12,632		(27,813		)	2,383,121
Equity securities with a readily determinable fair value	16,916		—		—			16,916		17,339		—		—			17,339
Total	$	2,342,977	$	1,580	$	(70,342	)	$	2,274,215	$	2,415,641	$	12,632	$	(27,813	)	$	2,400,460
December 31, 2017
December 31, 2018
U.S. government corporations and agencies	$	5,358	$	8	$	(38	)	$	5,328	$	32,075	$	3	$	(127	)	$	31,951
Mortgage and asset-backed securities	1,785,467		5,856		(37,587		)	1,753,736		2,061,358		3,740		(38,400		)	2,026,698
Obligations of states and political subdivisions	441,060		4,669		(4,714		)	441,015		382,101		919		(8,046		)	374,974
Total debt securities	2,231,885		10,533		(42,339		)	2,200,079		2,475,534		4,662		(46,573		)	2,433,623
Equity securities	16,296		378		—			16,674
Equity securities with a readily determinable fair value										17,086		—		—			17,086
Total	$	2,248,181	$	10,911	$	(42,339	)	$	2,216,753	$	2,492,620	$	4,662	$	(46,573	)	$	2,450,709

~~Investment securities as shown in this report reflect categories as required by Heartland’s adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities", on~~

On January 1, ~~2018. That new guidance refined~~2019, Heartland adopted ASU 2017-12, and as a result of the ~~definition~~adoption, $148.0 million of ~~equity~~held to maturity debt securities ~~and required their segregation from~~were transferred to debt securities available for ~~sale debt securities.~~

~~While changes in the fair value of available for sale debt~~sale. The securities continue to be recorded in the equity category of accumulated other comprehensive income, the new guidance requires changes in the fair value of equity securities to be recorded in current earnings. As required by the new guidance, the unrealized gain in fairwere transferred at book value on ~~equity securities (recorded in accumulated other comprehensive income at December 31, 2017) was reclassified to retained earnings on January 1, 2018. The amount~~the date of the ~~reclassification was $280,000, net of tax.~~transfer.

Equity securities include money market accounts that totaled $16.9 million at cost and $16.9 million at fair value at September 30, 2018. The portion of unrealized net gains on equity securities recognized in current earnings during the first nine months of 2018, which related to securities still held at September 30, 2018, totaled $97,000.

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

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value
September 30, 2018
Obligations of states and political subdivisions $ 239,908
$ 8,422
$ (936 ) $ 247,394
Total $ 239,908
$ 8,422
$ (936 ) $ 247,394
December 31, 2017
Obligations of states and political subdivisions $ 253,550
$ 12,460
$ (516 ) $ 265,494
Total $ 253,550
$ 12,460
$ (516 ) $ 265,494

~~At September 30, 2018, approximately 70% of Heartland's mortgage and asset-backed securities were issued by government-sponsored enterprises.~~



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
March 31, 2019
Obligations of states and political subdivisions	$	88,089	$	7,151	$	—		$	95,240
Total	$	88,089	$	7,151	$	—		$	95,240
December 31, 2018
Obligations of states and political subdivisions	$	236,283	$	9,554	$	(496	)	$	245,341
Total	$	236,283	$	9,554	$	(496	)	$	245,341

The amortized cost and estimated fair value of investment securities carried at fair value at ~~September 30, 2018,~~March 31, 2019, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.


	September 30, 2018				March 31, 2019
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	23,216	$	23,161	$	29,138	$	29,100
Due in 1 to 5 years	50,520		49,592		51,367		50,972
Due in 5 to 10 years	131,431		125,824		123,062		123,289
Due after 10 years	194,091		186,903		304,758		308,362
Total debt securities	399,258		385,480		508,325		511,723
Mortgage and asset-backed securities	1,926,803		1,871,819		1,889,977		1,871,398
Equity securities with a readily determinable fair value	16,916		16,916		17,339		17,339
Total investment securities	$	2,342,977	$	2,274,215	$	2,415,641	$	2,400,460

The amortized cost and estimated fair value of debt securities held to maturity at ~~September 30, 2018,~~March 31, 2019, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.


	September 30, 2018				March 31, 2019
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	1,274	$	1,281	$	6	$	6
Due in 1 to 5 years	31,121		31,495		12,966		13,200
Due in 5 to 10 years	105,183		107,052		58,150		61,138
Due after 10 years	102,330		107,566		16,967		20,896
Total investment securities	$	239,908	$	247,394	$	88,089	$	95,240

As of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, securities with a fair value of ~~$551.3~~$455.6 million and ~~$670.3~~$524.8 million, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.

Gross gains and losses realized related to the sales of securities carried at fair value for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ are summarized as follows, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2018		2017		2018		2017		2019		2018
Proceeds from sales	$	59,137	$	503,083	$	694,872	$	1,127,091	$	434,154	$	392,246
Gross security gains	67		2,088		3,537		8,585		2,408		3,013
Gross security losses	212		409		2,500		3,023		833		1,572

The following tables summarize, in thousands, the amount of unrealized losses, defined as the amount by which cost or amortized cost exceeds fair value, and the related fair value of investments with unrealized losses in Heartland's securities portfolio as of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017.~~2018. The investments were segregated into two categories: those that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or more. The reference point for determining how long an investment was in an unrealized loss position was ~~September 30, 2017,~~March 31, 2018, and December 31, ~~2016,~~2017, respectively. Securities for which Heartland has taken credit-related other-than-temporary impairment ("OTTI") write-downs are categorized as being "less than 12 months" or "12 months or longer" in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.


Debt securities available for sale	Less than 12 months					12 months or longer					Total					Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2018
March 31, 2019
U.S. government corporations and agencies	$	22,392	$	(39	)	$	4,605	$	(76	)	$	26,997	$	(115	)	$	18,742	$	(95	)	$	4,541	$	(20	)	$	23,283	$	(115	)
Mortgage and asset-backed securities	1,007,078		(18,299		)	668,623		(38,026		)	1,675,701		(56,325		)	227,902		(2,075		)	926,176		(22,980		)	1,154,078		(25,055		)
Obligations of states and political subdivisions	203,363		(5,552		)	139,394		(8,350		)	342,757		(13,902		)	26,161		(98		)	132,515		(2,545		)	158,676		(2,643		)
Total temporarily impaired securities	$	1,232,833	$	(23,890	)	$	812,622	$	(46,452	)	$	2,045,455	$	(70,342	)	$	272,805	$	(2,268	)	$	1,063,232	$	(25,545	)	$	1,336,037	$	(27,813	)
December 31, 2017
December 31, 2018																December 31, 2018
U.S. government corporations and agencies	$	4,819	$	(38	)	$	—	$	—		$	4,819	$	(38	)	$	24,902	$	(83	)	$	4,577	$	(44	)	$	29,479	$	(127	)
Mortgage and asset-backed securities	851,070		(11,533		)	399,978		(26,054		)	1,251,048		(37,587		)	733,826		(9,060		)	805,089		(29,340		)	1,538,915		(38,400		)
Obligations of states and political subdivisions	93,040		(667		)	159,180		(4,047		)	252,220		(4,714		)	34,990		(390		)	258,143		(7,656		)	293,133		(8,046		)
Total temporarily impaired securities	$	948,929	$	(12,238	)	$	559,158	$	(30,101	)	$	1,508,087	$	(42,339	)	$	793,718	$	(9,533	)	$	1,067,809	$	(37,040	)	$	1,861,527	$	(46,573	)


Securities held to maturity	Less than 12 months					12 months or longer					Total					Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2018
March 31, 2019
Obligations of states and political subdivisions	$	29,174	$	(209	)	$	13,160	$	(727	)	$	42,334	$	(936	)	$	—	$	—		$	—	$	—		$	—	$	—
Total temporarily impaired securities	$	29,174	$	(209	)	$	13,160	$	(727	)	$	42,334	$	(936	)	$	—	$	—		$	—	$	—		$	—	$	—
December 31, 2017
December 31, 2018																December 31, 2018
Obligations of states and political subdivisions	$	8,512	$	(49	)	$	8,989	$	(467	)	$	17,501	$	(516	)	$	10,802	$	(17	)	$	19,508	$	(479	)	$	30,310	$	(496	)
Total temporarily impaired securities	$	8,512	$	(49	)	$	8,989	$	(467	)	$	17,501	$	(516	)	$	10,802	$	(17	)	$	19,508	$	(479	)	$	30,310	$	(496	)

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

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

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

There were no gross realized gains or losses on the sale of securities carried at fair value or held to maturity securities with OTTI write-downs for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and March 31, 2018, ~~and September 30, 2017,~~ respectively.

Other investments, at cost, include equity securities without a readily determinable fair value. Equity securities without a readily determinable fair value totaled ~~$22.4~~$17.3 million and ~~$18.6~~$17.1 million at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, respectively. At ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, other investments at cost included shares of stock in the Federal Home Loan Banks (the "FHLBs") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of ~~$15.1~~$15.4 million and ~~$14.0~~$16.6 million, respectively.

The Heartland banks are required by federal law to maintain FHLB stock as members of the various FHLBs. These equity securities are "restricted" in that they can only be sold back to the respective institutions from which they were acquired or another member institution at par. Therefore, the FHLB stock is less liquid than other marketable equity securities, and the fair value approximates amortized cost. Heartland considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. Heartland evaluates impairment in these investments based on the ultimate recoverability of the par value and, at ~~September 30, 2018,~~March 31, 2019, did not consider the investments to be other than temporarily impaired.

NOTE 4: LOANS

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


	September 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Loans receivable held to maturity:
Commercial	$	1,962,222		$	1,646,606		$	2,042,594		$	2,020,231
Commercial real estate	3,648,731			3,163,269			3,702,457			3,711,481
Agricultural and agricultural real estate	574,048			511,588			544,805			565,408
Residential real estate	676,941			624,279			630,433			673,603
Consumer	506,181			447,484			412,573			440,158
Gross loans receivable held to maturity	7,368,123			6,393,226			7,332,862			7,410,881
Unearned discount	(1,340		)	(556		)	(288		)	(1,624		)
Deferred loan fees	(1,290		)	(1,206		)	(1,030		)	(1,560		)
Total net loans receivable held to maturity	7,365,493			6,391,464			7,331,544			7,407,697
Allowance for loan losses	(61,221		)	(55,686		)	(62,639		)	(61,963		)
Loans receivable, net	$	7,304,272		$	6,335,778		$	7,268,905		$	7,345,734

Heartland has certain lending policies and procedures in place that are designed to provide for an acceptable level of credit risk. The board of directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the board with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.

~~Diversification in the loan portfolio is also a means of managing risk associated with fluctuations in economic conditions.~~ Heartland originates commercial and commercial real estate loans for a wide variety of business purposes, including lines of credit for capital and operating purposes and term loans for real estate and equipment purchases. Agricultural loans provide financing for capital improvements and farm operations, as well as livestock and machinery purchases. Residential mortgage loans are originated for the construction, purchase or refinancing of single family residential properties. Consumer loans include loans for motor vehicles, home improvement, home equity and personal lines of credit. 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, which comprises approximately 14% of Heartland's total consumer loan portfolio.

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

The following table shows the balance in the allowance for loan losses at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, and the related loan balances, disaggregated on the basis of impairment methodology, in thousands. Loans evaluated under ASC 310-10-35 include loans on nonaccrual status and troubled debt restructurings, which are individually evaluated for impairment, and other impaired loans deemed to have similar risk characteristics. All other loans are collectively evaluated for impairment under ASC 450-20. Heartland has made no significant changes to the accounting for the allowance for loan losses during ~~2018.~~the quarter ended March 31, 2019.


	Allowance For Loan Losses						Gross Loans Receivable Held to Maturity						Allowance For Loan Losses						Gross Loans Receivable Held to Maturity
	Ending Balance Under ASC 310-10-35		Ending Balance Under ASC 450-20		Total		Ending Balance Evaluated for Impairment Under ASC 310-10-35		Ending Balance Evaluated for Impairment Under ASC 450-20		Total		Ending Balance Under ASC 310-10-35		Ending Balance Under ASC 450-20		Total		Ending Balance Evaluated for Impairment Under ASC 310-10-35		Ending Balance Evaluated for Impairment Under ASC 450-20		Total
September 30, 2018
March 31, 2019
Commercial	$	4,165	$	17,904	$	22,069	$	23,414	$	1,938,808	$	1,962,222	$	6,301	$	17,520	$	23,821	$	24,498	$	2,018,096	$	2,042,594
Commercial real estate	214		23,476		23,690		14,415		3,634,316		3,648,731		353		26,434		26,787		18,150		3,684,307		3,702,457
Agricultural and agricultural real estate	260		4,306		4,566		17,522		556,526		574,048		1,099		4,499		5,598		20,475		524,330		544,805
Residential real estate	279		1,571		1,850		23,647		653,294		676,941		153		1,452		1,605		18,619		611,814		630,433
Consumer	1,085		7,961		9,046		8,671		497,510		506,181		653		4,175		4,828		5,826		406,747		412,573
Total	$	6,003	$	55,218	$	61,221	$	87,669	$	7,280,454	$	7,368,123	$	8,559	$	54,080	$	62,639	$	87,568	$	7,245,294	$	7,332,862
December 31, 2017
December 31, 2018
Commercial	$	1,613	$	16,485	$	18,098	$	7,415	$	1,639,191	$	1,646,606	$	5,733	$	18,772	$	24,505	$	24,202	$	1,996,029	$	2,020,231
Commercial real estate	766		21,184		21,950		23,705		3,139,564		3,163,269		218		25,320		25,538		14,388		3,697,093		3,711,481
Agricultural and agricultural real estate	546		3,712		4,258		13,304		498,284		511,588		686		4,267		4,953		15,951		549,457		565,408
Residential real estate	430		1,794		2,224		27,141		597,138		624,279		168		1,617		1,785		20,251		653,352		673,603
Consumer	1,400		7,756		9,156		6,903		440,581		447,484		749		4,433		5,182		7,004		433,154		440,158
Total	$	4,755	$	50,931	$	55,686	$	78,468	$	6,314,758	$	6,393,226	$	7,554	$	54,409	$	61,963	$	81,796	$	7,329,085	$	7,410,881

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


	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Nonaccrual loans	$	68,528	$	58,272	$	72,670	$	67,833
Nonaccrual troubled debt restructured loans	4,532		4,309		4,624		4,110
Total nonaccrual loans	$	73,060	$	62,581	$	77,294	$	71,943
Accruing loans past due 90 days or more	$	154	$	830	$	1,706	$	726
Performing troubled debt restructured loans	$	4,180	$	6,617	$	3,460	$	4,026

The following tables provide information on troubled debt restructured loans that were modified during the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and March 31, 2018, ~~and September 30, 2017,~~ dollars in thousands:

Three Months Ended
September 30,
2018 2017
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 1
92
94
8
1,174
1,174
Consumer —
—
—
—
—
—
Total 1
$ 92
$ 94
8

$ 1,174
$ 1,174


	Nine Months Ended September 30,										Three Months Ended March 31,
	2018					2017					2019						2018
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment			Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial	—	$	—	$	—	3	$	131	$	131	—	$	—	$	—		—	$	—	$	—
Commercial real estate	—	—		—		—	—		—		—	—		—			—	—		—
Total commercial and commercial real estate	—	—		—		3	131		131		—	—		—			—	—		—
Agricultural and agricultural real estate	—	—		—		—	—		—		—	—		—			—	—		—
Residential real estate	11	2,098		1,808		22	2,977		2,977		1	36		42			5	877		752
Consumer	—	—		—		—	—		—		—	—		—		��	—	—		—
Total	11	$	2,098	$	1,808	25	$	3,108	$	3,108	1	$	36	$	42		5	$	877	$	752

The pre-modification and post-modification recorded investment represents amounts as of the date of loan modification. The ~~change related to~~difference between the pre-modification investment and post-modification investment amounts on Heartland's residential real estate trouble debt restructured loans for the ~~nine-months~~three-months ended ~~September 30, 2018,~~March 31, 2019, is due to ~~$356,000 of~~ principal deferment collected from government guarantees and ~~$66,000 of~~ capitalized interest and escrow. At ~~September 30, 2018,~~March 31, 2019, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructured loan.

The following table shows troubled debt restructured loans for which there was a payment default during the ~~three- and nine-~~three month periods ended ~~September 30,~~March 31, 2019, and March 31, 2018, ~~and September 30, 2017,~~ that had been modified during the twelve-month period prior to default, in thousands:

With Payment Defaults During the

Three Months Ended
September 30,
2018 2017
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 4
418
5

1,221
Consumer —
—
—

—
Total 4
$ 418
5

$ 1,221


	With Payment Defaults During the
	Nine Months Ended September 30,						With Payment Defaults During the Three Months Ended March 31,
	2018			2017			2019			2018
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment		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	10	1,598		8	1,480		1	42		3	519
Consumer	—	—		—	—		—	—		—	—
Total	10	$	1,598	8	$	1,480	1	$	42	3	$	519

Heartland's internal rating system is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category, categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration. The "nonpass" category consists of special mention, substandard, doubtful and loss loans. The "special mention" rating is attached to loans where the borrower exhibits negative trends in financial circumstances due to borrower specific or systemic conditions that, if left uncorrected, threaten the borrower's capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. These credits are closely monitored for improvement or deterioration. The "substandard" rating is assigned to loans that are inadequately protected by the current net worth and paying capacity of the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that Heartland will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following weaknesses: deteriorating financial trends, lack of earnings, inadequate debt service capacity, excessive debt and/or lack of liquidity. The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as

resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring the rating of the loan as "loss" until the exact status of the loan can be determined. The loss rating is assigned to loans considered uncollectible. Heartland had no loans classified as loss or doubtful as of ~~September 30, 2018.~~March 31, 2019. Loans are placed on "nonaccrual" when management does not expect to collect payments of principal and interest in full or when principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured and in the process of collection.

The following table presents loans by credit quality indicator at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, in thousands:


	Pass		Nonpass		Total		Pass		Nonpass		Total
September 30, 2018
March 31, 2019
Commercial	$	1,825,692	$	136,530	$	1,962,222	$	1,907,620	$	134,974	$	2,042,594
Commercial real estate	3,467,522		181,209		3,648,731		3,510,161		192,296		3,702,457
Total commercial and commercial real estate	5,293,214		317,739		5,610,953		5,417,781		327,270		5,745,051
Agricultural and agricultural real estate	476,261		97,787		574,048		440,927		103,878		544,805
Residential real estate	644,592		32,349		676,941		603,647		26,786		630,433
Consumer	491,092		15,089		506,181		398,695		13,878		412,573
Total gross loans receivable held to maturity	$	6,905,159	$	462,964	$	7,368,123	$	6,861,050	$	471,812	$	7,332,862
December 31, 2017
December 31, 2018
Commercial	$	1,552,783	$	93,823	$	1,646,606	$	1,880,579	$	139,652	$	2,020,231
Commercial real estate	2,985,501		177,768		3,163,269		3,524,344		187,137		3,711,481
Total commercial and commercial real estate	4,538,284		271,591		4,809,875		5,404,923		326,789		5,731,712
Agricultural and agricultural real estate	451,539		60,049		511,588		471,642		93,766		565,408
Residential real estate	586,623		37,656		624,279		645,478		28,125		673,603
Consumer	432,936		14,548		447,484		425,451		14,707		440,158
Total gross loans receivable held to maturity	$	6,009,382	$	383,844	$	6,393,226	$	6,947,494	$	463,387	$	7,410,881

The nonpass category in the table above is comprised of approximately ~~53%~~48% special mention loans and ~~47%~~52% substandard loans as of ~~September 30, 2018.~~March 31, 2019. The percent of nonpass loans on nonaccrual status as of ~~September 30, 2018,~~March 31, 2019, was 16%. As of December 31, ~~2017,~~2018, the nonpass category in the table above was comprised of approximately 52% special mention loans and 48% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, ~~2017,~~2018, was 16%. Loans delinquent 30 to 89 days as a percent of total loans were ~~0.62%~~0.47% at ~~September 30, 2018,~~March 31, 2019, compared to ~~0.27%~~0.21% at December 31, ~~2017.~~2018. Changes in credit risk are monitored on a ~~regular~~continuous basis and changes in risk ratings are made when identified. All impaired loans are reviewed at least annually.

As of ~~September 30, 2018,~~March 31, 2019, Heartland had ~~$3.1~~$2.8 million of loans secured by residential real estate property that were in the process of foreclosure.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Heartland’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, there is a reasonable doubt as to the timely collection of the interest and principal, normally when a loan is 90 days past due. When interest accruals are deemed uncollectible, interest credited to income in the current year is reversed and interest accrued in prior years is charged to the allowance for loan losses. A loan can be restored to accrual status if the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments on the loan, and (1) all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a reasonable period of time, and (2) that there is a sustained period of repayment performance (generally a minimum of six months) by the borrower in accordance with the scheduled contractual terms.

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


	Accruing Loans														Accruing Loans
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual		Total Loans		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual		Total Loans
September 30, 2018
March 31, 2019
Commercial	$	10,558	$	3,521	$	61	$	14,140	$	1,924,173	$	23,909	$	1,962,222	$	8,253	$	2,859	$	325	$	11,437	$	2,006,358	$	24,799	$	2,042,594
Commercial real estate	11,495		9,036		58		20,589		3,616,737		11,405		3,648,731		5,870		4,942		1,264		12,076		3,674,676		15,705		3,702,457
Total commercial and commercial real estate	22,053		12,557		119		34,729		5,540,910		35,314		5,610,953		14,123		7,801		1,589		23,513		5,681,034		40,504		5,745,051
Agricultural and agricultural real estate	1,294		1,146		35		2,475		554,055		17,518		574,048		2,179		800		31		3,010		521,621		20,174		544,805
Residential real estate	2,893		192		—		3,085		659,662		14,194		676,941		4,224		110		—		4,334		613,667		12,432		630,433
Consumer	4,493		811		—		5,304		494,843		6,034		506,181		4,835		536		86		5,457		402,932		4,184		412,573
Total gross loans receivable held to maturity	$	30,733	$	14,706	$	154	$	45,593	$	7,249,470	$	73,060	$	7,368,123	$	25,361	$	9,247	$	1,706	$	36,314	$	7,219,254	$	77,294	$	7,332,862
December 31, 2017
December 31, 2018
Commercial	$	1,246	$	259	$	100	$	1,605	$	1,637,773	$	7,228	$	1,646,606	$	2,574	$	205	$	—	$	2,779	$	1,991,525	$	25,927	$	2,020,231
Commercial real estate	4,769		2,326		—		7,095		3,139,576		16,598		3,163,269		4,819		—		726		5,545		3,694,259		11,677		3,711,481
Total commercial and commercial real estate	6,015		2,585		100		8,700		4,777,349		23,826		4,809,875		7,393		205		726		8,324		5,685,784		37,604		5,731,712
Agricultural and agricultural real estate	604		134		—		738		497,546		13,304		511,588		99		—		—		99		549,376		15,933		565,408
Residential real estate	2,022		270		—		2,292		601,120		20,867		624,279		5,147		49		—		5,196		655,329		13,078		673,603
Consumer	4,734		943		730		6,407		436,493		4,584		447,484		2,724		307		—		3,031		431,799		5,328		440,158
Total gross loans receivable held to maturity	$	13,375	$	3,932	$	830	$	18,137	$	6,312,508	$	62,581	$	6,393,226	$	15,363	$	561	$	726	$	16,650	$	7,322,288	$	71,943	$	7,410,881

The majority of Heartland's impaired loans are onthose that are nonaccrual, are past due 90 days or more and still accruing or have had their terms restructured in a troubled debt restructuring. The following tables present ~~by category of loan, impaired loans,~~ the unpaid ~~contractual loan balances~~principal balance that was contractually due at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017;~~2018, the outstanding loan ~~balances~~balance recorded on the consolidated balance sheets at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017;~~2018, any related allowance recorded for those loans as of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017;~~2018, the average outstanding loan balances recorded on the consolidated balance sheets during the ~~three- and nine-months~~three months ended ~~September 30, 2018,~~March 31, 2019, and year ended December 31, ~~2017;~~2018, and the interest income recognized on the impaired loans during the ~~three- and nine-month periods~~three-month period ended ~~September 30, 2018,~~March 31, 2019, and year ended December 31, ~~2017,~~2018, in thousands:


	Unpaid Contractual Balance		Loan Balance		Related Allowance Recorded		Quarter- to- Date Avg. Loan Balance		Quarter- to- Date Interest Income Recognized		Year- to- Date Avg. Loan Balance		Year- to- Date Interest Income Recognized		Unpaid Principal Balance		Loan Balance		Related Allowance Recorded		Year- to- Date Avg. Loan Balance		Year- to- Date Interest Income Recognized
September 30, 2018
March 31, 2019
Impaired loans with a related allowance:
Commercial	$	6,768	$	6,768	$	4,165	$	5,173	$	16	$	3,593	$	52	$	12,107	$	12,096	$	6,301	$	12,046	$	7
Commercial real estate	748		748		214		889		4		5,635		20		1,421		1,421		353		1,201		6
Total commercial and commercial real estate	7,516		7,516		4,379		6,062		20		9,228		72		13,528		13,517		6,654		13,247		13
Agricultural and agricultural real estate	2,043		2,043		260		3,000		2		2,369		2		3,280		3,280		1,099		2,225		1
Residential real estate	869		869		279		1,006		4		1,278		10		1,253		1,253		153		1,012		—
Consumer	3,028		3,028		1,085		3,146		9		3,069		29		1,272		1,270		653		1,275		6
Total impaired loans with a related allowance	$	13,456	$	13,456	$	6,003	$	13,214	$	35	$	15,944	$	113
Total loans held to maturity															$	19,333	$	19,320	$	8,559	$	17,759	$	20
Impaired loans without a related allowance:
Commercial	$	18,003	$	16,646	$	—	$	13,113	$	182	$	9,307	$	277	$	14,467	$	12,402	$	—	$	11,928	$	330
Commercial real estate	13,765		13,667		—		11,850		80		12,847		201		16,809		16,729		—		14,008		54
Total commercial and commercial real estate	31,768		30,313		—		24,963		262		22,154		478		31,276		29,131		—		25,936		384
Agricultural and agricultural real estate	18,002		15,479		—		15,837		1		14,726		4		19,538		17,195		—		14,373		16
Residential real estate	22,778		22,778		—		22,779		121		24,780		320		17,370		17,366		—		17,933		76
Consumer	5,643		5,643		—		5,522		22		4,930		78		4,620		4,556		—		4,820		25
Total impaired loans without a related allowance	$	78,191	$	74,213	$	—	$	69,101	$	406	$	66,590	$	880
Total loans held to maturity															$	72,804	$	68,248	$	—	$	63,062	$	501
Total impaired loans held to maturity:
Commercial	$	24,771	$	23,414	$	4,165	$	18,286	$	198	$	12,900	$	329	$	26,574	$	24,498	$	6,301	$	23,974	$	337
Commercial real estate	14,513		14,415		214		12,739		84		18,482		221		18,230		18,150		353		15,209		60
Total commercial and commercial real estate	39,284		37,829		4,379		31,025		282		31,382		550		44,804		42,648		6,654		39,183		397
Agricultural and agricultural real estate	20,045		17,522		260		18,837		3		17,095		6		22,818		20,475		1,099		16,598		17
Residential real estate	23,647		23,647		279		23,785		125		26,058		330		18,623		18,619		153		18,945		76
Consumer	8,671		8,671		1,085		8,668		31		7,999		107		5,892		5,826		653		6,095		31
Total impaired loans held to maturity	$	91,647	$	87,669	$	6,003	$	82,315	$	441	$	82,534	$	993	$	92,137	$	87,568	$	8,559	$	80,821	$	521


	Unpaid Contractual Balance		Loan Balance		Related Allowance Recorded		Year-to- Date Avg. Loan Balance		Year-to- Date Interest Income Recognized		Unpaid Principal Balance		Loan Balance		Related Allowance Recorded		Year-to- Date Avg. Loan Balance		Year-to- Date Interest Income Recognized
December 31, 2017
December 31, 2018
Impaired loans with a related allowance:
Commercial	$	2,292	$	2,292	$	1,613	$	3,607	$	39	$	12,376	$	12,366	$	5,733	$	4,741	$	33
Commercial real estate	11,925		10,068		766		11,479		34		891		891		218		4,421		25
Total commercial and commercial real estate	14,217		12,360		2,379		15,086		73		13,267		13,257		5,951		9,162		58
Agricultural and agricultural real estate	1,539		1,539		546		3,437		—		1,718		1,718		686		2,165		2
Residential real estate	1,568		1,568		430		2,056		15		647		647		168		1,138		12
Consumer	2,634		2,634		1,400		2,370		41		1,373		1,373		749		2,934		29
Total impaired loans with a related allowance	$	19,958	$	18,101	$	4,755	$	22,949	$	129
Total loans held to maturity											$	17,005	$	16,995	$	7,554	$	15,399	$	101
Impaired loans without a related allowance:
Commercial	$	6,243	$	5,123	$	—	$	2,586	$	165	$	13,616	$	11,836	$	—	$	10,052	$	299
Commercial real estate	14,243		13,637		—		20,148		514		13,578		13,497		—		13,000		249
Total commercial and commercial real estate	20,486		18,760		—		22,734		679		27,194		25,333		—		23,052		548
Agricultural and agricultural real estate	13,793		11,765		—		9,654		—		16,836		14,233		—		14,781		5
Residential real estate	25,573		25,573		—		26,024		277		19,604		19,604		—		23,950		308
Consumer	4,269		4,269		—		3,884		73		5,631		5,631		—		5,117		97
Total impaired loans without a related allowance	$	64,121	$	60,367	$	—	$	62,296	$	1,029
Total loans held to maturity											$	69,265	$	64,801	$	—	$	66,900	$	958
Total impaired loans held to maturity:
Commercial	$	8,535	$	7,415	$	1,613	$	6,193	$	204	$	25,992	$	24,202	$	5,733	$	14,793	$	332
Commercial real estate	26,168		23,705		766		31,627		548		14,469		14,388		218		17,421		274
Total commercial and commercial real estate	34,703		31,120		2,379		37,820		752		40,461		38,590		5,951		32,214		606
Agricultural and agricultural real estate	15,332		13,304		546		13,091		—		18,554		15,951		686		16,946		7
Residential real estate	27,141		27,141		430		28,080		292		20,251		20,251		168		25,088		320
Consumer	6,903		6,903		1,400		6,254		114		7,004		7,004		749		8,051		126
Total impaired loans held to maturity	$	84,079	$	78,468	$	4,755	$	85,245	$	1,158	$	86,270	$	81,796	$	7,554	$	82,299	$	1,059

On May 18, 2018, Heartland completed the acquisition of First Bank Lubbock Bancshares, Inc., parent company of First Bank & Trust, headquartered in Lubbock, Texas. As of May 18, 2018, First Bank Lubbock Bancshares, Inc. had gross loans of $696.9 million, and the estimated fair value of the loans acquired was $681.1 million.

On February 23, 2018, Heartland acquired Signature Bancshares, Inc., parent company of Signature Bank, based in Minnetonka, Minnesota. As of February 23, 2018, Signature Bancshares, Inc. had gross loans of $335.1 million and the estimated fair value of the loans acquired was $324.5 million. Included in loans acquired from Signature Bank was a lease portfolio with a fair value of $16.0 million on the acquisition date. The lease portfolio is included with the commercial loan category for disclosure purposes.

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, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, the carrying amount of loans acquired since 2015 consist of purchased impaired and nonimpaired purchased loans as summarized in the following table, in thousands:


	September 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
	Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans		Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans		Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans		Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans
Commercial	$	9,078	$	300,261	$	309,339	$	952	$	187,375	$	188,327	$	3,804	$	197,958	$	201,762	$	3,801	$	243,693	$	247,494
Commercial real estate	302		1,202,537		1,202,839		2,572		1,052,469		1,055,041		156		986,926		987,082		158		1,098,171		1,098,329
Agricultural and agricultural real estate	—		32,357		32,357		—		1,242		1,242		—		14,942		14,942		—		27,115		27,115
Residential real estate	220		204,414		204,634		214		173,909		174,123		227		168,167		168,394		231		184,389		184,620
Consumer loans	—		89,061		89,061		—		51,292		51,292		—		63,090		63,090		—		75,773		75,773
Total loans	$	9,600	$	1,828,630	$	1,838,230	$	3,738	$	1,466,287	$	1,470,025
Total covered loans													$	4,187	$	1,431,083	$	1,435,270	$	4,190	$	1,629,141	$	1,633,331

Changes in accretable yield on acquired loans with evidence of credit deterioration at the date of acquisition for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and March 31, 2018, ~~and September 30, 2017,~~ were as follows, in thousands:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Balance at beginning of period	$	463		$	101		$	57		$	182		$	227		$	57
Original yield discount, net, at date of acquisition	—			—			508			—			—			(56		)
Accretion	(93		)	(700		)	(943		)	(1,074		)	(257		)	(199		)
Reclassification from nonaccretable difference⁽¹⁾	186			654			934			947			218			198
Balance at period end	$	556		$	55		$	556		$	55		$	188		$	—

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

For loans acquired since January 2015, on the acquisition dates the preliminary estimate of the contractually required payments receivable for all loans with evidence of credit deterioration since origination was $36.9 million, and the estimated fair value of these loans was $21.8 million. At ~~September 30, 2018,~~March 31, 2019, a majority of these loans were valued based upon the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of such collateral, and the timing and amount of the cash flows could not be reasonably estimated. At ~~September 30, 2018,~~March 31, 2019, there was ~~$675,000~~$64,000 of allowance recorded and ~~$139,000~~$57,000 of allowance recorded at December 31, ~~2017,~~2018, related to these ASC 310-30 loans. Provision expense of ~~$675,000~~$7,000 and ~~$5,000~~$0 was recorded for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and 2018, ~~and 2017,~~ 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 $3.67 billion, and the estimated fair value of the loans was $3.59 billion.

NOTE 5: ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and March 31, 2018, ~~and September 30, 2017,~~ were as follows, in thousands:


	Commercial			Commercial Real Estate			Agricultural and Agricultural Real Estate			Residential Real Estate			Consumer			Total			Commercial			Commercial Real Estate			Agricultural and Agricultural Real Estate			Residential Real Estate			Consumer			Total
Balance at June 30, 2018	$	20,709		$	23,727		$	5,709		$	1,857		$	9,322		$	61,324
Balance at December 31, 2018																			$	24,505		$	25,538		$	4,953		$	1,785		$	5,182		$	61,963
Charge-offs	(2,945		)	(199		)	(1,145		)	—			(1,831		)	(6,120		)	(644		)	(39		)	(379		)	(163		)	(725		)	(1,950		)
Recoveries	158			242			—			1			378			779			175			151			330			13			322			991
Provision	4,147			(80		)	2			(8		)	1,177			5,238			(215		)	1,137			694			(30		)	49			1,635
Balance at September 30, 2018	$	22,069		$	23,690		$	4,566		$	1,850		$	9,046		$	61,221

	Commercial			Commercial Real Estate			Agricultural and Agricultural Real Estate			Residential Real Estate			Consumer			Total
Balance at December 31, 2017	$	18,098		$	21,950		$	4,258		$	2,224		$	9,156		$	55,686
Charge-offs	(4,717		)	(761		)	(1,357		)	(211		)	(4,462		)	(11,508		)
Recoveries	562			1,013			14			77			1,045			2,711
Provision	8,126			1,488			1,651			(240		)	3,307			14,332
Balance at September 30, 2018	$	22,069		$	23,690		$	4,566		$	1,850		$	9,046		$	61,221
Balance at March 31, 2019																			$	23,821		$	26,787		$	5,598		$	1,605		$	4,828		$	62,639


	Commercial			Commercial Real Estate			Agricultural and Agricultural Real Estate			Residential Real Estate			Consumer			Total			Commercial			Commercial Real Estate			Agricultural and Agricultural Real Estate		Residential Real Estate			Consumer			Total
Balance at June 30, 2017	$	17,168		$	21,861		$	3,832		$	2,263		$	8,927		$	54,051
Balance at December 31, 2017																			$	18,098		$	21,950		$	4,258	$	2,224		$	9,156		$	55,686
Charge-offs	(1,954		)	(1,913		)	—			(142		)	(1,750		)	(5,759		)	(794		)	(125		)	—		(16		)	(1,289		)	(2,224		)
Recoveries	347			46			14			63			418			888			104			448			14		75			290			931
Provision	1,409			546			2,281			82			1,387			5,705			1,987			1,196			444		(142		)	778			4,263
Balance at September 30, 2017	$	16,970		$	20,540		$	6,127		$	2,266		$	8,982		$	54,885

	Commercial			Commercial Real Estate			Agricultural and Agricultural Real Estate			Residential Real Estate			Consumer			Total
Balance at December 31, 2016	$	14,765		$	24,319		$	4,210		$	2,263		$	8,767		$	54,324
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
Balance at March 31, 2018																			$	19,395		$	23,469		$	4,716	$	2,141		$	8,935		$	58,656

Management allocates the allowance for loan losses by pools of risk within each loan portfolio. The allocation of the allowance for loan losses by loan portfolio is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular category. The total allowance for loan losses is available to absorb losses from any segment of the loan portfolio.

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

Heartland had goodwill of $391.7 million at ~~September 30, 2018,~~both March 31, 2019, and ~~$236.6 million at~~ December 31, ~~2017.~~2018. Heartland conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. There was no goodwill impairment as of the most recent assessment.

Heartland recorded $121.4 million of goodwill and $13.9 million of core deposit intangibles in connection with the acquisition of First Bank Lubbock Bancshares, Inc., parent company of First Bank & Trust Company, headquartered in Lubbock, Texas on May 18, 2018.

Heartland recorded $33.7 million of goodwill and $7.7 million of core deposit intangibles in connection with the acquisition of Signature Bancshares, Inc., parent company of Signature Bank, headquartered in Minnetonka, Minnesota on February 23, 2018.

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.

The core deposit intangibles recorded with the First Bank Lubbock Bancshares, Inc., and Signature Bancshares, Inc.~~, Citywide Banks of Colorado, Inc., and Founders Bancorp~~ 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 First Bank Lubbock Bancshares, Inc., and Signature Bancshares, Inc.~~, Citywide Banks of Colorado, Inc., and Founders Bancorp~~ acquisitions resulted from expected operational synergies, increased market presence, cross-selling opportunities, and expanded business lines and is not deductible for tax purposes.

Heartland's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangibles, and commercial servicing rights. The gross carrying amount of these intangible assets and the associated accumulated amortization at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, are presented in the table below, in thousands:


	September 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	83,639	$	33,820	$	49,819	$	62,008	$	27,086	$	34,922	$	83,640	$	39,236	$	44,404	$	83,640	$	36,403	$	47,237
Customer relationship intangibles	1,177		925		252		1,177		896		281		1,177		944		233		1,177		935		242
Mortgage servicing rights	42,616		12,445		30,171		42,139		18,891		23,248		41,473		14,001		27,472		42,228		12,865		29,363
Commercial servicing rights	6,800		4,932		1,868		6,719		4,110		2,609		6,902		5,406		1,496		6,834		5,125		1,709
Total	$	134,232	$	52,122	$	82,110	$	112,043	$	50,983	$	61,060	$	133,192	$	59,587	$	73,605	$	133,879	$	55,328	$	78,551

On April 26, 2019, Dubuque Bank and Trust Company signed an agreement to sell substantially all its servicing rights to PNC Bank, N.A., headquartered in Pittsburgh, Pennsylvania. The servicing portfolio had a book value of $21.0 million, and the portfolio contained approximately 20,300 serviced residential mortgage loans with unpaid principal balances of $3.35 billion as of March 31, 2019. The serviced loans are primarily owned by Fannie Mae and Freddie Mac. The transaction was approved by Fannie Mae and Freddie Mac and closed on April 30, 2019. Based upon the terms of the agreement, proceeds from the transaction were approximately $37.0 million. As part of the agreement, Dubuque Bank and Trust Company will subservice the loans until the transfer date in August 2019. The transaction qualified as a sale, and $21.0 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of April 30, 2019 when the transaction closed.

The following table shows the estimated future amortization expense for amortizable intangible assets, excluding the mortgage servicing rights portfolio for Dubuque Bank and Trust Company, in thousands:


	Core Deposit Intangibles		Customer Relationship Intangibles		Mortgage Servicing Rights		Commercial Servicing Rights		Total		Core Deposit Intangibles		Customer Relationship Intangibles		Mortgage Servicing Rights		Commercial Servicing Rights		Total
Three months ending December 31, 2018	$	2,583	$	10	$	1,642	$	139	$	4,374
Nine months ending December 31, 2019											$	6,949	$	28	$	736	$	310	$	8,023
Year ending December 31,
2019	9,452		38		7,132		485		17,107
2020	8,230		37		6,113		379		14,759		8,230		36		1,431		331		10,028
2021	7,036		35		5,094		331		12,496		7,036		35		1,226		293		8,590
2022	5,634		34		4,076		270		10,014		5,634		35		1,022		246		6,937
2023	4,933		34		3,057		154		8,178		4,933		34		818		159		5,944
2024											4,008		33		613		86		4,740
Thereafter	11,951		64		3,057		110		15,182		7,614		32		613		71		8,330
Total	$	49,819	$	252	$	30,171	$	1,868	$	82,110	$	44,404	$	233	$	6,459	$	1,496	$	52,592

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of ~~September 30, 2018.~~March 31, 2019. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others at First Bank & Trust were approximately ~~$4.16~~$692.3 million at March 31, 2019 compared to $648.9 million at December 31, 2018. Mortgage loans serviced for others at Dubuque Bank and Trust Company were $3.35 billion and ~~$3.56~~$3.45 billion ~~as of September 30, 2018,~~at March 31, 2019 and December 31, ~~2017,~~2018, respectively. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio for First Bank & Trust were approximately ~~$43.2~~$8.7 million at March 31, 2019 and ~~$17.3~~$5.9 million ~~as of September 30, 2018, and~~at December 31, ~~2017, respectively. The~~2018. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio for Dubuque Bank and Trust Company totaled $23.3 million at March 31, 2019 and $17.7 million at December 31, 2018. At March 31, 2019, the fair value of ~~Heartland's~~First Bank and Trust's mortgage servicing rights was estimated at ~~$47.6~~$6.5 million ~~at September 30, 2018, and $37.1~~ compared to $7.1 million at December 31, ~~2017.~~

~~Heartland acquired the right to service mortgage loans totaling $640.7 million and a~~2018. The fair value of ~~$7.0 million with the First~~Dubuque Bank ~~Lubbock Bancshares, Inc. transaction that closed on May 18, 2018. Heartland's~~and Trust Company'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~~at March 31, 2019 was estimated at $37.1 million compared 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 two of Heartland's subsidiaries.

During the third quarter of 2017, Heartland entered into an agreement to sell substantially all of its GNMA servicing portfolio, which contained loans with an unpaid principal balance of approximately $773.9 million. The transaction qualified as a sale, and $6.9$41.5 million ~~of mortgage servicing rights were de-recognized on the consolidated balance sheet as of~~at December 31, ~~2017.~~2018.

The fair value of mortgage servicing rights is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings are considered in the calculation. The average constant prepayment rate ~~was~~ ~~8.46%~~ ~~and 9.73%~~ for the ~~September 30, 2018,~~First Bank & Trust valuation was 12.00% as of March 31, 2019 compared to 10.30% at December 31, 2018. The discount rate for the First Bank & Trust valuation was 9.03% at both March 31, 2019 and December 31, ~~2017, valuations, respectively. The discount rate was~~ ~~9.19%~~ ~~and~~ ~~9.06%~~ ~~for the September 30, 2018, and December 31, 2017, valuations, respectively.~~2018. The average capitalization rate for First Bank & Trust during the first three m~~ninemonths~~onths of ~~2018~~2019 ranged from 89 92 to ~~125 basis~~98 basis points compared to ~~the~~a range of 9493 to ~~150~~117 basis points ~~for 2017.~~since acquisition on May 18, 2018. Fees collected for the servicing of mortgage loans for others were ~~$2.6 million and $2.9 million~~$427,000 for the ~~quarters~~three-months ended ~~September 30, 2018, and September 30, 2017, respectively, and $7.3 million and $9.3 million for the nine-months ended September 30, 2018, and September 30, 2017, respectively.~~March 31, 2019.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, and ~~September 30, 2017:~~March 31, 2018:


	2018			2017			2019			2018
Balance at January 1,	$	23,248		$	32,088		$	29,363		$	23,248
Originations	4,322			5,778			198			1,162
Amortization	(4,394		)	(7,184		)	(1,500		)	(1,245		)
Valuation allowance on mortgage servicing rights	—			—
Sale of mortgage servicing rights	—			(6,940		)
Acquired mortgage servicing rights	6,995			—
Valuation adjustment							(589		)	—
Balance at period end	$	30,171		$	23,742		$	27,472		$	23,165
Fair value of mortgage servicing rights	$	47,581		$	35,002
Mortgage servicing rights, net to servicing portfolio	0.73		%	0.67		%	0.68		%	0.72		%

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 ~~$114.5~~$95.0 million at ~~September 30, 2018~~March 31, 2019 and ~~$139.9~~$107.4 million at December 31, ~~2017.~~2018. The commercial servicing rights portfolio is separated into two tranches at the respective Heartland subsidiary, loans with a term of less than 20 years and loans with a term of more than 20 years. Fees collected for the servicing of commercial loans for others were ~~$401,000~~$380,000 and ~~$394,000~~$420,000 for the ~~quarter~~three-months ended ~~September 30,~~March 31, 2019, and March 31, 2018, ~~and September 30, 2017, respectively, and $1.2 million for both the nine-months ended September 30, 2018, and September 30, 2017,~~ 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 ~~9.64%~~11.37% to ~~11.94%~~14.44% as of ~~September 30, 2018,~~March 31, 2019, compared to ~~7.27%~~11.01% to ~~8.88%~~13.50% as of December 31, ~~2017.~~2018. The discount rate range was ~~13.28%~~12.71% to ~~16.55%~~16.13% for the ~~September 30, 2018,~~March 31, 2019, valuations compared to ~~13.04%~~13.44% to ~~15.49%~~16.96% for the December 31, ~~2017,~~2018, valuations. The capitalization rate for both ~~2018~~2019 and ~~2017~~2018 ranged from 310 to 445 basis points. The total fair value of Heartland's commercial servicing rights was estimated at ~~$2.5~~$1.9 million as of ~~September 30, 2018,~~March 31, 2019, and ~~$3.2~~$2.1 million as of December 31, ~~2017.~~

2018.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the ~~nine-months~~three-months ended ~~September 30, 2018,~~March 31, 2019, and ~~September 30, 2017:~~March 31, 2018:


	2018			2017			2019			2018
Balance at January 1,	$	2,609		$	3,690		$	1,709		$	2,609
Originations	82			215			68			21
Amortization	(835		)	(1,077		)	(281		)	(322		)
Valuation allowance on commercial servicing rights	12			29			—			(2		)
Balance at period end	$	1,868		$	2,857		$	1,496		$	2,306
Fair value of commercial servicing rights	$	2,529		$	3,458		$	1,926		$	2,781
Commercial servicing rights, net to servicing portfolio	1.63		%	1.98		%	1.58		%	1.84		%

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 ~~both September 30, 2018~~March 31, 2019, a $589,000 valuation allowance was required on mortgage servicing rights and at December 31, ~~2017, no~~2018, a $58,000 valuation allowance was required on mortgage servicing rights. At ~~September 30, 2018,~~March 31, 2019, no valuation allowance was required on commercial servicing rights with a term less than 20 years and no valuation allowance was required on commercial servicing rights with a term greater than 20 years. At December 31, ~~2017,~~2018, no valuation allowance was required on commercial servicing rights with a term less than 20 years and ~~a $12,000~~no valuation allowance was required on commercial servicing rights with a term greater than 20 years.

The following table summarizes, in thousands, the book value, the fair value of each tranche of the mortgage servicing rights and any recorded valuation allowance at each respective subsidiary at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017:~~2018:


September 30, 2018	Book Value 15-Year Tranche		Fair Value 15-Year Tranche		Impairment 15-Year Tranche		Book Value 30-Year Tranche		Fair Value 30-Year Tranche		Impairment 30-Year Tranche
March 31, 2019													Book Value 15-Year Tranche		Fair Value 15-Year Tranche		Impairment 15-Year Tranche		Book Value 30-Year Tranche		Fair Value 30-Year Tranche		Impairment 30-Year Tranche
Dubuque Bank and Trust Company	$	2,371	$	4,747	$	—	$	20,632	$	35,610	$	—	$	1,982	$	4,648	$	—	$	19,031	$	32,420	$	—
First Bank & Trust	1,685		1,741		—		5,483		5,483		—		1,644		1,519		125		5,462		4,940		522
Total	$	4,056	$	6,488	$	—	$	26,115	$	41,093	$	—	$	3,626	$	6,167	$	125	$	24,493	$	37,360	$	522
December 31, 2017
December 31, 2018
Dubuque Bank and Trust Company	$	2,858	$	4,988	$	—	$	20,390	$	32,093	$	—	$	2,195	$	4,636	$	—	$	20,025	$	36,901	$	—
First Bank & Trust													1,685		1,665		20		5,516		5,478		38
Total	$	2,858	$	4,988	$	—	$	20,390	$	32,093	$	—	$	3,880	$	6,301	$	20	$	25,541	$	42,379	$	38

The following table summarizes, in thousands, the book value, the fair value of each tranche of the commercial servicing rights and any recorded valuation allowance at each respective subsidiary at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017:~~2018:


September 30, 2018	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
March 31, 2019													Book Value Less than 20 Years		Fair Value Less than 20 Years		Impairment Less than 20 Years		Book Value More than 20 Years		Fair Value More than 20 Years		Impairment More than 20 Years
Citywide Banks	$	2	$	6	$	—	$	30	$	33	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Premier Valley Bank	53		82		—		188		203		—		37		65		—		168		178		—
Wisconsin Bank & Trust	260		519		—		1,335		1,686		—		212		387		—		1,079		1,296		—
Total	$	315	$	607	$	—	$	1,553	$	1,922	$	—	$	249	$	452	$	—	$	1,247	$	1,474	$	—
December 31, 2017
December 31, 2018
Citywide Banks	$	8	$	11	$	—	$	34	$	37	$	—	$	1	$	6	$	—	$	18	$	20	$	—
Premier Valley Bank	83		110		—		303		291		12		45		74		—		178		184		—
Wisconsin Bank & Trust	446		619		—		1,747		2,153		—		249		411		—		1,218		1,439		—
Total	$	537	$	740	$	—	$	2,084	$	2,481	$	12	$	295	$	491	$	—	$	1,414	$	1,643	$	—

NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

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

In addition, interest rate-related derivative instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by credit ratings of each counterparty. Heartland was required to pledge no$540,000 cash as collateral at ~~September 30, 2018,~~March 31, 2019, and ~~$1.2 million~~no cash at December 31, ~~2017.~~2018. At ~~September 30, 2018, $2.0 million of~~March 31, 2019, no collateral was required to be pledged by Heartland's counterparties, compared to no$770,000 collateral at December 31, ~~2017.~~2018.

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

Cash Flow Hedges

Heartland has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates. To manage the interest rate risk related to the variability of interest payments, Heartland has entered into various interest rate swap agreements. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received or made on Heartland's variable-rate liabilities. For the ~~nine~~three months ended ~~September 30, 2018,~~March 31, 2019, the change in net unrealized losses on cash flow hedges reflects changes in the fair value of the swaps and reclassification from accumulated other comprehensive income to interest expense totaling ~~$207,000.~~$165,000. For the next twelve months, Heartland estimates that cash receipts and reclassification from accumulated other comprehensive income to reduce interest expense will total ~~$83,000.~~$660,000.

Heartland entered into six forward starting interest rate swap transactions to effectively convert Heartland Financial Statutory Trust IV, V, VI, and VII, which total $85.0 million, as well as Morrill Statutory Trust I and II, which total $20.0 million, from variable rate subordinated debentures to fixed rate debt. For accounting purposes, these six swap transactions are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $105.0 million of Heartland's subordinated debentures that reset quarterly on a specified reset date. At inception, Heartland asserted that the underlying principal balance would remain outstanding throughout the hedge transaction, making it probable that sufficient LIBOR-based interest payments would exist through the maturity date of the swaps. During the first quarter of 2019,

the interest rate swap transactions associated with Morrill Statutory Trust I and II, totaling $20.0 million, matured and the fixed rate debt has been converted to variable rate subordinated debentures.

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

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


	Notional Amount		Fair Value			Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity	Notional Amount		Fair Value			Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity
September 30, 2018
March 31, 2019
Interest rate swap												$	25,000	$	50		Other assets	2.615	%	2.255	%	03/17/2021
Interest rate swap												20,000		(153		)	Other liabilities	2.795		3.355		01/07/2020
Interest rate swap												28,667		563			Other assets	4.993		3.674		05/10/2021
Interest rate swap												28,000		(897		)	Other liabilities	4.986		5.425		07/24/2028
Interest rate swap												20,000		(141		)	Other liabilities	2.611		2.390		06/15/2024
Interest rate swap												20,000		(99		)	Other liabilities	2.626		2.352		03/01/2024
Interest rate swap												6,000		62			Other assets	2.611		1.866		06/15/2021
Interest rate swap												3,000		35			Other assets	2.787		1.878		06/30/2021
December 31, 2018
Interest rate swap	$	25,000	$	424		Other assets	2.334	%	2.255	%	03/17/2021	$	25,000	$	191		Other assets	2.788	%	2.255	%	03/17/2021
Interest rate swap	20,000		(186		)	Other liabilities	2.339		3.355		01/07/2020	20,000		(177		)	Other liabilities	2.408		3.355		01/07/2020
Interest rate swap	10,000		42			Other assets	2.374		1.674		03/26/2019	10,000		29			Other assets	2.822		1.674		03/26/2019
Interest rate swap	10,000		42			Other assets	2.334		1.658		03/18/2019	10,000		28			Other assets	2.788		1.658		03/18/2019
Interest rate swap	30,667		1,089			Other assets	4.633		3.674		05/10/2021	29,667		763			Other assets	4.887		3.674		05/10/2021
Interest rate swap	29,500		(33		)	Other liabilities	4.712		5.425		07/24/2028	28,750		(572		)	Other liabilities	5.004		5.425		07/24/2028
Interest rate swap	20,000		652			Other assets	2.334		2.390		06/15/2024	20,000		157			Other assets	2.788		2.390		06/15/2024
Interest rate swap	20,000		666			Other assets	2.321		2.352		03/01/2024	20,000		185			Other assets	2.738		2.352		03/01/2024
Interest rate swap	6,000		175			Other assets	2.334		1.866		06/15/2021	6,000		105			Other Assets	2.788		1.866		06/15/2021
Interest rate swap	3,000		92			Other assets	2.436		1.878		06/30/2021	3,000		51			Other assets	2.787		1.878		06/30/2021
December 31, 2017
Interest rate swap	$	25,000	$	(106	)	Other liabilities	1.600	%	2.255	%	03/17/2021
Interest rate swap	20,000		(621		)	Other liabilities	1.350		3.355		01/07/2020
Interest rate swap	10,000		30			Other assets	1.329		1.674		03/26/2019
Interest rate swap	10,000		29			Other assets	1.600		1.658		03/18/2019
Interest rate swap	33,667		759			Other assets	3.932		3.674		05/10/2021
Interest rate swap	20,000		(177		)	Other liabilities	1.588		2.390		06/15/2024
Interest rate swap	20,000		(149		)	Other Liabilities	1.481		2.352		03/01/2024

The table below identifies the gains and losses recognized on Heartland's derivative instruments designated as cash flow hedges for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and March 31, 2018, ~~and September 30, 2017,~~ in thousands:

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

Amount of
Gain (Loss)
Category
Amount of
Gain (Loss)
Category
Amount of
Gain (Loss)
Three Months Ended September 30, 2018
Interest rate swaps $ 375
Interest expense $ 21
Other income $ —
Nine Months Ended September 30, 2018
Interest rate swaps $ 3,198
Interest expense $ (207 ) Other income $ —
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 $ —



	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 March 31, 2019
Interest rate swaps	$	(1,340	)	Interest expense	$	(165	)	Other income	$	—
Three Months Ended March 31, 2018
Interest rate swaps	$	1,896		Interest expense	$	(197	)	Other income	$	—

Fair Value Hedges

Heartland uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. Heartland uses hedge accounting in accordance with ASC 815, with the unrealized gains and losses, representing the change in

fair value of the derivative and the change in fair value of the risk being hedged on the related loan, being recorded in the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest income and interest expense in the consolidated statements of income. Heartland uses statistical regression to assess hedge effectiveness, both at the inception of the hedge as well as on a continual basis. The regression analysis involves regressing the periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.

Heartland was required to pledge $3.2 million and ~~$3.9~~$2.5 million of cash as collateral for these fair value hedges at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, respectively.

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


	Notional Amount		Fair Value			Balance Sheet Category	Notional Amount		Fair Value			Balance Sheet Category
September 30, 2018
March 31, 2019
Fair value hedges	$	30,954	$	625		Other assets	$	670	$	5		Other assets
Fair value hedges	4,133		(201		)	Other liabilities	28,749		(900		)	Other liabilities
December 31, 2017
December 31, 2018
Fair value hedges	$	35,635	$	(999	)	Other liabilities	$	19,820	$	74		Other assets
Fair value hedges							$	15,064	$	(339	)	Other liabilities

The table below identifies the gains and losses recognized on Heartland's fair value hedges for the ~~three- and nine- month~~three-month periods ended ~~September 30,~~March 31, 2019, and March 31, 2018, ~~and September 30, 2017,~~ in thousands:


	Amount of Gain (Loss)			Income Statement Category	Amount of Gain (Loss)			Income Statement Category
Three Months Ended September 30, 2018
Three Months Ended March 31, 2019
Fair value hedges	$	179		Interest income	$	(630	)	Interest income
Nine Months Ended September 30, 2018
Three Months Ended March 31, 2018
Fair value hedges	$	1,423		Interest income	$	894		Interest income
Three Months Ended September 30, 2017
Fair value hedges	$	(63	)	Interest income
Nine Months Ended September 30, 2017
Fair value hedges	$	89		Interest income

Embedded Derivatives

Heartland has fixed rate loans with embedded derivatives. The loans contain terms that affect the cash flows or value of the loan similar to a derivative instrument, and therefore are considered to contain an embedded derivative. The embedded derivatives are bifurcated from the loans because the terms of the derivative instrument are not clearly and closely related to the loans. The embedded derivatives are recorded at fair value on the consolidated balance sheets as a part of other assets, and changes in the fair value are a component of noninterest income. The table below identifies the notional amount, fair value and balance sheet category of Heartland's embedded derivatives at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category	Notional Amount		Fair Value			Balance Sheet Category
September 30, 2018
March 31, 2019
Embedded derivatives	$	13,643	$	215	Other assets	$	2,216	$	17		Other assets
December 31, 2017
Embedded derivatives	$	14,045	$	738	Other assets	$	9,785	$	(507	)	Other liabilities
December 31, 2018
Embedded derivatives						$	11,266	$	453		Other assets
Embedded derivatives						$	2,231	$	(54	)	Other liabilities

The table below identifies the gains and losses recognized on Heartland's embedded derivatives for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and March 31, 2018, ~~and September 30, 2017,~~ in thousands:

Amount of Gain (Loss) Income Statement Category
Three Months Ended September 30, 2018
Embedded derivatives $ 108
Other noninterest income
Nine Months Ended September 30, 2018
Embedded derivatives $ 523
Other noninterest income
Three Months Ended September 30, 2017
Embedded derivatives $ (296 ) Other noninterest income
Nine Months Ended September 30, 2017
Embedded derivatives $ (181 ) Other noninterest income

In conjunction with the CIC Bancshares, Inc. transaction on February 5, 2016, Heartland assumed convertible subordinated debt. The subordinated debt had a face value of $2.0 million, and the embedded conversion option allowed the holder to convert the debt to Heartland common equity in any increment and at the discretion of the holder. The conversion option was 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 September 30, 2018, and December 31, 2017, the remaining shares to be issued upon conversion totaled zero. 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 notional amount of the embedded conversion option was $0 at both September 30, 2018, and December 31, 2017.

For the three- and nine-month periods ended September 30, 2018, no other noninterest income was recorded for the embedded conversion option. For the three- and nine-month periods ended September 30, 2017, $285,000 and $422,000, respectively, was recorded in other noninterest income for the embedded conversion option.



	Amount of Gain (Loss)		Income Statement Category
Three Months Ended March 31, 2019
Embedded derivatives	$	889	Other noninterest income
Three Months Ended March 31, 2018
Embedded derivatives	$	277	Other noninterest income

Back-to-Back Loan Swaps

Heartland has interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan swaps, Heartland enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the consolidated balance sheets. Heartland was required to post ~~$815,000~~$7.2 million and ~~$1.6~~$2.0 million as of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to pledge ~~$2.5 million~~$140,000 at ~~September 30, 2018,~~March 31, 2019, and ~~$190,000~~$680,000 at December 31, ~~2017.~~2018. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the ~~nine~~three months ended ~~September 30,~~March 31, 2019 and March 31, 2018, ~~and September 30, 2017,~~ no gain or loss was recognized. The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as loan swaps at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, in thousands:


	Notional Amount		Fair Value			Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate		Notional Amount		Fair Value			Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
September 30, 2018
March 31, 2019
Customer interest rate swaps	$	200,241	$	5,305		Other assets	5.07	%	4.68	%	$	233,665	$	7,654		Other assets	5.15	%	5.05	%
Customer interest rate swaps	200,241		(5,305		)	Other liabilities	4.68		5.07		233,665		(7,654		)	Other liabilities	5.05		5.15
December 31, 2017
December 31, 2018
Customer interest rate swaps	$	126,766	$	2,377		Other assets	4.70	%	4.03	%	$	211,246	$	4,449		Other assets	5.10	%	4.96	%
Customer interest rate swaps	126,766		(2,377		)	Other liabilities	4.03		4.70		211,246		(4,449		)	Other liabilities	4.96		5.10

Other Free Standing Derivatives

Heartland has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments. Heartland enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on the commitments to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on the

consolidated balance sheets, with the changes in fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting treatment. Heartland was required to pledge collateral of ~~$35,000~~$0 at ~~September 30, 2018,~~March 31, 2019, and ~~$20,000~~$35,000 at December 31, ~~2017.~~2018. Heartland's counterparties were required to pledge ~~$29,000~~no collateral at both ~~September 30, 2018,~~March 31, 2019 and December 31, ~~2017, respectively,~~2018, as collateral for these forward commitments.

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

The table below identifies the balance sheet category and fair values of Heartland's other free standing derivative instruments not designated as hedging instruments at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, in thousands:


	Balance Sheet Category	Notional Amount		Fair Value			Balance Sheet Category	Notional Amount		Fair Value
September 30, 2018
March 31, 2019
Interest rate lock commitments (mortgage)	Other assets	$	52,649	$	1,539		Other assets	$	25,318	$	800
Forward commitments	Other assets	82,500		353			Other assets	1,000		—
Forward commitments	Other liabilities	33,500		(69		)	Other liabilities	46,000		(282		)
Undesignated interest rate swaps	Other liabilities	13,643		(215		)	Other liabilities	9,785		(507		)
December 31, 2017
Undesignated interest rate swaps							Other assets	2,216		17
December 31, 2018
Interest rate lock commitments (mortgage)	Other assets	$	53,588	$	1,738		Other assets	$	22,451	$	725
Forward commitments	Other assets	37,286		80			Other assets	—		—
Forward commitments	Other liabilities	118,632		(232		)	Other liabilities	51,500		(399		)
Undesignated interest rate swaps	Other liabilities	14,045		(738		)	Other liabilities	11,266		(453		)
Undesignated interest rate swaps							Other assets	2,231		54

The table below identifies the income statement category of the gains and losses recognized in income on Heartland's other free standing derivative instruments not designated as hedging instruments for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and March 31, 2018, ~~and September 30, 2017,~~ in thousands:


	Income Statement Category	Gain (Loss) Recognized			Income Statement Category	Gain (Loss) Recognized
Three Months Ended September 30, 2018
Three Months Ended March 31, 2019
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	(4,470	)	Net gains on sale of loans held for sale	$	264
Forward commitments	Net gains on sale of loans held for sale	644			Net gains on sale of loans held for sale	117
Undesignated interest rate swaps	Other noninterest income	108			Other noninterest income	889
Nine Months Ended September 30, 2018
Three Months Ended March 31, 2018
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	(1,849	)	Net gains on sale of loans held for sale	$	17
Forward commitments	Net gains on sale of loans held for sale	352			Net gains on sale of loans held for sale	115
Undesignated interest rate swaps	Other noninterest income	523			Other noninterest income	277
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

NOTE 8: FAIR VALUE

Heartland utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities carried at fair value, which include available for sale, trading securities and equity securities with a readily determinable fair value, and derivatives are recorded in the consolidated balance sheets at fair value on a recurring basis. Additionally, from time to time, Heartland may be required to record at fair value other assets on a nonrecurring basis such as loans held for sale, loans held to maturity and certain other assets including, but not limited to, mortgage servicing rights, commercial servicing rights and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.

Fair Value Hierarchy

Under ASC 820, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 — Valuation is based upon quoted prices for identical instruments in active markets.

Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, or similar instruments in markets that are not active, and model-based valuation techniques for all significant assumptions are observable in the market.

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

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

Assets

Securities Available for Sale and Held to Maturity

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

Equity Securities with a Readily Determinable Fair Value

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

Loans Held for Sale

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

Loans Held to Maturity

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

Premises, Furniture and Equipment Held for Sale

Heartland values premises, furniture and equipment held for sale based on third-party appraisals less estimated disposal costs. Heartland considers third party appraisals, as well as independent fair value assessments from Realtors or persons involved in selling bank premises, furniture and equipment, in determining the fair value of particular properties. Accordingly, the valuation of premises, furniture and equipment held for sale is subject to significant external and internal judgment. Heartland periodically

reviews premises, furniture and equipment held for sale to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. Premises, furniture and equipment held for sale are classified as nonrecurring Level 3 in the fair value hierarchy.

Mortgage Servicing Rights

Mortgage servicing rights assets represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. Heartland uses the amortization method (i.e., the lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, to determine the carrying value of its mortgage servicing rights. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of the assumptions in the discounted cash flow analysis require a significant degree of management estimation and judgment. Mortgage servicing rights are subject to impairment testing. The carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third party. For purposes of measuring impairment, the rights are stratified into certain risk characteristics including note type and note term. If the valuation model reflects a fair value less than the carrying value, mortgage servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies mortgage servicing rights as nonrecurring with Level 3 measurement inputs.

Commercial Servicing Rights

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

Derivative Financial Instruments

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

Although Heartland has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, Heartland has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Heartland has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Interest rate lock commitments

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

Forward commitments

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

Other Real Estate Owned

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

The table below presents Heartland's assets and liabilities that are measured at fair value on a recurring basis as of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, in thousands, aggregated by the level in the fair value hierarchy within which those measurements fall:


	Total Fair Value		Level 1		Level 2		Level 3		Total Fair Value		Level 1		Level 2		Level 3
September 30, 2018
March 31, 2019
Assets
Securities available for sale
U.S. government corporations and agencies	$	26,997	$	25,367	$	1,630	$	—	$	26,768	$	20,458	$	6,310	$	—
Mortgage and asset-backed securities	1,871,819		—		1,871,819		—		1,871,398		—		1,871,398		—
Obligations of states and political subdivisions	358,483		—		358,483		—		484,955		—		484,955		—
Equity securities with a readily determinable fair value	16,916		—		16,916		—		17,339		—		17,339		—
Derivative financial instruments⁽¹⁾	9,327		—		9,327		—		8,403		—		8,403		—
Interest rate lock commitments	1,539		—		—		1,539		800		—		—		800
Forward commitments	353		—		353		—
Total assets at fair value	$	2,285,434	$	25,367	$	2,258,528	$	1,539	$	2,409,663	$	20,458	$	2,388,405	$	800
Liabilities
Derivative financial instruments⁽²⁾	$	5,940	$	—	$	5,940	$	—	$	10,858	$	—	$	10,858	$	—
Forward commitments	69		—		69		—		282		—		282		—
Total liabilities at fair value	$	6,009	$	—	$	6,009	$	—	$	11,140	$	—	$	11,140	$	—
December 31, 2017
December 31, 2018
Assets
Securities available for sale
U.S. government corporations and agencies	$	5,328	$	3,484	$	1,844	$	—	$	31,951	$	25,414	$	6,537	$	—
Mortgage and asset-backed securities	1,753,736		—		1,753,736		—		2,026,698		—		2,026,698		—
Obligations of states and political subdivisions	441,015		—		441,015		—		374,974		—		374,974		—
Equity securities	16,674		—		16,674		—		17,086		—		17,086		—
Derivative financial instruments⁽¹⁾	3,933		—		3,933		—		6,539		—		6,539		—
Interest rate lock commitments	1,738		—		—		1,738		725		—		—		725
Forward commitments	80		—		80		—
Total assets at fair value	$	2,222,504	$	3,484	$	2,217,282	$	1,738	$	2,457,973	$	25,414	$	2,431,834	$	725
Liabilities
Derivative financial instruments⁽²⁾	$	5,167	$	—	$	5,167	$	—	$	6,044	$	—	$	6,044	$	—
Forward commitments	232		—		232		—		399		—		399		—
Total liabilities at fair value	$	5,399	$	—	$	5,399	$	—	$	6,443	$	—	$	6,443	$	—

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

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


	Fair Value Measurements at September 30, 2018											Fair Value Measurements at March 31, 2019
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses			Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses
Collateral dependent impaired loans:
Commercial	$	6,772	$	—	$	—	$	6,772	$	237		$	9,998	$	—	$	—	$	9,998	$	285
Commercial real estate	420		—		—		420		72			717		—		—		717		—
Agricultural and agricultural real estate	11,821		—		—		11,821		495			8,932		—		—		8,932		379
Residential real estate	590		—		—		590		—			1,207		—		—		1,207		4
Consumer	1,942		—		—		1,942		—			633		—		—		633		—
Total collateral dependent impaired loans	$	21,545	$	—	$	—	$	21,545	$	804		$	21,487	$	—	$	—	$	21,487	$	668
Loans held for sale	$	77,727	$	—	$	77,727	$	—	$	(835	)	$	69,716	$	—	$	69,716	$	—	$	(1,107	)
Other real estate owned	$	11,908	$	—	$	—	$	11,908	$	1,847		$	5,391	$	—	$	—	$	5,391	$	452
Premises, furniture and equipment held for sale	$	4,422	$	—	$	—	$	4,422	$	(74	)	$	7,030	$	—	$	—	$	7,030	$	—
Servicing rights												$	6,459	$	—	$	—	$	6,459	$	589


	Fair Value Measurements at December 31, 2017											Fair Value Measurements at December 31, 2018
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses			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	$	3,212	$	—	$	—	$	3,212	$	1,119		$	12,932	$	—	$	—	$	12,932	$	660
Commercial real estate	9,480		—		—		9,480		322			405		—		—		405		72
Agricultural and agricultural real estate	8,406		—		—		8,406		2,028			11,070		—		—		11,070		575
Residential real estate	1,137		—		—		1,137		—			478		—		—		478		—
Consumer	1,234		—		—		1,234		—			624		—		—		624		—
Total collateral dependent impaired loans	$	23,469	$	—	$	—	$	23,469	$	3,469		$	25,509	$	—	$	—	$	25,509	$	1,307
Loans held for sale	$	44,560	$	—	$	44,560	$	—	$	190		$	119,801	$	—	$	52,577	$	67,224	$	(1,870	)
Other real estate owned	$	10,777	$	—	$	—	$	10,777	$	737		$	6,153	$	—	$	—	$	6,153	$	2,647
Premises, furniture and equipment held for sale	$	1,977	$	—	$	—	$	1,977	$	192		$	7,258	$	—	$	—	$	7,258	$	59
Commercial servicing rights	$	291	$	—	$	—	$	291	$	(21	)
Servicing rights												$	7,143	$	—	$	—	$	7,143	$	58

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

Fair Value at

9/30/2018

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Fair Value at

3/31/2019

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Interest rate lock commitments

1,539

Discounted cash flows

Closing ratio

0-99%

(1)

800

Discounted cash flows

Closing ratio

0-99% (89%)⁽¹⁾

Other real estate owned

11,908

Modified appraised value

Third party appraisal

(2)

5,391

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%

(3)

Appraisal discount

0-10%⁽³⁾

Servicing rights

6,459

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

4,422

Modified appraised value

Third party appraisal

(2)

7,030

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%

(3)

Appraisal discount

0-10%⁽³⁾

Collateral dependent impaired loans:

Commercial

6,772

Modified appraised value

Third party appraisal

(2)

9,998

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-13%

(3)

Appraisal discount

0-18%⁽³⁾

Commercial real estate

420

Modified appraised value

Third party appraisal

(2)

717

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-12%

(3)

Appraisal discount

0-9%⁽³⁾

Agricultural and agricultural real estate

11,821

Modified appraised value

Third party appraisal

(2)

8,932

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%

(3)

Appraisal discount

0-15%⁽³⁾

Residential real estate

590

Modified appraised value

Third party appraisal

(2)

1,207

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-24%

(3)

Appraisal discount

0-12%⁽³⁾

Consumer

1,942

Modified appraised value

Third party valuation

(2)

633

Modified appraised value

Third party valuation

(2)

Valuation discount

0-14%

(3)

Valuation discount

0-9%⁽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. The weighted average closing ratio for Heartland's legacy mortgage operations is 86%. The weighted average closing ratio for PrimeWest Mortgage Corporation is 95%.

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

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

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

Fair Value at

12/31/2017

Valuation

Technique

Unobservable

Input

Range

(Weighted Average)

Fair Value at

12/31/2018

Valuation

Technique

Unobservable

Input

Range

(Weighted Average)

Loans held for sale

67,224

Discounted cash flows

Sales contract

⁽¹⁾

Interest rate lock commitments

1,738

Discounted cash flows

Closing ratio

0-99% (89%)

(1)

725

Discounted cash flows

Closing ratio

0-99% (91%)⁽²⁾

Other real estate owned

10,777

Modified appraised value

Third party appraisal

(2)

6,153

Modified appraised value

Third party appraisal

(3)

Appraisal discount

0-10%

(3)

Appraisal discount

0-10%⁽⁴⁾

Commercial servicing rights

291

Discounted cash flows

Third party valuation

(3)

Servicing rights

7,143

Discounted cash flows

Third party valuation

⁽⁵⁾

Premises, furniture and equipment held for sale

1,977

Modified appraised value

Third party appraisal

(2)

7,258

Modified appraised value

Third party appraisal

(3)

Appraisal discount

0-10%

(3)

Appraisal discount

0-10%⁽⁴⁾

Other real estate owned

10,777

Modified appraised value

Third party appraisal

(2)

6,153

Modified appraised value

Third party appraisal

(3)

Appraisal discount

0-10%

(3)

Appraisal discount

0-10%⁽⁴⁾

Collateral dependent impaired loans:

Commercial

3,212

Modified appraised value

Third party appraisal

(2)

12,932

Modified appraised value

Third party appraisal

(3)

Appraisal discount

0-15%

(3)

Appraisal discount

0-8%⁽⁴⁾

Commercial real estate

9,480

Modified appraised value

Third party appraisal

(2)

405

Modified appraised value

Third party appraisal

(3)

Appraisal discount

0-12%

(3)

Appraisal discount

0-19%⁽⁴⁾

Agricultural and agricultural real estate

8,406

Modified appraised value

Third party appraisal

(2)

11,070

Modified appraised value

Third party appraisal

(3)

Appraisal discount

0-10%

(3)

Appraisal discount

0-24%⁽⁴⁾

Residential real estate

1,137

Modified appraised value

Third party appraisal

(2)

478

Modified appraised value

Third party appraisal

(3)

Appraisal discount

0-12%

(3)

Appraisal discount

0-24%⁽⁴⁾

Consumer

1,234

Modified appraised value

Third party valuation

(2)

624

Modified appraised value

Third party valuation

(3)

Valuation discount

0-12%

(3)

Valuation discount

0-14%⁽⁴⁾

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

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

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

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

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

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 Nine Months Ended September 30, 2018			For the Year Ended December 31, 2017			For the Three Months Ended March 31, 2019			For the Year Ended December 31, 2018
Balance at January 1,	$	1,738		$	2,790		$	725		$	1,738
Acquired interest rate lock commitments	1,383			—			—			1,383
Total gains (losses) included in earnings	(1,849		)	(1,479		)	264			(3,269		)
Issuances	1,661			1,875			2,081			2,962
Settlements	(1,394		)	(1,448		)	(2,270		)	(2,089		)
Balance at period end	$	1,539		$	1,738		$	800		$	725

Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, were ~~$1.5 million~~$800,000 and ~~$1.7 million,~~$725,000, respectively.

The ~~tables~~table below ~~summarize~~is a summary of the estimated fair value of Heartland's financial instruments as(as defined by ASC ~~825~~825) as of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, in thousands. The carrying amounts in the following tables are recorded in the consolidated balance sheets under the indicated captions. In accordance with ASC 825, the assets and liabilities that are not financial instruments

are not included in the disclosure, ~~such as~~including the value of the commercial and mortgage servicing rights, premises, furniture and equipment, premises, furniture and equipment held for sale, OREO, goodwill, and other intangibles and other liabilities.

Heartland does not believe that the estimated information presented herein is representative of the earnings power or value of Heartland. The following analysis, which is inherently limited in depicting fair value, also does not consider any value associated with either existing customer relationships or the ability of Heartland to create value through loan origination, deposit gathering

or fee generating activities. Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.


					Fair Value Measurements at September 30, 2018										Fair Value Measurements at March 31, 2019
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	437,375	$	437,375	$	437,375	$	—	$	—	$	492,501	$	492,501	$	492,501	$	—	$	—
Time deposits in other financial institutions	5,836		5,836		5,836		—		—		4,675		4,675		4,675		—		—
Securities:
Carried at fair value	2,274,215		2,274,215		25,367		2,248,848		—		2,400,460		2,400,460		20,458		2,380,002		—
Held to maturity	239,908		247,394		—		247,394		—		88,089		95,240		—		95,240		—
Other investments	26,656		26,656		—		26,656		—		27,506		27,506		—		27,506		—
Loans held for sale	77,727		77,727		—		77,727		—		69,716		69,716		—		69,716		—
Loans, net:
Commercial	1,939,469		1,906,941		—		1,900,169		6,772		2,018,438		1,972,580		—		1,962,582		9,998
Commercial real estate	3,623,768		3,611,265		—		3,610,845		420		3,675,063		3,644,142		—		3,643,425		717
Agricultural and agricultural real estate	570,320		563,262		—		551,441		11,821		540,022		531,817		—		522,885		8,932
Residential real estate	673,628		663,234		—		662,644		590		627,619		613,086		—		611,879		1,207
Consumer	497,151		494,379		—		492,437		1,942		407,763		405,120		—		404,487		633
Total Loans, net	7,304,336		7,239,081		—		7,217,536		21,545		7,268,905		7,166,745		—		7,145,258		21,487
Cash surrender value on life insurance	162,216		162,216		—		162,216		—		163,764		163,764		—		163,764		—
Derivative financial instruments⁽¹⁾	9,126		9,126		—		9,126		—		8,403		8,403		—		8,403		—
Interest rate lock commitments	1,539		1,539		—		—		1,539		800		800		—		—		800
Forward commitments	353		353		—		353		—
Financial liabilities:
Deposits
Demand deposits	3,427,819		3,427,819		—		3,427,819		—		3,118,909		3,118,909		—		3,118,909		—
Savings deposits	4,958,430		4,958,430		—		4,958,430		—		5,145,929		5,145,929		—		5,145,929		—
Time deposits	1,125,914		1,125,914		—		1,125,914		—		1,008,104		1,088,104		—		1,088,104		—
Deposits held for sale											118,564		111,742		—		111,742		—
Short term borrowings	131,139		131,139		—		131,139		—		104,314		104,314		—		104,314		—
Other borrowings	277,563		279,087		—		279,087		—		268,312		268,528		—		268,528		—
Derivative financial instruments⁽²⁾	5,739		5,940		—		5,940		—		10,858		10,858		—		10,858		—
Forward commitments	69		69		—		69		—		282		282		—		282		—

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


					Fair Value Measurements at December 31, 2017										Fair Value Measurements at December 31, 2018
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		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	$	196,003	$	196,003	$	196,003	$	—	$	—	$	273,630	$	273,630	$	273,630	$	—	$	—
Time deposits in other financial institutions	9,820		9,820		9,820		—		—		4,672		4,672		4,672		—		—
Securities:
Carried at fair value	2,216,753		2,216,753		3,484		2,213,269		—		2,450,709		2,450,709		25,414		2,425,295		—
Held to maturity	253,550		265,494		—		265,494		—		236,283		245,341		—		245,341		—
Other investments	22,563		22,563		—		22,563		—		28,396		28,396		—		28,396		—
Loans held for sale	44,560		44,560		—		44,560		—		119,801		119,801		—		52,577		67,224
Loans, net:
Commercial	1,628,043		1,617,956		—		1,614,744		3,212		1,994,785		1,955,607		—		1,942,675		12,932
Commercial real estate	3,140,427		3,132,542		—		3,123,062		9,480		3,684,213		3,667,138		—		3,666,733		405
Agricultural and agricultural real estate	508,075		508,987		—		500,581		8,406		561,265		553,112		—		542,042		11,070
Residential real estate	620,939		614,667		—		613,530		1,137		670,473		654,596		—		654,118		478
Consumer	438,294		440,820		—		439,586		1,234		434,998		432,016		—		431,392		624
Total Loans, net	6,335,778		6,314,972		—		6,291,503		23,469		7,345,734		7,262,469		—		7,236,960		25,509
Cash surrender value on life insurance	142,818		142,818		—		142,818		—		162,892		162,892		—		162,892		—
Derivative financial instruments⁽¹⁾	3,933		3,933		—		3,933		—		6,539		6,539		—		6,539		—
Interest rate lock commitments	1,738		1,738		—		—		1,738		725		725		—		—		725
Forward commitments	80		80		—		80		—
Financial liabilities:
Deposits
Demand deposits	2,983,128		2,983,128		—		2,983,128		—		3,264,737		3,264,737		—		3,264,737		—
Savings deposits	4,240,328		4,240,328		—		4,240,328		—		5,107,962		5,107,962		—		5,107,962		—
Time deposits	923,453		923,453		—		923,453		—		1,023,730		1,023,730		—		1,023,730		—
Deposits held for sale											106,409		100,241		—		—		100,241
Short term borrowings	324,691		324,691		—		324,691		—		227,010		227,010		—		227,010		—
Other borrowings	285,011		285,609		—		285,609		—		274,905		276,966		—		276,966		—
Derivative financial instruments⁽²⁾	5,167		5,167		—		5,167		—		6,044		6,044		—		6,044		—
Forward commitments	232		232		—		232		—		399		399		—		399		—

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

Cash and Cash Equivalents — The carrying amount is a reasonable estimate of fair value due to the short-term nature of these instruments.

Time Deposits in Other Financial Institutions — The carrying amount is a reasonable estimate of fair value due to the short-term nature of these instruments.

Securities — For equity securities with a readily determinable fair value and debt securities either held to maturity, available for sale or trading, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated

using quoted market prices for similar securities. For Level 3 securities, Heartland utilizes independent pricing provided by third party vendors or brokers.

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

Loans — ~~Beginning in the first quarter of 2018, the~~The fair value of loans ~~were~~is determined using an exit price methodology as prescribed by ASU 2016-01, which was effective on January 1, 2018. The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, 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 risk. In comparison, loan fair values as of December 31, 2017, were estimated based on an entrance price methodology, which discounts future cash flows using the current rates at which a similar loan would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of non-impaired loans as of September 30, 2018, and December 31, 2017, are not comparable.

The fair value of impaired loans is measured using the fair value of the underlying collateral. The fair value of loans held for sale is estimated using quoted market prices.

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

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

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

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

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

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

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

Deposits Held for Sale — Heartland entered into agreements with third parties to sell the deposits of five branch locations, which totaled $118.6 million as of March 31, 2019. The estimated fair value in the table above is based on the carrying value of the deposits less the premium Heartland expects to receive in accordance with the sales contract when the transactions are completed, which is expected to be in 2019.

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

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

NOTE 9: REVENUE

On January 1, 2018, Heartland adopted ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606), and all subsequent ASUs that modified Topic 606. As stated in Note 1, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with Topic 605.

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

Service Charges and Fees

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

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

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

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

Trust Fees

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

Brokerage and Insurance Commissions

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

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the ~~three-~~three-months ended March 31, 2019, and ~~nine-months ended September 30,~~ 2018, ~~and 2017,~~ in thousands:


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2018			2017		2018		2017		2019			2018
In-scope of Topic 606
Service charges and fees
Service charges and fees on deposit accounts	$	2,858		$	2,577	$	8,270	$	7,002	$	2,977		$	2,618
Overdraft fees	2,990			2,479		7,716		6,950		2,744			2,208
Customer service fees	101			102		266		217		81			77
Credit card fee income	3,062			1,994		8,443		6,212		3,349			2,190
Debit card income	3,883			2,985		10,349		8,908		3,642			2,985
Other service charges	1			1		2		2		1			1
Total service charges and fees	$	12,895		$	10,138	$	35,046	$	29,291	$	12,794		$	10,079
Trust fees	4,499			3,872		13,794		11,482		4,474			4,680
Brokerage and insurance commissions	1,111			950		2,895		2,962		734			907
Total noninterest income in-scope of Topic 606	$	18,505		$	14,960	$	51,735	$	43,735	$	18,002		$	15,666

Out-of-scope of Topic 606
Loan servicing income	$	1,670		$	1,161	$	5,231	$	4,236	$	1,729		$	1,754
Securities gains/(losses), net	(145		)	1,679		1,037		5,553		1,575			1,441
Unrealized gain on equity securities, net	54			—		97		—
Unrealized gain/(loss) on equity securities, net										258			(28		)
Net gains on sale of loans held for sale	7,410			4,997		18,261		17,961		3,176			4,051
Valuation adjustment on commercial servicing rights	230			5		12		29
Valuation adjustment on servicing rights										(589		)	(2		)
Income on bank owned life insurance	892			766		2,206		2,039		899			614
Other noninterest income	1,149			1,409		3,536		2,941		1,667			1,220
Total noninterest income out-of-scope of Topic 606	11,260			10,017		30,380		32,759		8,715			9,050
Total noninterest income	$	29,765		$	24,977	$	82,115	$	76,494	$	26,717		$	24,716

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. Heartland's noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after Heartland satisfies its performance obligation and revenue is recognized. Heartland does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, Heartland did not have any significant contract balances.

Contract Acquisition Costs

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

NOTE 10: STOCK COMPENSATION

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 March 31, 2019, 368,071 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 $336,000 and $611,000 during the three months ended March 31, 2019 and 2018, respectively.

Restricted Stock Units

The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). In the first quarter of 2019, the Compensation Committee granted time-based RSUs with respect to 90,073 shares of common stock, and in the first quarter of 2018, the Compensation Committee granted time-based RSUs with respect to 52,153 shares of common stock to selected officers and employees. The time-based RSUs represent the right, without payment, to receive shares of Heartland common stock on a specified date in the future. The time-based RSUs granted in 2019 and 2018 vest over three years in equal installments on March 6 of each of the three years following the year of the grant. The time-based RSUs may also vest upon death or disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement). The retiree is required to sign a non-solicitation agreement as a condition to vesting.

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

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

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

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 three months ended March 31, 2019, and March 31, 2018, 1,045 and 0 time-based RSUs, respectively, were granted to directors and new employees.

A summary of the RSUs outstanding as of March 31, 2019, and 2018, and changes during the three months ended March 31, 2019 and 2018, follows:



	2019				2018
	Shares		Weighted-Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value
Outstanding at January 1,	266,995		$	43.89	301,578		$	34.74
Granted	125,966		45.77		87,249		55.25
Vested	(117,122	)	35.84		(107,553	)	30.79
Forfeited	(13,364	)	49.89		(19,113	)	43.62
Outstanding at March 31,	262,475		$	48.07	262,161		$	42.60

Total compensation costs recorded for RSUs were $2.4 million and $1.9 million for the three-month periods ended March 31, 2019 and 2018. As of March 31, 2019, there were $7.5 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2022.

NOTE 11: LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, Heartland adopted ASU No. 2016-02 "Leases" (Topic 842) and all subsequent ASUs that modified Topic 842. For Heartland, Topic 842 primarily affected the accounting treatment for operating lease agreements in which Heartland is the lessee.

Lessee Accounting

Substantially all of the leases in which Heartland is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2034. All of Heartland's leases are classified as operating leases, and therefore, were previously not recognized on the consolidated balance sheet. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use ("ROU") asset and a corresponding lease liability.

Heartland elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet. The table below presents Heartland's ROU assets and lease liabilities as of March 31, 2019, (in thousands):



Assets	Classification	March 31, 2019
Operating lease assets	Other assets	$	24,664
Total lease right-of-use assets		$	24,664

Liabilities
Operating lease liabilities	Accrued expenses and other liabilities	$	26,333
Total lease liabilities		$	26,333

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. Heartland’s lease agreements often include one or more options to renew at Heartland’s discretion. If at lease inception, Heartland considers the exercising of a renewal option to be reasonably certain, Heartland will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, Heartland utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. The variable lease cost primarily represents variable payments such as common area maintenance and utilities. The table below presents the lease costs and supplemental information as of March 31, 2019, in thousands:



	Three Months Ended March 31, 2019
Lease Cost
Operating lease cost	$	1,405
Variable lease cost	35
Total lease cost	$	1,440
Supplemental Information
Non-cash information on lease liabilities arising from obtaining ROU assets	$	1,209
Weighted-average remaining lease term (in years)
Operating leases	7.04
Weighted-average discount rate
Operating leases	3.00		%

As defined by Topic 842, future minimum payments for operating leases with initial or remaining terms of one year or more are presented in the table below as of March 31, 2019, in thousands:



Nine months ending December 31, 2019	$	3,859
Year ending December 31,
2020	5,174
2021	4,855
2022	3,351
2023	1,947
Thereafter	7,147
Total lease payments	$	26,333

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



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

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

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (including any information incorporated herein by reference) contains, and future oral and written statements of Heartland Financial USA, Inc. ("Heartland") and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the business, financial condition, results of operations, plans, objectives and future performance of Heartland. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of Heartland's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Although Heartland has made these statements based on management's experience and best estimate of future events, there may be events or factors that management has not anticipated, and the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, including those identified in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and Heartland undertakes no obligation to update any statement in light of new information or future events.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances. Among other things, the estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on Heartland's reported financial position and results of operations are described as critical accounting policies in Heartland's Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, ~~2017.~~2018.

OVERVIEW

Heartland is a multi-bank holding company providing banking, mortgage, wealth management, investments ~~insurance~~ and ~~consumer finance~~insurance services to individuals and businesses. As of the date of this Quarterly Report on Form 10-Q, Heartland has eleven banking subsidiaries with ~~122~~114 locations in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota, Kansas, Missouri, Texas and California. Heartland's primary objectives are to increase profitability and diversify its market area and asset base by expanding through acquisitions and to grow organically by increasing its customer base in the markets it serves.

Heartland's results of operations depend primarily on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges and fees, loan servicing income, trust income, brokerage and insurance commissions, securities gains, net gains on sale of loans held for sale, and income on bank owned life insurance also affects Heartland's results of operations. Heartland's principal operating expenses, aside from interest expense, consist of the provision for loan losses, salaries and employee benefits, occupancy and equipment costs, professional fees, ~~Federal Deposit Insurance Corporation (the "FDIC") insurance premiums,~~ advertising, core deposit ~~intangibles~~ and customer relationship intangibles amortization and other real estate and loan collection expenses.

Net income available to common stockholders for the quarter ended ~~September 30, 2018,~~March 31, 2019, was ~~$33.7~~$31.5 million, or ~~$0.97~~$0.91 per diluted common share, compared to ~~$21.6~~$23.3 million, or ~~$0.72~~$0.76 per diluted common share, for the quarter ended ~~September 30, 2017.~~March 31, 2018. Return on average common equity was ~~10.58%~~9.56% and return on average assets was ~~1.18%~~1.13% for the ~~third~~first quarter of ~~2018,~~2019, compared to ~~8.99%~~9.32% and ~~0.89%~~0.97%, respectively, for the same quarter in ~~2017.~~

Net income available to common stockholders for the nine months ended September 30, 2018, was $84.8 million or $2.59 per diluted common share, compared to $61.6 million or $2.21 per diluted common share for the nine months ended September 30, 2017. Return on average common equity was 9.95% and return on average assets was 1.07% for the first nine months of 2018, compared to 9.88% and 0.94% for the same period in 2017.2018.

For the ~~third~~first quarter of ~~2018,~~2019, Heartland's net interest margin was ~~4.32% (4.38%~~4.12% (4.18% on a fully tax-equivalent basis) compared to ~~4.08%~~4.19% (4.26% on a fully tax-equivalent basis) for the same quarter in ~~2017,~~2018, and the efficiency ratio was ~~62.40%~~65.23% and 64.54% for the third quarter of 2018 and 2017, respectively. For the nine-month period ended September 30, 2018, Heartland's net interest margin was 4.25% (4.32% on a fully tax-equivalent basis) compared to 4.00% (4.19% on a fully tax-equivalent basis) for the same period in 2017. The efficiency ratio68.21% for the first ~~nine months~~quarter of 2019 and 2018, ~~was 65.03% compared to 66.58% for the same period in 2017.~~respectively.

The financial impact of the following ~~transactions are~~transaction is included in the results of operations for the ~~nine-month~~three-month period ended ~~September 30, 2018,~~March 31, 2019, but not in the results of operations for the same period ended ~~September 30, 2017:~~

On February 23, 2018, Heartland completed the acquisition of Signature Bancshares, Inc., parent company of Signature Bank, based in Minnetonka, Minnesota. Based on Heartland's closing common stock price of $53.55 per share as of February 23, 2018, the aggregate consideration was $61.4 million, with approximately 10% of the consideration paid in cash and 90% paid by delivery of Heartland common stock. Simultaneous with the closing of the transaction, Signature Bank merged into Heartland's Minnesota Bank & Trust subsidiary. As of the close date, Signature Bancshares, Inc. had, at fair value, total assets of $427.1 million, total loans of $324.5 million and total deposits of $357.3 million. The systems conversion for this transaction occurred on April 20, 2018.March 31, 2018:

On May 18, 2018, Heartland completed the acquisition of Lubbock, Texas based First Bank Lubbock Bancshares, Inc. ("FBLB"), parent company of First Bank & Trust, and PrimeWest Mortgage Corporation, which is a wholly-owned subsidiary of First Bank & Trust. Based on Heartland's closing common stock price of $55.05 per share on May 18, 2018, the aggregate consideration paid to FBLB common shareholders was $189.9 million, with approximately 3% of the consideration paid in cash and 97% paid by delivery of Heartland common stock. As a result of the transaction, First

Bank & Trust became a wholly-owned subsidiary of Heartland and its 11th state-chartered bank. First Bank & Trust and PrimeWest Mortgage Corporation continue to operate under their present brands and management teams. As of the closing date, FBLB had, at fair value, total assets of $1.12 billion, total loans held to maturity of $681.1 million and total deposits of $893.8 million. Heartland also assumed, at fair value, $8.2 million of trust preferred debt. The systems conversion for this transaction occurred on August 17, 2018.

InTotal assets of Heartland were $11.31 billion at March 31, 2019, a decrease of $95.5 million or 1% since year-end 2018. Securities represented 22% of total assets at March 31, 2019, and 24% of total assets at December 31, 2018.

Total loans held to maturity were $7.33 billion at March 31, 2019, compared to $7.41 billion at year-end 2018, a decrease of $76.2 million or 1%. During the first quarter of ~~2018, Heartland recorded $2.6 million~~2019, the sale of restructuring expenses related to its legacy retail mortgage lending operation. The restructuring projects were primarily related to outsourcing of the loan application processing, underwriting and loan closing functions and included a workforce reduction of approximately 100 employees and the discontinuation of several current systems. Because of the significant reduction in infrastructure and the reporting structure of the mortgage sales staff, who currently report directly to the bank president in each market, retail mortgage lending was no longer considered a separate business segment as of January 1, 2018.

~~During the third quarter of 2018, Heartland closed three branch locations, consisting of one branch~~two branches at Dubuque Bank and Trust Company ~~Arizona Bank & Trust and Rocky Mountain Bank. Additionally, Wisconsin Bank & Trust~~was announced, ~~the sale of two branches. The sales transaction is expected to close in the first quarter of 2019, pending regulatory approval. At September 30, 2018, $31.4~~which included $20.3 million of loans ~~and $50.3~~that were classified as held for sale at March 31, 2019. Heartland also reclassified commercial loans with balances of $11.8 million at March 31, 2019, to held for sale as part of a plan to exit a small lease portfolio. Exclusive of these transactions, total loans held to maturity decreased $44.0 million or less than 1% since year-end 2018.

Total deposits were $9.35 billion as of March 31, 2019, compared to $9.40 billion at year-end 2018, a decrease of $43.5 million or less than 1%. The deposits classified as held for sale in conjunction with ~~this transaction.~~

~~Subsequent to September 30, 2018, Heartland announced~~ the ~~pending closure~~expected sale of ~~one branch of Morrill & Janes~~two branches at Dubuque Bank and ~~Trust. Pending regulatory approval, the loans and deposits~~Trust Company totaled $77.0 million at March 31, 2019. Exclusive of this ~~branch will be transferred and serviced by First Bank & Trust. Heartland expects the transaction to occur early in the first quarter of 2019.~~

Total assets of Heartland were $11.34 billion at September 30, 2018, an increase of $1.52 billion or 16% since year-end 2017. Excluding $427.1 million of assets acquired at fair value in the Signature Bancshares, Inc. transaction and $1.12 billion of assets acquired at fair value in the FBLB transaction, total ~~assets decreased $20.1~~deposits increased $33.5 million or less than 1% since December 31, ~~2017. Securities represented 22%~~2018.

Total equity was $1.37 billion at March 31, 2019, compared to $1.33 billion at year-end 2018. Book value per common share was $39.65 at March 31, 2019, compared to $38.44 at year-end 2018. Heartland's unrealized loss on securities available for sale, net of ~~total assets~~applicable taxes, was $11.4 million at ~~September 30, 2018, and 25%~~March 31, 2019, compared to an unrealized loss of ~~total assets~~$32.5 million, net of applicable taxes, at December 31, ~~2017.~~2018.

~~Heartland's total assets exceeded $10.0 billion as~~RECENT DEVELOPMENTS

Regulatory Developments

Enactment of ~~September 30, 2018. Various federal banking laws and regulations, including rules adopted by~~ the Federal Reserve Board pursuant to the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), impose heightened requirements on certain large banks and bank holding companies. Under the Dodd-Frank Act as originally adopted, most of these rules applied primarily to bank holding companies with at least $50 billion in total consolidated assets, but certain rules also applied to banks and bank holding companies with at least $10 billion in total consolidated assets. The Economic Growth, Regulatory Relief, and Consumer Protection Act ~~(the "Economic Growth Act"), which was signed into law on~~in May ~~24,~~ 2018 resulted in a roll-back of regulations applicable to the financial services industry primarily through certain amendments of the Dodd-Frank Act. Among other things, the Economic Growth Act reduced the dollar thresholds at which certain regulatory requirements apply. The Economic Growth Act increased the threshold for required stress testing under the Dodd-Frank Act from $10 billion in total consolidated assets to $100 billion in total consolidated assets. In addition, the threshold for requiring a dedicated board risk committee under the Dodd-Frank Act increased from $10 billion in total consolidated assets to $50 billion in total consolidated assets. The Economic Growth Act included additional regulatory relief, much of which benefited banks with less than $10 billion in consolidated assets. Certain of thesignificantly altered several provisions of the Dodd-Frank Act, amended by the Economic Growth Act took effect immediately, while others require that federal bank regulatory agencies jointly amend their rules. The banking authorities indicated through interagency guidance that the capital planning and risk management practices of banking institutionsincluding how stress tests are run. Bank holding companies with ~~total~~ assets of less than $100 billion, ~~would continue~~such as Heartland, are no longer subject to ~~be reviewed through~~company-run stress testing requirements in accordance with the ~~regular supervisory process,~~Dodd-Frank Act, which ~~may negate~~included publishing a summary of results. In response to ~~some extent~~ the ~~impact~~initial provisions of the ~~changes regarding stress testing and~~Dodd-Frank Act, Heartland has added staff, enhanced risk management ~~contained~~processes and invested in upgraded information systems and technology. In addition, management continues to run internal stress tests as a component of the ~~Economic Growth Act.~~comprehensive risk management and capital planning process.

Other provisions of the Dodd-Frank Act, such as the Durbin Amendment, which restricts interchange fees, remain in place. The Durbin Amendment, which will be effective for Heartland on July 1, 2019, restricts interchange fees to those which are "reasonable and proportionate" for certain debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing. In the final rules, interchange fees for debit card transactions were capped at $0.21 plus five basis points in order to be eligible for a safe harbor such that the fee is conclusively determined to be reasonable and proportionate. Based on calculations using ~~2017~~2018 debit card volume, the negative impact of the Durbin Amendment would be approximately $6.0 million annually to Heartland's noninterest income.

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

Blue Valley Ban Corp. Merger Agreement

On January 16, 2019, Heartland entered into a definitive merger agreement to acquire Blue Valley Ban Corp., and its wholly-owned subsidiary, Bank of Blue Valley, headquartered in Overland Park, Kansas. As of the announcement date, the transaction, in which all of the issued and outstanding shares of Blue Valley Ban Corp. stock will be exchanged for shares of Heartland common stock, was valued at approximately $93.9 million. Simultaneous with the closing of the transaction, Bank of Blue Valley will merge into Heartland's Kansas-based subsidiary, Morrill & Janes Bank and Trust Company, and the combined entity will operate as Bank of Blue Valley. The amount of the merger consideration is subject to fluctuations in the ~~process~~price of ~~preparing~~Heartland common stock and certain potential adjustments, and the transaction is subject to customary closing conditions. The transaction is expected to close in the second quarter of 2019 with a systems conversion planned for the ~~requirements under the Dodd-Frank Act over the past several quarters,~~third quarter of 2019. As of March 31, 2019, Bank of Blue Valley had total assets of approximately $711.6 million, which included approximately $564.1 million of gross loans outstanding, and ~~has added staff, enhanced risk management processes and invested in upgraded information systems and technology.~~ approximately $587.2 million of deposits.

The ~~potential impact~~foregoing description of the ~~Economic Growth Act~~definitive merger agreement is qualified in its entirety by reference to the agreement, which is part of the proxy statement/prospectus contained in Heartland’s Registration Statement on Form S-4 (File No. 333-230060), which became effective on April 9, 2019.

Branch Sales and Other Divestitures

On January 11, 2019, Heartland completed the ~~Dodd-Frank Act are still under evaluation by management.~~sale of the loan portfolios of its consumer finance subsidiaries, Citizens Finance Co. and Citizens Finance of Illinois Co. (collectively, "Citizens"). The loan portfolios had a fair value of $67.2 million.

On January 23, 2019, Heartland announced the sale of two branch locations of Dubuque Bank and Trust Company, which operate as First Community Bank, in Keokuk, Iowa. The announcement of this resulted in $20.3 million of loans and $77.0 million of deposits classified as held for sale as of March 31, 2019. This transaction, along with two previously announced branch sales, is expected to close in the second quarter of 2019.

On February 22, 2019, Heartland completed the sale of two branch locations of Wisconsin Bank & Trust. The sale included loans of $11.7 million and deposits of $48.6 million. Heartland recorded a net gain of $3.2 million in the first quarter of 2019, which consisted of a gain of $3.5 million and write-off $379,000 of core deposit intangibles.

~~Total loans held~~On April 26, 2019, Dubuque Bank and Trust Company signed an agreement to ~~maturity were $7.37 billion at September 30, 2018, compared~~sell substantially all its mortgage servicing rights to ~~$6.39 billion at year-end 2017,~~PNC Bank, N.A., headquartered in Pittsburgh, Pennsylvania. The servicing rights had an ~~increase of $974.0 million or 15%. This change includes $324.5 million of total loans held to maturity acquired at~~estimated fair value ~~in the Signature Bancshares, Inc. transaction~~of $37.0 million and ~~$681.1~~a book value of $21.0 million as of ~~total~~March 31, 2019. The portfolio contained approximately 20,300 serviced residential mortgage loans ~~held to maturity acquired at fair value in the FBLB transaction. Exclusive~~with unpaid principal balances of ~~these transactions, total loans held to maturity decreased $31.5 million or less than 1% since year-end 2017.~~

~~Total deposits were $9.51~~$3.35 billion as of ~~September~~March 31, 2019. The serviced loans are primarily owned by Fannie Mae and Freddie Mac. The transaction was approved by Fannie Mae and Freddie Mac and closed on April 30, ~~2018, compared~~2019. In the agreement, which included customary terms and conditions, Dubuque Bank and Trust Company will provide interim servicing of the loans until the transfer date, which is expected to ~~$8.15 billion at year-end 2017, an increase of $1.37 billion or 17%. This increase includes $357.3 million of deposits, at fair value, acquired~~be in the Signature Bancshares, Inc. transaction and $893.8 million of deposits, at fair value, acquired in the FBLB transaction. Exclusive of these transactions, total deposits increased $114.1 million or 1% since December 31, 2017.

Common stockholders' equity was $1.28 billion at September 30, 2018, compared to $990.5 million at year-end 2017. Book value per common share was $37.14 at September 30, 2018, compared to $33.07 at year-end 2017. Heartland's unrealized loss on securities available for sale, net of applicable taxes, was $52.4 million at September 30, 2018, compared to an unrealized loss of $24.3 million, net of applicable taxes, at December 31, 2017. The increase in the unrealized loss on securities available for sale was primarily due to increases in short-term interest rates.

~~FINANCIAL HIGHLIGHTS~~August 2019.


FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
STATEMENT OF INCOME DATA
Interest income	$	124,894		$	98,978		$	339,517		$	261,590		$	120,721		$	101,214
Interest expense	14,216			9,134			35,846			24,138			17,766			9,630
Net interest income	110,678			89,844			303,671			237,452			102,955			91,584
Provision for loan losses	5,238			5,705			14,332			10,235			1,635			4,263
Net interest income after provision for loan losses	105,440			84,139			289,339			227,217			101,320			87,321
Noninterest income	29,765			24,977			82,115			76,494			26,717			24,716
Noninterest expenses	92,539			78,759			265,067			219,797			88,230			83,646
Income taxes	8,956			8,725			21,530			22,314			8,310			5,123
Net income	33,710			21,632			84,857			61,600			31,497			23,268
Preferred dividends	(13		)	(13		)	(39		)	(45		)	—			(13		)
Interest expense on convertible preferred debt	—			3			—			12
Net income available to common stockholders	$	33,697		$	21,622		$	84,818		$	61,567		$	31,497		$	23,255

Key Performance Ratios
Annualized return on average assets	1.18		%	0.89		%	1.07		%	0.94		%	1.13		%	0.97		%
Annualized return on average common equity (GAAP)	10.58		%	8.99		%	9.95		%	9.88		%	9.56		%	9.32		%
Annualized return on average tangible common equity (non-GAAP)⁽¹⁾	16.30		%	12.41		%	14.71		%	12.90		%	15.24		%	13.85		%
Annualized ratio of net charge-offs to average loans	0.28		%	0.31		%	0.17		%	0.23		%	0.05		%	0.08		%
Annualized net interest margin (GAAP)	4.32		%	4.08		%	4.25		%	4.00		%	4.12		%	4.19		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)⁽²⁾⁽¹⁾	4.38		%	4.26		%	4.32		%	4.19		%	4.18		%	4.26		%
Efficiency ratio, fully tax-equivalent⁽³⁾	62.40		%	64.54		%	65.03		%	66.58		%
Efficiency ratio, fully tax-equivalent (non-GAAP)⁽¹⁾													65.23		%	68.21		%

Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)⁽⁴⁾
Net income available to common shareholders (GAAP)	$	33,697		$	21,622		$	84,818		$	61,567

Average common stockholders' equity (GAAP)	$	1,263,226		$	954,511		$	1,139,149		$	833,150
Less average goodwill	391,668			226,097			323,058			167,009
Less average other intangibles, net	51,592			36,950			45,207			27,992
Average tangible common equity (non-GAAP)	$	819,966		$	691,464		$	770,884		$	638,149
Annualized return on average common equity (GAAP)	10.58		%	8.99		%	9.95		%	9.88		%
Annualized return on average tangible common equity (non-GAAP)	16.30		%	12.41		%	14.71		%	12.90		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)⁽⁵⁾
Net Interest Income (GAAP)	$	110,678		$	89,844		$	303,671		$	237,452
Plus tax-equivalent adjustment⁽⁶⁾	1,544			3,925			4,663			11,581
Net interest income - tax-equivalent (non-GAAP)	$	112,222		$	93,769		$	308,334		$	249,033

Average earning assets	$	10,154,591		$	8,726,228		$	9,547,147		$	7,942,810
Net interest margin (GAAP)	4.32		%	4.08		%	4.25		%	4.00		%
Net interest margin, fully tax-equivalent (non-GAAP)	4.38		%	4.26		%	4.32		%	4.19		%

(Dollars in thousands, except per share data) Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Reconciliation of Non-GAAP Measure-Efficiency Ratio⁽⁷⁾

Net Interest Income (GAAP) $ 110,678
$ 89,844
$ 303,671
$ 237,452
Plus tax-equivalent adjustment⁽⁶⁾
1,544
3,925
4,663
11,581
Net interest income - tax-equivalent (non-GAAP)
112,222
93,769
308,334
249,033
Noninterest income 29,765
24,977
82,115
76,494
Securities (gains)/losses, net 145
(1,679 ) (1,037 ) (5,553 )
Unrealized gain on equity securities, net (54 ) —
(97 ) —
Adjusted income $ 142,078
$ 117,067
$ 389,315
$ 319,974

Total noninterest expenses $ 92,539
$ 78,759
$ 265,067
$ 219,797
Less:
Core deposit intangibles and customer relationship intangibles amortization 2,626
1,863
6,763
4,252
Partnership investment in tax credit projects 338
—
338
876
(Gain)/loss on sales/valuations of assets, net

912
1,342
2,243
1,642
Restructuring expenses —
—
2,564
—
Adjusted noninterest expenses $ 88,663
$ 75,554
$ 253,159
$ 213,027

Efficiency ratio, fully tax-equivalent (non-GAAP) 62.40 % 64.54 % 65.03 % 66.58 %
(1) Refer to the "Reconciliation of Annualized 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) Annualized 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) Computed on a tax-equivalent basis using an effective tax rate of 21% beginning January 1, 2018, and 35% for all prior periods.
(7) 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.



FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)	Three Months Ended March 31,
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common shareholders (GAAP)	$	31,497		$	23,255
Plus core deposit and customer relationship intangibles amortization, net of tax⁽²⁾	2,245			1,472
Adjusted net income available to common shareholders (non-GAAP)	$	33,742		$	24,727

Average common stockholders' equity (GAAP)	$	1,336,250		$	1,011,580
Less average goodwill	391,668			250,172
Less average other intangibles, net	46,490			37,510
Average tangible common equity (non-GAAP)	$	898,092		$	723,898
Annualized return on average common equity (GAAP)	9.56		%	9.32		%
Annualized return on average tangible common equity (non-GAAP)	15.24		%	13.85		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net Interest Income (GAAP)	$	102,955		$	91,584
Plus tax-equivalent adjustment⁽²⁾	1,412			1,544
Net interest income - tax-equivalent (non-GAAP)	$	104,367		$	93,128

Average earning assets	$	10,129,957		$	8,857,801
Net interest margin (GAAP)	4.12		%	4.19		%
Net interest margin, fully tax-equivalent (non-GAAP)	4.18		%	4.26		%

Reconciliation of Efficiency Ratio (non-GAAP)
Net interest income	$	102,955		$	91,584
Plus tax-equivalent adjustment⁽²⁾	1,412			1,544
Fully tax-equivalent net interest income	104,367			93,128
Noninterest income	26,717			24,716
Securities gains, net	(1,575		)	(1,441		)
Unrealized (gain)/loss on equity securities, net	(258		)	28
Valuation adjustment on servicing rights	589			2
Adjusted income	$	129,840		$	116,433

Total noninterest expenses	$	88,230		$	83,646
Less:
Core deposit and customer relationship intangibles amortization	2,842			1,863
Partnership investment in tax credit projects	475			—
Gain on sales/valuations of assets, net	(3,004		)	(197		)
Restructuring expenses	3,227			2,564
Adjusted noninterest expenses	$	84,690		$	79,416

Efficiency ratio, fully tax-equivalent (non-GAAP)	65.23		%	68.21		%

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

FINANCIAL HIGHLIGHTS, continued


(Dollars in thousands, except per share data)	As Of and For the Quarter Ended															As Of and For the Quarter Ended
	9/30/2018			6/30/2018			3/31/2018			12/31/2017			9/30/2017			3/31/2019			12/31/2018			9/30/2018			6/30/2018			3/31/2018
BALANCE SHEET DATA
Investments	$	2,540,779		$	2,468,113		$	2,300,413		$	2,492,866		$	2,372,916		$	2,516,055		$	2,715,388		$	2,540,779		$	2,468,113		$	2,300,413
Loans held for sale	77,727			55,684			24,376			44,560			35,795			69,716			119,801			77,727			55,684			24,376
Total loans receivable⁽¹⁾	7,365,493			7,477,697			6,746,015			6,391,464			6,373,415			7,331,544			7,407,697			7,365,493			7,477,697			6,746,015
Allowance for loan losses	61,221			61,324			58,656			55,686			54,885			62,639			61,963			61,221			61,324			58,656
Total assets	11,335,132			11,301,920			10,055,863			9,810,739			9,755,627			11,312,495			11,408,006			11,335,132			11,301,920			10,055,863
Total deposits⁽²⁾	9,512,163			9,489,144			8,541,540			8,146,909			8,231,884			9,352,942			9,396,429			9,512,163			9,489,144			8,541,540
Long-term obligations	277,563			258,708			276,118			285,011			301,473			268,312			274,905			277,563			258,708			276,118
Preferred equity	—			938			938			938			938			—			—			—			938			938
Common stockholders’ equity	1,280,393			1,254,809			1,050,567			990,519			980,746			1,372,102			1,325,175			1,280,393			1,254,809			1,050,567

Common Share Data
Book value per common share (GAAP)	$	37.14		$	36.44		$	33.81		$	33.07		$	32.75		$	39.65		$	38.44		$	37.14		$	36.44		$	33.81
Tangible book value per common share (non-GAAP)⁽³⁾	$	24.33		$	23.53		$	23.79		$	23.99		$	23.61		$	27.04		$	25.70		$	24.33		$	23.53		$	23.79
Common shares outstanding, net of treasury stock	34,473,029			34,438,445			31,068,239			29,953,356			29,946,069			34,603,611			34,477,499			34,473,029			34,438,445			31,068,239
Tangible common equity ratio (non-GAAP)⁽⁴⁾⁽³⁾	7.70		%	7.46		%	7.59		%	7.53		%	7.46		%	8.60		%	8.08		%	7.70		%	7.46		%	7.59		%

Reconciliation of Tangible Book Value Per Common Share (non-GAAP)⁽⁵⁾
Common stockholders' equity (GAAP)	$	1,280,393		$	1,254,809		$	1,050,567		$	990,518		$	980,746		$	1,372,102		$	1,325,175		$	1,280,393		$	1,254,809		$	1,050,567
Less goodwill	391,668			391,668			270,305			236,615			236,615			391,668			391,668			391,668			391,668			270,305
Less core deposit intangibles and customer relationship intangibles, net	50,071			52,698			41,063			35,203			37,028
Less core deposit and customer relationship intangibles, net																44,637			47,479			50,071			52,698			41,063
Tangible common stockholders' equity (non-GAAP)	$	838,654		$	810,443		$	739,199		$	718,700		$	707,103		$	935,797		$	886,028		$	838,654		$	810,443		$	739,199

Common shares outstanding, net of treasury stock	34,473,029			34,438,445			31,068,239			29,953,356			29,946,069			34,603,611			34,477,499			34,473,029			34,438,445			31,068,239
Common stockholders' equity (book value) per share (GAAP)	$	37.14		$	36.44		$	33.81		$	33.07		$	32.75		$	39.65		$	38.44		$	37.14		$	36.44		$	33.81
Tangible book value per common share (non-GAAP)	$	24.33		$	23.53		$	23.79		$	23.99		$	23.61		$	27.04		$	25.70		$	24.33		$	23.53		$	23.79

Reconciliation of Tangible Common Equity Ratio (non-GAAP)⁽⁶⁾
Tangible common stockholders' equity (non-GAAP)																$	935,797		$	886,028		$	838,654		$	810,443		$	739,199

Total assets (GAAP)	$	11,335,132		$	11,301,920		$	10,055,863		$	9,810,739		$	9,755,627		$	11,312,495		$	11,408,006		$	11,335,132		$	11,301,920		$	10,055,863
Less goodwill	391,668			391,668			270,305			236,615			236,615			391,668			391,668			391,668			391,668			270,305
Less core deposit intangibles and customer relationship intangibles, net	50,071			52,698			41,063			35,203			37,028
Less core deposit and customer relationship intangibles, net																44,637			47,479			50,071			52,698			41,063
Total tangible assets (non-GAAP)	$	10,893,393		$	10,857,554		$	9,744,495		$	9,538,921		$	9,481,984		$	10,876,190		$	10,968,859		$	10,893,393		$	10,857,554		$	9,744,495
Tangible common equity ratio (non-GAAP)	7.70		%	7.46		%	7.59		%	7.53		%	7.46		%	8.60		%	8.08		%	7.70		%	7.46		%	7.59		%
																															(1) Excludes loans held for sale.	(2) Excludes deposits held for sale.
(3) Refer to the "Reconciliation of Tangible Book Value Per Common Share (non-GAAP)" table.
(4) Refer to the "Reconciliation of Tangible Common Equity Ratio (non-GAAP)" table.
(5) 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.
(6) 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.
(3) Refer to the "Non-GAAP Measures" section after these financial tables for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.																(3) Refer to the "Non-GAAP Measures" section after these financial tables for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.

Non-GAAP Financial Measures

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

Net Interest Income

Net interest margin, expressed as a percentage of average earning assets, was ~~4.32% (4.38%~~4.12% (4.18% on a fully tax-equivalent basis) during the ~~third~~first quarter of ~~2018,~~2019, compared to ~~4.08%~~4.19% (4.26% on a fully tax-equivalent basis) during the ~~third~~first quarter of ~~2017.~~2018. Heartland's success in maintaining its net interest margin has been the result of an increase in average earning assets and a favorable deposit mix. Also contributing to Heartland's ability to maintain its net interest margin has been the amortization of purchase accounting discounts associated with acquisitions completed by Heartland. For the ~~third~~first quarter of ~~2018,~~2019, Heartland's net interest margin included 2516 basis points of purchase accounting discount amortization compared to 1622 basis points in the same quarter of 2017. For the nine months ended September 30, 2018, purchase accounting discount amortization added 21 basis points to net interest margin compared to 14 basis points for the nine months ended September 30, 2017.2018. See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for information relating to Heartland's net interest income on a fully tax-equivalent basis, which is not defined by GAAP, and refer to the financial tables above for a reconciliation of annualized net interest margin on a fully tax-equivalent basis to GAAP.

Growth in interest income on a tax-equivalent basis was primarily due to recent increases in market interest rates and the increase in average earning assets. Total interest income for the ~~third~~first quarter of ~~2018~~2019 was ~~$124.9~~$120.7 million, an increase of ~~$25.9~~$19.5 million or ~~26%~~19%, compared to ~~$99.0~~$101.2 million recorded in the ~~third~~first quarter of ~~2017.~~2018. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were $1.4 million for the first quarter of 2019 and $1.5 million for the ~~third~~first quarter of ~~2018 and $3.9 million for the third quarter of 2017.~~2018. With these adjustments, total interest income on a tax-equivalent basis was $126.4 million for the third quarter of 2018, an increase of $23.5 million or 23%, compared to $102.9 million for the third quarter of 2017. For the first nine months of 2018, total interest income increased $77.9 million or 30% to $339.5 million compared to $261.6$122.1 million for the first ~~nine months~~quarter of ~~2017. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were $4.7~~2019, an increase of $19.4 million ~~and $11.6~~or 19%, compared to $102.8 million for the first ~~nine months~~quarter of 2018 and 2017, respectively. With these adjustments, total interest income on a tax-equivalent basis was $344.2 million during the first nine months of 2018 compared to $273.2 million during the first nine months of 2017, an increase of $71.0 million or 26%.2018.

Average earning assets increased ~~$1.43~~$1.27 billion or ~~16% to $10.15 billion for~~14% from the ~~third~~first quarter of 2018, ~~compared to $8.73 billion for the same quarter in 2017. For the first nine months of 2018, average earning assets were $9.55 billion compared to $7.94 billion for the first nine months of 2017,~~ which was an increase of $1.60 billion or 20%. The average rate on earning assets increased 26 basis points to 4.94% for the third quarter of 2018 compared to 4.68% for the third quarter of 2017. The average rate on earning assets for the first nine months of 2018 was 4.82%, an increase of 22 basis points compared to 4.60% for the same period in 2017. The increase in total interest income and average earning assets for the quarterly and nine-month periods ended September 30, 2018, was primarily attributable to the acquisitions completed in ~~2017 and~~2018. The average interest rate on earning assets increased 19 basis points to 4.89% for the first ~~half~~quarter of ~~2018 and~~2019 compared to 4.70% for the same quarter in 2018.

Increases in total interest expense were primarily due to recent increases in market interest ~~rates.~~

~~Total interest expense for the third quarter of 2018 was $14.2 million, an increase of $5.1 million or 56%~~rates and deposit growth from ~~$9.1 million in the third quarter of 2017.~~recent acquisitions. Total interest expense for the first ~~nine months~~quarter of ~~2018 totaled $35.8~~2019 was $17.8 million, ~~compared to $24.1 million for the first nine months of 2017, which was~~ an increase of ~~$11.7~~$8.1 million or ~~49%. For the quarter ended September 30, 2018, average interest bearing liabilities were $6.54 billion, an increase of $847.2~~84% from $9.6 million or 15%, from $5.70 billion for the quarter ended September 30, 2017. In addition, the average interest rate paid on Heartland's interest bearing deposits and borrowings increased 22 basis points to 0.86% in the third quarter of 2018 from 0.64% in the third quarter of 2017. Average interest bearing liabilities increased $804.4 million or 15% to $6.15 billion for the first nine months of 2018 compared to $5.35 billion for the first nine months in 2017, while the average interest rate paid on Heartland's interest bearing deposits and borrowings increased 18 basis points to 0.78% in the first ~~nine months~~quarter of ~~2018 from 0.60% in the first nine months of 2017.~~2018. The average interest rate paid on savings deposits was ~~0.56%~~0.80% during the ~~third~~first quarter of ~~2018~~2019 compared to ~~0.30%~~0.35% for the ~~third~~first quarter of ~~2017,~~2018, and the average interest rate paid on time deposits was ~~1.03%~~1.23% for the ~~third~~first quarter of ~~2018~~2019 compared to ~~0.77%~~0.88% for the ~~third~~first quarter of ~~2017. For the first nine months of 2018, the~~2018. The average interest rate paid on ~~savings deposits~~Heartland's borrowings was ~~0.47% compared to 0.26%~~3.96% for the first ~~nine months~~quarter of ~~2017, and~~2019 compared to 3.66% in the first quarter of 2018.

For the quarter ended March 31, 2019, average interest ~~rate paid on time deposits was 0.96% and 0.79%~~bearing liabilities were $6.62 billion, an increase of $927.8 million or 16%, from $5.69 billion for the ~~nine-month periods ending September 30, 2018, and 2017, respectively.~~quarter ended March 31, 2018. Average interest bearing deposits increased $889.5 million or 17% to $6.16 billion for the quarter ended March 31, 2019, from $5.27 billion in the same quarter in 2018. Average borrowings increased $38.3 million or 9% to $466.2 million during the first quarter of 2019 from $427.9 million during the same quarter in 2018. The increase in Heartland's average interest bearing liabilities ~~for both the quarterly and year-to date comparisons~~ is primarily attributable to ~~the acquisitions completed in 2017 and the first half of 2018. The increase in the average interest rate paid on Heartland's interest bearing liabilities is primarily due to~~ recent ~~increases in market interest rates.~~acquisitions.

Net interest income increased ~~$20.8~~$11.4 million or ~~23%~~12% to ~~$110.7~~$103.0 million in the ~~third~~first quarter of ~~2018~~2019 from ~~$89.8~~$91.6 million in the ~~third~~first quarter of ~~2017.~~2018. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $112.2 million during the third quarter of 2018, an increase of $18.5 million or 20% from $93.8 million during the third quarter of 2017. For the first nine months of 2018, net interest income increased $66.2 million or 28% to $303.7 million from $237.5 million recorded in the first nine months of 2017. After the tax-equivalent adjustment discussed above, net interest income on a tax-

~~equivalent basis totaled $308.3~~$104.4 million during the first ~~nine months~~quarter of ~~2018,~~2019, an increase of ~~$59.3~~$11.2 million or ~~24%~~12% from ~~$249.0~~$93.1 million ~~recorded~~ during the first ~~nine months~~quarter of ~~2017.~~2018.

Heartland attempts to manage its balance sheet to minimize the effect that a change in interest rates has on its net interest margin. Heartland plans to continue to work toward improving both its earning assets and funding mix through targeted organic growth strategies, which management believes will result in additional net interest income. Heartland produces and reviews simulations of various interest rate scenarios to assist in monitoring its exposure to interest rate risk. Based on these simulations, it is management's opinion that Heartland maintains a well-balanced and manageable interest rate posture. Item 3 of Part I of this Quarterly Report on Form 10-Q contains additional information about the results of Heartland's most recent net interest income simulations. Note 7 to the consolidated financial statements included in this Quarterly Report on Form 10-Q contains a detailed discussion of the derivative instruments Heartland has utilized to manage its interest rate risk.

The following table sets forth certain information relating to Heartland's average consolidated balance sheets and reflects the yield on average earning assets and the cost of average interest bearing liabilities for the periods indicated, in thousands. Such yields and costs are calculated by dividing income or expense by the average balance of assets or liabilities. Average balances are derived from daily balances, and nonaccrual loans and loans held for sale are included in each respective loan category. Assets that receive favorable tax treatment are evaluated on a tax-equivalent basis assuming a federal income tax rate of 21% ~~for the third quarter and first nine months of 2018 and 35% for the third quarter and first nine months of 2017.~~. 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 favored assets and dividing this amount by the average balance of the tax favorable assets.

ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾(Dollars in thousands)
For the Quarter Ended
September 30, 2018 September 30, 2017
Average
Balance Interest Rate Average
Balance Interest Rate
Earning Assets
Securities:
Taxable $ 2,066,071
$ 14,433
2.77 % $ 1,667,076
$ 10,394
2.47 %
Nontaxable⁽¹⁾
435,045
4,418
4.03
643,925
7,825
4.82
Total securities 2,501,116
18,851
2.99
2,311,001
18,219
3.13
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments 252,535
1,238
1.94
164,809
558
1.34
Federal funds sold —
—
—
18,874
34
0.71
Loans:⁽²⁾

Commercial and commercial real estate⁽¹⁾
5,637,360
77,443
5.45
4,647,414
59,121
5.05
Residential mortgage 736,875
8,952
4.82
683,186
7,300
4.24
Agricultural and agricultural real estate⁽¹⁾
571,599
7,725
5.36
504,970
6,175
4.85
Consumer 516,342
10,043
7.72
450,694
9,032
7.95
Fees on loans 2,186
—
2,464
—
Less: allowance for loan losses (61,236 ) —
—
(54,720 ) —
—
Net loans 7,400,940
106,349
5.70
6,231,544
84,092
5.35
Total earning assets 10,154,591
126,438
4.94 % 8,726,228
102,903
4.68 %
Nonearning Assets 1,136,698
913,616

Total Assets $ 11,291,289
$ 9,639,844

Interest Bearing Liabilities⁽³⁾

Savings $ 4,932,013
$ 6,980
0.56 % $ 4,205,946
$ 3,162
0.30 %
Time, $100,000 and over 575,810
1,379
0.95
408,560
787
0.76
Other time deposits 618,161
1,733
1.11
573,178
1,124
0.78
Short-term borrowings 148,041
464
1.24
209,795
271
0.51
Other borrowings 270,924
3,660
5.36
300,234
3,790
5.01
Total interest bearing liabilities 6,544,949
14,216
0.86 % 5,697,713
9,134
0.64 %
Noninterest Bearing Liabilities⁽³⁾

Noninterest bearing deposits 3,404,759
2,912,344

Accrued interest and other liabilities 77,786
74,338

Total noninterest bearing liabilities 3,482,545
2,986,682

Stockholders' Equity 1,263,795
955,449

Total Liabilities and Stockholders' Equity $ 11,291,289
$ 9,639,844

Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾
$ 112,222
$ 93,769

Net interest spread⁽¹⁾
4.08 % 4.04 %
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets⁽⁴⁾
4.38 % 4.26 %
Interest bearing liabilities to earning assets 64.45 % 65.29 %
Reconciliation of annualized net interest margin, fully tax-equivalent (non-GAAP)⁽⁴⁾

Net interest income, fully tax-equivalent (non-GAAP) $ 112,222
$ 93,769

Adjustments for tax-equivalent interest⁽¹⁾
(1,544 ) (3,925 )
Net interest income (GAAP) $ 110,678
$ 89,844

Average earning assets $ 10,154,591
$ 8,726,228

Annualized net interest margin (GAAP) 4.32 % 4.08 %
Annualized net interest margin, fully tax-equivalent (non-GAAP) 4.38 % 4.26 %

(1) Computed on a tax-equivalent basis using an effective tax rate of 21% beginning January 1, 2018, and 35% for all prior periods.
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.
(3) Includes deposits held for sale.
(4) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax exempt sources. This measure should not be considered a substitute for operating results determined in accordance with GAAP.

ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾
(Dollars in thousands)
For the Nine Months Ended
September 30, 2018
September 30, 2017
Average
Balance Interest Rate Average
Balance Interest Rate
Earning Assets
Securities:
Taxable $ 1,937,053
$ 38,280
2.64 % $ 1,545,091
$ 27,246
2.36 %
Nontaxable⁽¹⁾
444,127
13,485
4.06
638,119
23,534
4.93
Total securities 2,381,180
51,765
2.91
2,183,210
50,780
3.11
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments 183,905
2,413
1.75
127,870
1,112
1.16
Federal funds sold 471
—
—
6,885
37
0.72
Loans:⁽²⁾

Commercial and commercial real estate⁽¹⁾
5,319,862
211,557
5.32
4,097,967
151,946
4.96
Residential mortgage 688,367
23,365
4.54
654,488
20,492
4.19
Agricultural and agricultural real estate⁽¹⁾
542,755
20,579
5.07
492,170
17,536
4.76
Consumer 489,417
27,895
7.62
434,995
25,374
7.80
Fees on loans 6,606
—
5,894
—
Less: allowance for loan losses (58,810 ) —
—
(54,775 ) —
—
Net loans 6,981,591
290,002
5.55
5,624,845
221,242
5.26
Total earning assets 9,547,147
344,180
4.82 % 7,942,810
273,171
4.60 %
Nonearning Assets 1,023,306
797,893

Total Assets $ 10,570,453
$ 8,740,703

Interest Bearing Liabilities⁽³⁾

Savings $ 4,681,710
$ 16,306
0.47 % $ 3,976,403
$ 7,772
0.26 %
Time, $100,000 and over 479,342
3,221
0.90
369,595
2,239
0.81
Other time deposits 569,536
4,314
1.01
512,551
2,955
0.77
Short-term borrowings 149,453
1,279
1.14
199,503
498
0.33
Other borrowings 271,234
10,726
5.29
288,774
10,674
4.94
Total interest bearing liabilities 6,151,275
35,846
0.78 % 5,346,826
24,138
0.60 %
Noninterest Bearing Liabilities⁽³⁾

Noninterest bearing deposits 3,207,709
2,494,850

Accrued interest and other liabilities 71,506
64,824

Total noninterest bearing liabilities 3,279,215
2,559,674

Stockholders' Equity 1,139,963
834,203

Total Liabilities and Stockholders' Equity $ 10,570,453
$ 8,740,703

Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾
$ 308,334
$ 249,033

Net interest spread⁽¹⁾
4.04 % 4.00 %
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets⁽⁴⁾
4.32 % 4.19 %
Interest bearing liabilities to earning assets 64.43 % 67.32 %
Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)⁽⁴⁾

Net interest income, fully tax-equivalent (non-GAAP) $ 308,334
$ 249,033

Adjustments for tax-equivalent interest⁽¹⁾
(4,663 ) (11,581 )
Net interest income (GAAP) $ 303,671
$ 237,452

Average Earning Assets $ 9,547,147
$ 7,942,810

Annualized net interest margin (GAAP) 4.25 % 4.00 %
Annualized net interest margin, fully tax-equivalent (non-GAAP) 4.32 % 4.19 %

(1) Computed on a tax-equivalent basis using an effective tax rate of 21% beginning January 1, 2018, and 35% for all prior periods.
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.
(3) Includes deposits held for sale.
(4) Annualized net interest margin, fully tax-equivalent is a non-GAAP measure, which adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources. This measure should not be considered a substitute for operating results determined in accordance with GAAP.



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

	For the Quarter Ended
	March 31, 2019							December 31, 2018							March 31, 2018
	Average Balance			Interest		Rate		Average Balance			Interest		Rate		Average Balance			Interest		Rate
Earning Assets
Securities:
Taxable	$	2,169,016		$	15,876	2.97	%	$	2,184,096		$	15,851	2.88	%	$	1,827,611		$	11,577	2.57	%
Nontaxable⁽¹⁾	391,724			3,915		4.05		427,332			4,388		4.07		448,641			4,530		4.09
Total securities	2,560,740			19,791		3.13		2,611,428			20,239		3.07		2,276,252			16,107		2.87
Interest on deposits with other banks and other short-term investments	218,445			1,292		2.40		238,087			1,285		2.14		112,024			407		1.47
Federal funds sold	560			4		2.90		309			—		—		—			—		—
Loans:⁽²⁾
Commercial and commercial real estate⁽¹⁾	5,745,180			78,083		5.51		5,644,475			77,822		5.47		4,910,797			62,813		5.19
Residential mortgage	673,682			7,179		4.32		704,012			8,682		4.89		642,181			6,851		4.33
Agricultural and agricultural real estate⁽¹⁾	554,506			7,301		5.34		568,904			7,752		5.41		513,780			6,004		4.74
Consumer	439,487			6,479		5.98		519,106			9,355		7.15		458,795			8,660		7.66
Fees on loans				2,004		—		—			2,733		—					1,916		—
Less: allowance for loan losses	(62,643		)	—		—		(60,912		)	—		—		(56,028		)	—		—
Net loans	7,350,212			101,046		5.58		7,375,585			106,344		5.72		6,469,525			86,244		5.41
Total earning assets	10,129,957			122,133		4.89	%	10,225,409			127,868		4.96	%	8,857,801			102,758		4.70	%
Nonearning Assets	1,137,257							1,145,838							902,135
Total Assets	$	11,267,214						$	11,371,247						$	9,759,936
Interest Bearing Liabilities⁽³⁾
Savings	$	5,121,179		$	10,083	0.80	%	$	5,071,573		$	8,817	0.69	%	$	4,358,508		$	3,791	0.35	%
Time deposits	1,034,744			3,130		1.23		1,088,122			3,009		1.10		907,928			1,975		0.88
Short-term borrowings	195,390			889		1.85		121,053			417		1.37		147,738			268		0.74
Other borrowings	270,836			3,664		5.49		276,437			3,777		5.42		280,163			3,596		5.21
Total interest bearing liabilities	6,622,149			17,766		1.09	%	6,557,185			16,020		0.97	%	5,694,337			9,630		0.69	%
Noninterest Bearing Liabilities⁽³⁾
Noninterest bearing deposits	3,200,281							3,437,112							2,984,704
Accrued interest and other liabilities	108,534							86,259							68,377
Total noninterest bearing liabilities	3,308,815							3,523,371							3,053,081
Stockholders' Equity	1,336,250							1,290,691							1,012,518
Total Liabilities and Stockholders' Equity	$	11,267,214						$	11,371,247						$	9,759,936
Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾				$	104,367						$	111,848						$	93,128
Net interest spread⁽¹⁾						3.80	%						3.99	%						4.01	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets						4.18	%						4.34	%						4.26	%

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

Provision For Loan Losses

The allowance for loan losses is established through provision expense to provide, in Heartland management's opinion, an appropriate allowance for loan losses. The provision for loan losses decreased ~~$467,000~~$2.6 million to ~~$5.2~~$1.6 million for the ~~third~~first quarter of 2019 compared to $4.3 million for the first quarter of 2018. The impact of the closure of the Citizen's Finance offices in the first quarter of 2019 resulted in net recoveries of $93,000 in the first quarter of 2019 compared to net charge-offs of $706,000 in the

first quarter of 2018. As a result, Heartland recorded negative provision expense of $93,000 for the first quarter of 2019 compared to provision expense of $792,000 in the same quarter of 2018, ~~compared to $5.7 million for the third quarter of 2017. For the first nine months of 2018, provision expense totaled $14.3 million compared to $10.2 million for the same period in 2017,~~ which was ~~an increase~~a decrease of ~~$4.1 million. The increase is attributable to a combination of factors, including acquired loans moving out of the purchase accounting pools and general changes in credit quality.~~$885,000.

Given the size of Heartland's loan portfolio, the level of organic loan growth, acquired loans that move out of the purchase accounting pool, changes in credit quality and the variability that can occur in the factors considered when determining the appropriateness of the allowance for loan losses, Heartland's provision for loan losses will vary from quarter to quarter. For additional details on the specific factors considered in establishing the allowance for loan losses, refer to the discussion of critical accounting policies set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Heartland's Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, and the information under the caption "Allowance For Loan Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 5 to the consolidated financial statements included herein.

Heartland believes the allowance for loan losses as of ~~September 30, 2018,~~March 31, 2019, was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions should deteriorate, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses.

Noninterest Income

The tables below show Heartland's noninterest income for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and 2018, ~~and 2017,~~ in thousands:

Three Months Ended
September 30,
2018 2017 Change % Change
Service charges and fees $ 12,895
$ 10,138
$ 2,757
27 %
Loan servicing income 1,670
1,161
509
44
Trust fees 4,499
3,872
627
16
Brokerage and insurance commissions 1,111
950
161
17
Securities gains/(losses), net (145 ) 1,679
(1,824 ) (109 )
Unrealized gain on equity securities, net 54
—
54
100
Net gains on sale of loans held for sale 7,410
4,997
2,413
48
Valuation adjustment on servicing rights 230
5
225
4,500
Income on bank owned life insurance 892
766
126
16
Other noninterest income 1,149
1,409
(260 ) (18 )
Total noninterest income $ 29,765
$ 24,977
$ 4,788
19 %


	Nine Months Ended September 30,									Three Months Ended March 31,
	2018		2017		Change			% Change		2019			2018			Change			% Change
Service charges and fees	$	35,046	$	29,291	$	5,755		20	%	$	12,794		$	10,079		$	2,715		27	%
Loan servicing income	5,231		4,236		995			23		1,729			1,754			(25		)	(1	)
Trust fees	13,794		11,482		2,312			20		4,474			4,680			(206		)	(4	)
Brokerage and insurance commissions	2,895		2,962		(67		)	(2	)	734			907			(173		)	(19	)
Securities gains/(losses), net	1,037		5,553		(4,516		)	(81	)
Unrealized gain on equity securities, net	97		—		97			100
Securities gains, net										1,575			1,441			134			9
Unrealized (gain)/loss on equity securities, net										258			(28		)	286			1,021
Net gains on sale of loans held for sale	18,261		17,961		300			2		3,176			4,051			(875		)	(22	)
Valuation adjustment on servicing rights	12		29		(17		)	(59	)	(589		)	(2		)	(587		)	(29,350	)
Income on bank owned life insurance	2,206		2,039		167			8		899			614			285			46
Other noninterest income	3,536		2,941		595			20		1,667			1,220			447			37
Total noninterest income	$	82,115	$	76,494	$	5,621		7	%	$	26,717		$	24,716		$	2,001		8	%

~~Noninterest~~Total noninterest income totaled ~~$29.8~~$26.7 million during the ~~third~~first quarter of 2019 compared to $24.7 million during the first quarter of 2018, ~~compared to $25.0 million during the third quarter of 2017,~~ an increase of ~~$4.8~~$2.0 million or ~~19%~~8%. This increase reflected higher service charges and fees, ~~loan servicing~~net securities gains and other noninterest income, ~~trust fees and~~which were partially offset by decreased net gains on sale of loans held for sale which were partially offset by decreased net securities gains. Noninterest income totaled $82.1 million during the nine-month period ended September 30, 2018 compared to $76.5 million during the comparable period in 2017,and an ~~increase of $5.6 million or 7%. For the nine-month period ended September 30, 2018, increases in service charges and fees, loan~~increased valuation adjustment on servicing ~~income and trust fees were partially offset by decreases in net securities gains.~~rights.

Service Charges and Fees

The following tables summarize the changes in service charges and fees for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and 2018, ~~and 2017,~~ in thousands:


	Three Months Ended September 30,									Three Months Ended March 31,
	2018		2017		Change			% Change		2019		2018		Change		% Change
Service charges and fees on deposit accounts	$	2,858	$	2,577	$	281		11	%	$	2,977	$	2,618	$	359	14	%
Overdraft fees	2,990		2,479		511			21		2,744		2,208		536		24
Customer service fees	101		102		(1		)	(1	)	81		77		4		5
Credit card fee income	3,062		1,994		1,068			54		3,349		2,190		1,159		53
Debit card income	3,883		2,985		898			30		3,642		2,985		657		22
Other service charges	1		1		—			—		1		1		—		—
Total service charges and fees	$	12,895	$	10,138	$	2,757		27	%	$	12,794	$	10,079	$	2,715	27	%

	Nine Months Ended September 30,
	2018		2017		Change			% Change
Service charges and fees on deposit accounts	$	8,270	$	7,002	$	1,268		18	%
Overdraft fees	7,716		6,950		766			11
Customer service fees	266		217		49			23
Credit card fee income	8,443		6,212		2,231			36
Debit card income	10,349		8,908		1,441			16
Other service charges	2		2		—			—
Total service charges and fees	$	35,046	$	29,291	$	5,755		20	%

~~Service~~Total service charges and fees increased ~~$2.8~~$2.7 million or 27% to ~~$12.9~~$12.8 million during the ~~third~~first quarter of ~~2018~~2019 compared to $10.1 million during the ~~third~~first quarter of ~~2017 and $5.8 million or 20% to $35.0 million during the first nine months of 2018 compared to $29.3 million for the first nine months of 2017.~~2018. Service charges and fees on deposit accounts ~~and overdraft fees~~ increased ~~$792,000~~$359,000 or ~~16%~~14% to ~~$5.8~~$3.0 million for the ~~third~~first quarter of ~~2018~~2019 compared to ~~$5.1~~$2.6 million for the ~~third~~first quarter of ~~2017, and~~2018. Overdraft fees increased $536,000 or 24% to $2.7 million for the ~~nine months ended September 30, 2018, service charges and fees on deposit accounts and overdraft fees increased $2.0~~first quarter of 2019 compared to $2.2 million ~~or 15% to $16.0 million from $14.0 million recorded in~~for the ~~same period in 2017.~~first quarter of 2018. These increases were primarily attributable to a larger demand deposit customer base, a portion of which is attributable to the acquisitions completed in ~~2017 and the first half of~~ 2018.

Fees associated with credit card services were ~~$3.1~~$3.3 million during the ~~third~~first quarter of 2019 compared to $2.2 million during the first quarter of 2018, ~~compared to $2.0 million during the third quarter of 2017,~~ an increase of ~~$1.1~~$1.2 million or ~~54%~~53%. ~~For the nine months ended September 30, 2018, credit card fee income increased $2.2 million or 36% to $8.4 million from $6.2 million recorded in the first nine months of 2017.~~ These increases resulted primarily from efforts to increase the level of commercial credit card services provided at Heartland's subsidiary banks, including at the recently acquired banks. Heartland has focused on expanding its card payment solutions for businesses. In particular, Heartland has introduced an expense management service that provides business customers the ability to more efficiently manage their card-based spending.

Debit card income increased ~~$898,000~~$657,000 or ~~30%~~22% to ~~$3.9~~$3.6 million for the ~~third~~first quarter of ~~2018~~2019 compared to $3.0 million for the ~~third~~first quarter of ~~2017. For the nine-month periods ended September 30,~~2018. Based on estimated calculations using 2018 ~~and 2017,~~ debit card income, ~~totaled $10.3 million and $8.9 million, respectively,~~Heartland estimates the impact of the Durbin Amendment, which ~~was an increase of $1.4 million or 16%. The increases in~~Heartland expects to be subject to on July 1, 2019, will reduce debit card income ~~were primarily attributable to Heartland's larger customer base, including customers from recent acquisitions.~~

by approximately $6.0 million on an annualized basis.

Loan Servicing Income

The following tables show the changes in loan servicing income for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and 2018, ~~and 2017,~~ in thousands:


	Three Months Ended September 30,											Three Months Ended March 31,
	2018			2017			Change			% Change		2019			2018			Change			% Change
Commercial and agricultural loan servicing fees⁽¹⁾	$	702		$	684		$	18		3	%	$	683		$	749		$	(66	)	(9	)%
Residential mortgage servicing fees	2,610			2,932			(322		)	(11	)	2,546			2,250			296			13
Mortgage servicing rights amortization	(1,642		)	(2,455		)	813			33		(1,500		)	(1,245		)	(255		)	(20	)
Total loan servicing income	$	1,670		$	1,161		$	509		44	%	$	1,729		$	1,754		$	(25	)	(1	)%

	Nine Months Ended September 30,
	2018			2017			Change			% Change
Commercial and agricultural loan servicing fees⁽¹⁾	$	2,375		$	2,101		$	274		13	%
Residential mortgage servicing fees	7,250			9,319			(2,069		)	(22	)
Mortgage servicing rights amortization	(4,394		)	(7,184		)	2,790			39
Total loan servicing income	$	5,231		$	4,236		$	995		23	%

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

Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which are dependent upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. Loan servicing income totaled $1.7 million during the ~~third~~first quarter of 2019 compared to $1.8 million during the first quarter of 2018, ~~compared~~a decrease of $25,000 or 1%. Due to ~~$1.2 million during~~ the ~~third quarter~~sale of ~~2017, an increase~~the mortgage servicing rights portfolio of ~~$509,000 or 44%. On a nine-month comparative basis,~~Dubuque Bank and Trust Company, which occurred on April 30, 2019, net loan servicing income related to residential mortgage loans is expected to decrease by approximately $500,000 in the second quarter of 2019 and $800,000 in future quarters. This transaction does not impact the residential mortgage servicing portfolio of Heartland's PrimeWest Mortgage Corporation subsidiary.

Securities Gains, Net

Securities gains, net, totaled ~~$5.2~~$1.6 million ~~during 2018~~for the first quarter of 2019 compared to ~~$4.2~~net securities gains of $1.4 million ~~during 2017, an increase~~for the first quarter of ~~$995,000 or 23%. Heartland's residential mortgage loan servicing portfolio totaled $4.16 billion at September 30,~~ 2018, ~~compared to $3.56 billion at September 30, 2017,~~ which was an increase of ~~$599.1~~$134,000 or 9%. Heartland's net unrealized loss on securities available for sale totaled $15.2 million ~~or 17%. Heartland acquired the right~~at March 31, 2019, compared to ~~service mortgage loans with the FBLB transaction that closed on May 18, 2018, and~~$52.8 million at ~~September 30, 2018, the FBLB servicing portfolio totaled $652.7 million.~~

~~Trust Fees~~

Trust fees for the three months ended September 30, 2018 and 2017 totaled $4.5 million and $3.9 million, respectively, which was an increase of $627,000 or 16%. For the nine months ended September 30, 2018 and 2017, trust fees totaled $13.8 million and $11.5 million, respectively, which was an increase of $2.3 million or 20%. The increase for both the quarterly and year-to-date comparison is primarily attributable to increases in the market value of the assets under management.

March 31, 2018.

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 ended September 30, 2018, and 2017, in thousands:~~

Three Months Ended
September 30, Nine Months Ended
September 30,
2018 2017 2018 2017
Total residential mortgage loan applications $ 298,602
$ 271,476
$ 875,405
$ 828,203
Residential mortgage loans originated $ 262,821
$ 198,911
$ 638,152
$ 577,399
Residential mortgage loans sold $ 238,684
$ 188,501
$ 568,465
$ 541,318
Net gains on sale of residential mortgage loans $ 7,188
$ 4,821
$ 17,888
$ 17,396
Net gain/(loss) on sale of other commercial, agricultural and consumer loans⁽¹⁾
$ 222
$ 176
$ 373
$ 565
Percentage of residential mortgage loans originated for refinancing 19 % 31 % 24 % 30 %

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

During the ~~third~~first quarter of ~~2018,~~2019, net gains on sale of loans held for sale totaled ~~$7.4~~$3.2 million compared to ~~$5.0~~$4.1 million during the same period in 2017, an increase of $2.4 million or 48%. These gains result primarily from the gain or loss on sales of mortgage loans into the secondary market, related fees and fair value marks on the associated derivatives. The percentage of residential mortgage loans that represented refinancings was 19% during the third quarter of 2018, compared to 31% in the third quarter of 2017. For the nine months ended September 30, 2018, mortgage loan refinancings were 24% of the originations compared to 30% during the first nine months of 2017.

~~Securities Gains/Losses, Net~~

~~Securities losses, net, totaled $145,000 for the third quarter of 2018 compared to net securities gains of $1.7 million for the third quarter of 2017, which was~~ a decrease of ~~$1.8 million~~$875,000 or 109%. For the first nine months of 2018, securities gains, net, totaled $1.0 million compared to $5.6 million during the first nine months of 2017, a decrease of $4.5 million or 81%. Heartland's net unrealized loss on securities available for sale totaled $68.8 million at September 30, 2018, compared to $30.8 million at September 30, 2017. The increase in the unrealized loss on securities available for sale22%, which was primarily due to ~~increases in short-term interest rates, which have caused a decline~~the outsourcing of Heartland's legacy residential mortgage lending operations in the ~~fair value~~fourth quarter of ~~Heartland's available~~2018.

Other Noninterest Income

Other noninterest income totaled $1.7 million and $1.2 million for ~~sale securities.~~the quarters ended March 31, 2019 and 2018, respectively. The increase of $447,000 or 37% was primarily attributable to $368,000 from the accrual on a death benefit on bank owned life insurance in the first quarter of 2019. Heartland expects to receive the proceeds in the second quarter of 2019.

Noninterest Expense

The tables below show Heartland's noninterest expenses for the ~~three- and nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and 2018, ~~and 2017,~~ in thousands:

Three Months Ended
September 30,
2018 2017 Change % Change
Salaries and employee benefits $ 49,921
$ 45,225
$ 4,696
10 %
Occupancy 6,348
6,223
125
2
Furniture and equipment 3,470
2,826
644
23
Professional fees 11,681
8,450
3,231
38
FDIC insurance assessments 1,119
894
225
25
Advertising 2,754
1,358
1,396
103
Core deposit intangibles and customer relationship intangibles amortization 2,626
1,863
763
41
Other real estate and loan collection expenses 784
581
203
35
(Gain)/loss on sales/valuations of assets, net 912
1,342
(430 ) (32 )
Restructuring expenses —
—
—
—
Other noninterest expenses 12,924
9,997
2,927
29
Total noninterest expenses $ 92,539
$ 78,759
$ 13,780
17 %


	Nine Months Ended September 30,								Three Months Ended March 31,
	2018		2017		Change		% Change		2019			2018			Change			% Change
Salaries and employee benefits	$	149,389	$	128,118	$	21,271	17	%	$	50,285		$	48,710		$	1,575		3	%
Occupancy	18,706		16,352		2,354		14		6,607			6,043			564			9
Furniture and equipment	9,403		7,913		1,490		19		2,692			2,749			(57		)	(2	)
Professional fees	30,088		24,342		5,746		24		11,379			9,448			1,931			20
FDIC insurance assessments	2,792		2,610		182		7
Advertising	6,839		5,141		1,698		33		2,325			1,940			385			20
Core deposit intangibles and customer relationship intangibles amortization	6,763		4,252		2,511		59
Core deposit and customer relationship intangibles amortization									2,842			1,863			979			53
Other real estate and loan collection expenses	2,464		1,774		690		39		701			732			(31		)	(4	)
(Gain)/loss on sales/valuations of assets, net	2,243		1,642		601		37
Gain on sales/valuations of assets, net									(3,004		)	(197		)	(2,807		)	(1,425	)
Restructuring expenses	2,564		—		2,564		100		3,227			2,564			663			26
Other noninterest expenses	33,816		27,653		6,163		22		11,176			9,794			1,382			14
Total noninterest expenses	$	265,067	$	219,797	$	45,270	21	%	$	88,230		$	83,646		$	4,584		5	%

For the ~~third~~first quarter of ~~2018,~~2019, noninterest expenses totaled ~~$92.5~~$88.2 million compared to ~~$78.8 million during the third quarter of 2017, an increase of $13.8 million or 17%. For the first nine months of 2018, noninterest expenses totaled $265.1 million compared to $219.8~~$83.6 million during the first ~~nine months~~quarter of ~~2017,~~2018, an increase of ~~$45.3~~$4.6 million or ~~21%~~5%. The most significant increases ~~for the quarterly and nine month periods~~ were related to salaries and employee benefits, professional fees, ~~and advertising. The increases in occupancy, furniture and equipment, FDIC insurance assessments, advertising,~~ core deposit ~~intangibles~~ and customer relationship intangibles amortization, ~~other real estate and loan collection expenses, gain/loss~~gain on sales/~~valuation~~valuations of assets, net, and restructuring expenses. The increases in occupancy, advertising and other noninterest expenses ~~were~~are primarily related to the ~~recent acquisitions.~~acquisitions completed in 2018.

Salaries and Employee Benefits

The largest component of noninterest expenses, salaries and employee benefits, increased ~~$4.7~~$1.6 million or ~~10%~~3% during the ~~third~~first quarter of ~~2018~~2019 as compared to the same quarter in ~~2017. The~~2018. Base salary expense totaled $32.3 million and $31.2 million for the first quarter of 2019 and 2018, respectively, which was an increase of $1.1 million or 3%. This increase is primarily ~~attributable~~related to the ~~additional salaries~~acquisitions completed in 2018. Stock compensation expense for restricted stock units and employee ~~benefits for employees of banks acquired~~stock purchase plan expense increased $398,000 or 24% to $2.1 million in ~~2018 and 2017. When comparing~~ the first ~~nine months~~quarter of 2019 compared to $1.9 million in the first quarter of 2018. Retirement plan and 401K expenses totaled $2.7 million in the first quarter of 2019 compared to $2.3 million in the first quarter of 2018, ~~to the same period in 2017, salaries and employee benefits increased $21.3 million~~which was an increase of $409,000 or ~~17%~~18%. Heartland had total full-time equivalent employees of ~~2,211~~1,976 on ~~September 30, 2018,~~March 31, 2019, compared to ~~2,024~~2,022 on ~~September 30, 2017.~~March 31, 2018.

Professional Fees

Professional fees for the ~~third~~first quarter of ~~2018~~2019 totaled ~~$11.7~~$11.4 million compared to ~~$8.5~~$9.4 million for the same quarter of ~~2017,~~2018, which was an increase of ~~$3.2~~$1.9 million or ~~38%. For the nine months ended September 30, 2018, professional fees totaled $30.1 million compared to $24.3 million, which was an increase of $5.7 million or 24%~~20%. The increase ~~for quarterly and nine-month periods~~ is primarily attributable to professional fees incurred at the entities acquired in 2018, model validation expenses, ~~third-party mortgage processing expenses~~ and ~~higher~~increased advisory services associated with the higher level of regulation resulting from Heartland having assets over $10 billion.

~~Restructuring Expenses~~

Core Deposit and Customer Relationship Intangibles Amortization

Core deposit and customer relationship intangibles amortization was $2.8 million for the first quarter of 2019 compared to $1.9 million for the same quarter of 2018, which was an increase of $979,000 or 53%. Included in this increase was a $379,000 write-off of core deposit intangibles related to the branch sales at Wisconsin Bank & Trust during the first quarter of 2019. The remainder of the increase was due to acquisitions completed in 2018.

Gain on Sales/Valuations of Assets, Net

Gain on sales/valuations of assets, net, totaled $3.0 million during the first quarter of 2019 compared to $197,000 for the first quarter of 2018, which was an increase of $2.8 million. In the first quarter ~~2018, Heartland~~of 2019, a gain of $3.5 million was recorded related to the sale of two branches at Wisconsin Bank & Trust.

Restructuring Expenses

Restructuring expenses totaled $3.2 million and $2.6 million for the first quarter of 2019 and 2018, respectively. In the first quarter of 2019, the restructuring expenses ~~related to its~~consisted of severance and retention payments for legacy mortgage ~~lending operation. The~~and Citizens' Finance Co. employees, software discontinuation fees and expected lease buyouts. In the first quarter of 2018, the restructuring ~~projects~~expenses were primarily related to outsourcing the residential mortgage loan application processing, underwriting and loan closing functions. The restructuring expenses consisted of severance and retention costs related to the workforce reduction and contract buyouts associated with the discontinued use of several ~~current~~ systems.

Efficiency Ratio

One of Heartland's top priorities is to improve its efficiency ratio, on a fully tax-equivalent basis, by reducing it to ~~65% or less.~~the low 60% range. During the ~~third~~first quarter of ~~2018,~~2019, Heartland's efficiency ratio on a fully tax-equivalent basis decreased by ~~214~~298 basis points to ~~62.40%~~65.23% in comparison with ~~64.54%~~68.21% for the quarter ended ~~September 30, 2017. For the nine-month period ended September 30, 2018, the~~March 31, 2018. Management has taken actions to improve its efficiency ratio, ~~on a fully tax-equivalent basis decreased by 155 basis points~~including restructuring its mortgage lending operations and optimizing bank branch locations. Additionally, systems conversions of newly acquired entities are completed as soon as possible after the closing of the transaction in order to ~~65.03% when compared to 66.58% for the same nine-month period in 2017.~~optimize cost savings. Heartland's efficiency ratio will vary from quarter to quarter as a result of merger and acquisition ~~activities and also from the seasonality and related revenue and expense timing differences that are inherent in the residential mortgage business.~~

activities.

Income Taxes

Heartland's effective tax rate was ~~20.99%~~20.88% for the ~~third~~first quarter of ~~2018~~2019 compared to ~~28.74%~~18.04% for the ~~third~~first quarter of ~~2017. Heartland's effective tax rate was affected by the passage of the Tax Cuts and Jobs Act in December 2017, which reduced the federal income tax rate from a maximum of 35% to 21%.~~2018. Federal low-income housing tax credits ~~totaling $307,000 reduced Heartland's income taxes in both the third quarter of 2018 and 2017. Also included in the third quarter of 2018 tax computation was a solar energy tax credit of $223,000.~~

~~Heartland's effective tax rate was 20.24% for the first nine months of 2018 compared to 26.59% for the first nine months of 2017. Federal low-income housing tax credits totaling $921,000 were~~ included in the determination of Heartland's income taxes totaled $281,000 for ~~both nine-month periods ended September 30. Also included~~the first quarter of 2019 compared to $307,000 for the first quarter of 2018. Included in ~~the 2018~~Heartland's first quarter 2019 tax ~~computation~~calculation was ~~the~~a solar energy tax credit ~~mentioned above. Included in the determination of Heartland's income taxes during the first nine months of 2017 were solar energy tax credits~~ totaling ~~$270,000 and a state tax credit of $830,000 related to a partnership investment in a historic rehabilitation tax credit project.~~$314,000. The ~~level of~~ tax-exempt interest income as a percentage of pre-tax income ~~was 16.49%~~declined to 13.35% during the first ~~nine months~~quarter of ~~2018 compared to 25.63%~~2019 from 20.46% during the first ~~nine months~~quarter of ~~2017.~~2018.

Heartland's income taxes included a tax benefit of ~~$672,000~~$336,000 and ~~$1.1 million~~$611,000 for the ~~nine-month~~three-month periods ended ~~September 30,~~March 31, 2019, and 2018, ~~and 2017,~~ respectively, resulting from the vesting of outstanding restricted stock unit awards and options. The majority of Heartland's restricted stock unit awards vest in the first quarter of each year.

FINANCIAL CONDITION

Total assets of Heartland were ~~$11.34~~$11.31 billion at ~~September 30, 2018, an increase~~March 31, 2019, a decrease of $1.52 billion or 16% since December 31, 2017. Excluding $427.1 million of assets acquired at fair value in the Signature Bancshares Inc. transaction and $1.12 billion of assets acquired at fair value in the FBLB transaction, total assets decreased $20.1$95.5 million or ~~less than~~ 1% since December 31, ~~2017.~~2018. Securities represented 22% and ~~25%~~24% of total assets at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, respectively.

Lending Activities

The commercial and commercial real estate loan portfolio includes a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and real estate. Although most loans are made on a secured basis, loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. Commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The collateral that Heartland requires for most of these loans is based upon the discounted market value of the collateral. The primary repayment risks of commercial loans are that the cash flow of the borrowers may be unpredictable, and the collateral securing these loans

may fluctuate in value. Heartland seeks to minimize these risks in a variety of ways. The underwriting analysis includes credit verification, analysis of global cash flows, appraisals and a review of the financial condition of the borrower. Personal guarantees are frequently required as a tertiary form of repayment. In addition, when underwriting loans for commercial real estate, careful consideration is given to the property's operating history, future operating projections, current and projected occupancy, location and physical condition. Heartland also utilizes government guaranteed lending through the U.S. Small Business Administration and the U.S. Department of Agriculture's Rural Development Business and Industry Program to assist customers with longer-term funding and to reduce risk.

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

During the fourth quarter of 2018, Heartland 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 10entered into arrangements with third parties to ~~30 years. Heartland typically sells longer-term, low-rate,~~offer residential mortgage loans to customers in many of its markets. In addition, the acquisition in 2018 of First Bank & Trust in Lubbock, Texas, included its wholly owned mortgage subsidiary, PrimeWest Mortgage Corporation. PrimeWest Mortgage Corporation provides mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of customers in several of Heartland's southwestern markets. PrimeWest Mortgage Corporation services the loans it sells into the secondary market 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.market.

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

Total loans held to maturity were ~~$7.37~~$7.33 billion at ~~September 30, 2018,~~March 31, 2019, compared to ~~$6.39~~$7.41 billion at ~~year-end 2017, an increase~~December 31, 2018, a decrease of ~~$974.0~~$76.2 million or ~~15%~~1%. This change includes $324.5 million of total loans held to maturity acquired at fair value in the Signature Bancshares, Inc. transaction and $681.1 million of total loans held to maturity acquired at fair value in the FBLB transaction. During the ~~third~~first quarter of ~~2018,~~2019, the sale of two branches at ~~Wisconsin~~Dubuque Bank &and Trust Company was announced, which included ~~$31.4~~$20.3 million of loans that were classified as held for sale at ~~September 30, 2018.~~March 31, 2019. Heartland also reclassified commercial loans with balances of $11.8 million at March 31, 2019, to held for sale as part of a plan to exit a small lease portfolio. Exclusive of these transactions, total loans held to maturity decreased ~~$140,000~~$44.0 million or less than 1% since December 31, 2018. Loan changes by category were:

Commercial and commercial real estate loans totaled $5.75 billion at March 31, 2019, compared to $5.73 billion at December 31, 2018, which was an increase of $13.3 million or less than 1%. Excluding $14.9 million of commercial and commercial real estate loans classified as held for sale during the quarter, commercial and commercial real estate loans increased $28.2 million or less than 1% since year-end.

Agricultural and agricultural real estate loans totaled $544.8 million at March 31, 2019, compared to $565.4 million at year-end, ~~2017. Price competition~~which was a decrease of $20.6 million or 4%. Excluding $6.6 million of agricultural and agricultural real estate loans classified as held for ~~quality~~sale during the quarter, agricultural and agricultural real estate loans ~~remains intense, and Heartland remains committed~~decreased $14.0 million or 2% since December 31, 2018.

Residential mortgage loans decreased $43.2 million or 6% to ~~its pricing strategy, disciplined credit approach and emphasis on~~$630.4 million at March 31, 2019, from $673.6 million at year-end. Excluding $2.0 million of residential mortgage loans classified as held for sale during the ~~client relationship.~~quarter, residential mortgage loans decreased $41.2 million or 6% since year-end.

Consumer loans decreased $27.6 million or 6% to $412.6 million at March 31, 2019, compared to $440.2 million at December 31, 2018. Excluding $8.6 million of loans classified as held for sale during the quarter, consumer loans decreased $19.0 million or 4% since year-end.

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

LOAN PORTFOLIO September 30, 2018 December 31, 2017
Amount Percent Amount Percent
Loans receivable held to maturity:
Commercial $ 1,962,222
26.63 % $ 1,646,606
25.76 %
Commercial real estate 3,648,731
49.52
3,163,269
49.48
Agricultural and agricultural real estate 574,048
7.79
511,588
8.00
Residential mortgage 676,941
9.19
624,279
9.76
Consumer 506,181
6.87
447,484
7.00
Gross loans receivable held to maturity 7,368,123
100.00 % 6,393,226
100.00 %
Unearned discount (1,340 ) (556 )
Deferred loan fees (1,290 ) (1,206 )
Total net loans receivable held to maturity 7,365,493
6,391,464

Allowance for loan losses (61,221 ) (55,686 )
Loans receivable, net $ 7,304,272
$ 6,335,778



LOAN PORTFOLIO	March 31, 2019					December 31, 2018
	Amount			Percent		Amount			Percent
Loans receivable held to maturity:
Commercial	$	2,042,594		27.86	%	$	2,020,231		27.26	%
Commercial real estate	3,702,457			50.48		3,711,481			50.08
Agricultural and agricultural real estate	544,805			7.43		565,408			7.63
Residential mortgage	630,433			8.60		673,603			9.09
Consumer	412,573			5.63		440,158			5.94
Gross loans receivable held to maturity	7,332,862			100.00	%	7,410,881			100.00	%
Unearned discount	(288		)			(1,624		)
Deferred loan fees	(1,030		)			(1,560		)
Total net loans receivable held to maturity	7,331,544					7,407,697
Allowance for loan losses	(62,639		)			(61,963		)
Loans receivable, net	$	7,268,905				$	7,345,734

Loans secured by real estate, either fully or partially, totaled ~~$4.77~~$4.74 billion or ~~64%~~65% of gross loans at ~~September 30, 2018.~~March 31, 2019. At ~~September 30, 2018,~~March 31, 2019, approximately ~~50%~~52% of the properties securing non-farm, nonresidential real estate loans are owner occupied. The largest categories of Heartland's loans secured by real estate at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, are listed below, in thousands:

									LOANS SECURED BY REAL ESTATE
	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Residential real estate, excluding residential construction and residential lot loans	$	1,152,337	$	1,080,066	$	1,079,352	$	1,119,942
Industrial, manufacturing, business and commercial	815,835		935,614		670,440		805,265
Agriculture	275,028		256,452		266,010		270,023
Retail	427,970		348,749		479,469		435,680
Office	485,972		356,782		485,794		485,262
Land development and lots	212,465		162,273		202,513		216,665
Hotel, resort and hospitality	231,314		167,396		280,285		233,735
Multi-family	268,462		211,862		324,198		311,319
Food and beverage	132,017		108,977		142,630		130,981
Warehousing	183,232		125,372		169,721		186,436
Health services	172,906		155,529		204,410		182,882
Residential construction	184,057		134,848		161,116		171,116
All other	230,814		187,508		269,165		255,145
Total loans secured by real estate	$	4,772,409	$	4,231,428	$	4,735,103	$	4,804,451

Allowance For Loan Losses

The process utilized by Heartland to determine the appropriateness of the allowance for loan ~~and~~ losses is considered a critical accounting practice for Heartland and has remained consistent over the past several years. The allowance for loan losses represents management's estimate of identified and unidentified probable losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for loan losses, refer to the critical accounting policies section of Heartland's Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Nonperforming loans were ~~$73.2~~$79.0 million or ~~0.99%~~1.08% of total loans at ~~September 30, 2018,~~March 31, 2019, compared to ~~$63.4~~$72.7 million or ~~0.99%~~0.98% of total loans at December 31, ~~2017.~~2018. The increase was primarily related to two agribusiness relationships that were originated in Heartland's Midwestern markets. At ~~September 30, 2018,~~March 31, 2019, approximately ~~$37.6~~$42.4 million or ~~51%~~54% of Heartland's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to ~~sixteen~~seventeen borrowers. At ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, Heartland had ~~$8.1~~$7.9 million and ~~$13.5~~$7.7 million, respectively, of nonperforming residential real estate loans that were repurchased under various ~~GNMA~~Government National Mortgage Association ("GNMA") or other guaranteed loan programs. The portion of

Heartland's nonperforming nonresidential real estate loans covered by government guarantees totaled ~~$8.6~~$12.7 million at ~~September 30, 2018,~~March 31, 2019, compared to ~~$3.0~~$7.7 million at December 31, ~~2017.~~2018.

The allowance for loan losses was ~~0.83%~~0.85% and ~~0.87%~~0.84% of loans at ~~September 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively, and ~~83.62%~~79.29% and ~~87.82%~~85.27% of nonperforming loans at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, respectively. Excluding the acquired loans covered by the valuation reserves, the ratio of the allowance for loan losses to outstanding loans was ~~1.09%~~1.01% and ~~1.13%~~1.03% at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, respectively. At ~~September 30, 2018,~~March 31, 2019, valuation reserves totaled ~~$47.1~~$36.7 million and covered ~~$1.89~~$1.47 billion of acquired loans. At December 31, ~~2017,~~2018, valuation reserves totaled ~~$36.4~~$40.9 million and covered ~~$1.51~~$1.63 billion of acquired loans. Loans delinquent 30-89 days as a percent of total loans was ~~0.62%~~0.47% at ~~September 30, 2018,~~March 31, 2019, in comparison with ~~0.27%~~0.21% at December 31, ~~2017.~~2018. The increase in loans delinquent 30-89 days was primarily attributable to recently acquired ~~portfolios.~~portfolios and one large credit resolved in the near term. Management believes the increase in delinquencies in the acquired portfolios is ~~related~~due to the implementation of Heartland's underwriting and closing processes at the new entities and is not indicative of the underlying credit quality.

The table below presents the changes in the allowance for loan losses during the ~~three- and nine- month~~three-month periods ended ~~September 30,~~March 31, 2019 and 2018, ~~and 2017,~~ in thousands:


ANALYSIS OF ALLOWANCE FOR LOAN LOSSES	Three Months Ended September 30,
	2018			2017
Balance at beginning of period	$	61,324		$	54,051
Provision for loan losses	5,238			5,705
Recoveries on loans previously charged off	779			888
Charge-offs on loans	(6,120		)	(5,759		)
Balance at end of period	$	61,221		$	54,885
Annualized ratio of net charge offs to average loans	0.28		%	0.31		%

	Nine Months Ended September 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Balance at beginning of period	$	55,686		$	54,324		$	61,963		$	55,686
Provision for loan losses	14,332			10,235			1,635			4,263
Recoveries on loans previously charged off	2,711			2,569			991			931
Charge-offs on loans	(11,508		)	(12,243		)	(1,950		)	(2,224		)
Balance at end of period	$	61,221		$	54,885		$	62,639		$	58,656
Annualized ratio of net charge offs to average loans	0.17		%	0.23		%	0.05		%	0.08		%

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


NONPERFORMING ASSETS	September 30,						December 31,						March 31,						December 31,
	2018			2017			2017			2016			2019			2018			2018			2017
Nonaccrual loans	$	73,060		$	63,456		$	62,581		$	64,299		$	77,294		$	64,806		$	71,943		$	62,581
Loans contractually past due 90 days or more	154			2,348			830			86			1,706			22			726			830
Total nonperforming loans	73,214			65,804			63,411			64,385			79,000			64,828			72,669			63,411
Other real estate	11,908			13,226			10,777			9,744			5,391			11,801			6,153			10,777
Other repossessed assets	495			773			411			663			8			423			459			411
Total nonperforming assets	$	85,617		$	79,803		$	74,599		$	74,792		$	84,399		$	77,052		$	79,281		$	74,599
Performing troubled debt restructured loans⁽¹⁾	$	4,180		$	10,040		$	6,617		$	10,380		$	3,460		$	3,206		$	4,026		$	6,617
Nonperforming loans to total loans	0.99		%	1.03		%	0.99		%	1.20		%	1.08		%	0.96		%	0.98		%	0.99		%
Nonperforming assets to total loans plus repossessed property	1.16		%	1.25		%	1.17		%	1.39		%	1.15		%	1.14		%	1.07		%	1.17		%
Nonperforming assets to total assets	0.76		%	0.82		%	0.76		%	0.91		%	0.75		%	0.77		%	0.69		%	0.76		%

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

The schedules below summarize the changes in Heartland's nonperforming assets during the ~~three- and nine-month periods~~first three months of ~~2018,~~2019, in thousands:

Nonperforming
Loans

Other
Real Estate
Owned

Other
Repossessed
Assets

Total
Nonperforming
Assets
June 30, 2018 $ 69,430
$ 11,074
$ 499
$ 81,003
Loan foreclosures (2,755 ) 2,752
3
—
Net loan charge-offs (5,341 ) —
—
(5,341 )
Acquired nonperforming assets —
—
—
—
New nonperforming loans 16,965
—
—
16,965
Reduction of nonperforming loans⁽¹⁾
(5,085 ) —
—
(5,085 )
OREO/Repossessed assets sales proceeds —
(1,063 ) (1 ) (1,064 )
OREO/Repossessed assets writedowns, net —
(855 ) (31 ) (886 )
Net activity at Citizens Finance Co. —
—
25
25
September 30, 2018 $ 73,214
$ 11,908
$ 495
$ 85,617


	Nonperforming Loans			Other Real Estate Owned			Other Repossessed Assets			Total Nonperforming Assets			Nonperforming Loans			Other Real Estate Owned			Other Repossessed Assets			Total Nonperforming Assets
December 31, 2017	$	63,411		$	10,777		$	411		$	74,599
December 31, 2018													$	72,669		$	6,153		$	459		$	79,281
Loan foreclosures	(5,081		)	5,016			65			—			(1,786		)	1,694			92			—
Net loan charge-offs	(8,797		)	—			—			(8,797		)	(959		)	—			—			(959		)
Acquired nonperforming assets	9,246			1,186			—			10,432
New nonperforming loans	41,765			—			—			41,765			15,314			—			—			15,314
Reduction of nonperforming loans⁽¹⁾	(27,330		)	—			—			(27,330		)	(6,238		)	—			—			(6,238		)
OREO/Repossessed assets sales proceeds	—			(3,225		)	(37		)	(3,262		)	—			(2,004		)	(88		)	(2,092		)
OREO/Repossessed assets writedowns, net	—			(1,846		)	(49		)	(1,895		)	—			(452		)	(10		)	(462		)
Net activity at Citizens Finance Co.	—			—			105			105			—			—			(445		)	(445		)
September 30, 2018	$	73,214		$	11,908		$	495		$	85,617
March 31, 2019													$	79,000		$	5,391		$	8		$	84,399

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

Securities

The composition of Heartland's securities portfolio is managed to maximize the return on the portfolio while considering the impact it has on Heartland's asset/liability position and liquidity needs. Securities represented 22% and ~~25%~~24% of total assets at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, respectively. Total securities carried at fair value as of ~~September 30, 2018,~~March 31, 2019, were ~~$2.27~~$2.40 billion, ~~an increase~~a decrease of ~~$57.5~~$50.2 million or 3%2% from ~~$2.22~~$2.45 billion at December 31, ~~2017.~~2018.

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

SECURITIES PORTFOLIO COMPOSITION September 30, 2018 December 31, 2017
Amount Percent Amount Percent
U.S. government corporations and agencies $ 26,997
1.06 % $ 5,328
0.21 %
Mortgage and asset-backed securities 1,871,819
73.67
1,753,736
70.35
Obligation of states and political subdivisions 598,391
23.55
694,565
27.86
Equity securities 16,916
0.67
16,674
0.67
Other securities 26,656
1.05
22,563
0.91
Total securities $ 2,540,779
100.00 % $ 2,492,866
100.00 %



SECURITIES PORTFOLIO COMPOSITION	March 31, 2019				December 31, 2018
	Amount		Percent		Amount		Percent
U.S. government corporations and agencies	$	26,768	1.06	%	$	31,951	1.18	%
Mortgage and asset-backed securities	1,871,398		74.38		2,026,698		74.64
Obligation of states and political subdivisions	573,044		22.78		611,257		22.50
Equity securities	17,339		0.69		17,086		0.63
Other securities	27,506		1.09		28,396		1.05
Total securities	$	2,516,055	100.00	%	$	2,715,388	100.00	%

The percentage of Heartland's securities portfolio comprised of mortgage and asset-backed securities was 74% at ~~September 30, 2018,~~March 31, 2019, compared to ~~70%~~75% at December 31, ~~2017. Approximately 70% of Heartland's mortgage and asset-backed securities were issued by government-sponsored enterprises at September 30,~~ 2018. Heartland's securities portfolio had an expected modified duration of ~~4.09~~4.34 years as of ~~September 30, 2018,~~March 31, 2019, compared to ~~4.71~~4.01 years as of year-end ~~2017.~~2018.

At ~~September 30, 2018,~~March 31, 2019, Heartland had ~~$26.7~~$27.5 million of other securities, including capital stock in each Federal Home Loan Bank ("FHLB") of which each of its bank subsidiaries is a member. All of these securities were classified as other securities held at cost.

Deposits

Total deposits were ~~$9.51~~$9.35 billion as of ~~September 30, 2018,~~March 31, 2019, compared to ~~$8.15~~$9.40 billion at December 31, ~~2017, an increase~~2018, a decrease of ~~$1.37 billion~~$43.5 million or ~~17%~~less than 1%. This increase included $357.3 million of deposits, at fair value, acquired in the Signature Bancshares, Inc. transaction and $893.8 million of deposits acquired, at fair value, in the FBLB transaction. The deposits classified as held for sale in conjunction with the ~~pending branch~~ sale of two branches at ~~Wisconsin~~Dubuque Bank &and Trust Company totaled ~~$50.3~~$77.0 million at ~~September 30, 2018.~~March 31, 2019. Exclusive of ~~these transactions,~~this transaction, total deposits increased ~~$164.4~~$33.5 million or less than 1% since December 31, 2018. Deposits changes by type were:

Demand deposits decreased $145.8 million or 4% to $3.12 billion at March 31, 2019, compared to $3.26 billion at December 31, 2018. Excluding $17.3 million of demand deposits classified as held for sale during the quarter, demand deposits decreased $128.6 million or 4% since year-end 2018.

Savings deposits increased $38.0 million or 1% to $5.15 billion at March 31, 2019, from $5.11 billion at December 31, 2018. Excluding savings deposits of $47.8 million classified as held for sale during the quarter, savings deposits increased $85.8 million or 2% since year-end 2018.

Time deposits increased $64.4 million or 6% to $1.09 billion at March 31, 2019 from $1.02 billion at December 31, ~~2017.~~2018. Excluding time deposits of $11.9 million classified as held for sale during the quarter, time deposits increased $76.2 million or 7% since year-end 2018.

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

DEPOSITS September 30, 2018 December 31, 2017
Amount Percent Amount Percent
Demand $ 3,427,819
36.04 % $ 2,983,128
36.62 %
Savings 4,958,430
52.12
4,240,328
52.05
Time 1,125,914
11.84
923,453
11.33
Total $ 9,512,163
100.00 % $ 8,146,909
100.00 %

~~Demand deposits totaled $3.43 billion at September 30, 2018, an increase of $444.7 million or 15% since year-end 2017~~. Excluding $299.0 million of demand deposits attributable to the Signature Bancshares, Inc. and FBLB transactions, demand deposits increased $145.7 million or 5% since year-end 2017. Savings deposits increased $718.1 million or 17% to $4.96 billion at September 30, 2018, from $4.24 billion at December 31, 2017. Excluding savings deposits of $619.0 million acquired in the Signature Bancshares, Inc. and FBLB transactions, savings deposits increased $99.1 million or 2% since year-end 2017. Time deposits increased $202.5 million or 22% since year-end 2017, and exclusive of $333.1 million of time deposits acquired in 2018, time deposits decreased $130.6 million or 14% since December 31, 2017.



DEPOSITS	March 31, 2019				December 31, 2018
	Amount		Percent		Amount		Percent
Demand	$	3,118,909	33.35	%	$	3,264,737	34.74	%
Savings	5,145,929		55.02		5,107,962		54.37
Time	1,088,104		11.63		1,023,730		10.89
Total	$	9,352,942	100.00	%	$	9,396,429	100.00	%

Short-Term Borrowings

Short-term borrowings, which Heartland defines as borrowings with an original maturity of one year or less, were as follows as of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, in thousands:


	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Securities sold under agreement to repurchase	$	88,606	$	107,957	$	65,696	$	80,124
Federal funds purchased	3,900		168,250		3,650		35,400
Advances from the FHLB	30,000		40,000		25,000		100,838
Other short-term borrowings	8,633		8,484		9,968		10,648
Total	$	131,139	$	324,691	$	104,314	$	227,010

Short-term borrowings generally include federal funds purchased, securities sold under agreements to repurchase, short-term FHLB advances and discount window borrowings from the Federal Reserve Bank. These funding alternatives are utilized in varying degrees depending on their pricing and availability. All of Heartland's bank subsidiaries own FHLB stock in one of the Chicago, Dallas, Des Moines, San Francisco or Topeka FHLBs, enabling them to borrow funds from their respective FHLB for short-term or long-term purposes under a variety of programs. The amount of short-term borrowings of Heartland was ~~$131.1~~$104.3 million at ~~September 30, 2018,~~March 31, 2019, compared to ~~$324.7~~$227.0 million at year-end ~~2017,~~2018, a decrease of ~~$193.6~~$122.7 million or ~~60%~~54%.

All of the Heartland bank subsidiaries provide retail repurchase agreements to their customers as a cash management tool, which sweep excess funds from demand deposit accounts into these agreements. 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 ~~$88.6~~$65.7 million at ~~September 30, 2018,~~March 31, 2019, compared to ~~$108.0~~$80.1 million at December 31, ~~2017,~~2018, a decrease of ~~$19.4~~$14.4 million or 18%.

Also included in short-term borrowings is a $30.0 million revolving credit line agreement Heartland has with an unaffiliated bank, primarily to provide liquidity to Heartland. The borrowing capacity of this revolving credit line was increased from $25.0 million to $30.0 million on June 14, 2018. During the first nine months of 2018, $25.0 million was drawn and repaid on this credit line. The outstanding balance was $0 at both ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017.~~2018.

Other Borrowings

The outstanding balances of other borrowings, which Heartland defines as borrowings with an original maturity date of more than one year, are shown in the table below, net of discount and issuance costs amortization as of ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, in thousands:


	September 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Advances from the FHLB	$	3,523	$	6,702	$	3,350	$	3,399
Wholesale repurchase agreements	—		30,000
Trust preferred securities	130,722		121,886		131,105		130,913
Senior notes	6,000		11,000		—		5,000
Note payable to unaffiliated bank	60,167		33,667		56,667		58,417
Contracts payable for purchase of real estate and other assets	1,964		1,881		1,932		1,953
Subordinated notes	74,107		74,000		74,178		74,143
Other borrowings	1,080		5,875		1,080		1,080
Total	$	277,563	$	285,011	$	268,312	$	274,905

As of ~~September 30, 2018,~~March 31, 2019, the amount of other borrowings was ~~$277.6~~$268.3 million, a decrease of ~~$7.4~~$6.6 million or 3%2% since year-end ~~2017.~~2018. The decrease since year-end ~~2017~~2018 was due to scheduled principal payments in accordance with the debt agreements. Heartland acquired $5.9 million of subordinated debt in the Signature Bancshares, Inc. transaction and $3.9 million of other debt in the FBLB transaction, which were paid off simultaneously with the closing of the respective transaction. In connection with the FBLB transaction, Heartland acquired $8.2 million of trust preferred securities.

Heartland has a non-revolving credit facility with an unaffiliated bank, which provides a borrowing capacity of up to $70.0 million. ~~The borrowing capacity was reduced to $70.0 million from $75.0 million on June 14, 2018.~~ At ~~September 30, 2018, $60.2~~March 31, 2019, $56.7 million was outstanding on this non-revolving credit line compared to ~~$33.7~~$58.4 million outstanding at December 31, ~~2017.~~2018. At ~~September 30, 2018,~~March 31, 2019, Heartland had $8.3 million available on this non-revolving credit facility, of which no balance was drawn.

A schedule of Heartland's trust preferred securities outstanding excluding deferred issuance costs, as of ~~September 30, 2018,~~March 31, 2019, is as follows, in thousands:

Amount

Issued

Issuance

Date

Interest

Rate

Interest

Rate as of 9/30/18⁽¹⁾

Maturity

Date

Callable

Date

Amount

Issued

Issuance

Date

Interest

Rate

Interest

Rate as of 3/31/19⁽¹⁾

Maturity

Date

Callable

Date

Heartland Financial Statutory Trust IV

10,310

03/17/2004

2.75% over LIBOR

5.08%

⁽²⁾

03/17/2034

12/17/2018

10,310

03/17/2004

2.75% over LIBOR

5.36%

⁽²⁾

03/17/2034

06/17/2018

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

3.67%

⁽³⁾

04/07/2036

01/07/2019

20,619

01/27/2006

1.33% over LIBOR

4.12%

⁽³⁾

04/07/2036

07/07/2019

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

3.81%

⁽⁴⁾

09/15/2037

12/15/2018

20,619

06/21/2007

1.48% over LIBOR

4.09%

⁽⁴⁾

09/15/2037

06/15/2019

Heartland Financial Statutory Trust VII

20,619

06/26/2007

1.48% over LIBOR

3.80%

⁽⁵⁾

09/01/2037

12/01/2018

20,619

06/26/2007

1.48% over LIBOR

4.11%

⁽⁵⁾

09/01/2037

06/01/2019

Morrill Statutory Trust I

8,970

12/19/2002

3.25% over LIBOR

5.62%

⁽⁶⁾

12/26/2032

12/26/2018

9,017

12/19/2002

3.25% over LIBOR

5.86%

12/26/2032

06/26/2018

Morrill Statutory Trust II

8,615

12/17/2003

2.85% over LIBOR

5.18%

⁽⁷⁾

12/17/2033

12/17/2018

8,670

12/17/2003

2.85% over LIBOR

5.46%

12/17/2033

06/17/2019

Sheboygan Statutory Trust I

6,418

09/17/2003

2.95% over LIBOR

5.28%

09/17/2033

12/17/2018

6,462

09/17/2003

2.95% over LIBOR

5.56%

09/17/2033

06/17/2019

CBNM Capital Trust I

4,346

09/10/2004

3.25% over LIBOR

5.58%

12/15/2034

12/15/2018

4,371

09/10/2004

3.25% over LIBOR

5.86%

12/15/2034

06/15/2019

Citywide Capital Trust III

6,369

12/19/2003

2.80% over LIBOR

5.14%

12/19/2033

01/23/2019

6,398

12/19/2003

2.80% over LIBOR

5.55%

12/19/2033

07/23/2019

Citywide Capital Trust IV

4,224

09/30/2004

2.20% over LIBOR

4.51%

09/30/2034

11/23/2018

4,252

09/30/2004

2.20% over LIBOR

4.85%

09/30/2034

05/23/2019

Citywide Capital Trust V

11,467

05/31/2006

1.54% over LIBOR

3.87%

07/25/2036

12/15/2018

11,579

05/31/2006

1.54% over LIBOR

4.15%

07/25/2036

06/15/2019

OCGI Statutory Trust III

2,987

06/27/2002

3.65% over LIBOR

5.99%

⁽⁸⁾

09/30/2032

12/30/2018

2,991

06/27/2002

3.65% over LIBOR

6.25%

⁽⁶⁾

09/30/2032

06/30/2019

OCGI Capital Trust IV

5,272

09/23/2004

2.50% over LIBOR

4.83%

⁽⁹⁾

12/15/2034

12/15/2018

5,300

09/23/2004

2.50% over LIBOR

5.11%

⁽⁷⁾

12/15/2034

06/15/2019

130,835

131,207

(1) Effective weighted average interest rate as of September 30, 2018, was 5.45% 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, 2018, 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, 2018, 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, 2018, 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, 2018, 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, 2018, 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, 2018, was 4.51% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(8) Effective interest rate as of September 30, 2018, was 5.53% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(9) Effective interest rate as of September 30, 2018, was 4.37% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(1) Effective weighted average interest rate as of March 31, 2019, was 5.11% 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 March 31, 2019, was 5.01% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(3) Effective interest rate as of March 31, 2019, was 4.69% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(4) Effective interest rate as of March 31, 2019, was 3.87% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(5) Effective interest rate as of March 31, 2019, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(6) Effective interest rate as of March 31, 2019, was 5.53% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(7) Effective interest rate as of March 31, 2019, was 4.37% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

CAPITAL REQUIREMENTS

The Federal Reserve Board, which supervises bank holding companies, has adopted capital adequacy guidelines that are used to assess the adequacy of capital of a bank holding company. The federal banking agencies implemented final rules (the "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 Act. The Final Rules substantially revised the regulatory risk-based capital rules applicable to Heartland. Under Basel III, Heartland must hold a conservation buffer above the adequately capitalized risk-based capital ~~ratios. The capital~~ratios; however, the transition provisions related to the conservation buffer ~~for 2018 is 1.875%.~~have been extended indefinitely.

The most recent notification from the FDIC categorized Heartland and each of its bank subsidiaries as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the categorization of any of these entities.

Heartland's capital ratios are calculated in accordance with Federal Reserve Board instructions and are required regulatory financial measures. The following table illustrates Heartland's capital ratios and the Federal Reserve Board's current capital adequacy guidelines for the dates indicated, in ~~thousands:~~thousands. The table also indicates the fully-phased in capital conservation buffer, but the requirements to comply have been extended indefinitely.


	Total Capital (to Risk- Weighted Assets)			Tier 1 Capital (to Risk- Weighted Assets)			Common Equity Tier 1 (to Risk- Weighted Assets)			Tier 1 Capital (to Average Assets)			Total Capital (to Risk- Weighted Assets)			Tier 1 Capital (to Risk- Weighted Assets)			Common Equity Tier 1 (to Risk- Weighted Assets)			Tier 1 Capital (to Average Assets)
September 30, 2018	13.59		%	12.02		%	10.50		%	9.53		%
March 31, 2019													14.37		%	12.77		%	11.24		%	10.08		%
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													$	8,558,021		$	8,558,021		$	8,558,021		N/A
Average Assets													N/A			N/A			N/A			$	10,845,274

December 31, 2018													13.72		%	12.16		%	10.66		%	9.73		%
Minimum capital requirement	8.00		%	6.00		%	4.50		%	4.00		%	8.00		%	6.00		%	4.50		%	4.00		%
Well capitalized requirement	10.00		%	8.00		%	6.50		%	5.00		%	10.00		%	8.00		%	6.50		%	5.00		%
Minimum capital requirement, including fully-phased in capital conservation buffer (2019)	10.50		%	8.50		%	7.00		%	N/A			10.50		%	8.50		%	7.00		%	N/A
Risk-weighted assets	$	8,615,005		$	8,615,005		$	8,615,005		N/A			$	8,756,130		$	8,756,130		$	8,756,130		N/A
Average Assets	N/A			N/A			N/A			$	10,863,820		N/A			N/A			N/A			$	10,946,440

December 31, 2017	13.45		%	11.70		%	10.07		%	9.20		%
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	$	7,511,544		$	7,511,544		$	7,511,544		N/A
Average Assets	N/A			N/A			N/A			$	9,552,227

Retained earnings that could be available for the payment of dividends to Heartland from its banks totaled approximately ~~$319.5~~$352.4 million and ~~$242.3~~$311.3 million at ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, respectively, under the capital requirements to remain well capitalized. At ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, retained earnings that could be available for the payment of dividends under the most restrictive minimum capital requirements totaled ~~$491.8~~$523.7 million and ~~$392.5~~$486.5 million, respectively.

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

~~On February 23, 2018,~~

OFF-BALANCE SHEET ARRANGEMENTS

Heartland ~~completed~~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 ~~acquisition~~secondary market and forward commitments for the future delivery of ~~Signature Bancshares, Inc., parent company~~such loans. Heartland enters into forward commitments for the future delivery of ~~Signature Bank, based~~residential mortgage loans when interest rate lock commitments are entered into in ~~Minnetonka, Minnesota. Based~~order to economically hedge the effect of future interest rate changes on the commitments to fund the loans as well as on the residential mortgage loans available for sale. See Note 7, "Derivative Financial Instruments," to the consolidated financial statements for additional information on Heartland's closing price of $53.55 per share of common stock on February 23, 2018, the aggregate consideration was approximately $61.4 million, which was paid by delivery of 1,000,843 shares of common stock and $7.8 million of cash.derivative financial instruments.

~~On May 18, 2018,~~ Heartland ~~completed~~also enters into financial instruments with off-balance sheet risk in the ~~acquisition~~normal course of ~~Lubbock, Texas based First Bank Lubbock Bancshares, Inc., parent company~~business to meet the financing needs of ~~First Bank & Trust,~~customers. These financial instruments include commitments to extend credit and ~~PrimeWest Mortgage Corporation, which is a wholly-owned subsidiary~~standby letters of First Bank & Trust. Based on Heartland's closing common stock price of $55.05 per share on May 18, 2018, the aggregate consideration paid to FBLB common shareholders was $189.9 million, with was paid by delivery of 3,350,664 shares of Heartland common stock and $5.5 million of cash.credit.

Off-balance sheet arrangements were disclosed in Heartland's Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to Heartland's off-balance sheet arrangements since that report was filed.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

Commitments and Contractual Obligations

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Heartland's bank subsidiaries evaluate the creditworthiness of customers to which

they extend a credit commitment on a case-by-case basis and may require collateral to secure any credit extended. The amount of collateral obtained is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees are conditional commitments issued by Heartland's bank subsidiaries to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At ~~September 30, 2018,~~March 31, 2019, and December 31, ~~2017,~~2018, commitments to extend credit aggregated ~~$2.41~~$2.33 billion and ~~$1.96~~$2.47 billion, respectively. Standby letters of credit aggregated ~~$55.9~~$72.9 million at ~~September 30, 2018,~~March 31, 2019, and ~~$55.5~~$71.9 million at December 31, ~~2017.~~2018.

Contractual obligations and other commitments were disclosed in Heartland's Annual Report on Form 10-K for the year ended December 31, ~~2017. There~~2018. Except for the agreement to acquire Blue Valley Ban Corp. described below, there have been no material changes into Heartland's contractual obligations and other commitments since that report was filed.

On January 16, 2019, Heartland entered into a ~~consolidated basis,~~definitive merger agreement to acquire Blue Valley Ban Corp., and its wholly-owned subsidiary, Bank of Blue Valley, headquartered in Overland Park, Kansas. As of the announcement date, the transaction, in which all of the issued and outstanding shares of Blue Valley Ban Corp. stock will be exchanged for shares of Heartland ~~maintains a large balance~~common stock, was valued at approximately $93.9 million. Simultaneous with the closing of ~~short-term securities that, when combined with cash from operations, Heartland believes are adequate to meet its funding obligations.~~

At the ~~parent company level, routine funding requirements consist primarily~~transaction, Bank of ~~dividends paid to stockholders, debt service on revolving credit arrangements~~Blue Valley will merge into Heartland's Kansas-based subsidiary, Morrill & Janes Bank 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 subsidiariesTrust Company, and the ~~issuance~~combined entity will operate as Bank of ~~debt~~Blue Valley. The amount of the merger consideration is subject to fluctuations in the price of Heartland common stock and ~~equity securities. On June 14, 2018, Heartland's revolving credit agreement~~certain potential adjustments, and the transaction is subject to customary closing conditions. The transaction is expected to close in the second quarter of 2019 with ~~an unaffiliated bank was increased to $30.0~~a systems conversion planned for the third quarter of 2019. As of March 31, 2019, Bank of Blue Valley had total assets of approximately $711.6 million, ~~from $25.0~~which included approximately $564.1 million of ~~maximum borrowing capacity,~~gross loans outstanding, and approximately $587.2 million of which none was outstanding at September 30, 2018. Heartland also has a non-revolving credit line with the same unaffiliated bank. At September 30, 2018, $8.3 million was available on this non-revolving credit line. These credit agreements contain specific financial covenants, all of which Heartland complied with as of September 30, 2018.

The ability of Heartland to pay dividends to its stockholders is dependent upon dividends paid to Heartland by its subsidiaries. The bank subsidiaries are subject to statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios at Heartland's bank subsidiaries, certain portions of their retained earnings are not available for the payment of dividends.deposits.

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

Derivative Financial Instruments

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

LIQUIDITY

Liquidity refers to Heartland's ability to maintain a cash flow that is adequate to meet maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund operations and to provide for customers’ credit needs. The liquidity of Heartland principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and its ability to borrow funds in the money or capital markets.

At ~~September 30, 2018,~~March 31, 2019, Heartland had ~~$437.4~~$492.5 million of cash and cash equivalents, time deposits in other financial institutions of ~~$5.8~~$4.7 million and securities carried at fair value of ~~$2.27~~$2.40 billion.

Management of investing and financing activities, and market conditions, determine the level and the stability of net interest cash flows. Management attempts to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principal determinant of growth in net interest cash flows.

Heartland's diversified deposit base provides a sizable source of relatively stable and low-cost funding. Total deposits were $9.35 billion at March 31, 2019, compared to $9.40 billion at December 31, 2018. Heartland's short-term borrowing balances are, on average, another stable source of funds. These balances are dependent on commercial cash management and smaller correspondent bank relationships and, as a result, will normally fluctuate. Management ~~believes these balances, on average, to be stable sources of funds; however, management~~ intends to rely on deposit growth and additional FHLB borrowings as needed in the future. ~~As of September 30, 2018, Heartland had $131.1 million of short-term borrowings outstanding.~~

Additional funding is provided by long-term debt and short-term borrowings. In the event of short-term liquidity needs, Heartland's banks may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank. As of March 31, 2019, Heartland had $104.3 million of short-term borrowings outstanding. As of March 31, 2019, Heartland had $268.3 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure. Additionally, the banks' FHLB memberships give them the ability to borrow funds for short-term and long-term purposes under a variety of programs. At ~~September 30, 2018,~~March 31, 2019, Heartland had ~~$1.39~~$1.44 billion of borrowing capacity under these programs.

On a consolidated basis, Heartland maintains a large balance of short-term securities that, when combined with cash from operations, Heartland believes are adequate to meet its funding obligations.

At the parent company level, routine funding requirements consist primarily of dividends paid to stockholders, debt service on revolving credit arrangements and trust preferred securities issuances, repayment requirements under other debt obligations and payments for acquisitions. The parent company obtains the funding to meet these obligations from dividends paid by its bank subsidiaries and the issuance of debt and equity securities. Heartland's revolving credit ~~line~~ agreement with an unaffiliated bank ~~provides a~~has $30.0 million of maximum borrowing capacity, of ~~$30.0 million. During the first nine months of 2018, Heartland had advances of $25.0 million on this line, of~~ which $0none was outstanding at ~~September 30, 2018.~~March 31, 2019. Heartland also has a non-revolving credit line with the same unaffiliated ~~bank, which had~~bank. At March 31, 2019, $8.3 million ~~of borrowing capacity at September 30, 2018,~~was available on this non-revolving credit line. These credit agreements contain specific financial covenants, all of which ~~no balance had been drawn.~~Heartland complied with as of March 31, 2019.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market prices and rates. Heartland's market risk is comprised primarily of interest rate risk resulting from its core banking activities of lending and accepting deposits. Interest rate risk measures the impact on earnings from changes in interest rates and the effect on the current fair market values of Heartland's assets, liabilities and off-balance sheet contracts. Heartland's objective is to measure this risk and manage its balance sheet to avoid unacceptable potential for economic loss.

Management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a regular basis by the asset/liability committees of Heartland's bank subsidiaries and, on a consolidated basis, by Heartland's executive management and board of directors. At least quarterly, a detailed review of the balance sheet risk profile is performed for Heartland and each of its bank subsidiaries. Included in these reviews are interest rate sensitivity analyses, which simulate changes in net interest income in response to various interest rate scenarios. These analyses consider current portfolio rates, existing maturities, repricing opportunities and market interest rates, in addition to prepayments and growth under different interest rate assumptions. Selected strategies are modeled prior to implementation to determine their effect on Heartland's interest rate risk profile and net interest income. Heartland believes its primary market risk exposures did not change significantly in the first ~~nine~~three months of ~~2018.~~2019.

The core interest rate risk analysis utilized by Heartland examines the balance sheet under increasing and decreasing interest rate scenarios that are neither too modest nor too extreme. All rate changes are ramped over a 12-month horizon based upon a parallel shift in the yield curve and then maintained at those levels over the remainder of the simulation horizon. Using this approach, management is able to see the effect that both a gradual change of rates (year one) and a rate shock (year two and beyond) could have on Heartland's net interest income. Starting balances in the model reflect actual balances on the "as of" date, adjusted for material transactions. Pro-forma balances remain static. This methodology enables interest rate risk embedded within the existing balance sheet structure to be isolated from the interest rate risk often caused by growth in assets and liabilities. Due to the low interest rate environment, the simulations under a decreasing interest rate scenario were prepared using a 100 basis point shift in rates. The most recent reviews at ~~September 30,~~March 31, 2019, and March 31, 2018, ~~and September 30, 2017,~~ provided the following results, in thousands:


	2018				2017				2019				2018
	Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base
Year 1
Down 100 Basis Points	$	442,187	(3.07	)%	$	343,033	(2.69	)%	$	400,843	(3.30	)%	$	362,642	(3.02	)%
Base	$	456,192			$	352,502			$	414,540			$	373,953
Up 200 Basis Points	$	454,513	(0.37	)%	$	351,265	(0.35	)%	$	437,779	5.61	%	$	377,453	0.94	%
Year 2
Down 100 Basis Points	$	423,766	(7.11	)%	$	326,965	(7.24	)%	$	382,215	(7.80	)%	$	346,225	(7.41	)%
Base	$	463,765	1.66	%	$	354,238	0.49	%	$	416,785	0.54	%	$	379,901	1.59	%
Up 200 Basis Points	$	474,816	4.08	%	$	369,712	4.88	%	$	464,301	12.00	%	$	404,390	8.14	%

Heartland uses derivative financial instruments to manage the impact of changes in interest rates on its future interest income or interest expense. Heartland is exposed to credit-related losses in the event of nonperformance by the counterparties to these

derivative instruments, but believes it has minimized the risk of these losses by entering into the contracts with large, stable financial institutions. The estimated fair market values of these derivative instruments are presented in Note 7 to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

Heartland enters into financial instruments with off balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition established in the contract relating to the commitment. Commitments generally have fixed expiration dates and may require collateral from the borrower. Standby letters of credit are conditional commitments issued by Heartland to guarantee the performance of a customer to a third party up to a stated amount and subject to specified terms and conditions. These commitments to extend credit and standby letters of credit are not recorded on the consolidated balance sheet until the loan is made or the letter or credit is issued.

Heartland periodically holds a securities trading portfolio that would also be subject to elements of market risk. These securities are carried on the balance sheet at fair value. At both September 30, 2018, and December 31, 2017, Heartland held no securities in its securities trading portfolio.

ITEM 4. CONTROLS AND PROCEDURES

Based on an evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of Heartland's management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded ~~that~~ that:

Heartland's disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) were effective.

During the quarter ended ~~September 30, 2018,~~March 31, 2019, there have been no changes in Heartland's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, Heartland's internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors applicable to Heartland from those disclosed in Part I, Item 1A. “Risk Factors” in Heartland's ~~2017~~2018 Annual Report on Form 10-K. Please refer to that section of Heartland's Form 10-K report for disclosures regarding the risks and uncertainties related to Heartland's business.

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

Heartland's board of directors has authorized management to acquire and hold up to 500,000 shares of common stock as treasury shares at any one time. Heartland and its affiliated purchasers made no purchases of its common stock during the quarter ended ~~September 30, 2018.~~March 31, 2019.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits



~~3.1~~10.1		Agreement and Plan of Merger between Heartland Financial USA, Inc. and Blue Valley Ban Corp., dated January 16, 2019 (incorporated by reference to Exhibit 10.27 to the Registrant’s Annual Report on Form 10-K filed on February 27, 2019).

10.2	⁽¹⁾	~~Amendment~~Deferred Compensation Plan dated April 30, 2019 (incorporated by reference to ~~Certificate of Incorporation of Heartland Financial USA, Inc.~~Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed ~~August 28, 2018~~on May 6, 2019).

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

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

32.1	⁽¹⁾⁽²⁾	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	⁽¹⁾⁽²⁾	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Financial statement formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, and (vi) the Notes to Consolidated Financial Statements.

______________

(1) Management contracts or compensatory plans or arrangements

(2) Filed or furnished herewith.

SIGNATURES

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

HEARTLAND FINANCIAL USA, INC.

(Registrant)

/s/ Bruce K. Lee

By: Bruce K. Lee

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 6, 2018~~May 7, 2019



	As of May 18, 2018
Fair value of consideration paid:
Common stock (3,350,664 shares)	$	184,454
Cash	5,451
Total consideration paid	189,905
Fair value of assets acquired
Cash and cash equivalents	212,105
Securities:
Carried at fair value	1,788
Other securities	3,268
Loans held for sale	31,050
Loans held to maturity	681,080
Premises, furniture and equipment, net	23,271
Other real estate, net	379
Mortgage servicing rights	6,995
Core deposit intangibles and customer relationships, net	13,908
Cash surrender value on life insurance	14,997
Other assets	7,185
Total assets	996,026
Fair value of liabilities assumed
Deposits	893,827
Other borrowings	12,077
Other liabilities	21,580
Total liabilities assumed	927,484
Fair value of net assets acquired	68,542
Goodwill resulting from acquisition	$	121,363



(Dollars in thousands, except per share data), unaudited	For the Nine Months Ended
	September 30, 2018		September 30, 2017
Net interest income	$	317,846	$	262,367
Net income available to common stockholders	$	69,075	$	76,698
Basic earnings per share	$	2.02	$	2.48
Diluted earnings per share	$	2.01	$	2.46