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 March 31, ~~2019~~

2020



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

Large accelerated filerx

☒

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 Exchange 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 May ~~6, 2019,~~5, 2020, the Registrant had outstanding ~~34,604,462~~36,808,249 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


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
	March 31, 2020 (Unaudited)		December 31, 2019
ASSETS
Cash and due from banks	$	175,587	$	206,607
Interest bearing deposits with other banks and other short-term investments	64,156		172,127
Cash and cash equivalents	239,743		378,734
Time deposits in other financial institutions	3,568		3,564
Securities:

Carried at fair value (cost of $3,517,232 at March 31, 2020, and $3,311,433 at December 31, 2019)	3,488,621		3,312,796
Held to maturity, net of allowance for credit losses of $197 at March 31, 2020 (fair value of $101,375 at March 31, 2020, and $100,484 at December 31, 2019)	91,875		91,324
Other investments, at cost	35,370		31,321
Loans held for sale	22,957		26,748
Loans receivable:
Held to maturity	8,374,236		8,367,917

Allowance for credit losses	(97,350)		(70,395)
Loans receivable, net	8,276,886		8,297,522
Premises, furniture and equipment, net	197,993		197,558
Premises, furniture and equipment held for sale	2,967		2,967
Other real estate, net	6,074		6,914
Goodwill	446,345		446,345
Core deposit intangibles and customer relationship intangibles, net	45,707		48,688
Servicing rights, net	5,220		6,736
Cash surrender value on life insurance	172,140		171,625

Other assets	259,043		186,755
TOTAL ASSETS	$	13,294,509	$	13,209,597
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	3,696,974	$	3,543,863
Savings	6,366,610		6,307,425
Time	1,110,441		1,193,043
Total deposits	11,174,025		11,044,331

Short-term borrowings	121,442		182,626
Other borrowings	276,150		275,773
Accrued expenses and other liabilities	169,178		128,730
TOTAL LIABILITIES	11,740,795		11,631,460
STOCKHOLDERS' EQUITY:


Preferred stock (par value $1 per share; authorized 17,604 shares; 0ne issued or outstanding at both March 31, 2020, and December 31, 2019)	—		—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; 0ne issued or outstanding at both March 31, 2020, and December 31, 2019)	—		—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both March 31, 2020, and December 31, 2019, 0ne issued or outstanding at both March 31, 2020, and December 31, 2019)	—		—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both March 31, 2020, and December 31, 2019; 0ne issued or outstanding at both March 31, 2020, and December 31, 2019)	—		—
Common stock (par value $1 per share; 60,000,000 shares authorized at both March 31, 2020, and December 31, 2019; issued 36,807,217 shares at March 31, 2020, and 36,704,278 shares at December 31, 2019)	36,807		36,704
Capital surplus	842,780		839,857
Retained earnings	700,298		702,502
Accumulated other comprehensive income/(loss)	(26,171)		(926)



TOTAL STOCKHOLDERS' EQUITY	1,553,714		1,578,137
TOTAL LIABILITIES AND EQUITY	$	13,294,509	$	13,209,597

See accompanying notes to consolidated financial statements.

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

March 31, 2019 (Unaudited) December 31, 2018
ASSETS
Cash and due from banks $ 174,198
$ 223,135
Interest bearing deposits with other banks and other short-term investments 318,303
50,495
Cash and cash equivalents 492,501
273,630
Time deposits in other financial institutions 4,675
4,672
Securities:
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 27,506
28,396
Loans held for sale 69,716
119,801
Loans receivable:
Held to maturity 7,331,544
7,407,697
Allowance for loan and lease losses (62,639 ) (61,963 )
Loans receivable, net 7,268,905
7,345,734
Premises, furniture and equipment, net 183,185
187,418
Premises, furniture and equipment held for sale 7,030
7,258
Other real estate, net 5,391
6,153
Goodwill 391,668
391,668
Core deposit intangibles and customer relationship intangibles, net 44,637
47,479
Servicing rights, net 28,968
31,072
Cash surrender value on life insurance 163,764
162,892
Other assets 136,000
114,841
TOTAL ASSETS $ 11,312,495
$ 11,408,006
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand $ 3,118,909
$ 3,264,737
Savings 5,145,929
5,107,962
Time 1,088,104
1,023,730
Total deposits 9,352,942
9,396,429
Deposits held for sale 118,564
106,409
Short-term borrowings 104,314
227,010
Other borrowings 268,312
274,905
Accrued expenses and other liabilities 96,261
78,078
TOTAL LIABILITIES 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 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 745,596
743,095
Retained earnings 603,506
579,252
Accumulated other comprehensive loss (11,604 ) (31,649 )
TOTAL STOCKHOLDERS' EQUITY 1,372,102
1,325,175
TOTAL LIABILITIES AND EQUITY $ 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 March 31,
	2020		2019
INTEREST INCOME:
Interest and fees on loans	$	106,414	$	100,456
Interest on securities:
Taxable	21,731		15,876
Nontaxable	2,183		3,093
Interest on federal funds sold	—		4
Interest on interest bearing deposits in other financial institutions	721		1,292
TOTAL INTEREST INCOME	131,049		120,721
INTEREST EXPENSE:
Interest on deposits	14,582		13,213
Interest on short-term borrowings	296		889
Interest on other borrowings (includes $(183) and $165 of interest expense/(benefit) related to derivatives reclassified from accumulated other comprehensive income/(loss) for the three months ended March 31, 2020 and 2019, respectively.	3,660		3,664
TOTAL INTEREST EXPENSE	18,538		17,766
NET INTEREST INCOME	112,511		102,955
Provision for credit losses	21,520		1,635
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	90,991		101,320
NONINTEREST INCOME:
Service charges and fees	12,021		12,794
Loan servicing income	963		1,729
Trust fees	5,022		4,474
Brokerage and insurance commissions	733		734
Securities gains, net includes $1,658 and $1,575 of net security gains reclassified from accumulated other comprehensive income/(loss) for the three months ended March 31, 2020 and 2019, respectively.	1,658		1,575


Unrealized gain/(loss) on equity securities, net	(231)		258
Net gains on sale of loans held for sale	4,660		3,176
Valuation allowance on servicing rights	(1,565)		(589)
Income on bank owned life insurance	498		899
Other noninterest income	2,058		1,667
TOTAL NONINTEREST INCOME	25,817		26,717
NONINTEREST EXPENSES:
Salaries and employee benefits	49,957		50,285
Occupancy	6,471		6,607
Furniture and equipment	3,108		2,692
Professional fees	12,473		10,995

Advertising	2,205		2,320
Core deposit intangibles and customer relationship intangibles amortization	2,981		2,869
Other real estate and loan collection expenses	334		701
(Gain)/loss on sales/valuations of assets, net	16		(3,004)
Acquisition, integration and restructuring costs	1,376		3,614
Partnership investment in tax credit projects	184		475
Other noninterest expenses	11,754		10,676
TOTAL NONINTEREST EXPENSES	90,859		88,230
INCOME BEFORE INCOME TAXES	25,949		39,807
Income taxes (includes $466 and $358 of income tax expense reclassified from accumulated other comprehensive income/(loss) for the three months ended March 31, 2020 and 2019, respectively.)	5,909		8,310





NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	20,040	$	31,497
EARNINGS PER COMMON SHARE - BASIC	$	0.54	$	0.91
EARNINGS PER COMMON SHARE - DILUTED	$	0.54	$	0.91
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.20	$	0.16

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
March 31,
2019 2018
INTEREST INCOME:
Interest and fees on loans $ 100,456
$ 85,651
Interest on securities:
Taxable 15,876
11,577
Nontaxable 3,093
3,579
Interest on federal funds sold 4
—
Interest on interest bearing deposits in other financial institutions 1,292
407
TOTAL INTEREST INCOME 120,721

101,214
INTEREST EXPENSE:
Interest on deposits 13,213
5,766
Interest on short-term borrowings 889
268
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 17,766

9,630
NET INTEREST INCOME 102,955

91,584
Provision for loan losses 1,635
4,263
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 101,320

87,321
NONINTEREST INCOME:
Service charges and fees 12,794
10,079
Loan servicing income 1,729
1,754
Trust fees 4,474
4,680
Brokerage and insurance commissions 734
907
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 3,176
4,051
Valuation allowance on servicing rights (589 ) (2 )
Income on bank owned life insurance 899
614
Other noninterest income 1,667
1,220
TOTAL NONINTEREST INCOME 26,717

24,716
NONINTEREST EXPENSES:
Salaries and employee benefits 50,285
48,710
Occupancy 6,607
6,043
Furniture and equipment 2,692
2,749
Professional fees 11,379
9,448
Advertising 2,325
1,940
Core deposit intangibles and customer relationship intangibles amortization 2,842
1,863
Other real estate and loan collection expenses 701
732
Gain on sales/valuations of assets, net (3,004 ) (197 )
Restructuring expenses 3,227
2,564
Other noninterest expenses 11,176
9,794
TOTAL NONINTEREST EXPENSES 88,230

83,646
INCOME BEFORE INCOME TAXES 39,807

28,391
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 31,497

23,268
Preferred dividends —
(13 )
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 31,497

$ 23,255
EARNINGS PER COMMON SHARE - BASIC $ 0.91
$ 0.76
EARNINGS PER COMMON SHARE - DILUTED $ 0.91
$ 0.76
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.16
$ 0.13

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS) (Unaudited) (Dollars in thousands)
	Three Months Ended March 31,
	2020		2019
NET INCOME	$	20,040	$	31,497
OTHER COMPREHENSIVE INCOME/(LOSS)
Securities:
Net change in unrealized gain/(loss) on securities	(28,328)		29,965

Reclassification adjustment for net gains realized in net income	(1,658)		(1,575)

Income taxes	7,797		(7,281)
Other comprehensive income/(loss) on securities	(22,189)		21,109
Derivatives used in cash flow hedging relationships:
Net change in unrealized loss on derivatives	(3,680)		(1,504)
Reclassification adjustment for net gains/(losses) on derivatives realized in net income	(190)		158
Income taxes	814		282
Other comprehensive loss on cash flow hedges	(3,056)		(1,064)
Other comprehensive income/(loss)	(25,245)		20,045
TOTAL COMPREHENSIVE INCOME/(LOSS)	$	(5,205)	$	51,542

See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
2019 2018
NET INCOME $ 31,497
$ 23,268
OTHER COMPREHENSIVE INCOME/(LOSS)
Securities:
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 (7,281 ) 5,391
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 (1,505 ) 1,699
Reclassification adjustment for net losses on derivatives realized in net income 158
197
Income taxes 283
(708 )
Other comprehensive income/(loss) on cash flow hedges (1,064 ) 1,188
Other comprehensive income/(loss) 20,045
(14,696 )
TOTAL COMPREHENSIVE INCOME $ 51,542
$ 8,572

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
	Three Months Ended March 31,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	20,040	$	31,497
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,100		8,155
Provision for credit losses	21,520		1,635
Net amortization of premium on securities	3,685		5,692
Securities gains, net	(1,658)		(1,575)

Unrealized (gain)/loss on equity securities, net	231		(258)
Stock based compensation	2,222		2,375

Loans originated for sale	(91,974)		(61,348)
Proceeds on sales of loans held for sale	100,425		64,941
Net gains on sale of loans held for sale	(4,660)		(2,978)
(Increase) decrease in accrued interest receivable	(667)		682
Increase in prepaid expenses	(157)		(1,708)
Increase in accrued interest payable	316		1,261

Capitalization of servicing rights	(414)		(266)
Valuation allowance on servicing rights	1,565		589
Loss on sales/valuations of assets, net	16		1,512
Net excess tax (expense) benefit from stock based compensation	(25)		336
Other, net	(40,513)		(16,493)
NET CASH PROVIDED BY OPERATING ACTIVITIES	17,052		34,049
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits in other financial institutions	(4)		(248)
Proceeds from the sale of securities available for sale	328,890		434,154



Proceeds from the maturity of and principal paydowns on securities available for sale	92,413		86,727
Proceeds from the maturity of and principal paydowns on securities held to maturity	55		2,156
Proceeds from the maturity of time deposits in other financial institutions	150		245
Proceeds from the sale, maturity of and principal paydowns on other investments	5,613		2,730
Purchase of securities available for sale	(627,246)		(299,105)

Purchase of other investments	(9,662)		(1,779)
Net (increase) decrease in loans	(5,568)		43,925
Purchase of bank owned life insurance policies	(39)		(5)


Capital expenditures	(3,723)		(1,123)

Proceeds from the sale of equipment	—		117
Net cash expended in divestitures	—		28,142
Proceeds on sale of OREO and other repossessed assets	1,019		2,537
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES	$	(218,102)	$	298,473

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

Three Months Ended
March 31,
2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,497
$ 23,268
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 8,155
6,802
Provision for loan losses 1,635
4,263
Net amortization of premium on securities 5,692
5,823
Securities gains, net (1,575 ) (1,441 )
Unrealized (gain)/loss on equity securities, net (258 ) 28
Stock based compensation 2,375
1,858
Loans originated for sale (61,348 ) (112,433 )
Proceeds on sales of loans held for sale 64,941
135,506
Net gains on sale of loans held for sale (2,978 ) (2,889 )
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 (266 ) (1,183 )
Valuation allowance on servicing rights 589
2
(Gain)/loss on sales/valuations of assets, net 1,512
(197 )
Net excess tax benefit from stock based compensation 336
611
Other, net (16,493 ) (5,441 )
NET CASH PROVIDED BY OPERATING ACTIVITIES 34,049
59,039
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits in other financial institutions (248 ) —
Proceeds from the sale of securities available for sale 434,154
392,246
Proceeds from the redemption of time deposits in other financial institutions —
8,767
Proceeds from the maturity of and principal paydowns on securities available for sale 86,727
49,603
Proceeds from the maturity of and principal paydowns on securities held to maturity 2,156
3,570
Proceeds from the maturity of and principal paydowns on time deposits in other financial institutions 245
4,368
Proceeds from the sale, maturity of and principal paydowns on other investments 2,730
677
Purchase of securities available for sale (299,105 ) (244,289 )
Purchase of other investments (1,779 ) (644 )
Net (increase) decrease in loans 43,925
(32,314 )
Purchase of bank owned life insurance policies (5 ) —
Capital expenditures (1,123 ) (2,356 )
Net cash and cash equivalents received in acquisitions —
5,543
Proceeds from the sale of equipment 117
615
Net cash received in divestitures 28,142
—
Proceeds on sale of OREO and other repossessed assets 2,537
668
NET CASH PROVIDED BY INVESTING ACTIVITIES $ 298,473
$ 186,454


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands)
	Three Months Ended March 31,
	2020		2019
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits	$	153,111	$	(131,876)
Net increase in savings deposits	59,185		74,016
Net increase (decrease) in time deposit accounts	(82,602)		75,141


Net decrease in short-term borrowings	(34,987)		(43,000)
Proceeds from short term FHLB advances	491,545		430,888
Repayments of short term FHLB advances	(517,742)		(506,725)
Proceeds from other borrowings	1,930		50
Repayments of other borrowings	(1,832)		(6,868)





Proceeds from issuance of common stock	804		253
Dividends paid	(7,353)		(5,530)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES	62,059		(113,651)
Net increase (decrease) in cash and cash equivalents	(138,991)		218,871
Cash and cash equivalents at beginning of year	378,734		273,630
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	239,743	$	492,501
Supplemental disclosures:
Cash paid for income/franchise taxes	$	12	$	84
Cash paid for interest	$	18,222	$	16,537
Loans transferred to OREO	$	245	$	1,694
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale	$	—	$	654

Deposits transferred to held for sale	$	—	$	76,968
Loans transferred to held for sale	$	—	$	32,111
Securities transferred from held to maturity to available for sale	$	—	$	148,030
Purchases of securities available for sale, accrued, not settled	$	14,035	$	2,019

Maturity of securities available for sale, accrued, not settled	$	—	$	1,000
Transfer of available for sale securities to held to maturity securities	$	462	$	—



See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
2019 2018
CASH FLOWS FROM FINANCING ACTIVITIES:
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 —
15,000
Net decrease in short-term borrowings (43,000 ) (168,451 )
Proceeds from short term FHLB advances 430,888
220,000
Repayments of short term FHLB advances (506,725 ) (260,000 )
Proceeds from other borrowings 50
—
Repayments of other borrowings (6,868 ) (14,995 )
Purchase of treasury stock —
(97 )
Proceeds from issuance of common stock 253
14
Dividends paid (5,530 ) (3,920 )
NET CASH USED BY FINANCING ACTIVITIES (113,651 ) (175,150 )
Net increase in cash and cash equivalents 218,871
70,343
Cash and cash equivalents at beginning of year 273,630
196,003
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 492,501
$ 266,346
Supplemental disclosures:
Cash paid for income/franchise taxes $ 84
$ 2
Cash paid for interest $ 16,537
$ 8,601
Loans transferred to OREO $ 1,694
$ 939
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale $ 654
$ —
Deposits transferred to held for sale $ 76,968
$ —
Loans transferred to held for sale $ 32,111
$ —
Securities transferred from held to maturity to available for sale $ 148,030
$ —
Purchases of securities available for sale, accrued, not settled $ 2,019
$ —
Maturity of securities available for sale, accrued, not settled $ 1,000
$ —
Stock consideration granted for acquisitions $ —
$ 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, 2019	$	—	$	34,477	$	743,095	$	579,252	$	(31,649)	$	—	$	1,325,175
Comprehensive income/(loss)							31,497		20,045				51,542

Cumulative effect adjustment from the adoption of ASU 2016-02							(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








Balance at January 1, 2020	$	—	$	36,704	$	839,857	$	702,502	$	(926)	$	—	$	1,578,137
Comprehensive income/(loss)							20,040		(25,245)				(5,205)

Cumulative effect adjustment from the adoption of ASU 2016-13							(14,891)						(14,891)
Cash dividends declared:


Common, $0.20 per share							(7,353)						(7,353)




Issuance of 102,939 shares of common stock			103		701								804
Stock based compensation					2,222								2,222
Balance at March 31, 2020	$	—	$	36,807	$	842,780	$	700,298	$	(26,171)	$	—	$	1,553,714

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, ~~2018,~~2019, included in the Form 10-K of Heartland Financial USA, Inc. ("Heartland") filed with the Securities and Exchange Commission ("SEC") on February ~~27, 2019~~26, 2020. 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 March 31, ~~2019,~~2020, are not necessarily indicative of the results expected for the year ending December 31, ~~2019.~~2020.

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-month periods ended March 31, ~~2019,~~2020, and ~~2018,~~2019, are shown in the table below:


	Three Months Ended March 31,						Three Months Ended March 31,
(Dollars and number of shares in thousands, except per share data)	2019		2018			(Dollars and number of shares in thousands, except per share data)	2020		2019
Net income	$	31,497	$	23,268
Preferred dividends	—		(13		)
Net income available to common stockholders	$	31,497	$	23,255

Net income available to stockholders						Net income available to stockholders	$	20,040	$	31,497

Weighted average common shares outstanding for basic earnings per share	34,564		30,442			Weighted average common shares outstanding for basic earnings per share	36,821		34,564
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	136		203			Assumed incremental common shares issued upon vesting of outstanding restricted stock units	75		136
Weighted average common shares for diluted earnings per share	34,700		30,645			Weighted average common shares for diluted earnings per share	36,896		34,700
Earnings per common share — basic	$	0.91	$	0.76		Earnings per common share — basic	$	0.54	$	0.91
Earnings per common share — diluted	$	0.91	$	0.76		Earnings per common share — diluted	$	0.54	$	0.91
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	2		—			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 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 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 purchase2016-13

~~the underlying asset. Early adoption is permitted. In~~On 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 2016-02.1, 2020, Heartland adopted the accounting standard on January 1, 2019, on a modified retrospective basis, as required, and will not restate comparative periods. Heartland adopted the practical expedients, which allow for existing leases to be accounted for under previous guidance with the exception of balance sheet recognition for lessees. The adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $25.9 million and $27.6 million, respectively, on January 1, 2019. The difference between the lease assets and lease liabilities, which was $1.7 million, was recorded as an adjustment to retained earnings. The adoption of the standard did not impact Heartland's results of operations or liquidity. See Note 11, "Leases", for more information on Heartland's leases.

~~In June 2016, the FASB issued ASU~~Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326).,", which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss ("CECL") methodology. Also on January 1, 2020, Heartland adopted ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments," which amended certain provisions contained in ASU 2016-13, particularly by including accrued interest in the definition of amortized cost, as well as by clarifying that loan extension and renewal options in the original or modified contract that are not unconditionally cancelable by the entity should be considered in the entity's determination of expected credit losses. Also on January 1, 2020, Heartland adopted ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," which amended certain aspects of ASU 2016-13.

The ~~amendments in this~~measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, which includes loans held to maturity and held to maturity debt securities. It also applies to available for sale

debt securities and off-balance sheet unfunded loan commitments. Heartland adopted ASU ~~require a~~2016-13 using the modified retrospective method for all financial ~~asset (or a group of financial assets)~~assets measured at amortized cost basis and off-balance sheet unfunded loan commitments. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be ~~presented~~reported in accordance with previously applicable GAAP.

Heartland's adoption of ASU 2016-13 resulted in an increase of $12.1 million to the allowance for credit losses related to loans, which included the addition of $6.0 million of purchased credit impaired discount on previously acquired loans and a cumulative-effect adjustment to retained earnings totaling $4.6 million, net of taxes of $1.5 million. Heartland adopted ASU 2016-13 using the prospective transition approach for loans purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under Accounting Standards Codification ("ASC") 310-30. In accordance with ASC 326, Heartland did not reassess whether PCI loans met the criteria of PCD loans as of the adoption date.

The adoption of ASU 2016-13 resulted in an increase of $13.6 million to the allowance for unfunded commitments and a cumulative-effect adjustment to retained earnings totaling $10.2 million, net of taxes of $3.4 million.

The adoption of ASU 2016-13 also established an allowance for credit losses for Heartland's held to maturity debt securities of $158,000 and a cumulative-effect adjustment to retained earnings totaling $118,000, net of taxes of $40,000. Heartland did not record an allowance for credit losses for Heartland's available for sale debt securities upon adoption of ASU 2016-13.

The total result of the adoption of ASU 2016-13 was a cumulative-effect adjustment to Heartland's retained earnings of $14.9 million, net of taxes of $5.0 million.

Heartland elected to not measure an allowance for credit losses on accrued interest as such accrued interest is written off in a timely manner when deemed uncollectible. Any such write-off of accrued interest will reverse previously recognized interest income. Heartland elected to not include accrued interest within the presentation and disclosures of the carrying amount of financial assets held at amortized cost. This election is applicable to the various disclosures included within the consolidated financial statements and notes contained in this Quarterly Report on Form 10-Q.

The adoption of ASU 2019-04 did not have a material impact on Heartland's results of operation or financial condition.

Heartland elected not to utilize the regulatory transition relief issued by federal regulatory authorities in the first quarter of 2020, which allowed banking institutions to delay the impact of CECL on regulatory capital because the impact on the capital ratios of Heartland and its subsidiary banks was not significant.

Loans Held to Maturity

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, which is the principal amount outstanding, net of cumulative charge-offs, unamortized net deferred loan origination fees and costs and unamortized premiums or discounts on purchased loans. Heartland has a loan policy which establishes the credit risk appetite, lending standards and underwriting criteria designed so that Heartland may extend credit in a prudent and sound manner. The Heartland board of directors reviews and approves the loan policy 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.

Heartland originates commercial and industrial loans and owner occupied 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. Non-owner occupied commercial real estate loans provide financing for various non-owner occupied or income producing properties. Real estate construction loans are generally short-term or interim loans that provide financing for acquiring or developing commercial income properties, multi-family projects or single-family residential homes. Agricultural and agricultural real estate loans provide financing for capital improvements and farm operations, as well as livestock and machinery purchases. Residential real estate loans are originated for the purchase or refinancing of single family residential properties. Consumer loans include loans for motor vehicles, home improvement, home equity and personal lines of credit.

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

Allowance for Credit Losses on Loans

The allowance for credit losses is a valuation account that is deducted from the loans held to maturity amortized cost basis ~~of the financial asset(s)~~ to present the net ~~carrying value at the~~ amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of the amounts previously charged off.

Heartland's allowance model is designed to consider the current contractual term of the loan, defined as starting as of the most recent renewal date and ending at maturity date. Prepayments are implicit in the model.

Management's estimation of expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. Adjustments are made to historical loss experience to reflect differences in asset-specific risk characteristics, such as underwriting standards, portfolio mix or asset terms and differences in economic conditions, both current conditions and reasonable and supportable forecasts. If Heartland is not able to make or obtain reasonable and supportable forecasts for the entire life of the financial ~~asset.~~asset, it is required to estimate expected credit losses for the remaining life using an approach that reverts to historical credit loss information. The ~~amendments~~components of the allowance for credit losses are described more specifically below.

Quantitative Factors

The quantitative component of the allowance for credit losses is measured using historical loss experience using a look-back period, currently over the most recent 12 years, on a pool basis for loans with similar risk characteristics. Heartland utilizes third-party software to calculate the expected credit losses. The risks in ~~this ASU indicate~~the commercial and industrial loan portfolio include the unpredictability of the cash flow of the borrowers and the variability in the value of the collateral securing the loans. Owner occupied commercial real estate loans are dependent upon the cash flow of the borrowers and the collateral value of the real estate. Non-owner occupied commercial real estate loans are typically dependent, in large part, on sufficient income from the properties securing the loans to cover the operating expenses and debt service. Real estate construction loans involve additional risks because funds are advanced based upon estimates of costs and the estimated value of the completed project. Additionally, real estate construction loans have a greater risk of default in a weaker economy because the source of repayment is reliant on the successful and timely sale of the project. Agricultural and agricultural real estate loans are dependent upon the profitable operation or management of the farm property securing the loan. Loans secured by farm equipment, livestock or crops may not provide an adequate source of repayment because of damage or depreciation. Residential real estate loans are dependent upon the borrower's ability to repay the loan and the underlying collateral value. Consumer loans are dependent upon the borrower's personal financial circumstances and continued financial stability.

If a loan no longer shares similar risk characteristics with other loans in the pool and does not share similar risk characteristics with another pool, it is evaluated on an individual basis and is not included in the collective evaluation. Heartland will individually assess loans that are collateral dependent. A loan is collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For those loans that are deemed collateral dependent and in foreclosure the impairment will be recognized by creating a specific reserve against the loan with a corresponding charge to provision expense. In most cases, the specific reserve will be charged off in the same quarter as the loss is probable. Individually assessed loans will be considered non-accrual since it is probable that the collection of all principal and interest will not occur. In some cases when foreclosure is not probable, but Heartland believes certain loans do not share the same risk characteristics with the like loans in the pool, the standard allows for these loans to be individually assessed. All individually assessed calculations are completed at least annually.

Qualitative Factors

Heartland's allowance methodology also has a qualitative component, the purpose of which is to provide management with a means to take into consideration changes in current conditions that could potentially have an effect, up or down, on the level of recognized loan losses, that, for whatever reason, fail to show up in the quantitative analysis performed in determining its base loan loss rates.

Heartland utilizes the following qualitative factors:

•changes in lending policies and procedures

•changes in the nature and volume of loans

•experience and ability of management

•changes in the credit quality of the loan portfolio

•quality of institution’s loan review system

•concentrations of credit

•other external factors

The qualitative adjustments are based on the comparison of the current condition to the average condition over the look back period. The adjustment amount can be either positive or negative depending whether or not the current condition is better or worse than the historical average. Heartland incorporates the adjustments for changes in current conditions using an overlay method. The adjustments are applied as a percentage adjustment in addition to the calculated historical loss rates of each pool. These adjustments reflect the extent to which Heartland expects current conditions to differ from the conditions that existed for the period over which historical information was evaluated. Heartland utilizes anchoring to determine the minimum and maximum amount of qualitative allowance for credit losses, which is determined by comparing the highest and lowest historical rate to the average loss rate to calculate the rate for the adjustment.

Economic Forecasting

Heartland utilizes an overlay method for its economic forecasting component, similar to the method utilized for the qualitative factors. The length of the reasonable and supportable forecast period is a judgmental determination based on the level to which the entity can support its forecast of economic conditions that drive its estimate of expected loss. Heartland compares forecasted economic indices, such as unemployment and gross domestic product, to the economic conditions that existed over Heartland's look-back period.

It is expected that actual economic conditions will, in many circumstances, turn out differently than forecasted because the ultimate outcomes during the forecast period may be affected by events that were unforeseen, such as economic disruption and fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to the entity’s confidence level as to the outcomes being forecasted. That is, an entity ~~should~~is likely less confident in the ultimate outcome of events that will occur at the end of the forecast period as compared to the beginning. As a result, actual future economic conditions may not ~~use~~be an effective indicator of the quality of management’s forecasting process, including the length of ~~time~~the forecast period.

Heartland has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in Heartland's methodology. Because Heartland is applying the economic forecast adjustment qualitatively, the concept of "reversion to the historical mean" does not apply. For Heartland's January 1, 2020 calculation, a two-year reasonable and supportable forecast period was used. Because of the economic uncertainty associated with COVID-19, Heartland utilized a one-year reasonable and supportable forecast period for the calculation of the March 31, 2020, allowance for credit losses.

Allowance for Credit Losses on Unfunded Loan Commitments

Heartland estimates expected credit losses over the contractual term of the loan for the unfunded portion of the loan commitment that is not unconditionally cancellable by Heartland. Management uses an estimated average utilization rate to determine the exposure at default. The allowance for unfunded commitments is recorded in the Accrued Expenses and Other Liabilities section of the consolidated balance sheets.

Allowance for Credit Losses on Held to Maturity Debt Securities

Heartland measures expected credit losses on held to maturity debt securities on a collective basis based on security ~~has~~type. The estimate of expected credit losses considers historical credit information that is adjusted for current conditions and supportable forecasts. Heartland's held to maturity debt securities consist primarily of investment grade obligations of states and political subdivisions. The forecast and forecast period used in the calculation of allowance for credit losses on loans is used in calculating the allowance for credit losses on held to maturity debt securities, and Heartland utilizes a third-party to calculate the expected credit losses.

Allowance for Credit Losses on Available for Sale ("AFS") Debt Securities

ASU 2016-13 modifies the impairment model for AFS debt securities. AFS debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. The decline in fair value of an AFS debt security due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, 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 debt security ~~and recoveries or declines in~~is generally considered to not be related to credit when the 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.~~security is below the carrying value primarily due to changes in risk-free interest rates, there has not been

significant deterioration in the financial condition of the issuer, and Heartland ~~intends~~does not intend to ~~adopt~~sell nor does it believe it will be required to sell the ~~accounting standard in 2020, as required. Upon~~security before the recovery of its cost basis.

Heartland did not record an allowance for credit losses on AFS debt securities upon adoption of ASU 2016-13 a cumulative-effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective. Heartland has formed an internal committee to assess and implement the standard. Heartland has entered into an agreement with a third party vendor to evaluate potential methodologies and data and has started designing its financial models to estimate credit losses in accordance with the new standard. Further development, testing and evaluation of the models is required to determine the impact that the adoption of this standard will have on Heartland's results of operations, financial position and liquidity.or at March 31, 2020.

ASU 2017-04

In January 2017, the ~~FASB~~Financial Accounting Standards Board ("FASB") issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)." ~~This amendment is to~~ The amendments in this ASUsimplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Instead, an entity ~~will perform~~performs 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~~has the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. This ~~amendment~~ASU is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and ~~should be~~is applied prospectively. Early adoption iswas permitted, including in an interim period for impairment tests performed after January 1, 2017. Heartland ~~intends to adopt this~~adopted ASU 2017-04 in the ~~third~~first 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 adopted this ASU on January 1, 2019, as required, and the adoption did not have a material impact on its results of operations, financial position and 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 prepayable2018-13

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 on the balance sheet as of the date of adoption. Heartland adopted this ASU on January 1, 2019, as required, and as a result of the adoption, $148.0 million of held to maturity securities were reclassified to available for sale debt securities carried at fair value. See Note 3, "Securities," for further details. There was no impact to Heartland's results of operations, or liquidity as a result of the adoption of this amendment.

In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement." ~~This~~ ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities ~~will~~are 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~~are 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 iswas permitted. Heartland ~~intends to adopt~~adopted this ASU inon January 1, 2020, as required, and because ~~the~~ ASU 2018-13 only ~~revises~~revised disclosure requirements, the adoption of this ASU did not have a material impact on its results of operations, financial position and liquidity.

ASU 2018-16

In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting." In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate ("LIBOR") swap rate, and the Overnight Index Swap ("OIS") Rate based on the Fed Funds Effective Rate. When the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017, it introduced the Securities Industry and Financial Markets Association ("SIFMA") Municipal Swap Rate as the fourth permissible U.S. benchmark rate. ASU 2018-16 adds the OIS rate based on the Secured Overnight Financing Rate ("SOFR") as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. ASU 2018-16 became effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and the financial statement impact immediately upon adoption was immaterial. The future financial statement impact will depend on any new contracts entered into using new benchmark rates, as well as any existing contracts that are migrated from LIBOR to new benchmark interest rates. Heartland is currently evaluating the impact of the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates, including but not limited to the SOFR. Currently, Heartland has adjustable rate loans, several debt obligations and derivative instruments in place that reference LIBOR-based rates. The transition from LIBOR is expected to take place at the end of 2021, and management will continue to actively assess the related opportunities and risks involved in this transition.

ASU 2019-12

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes." ASU 2019-12 simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Heartland intends to adopt this ASU on January 1, 2021, as required, and the adoption is not expected to have a material impact on its results of operations, financial position and liquidity.

ASU 2020-02

In February 2020, the FASB issued ASU 2020-02, "Financial Instruments - Credit losses (Topic 326) and Leases (Topic 842)," which incorporates SEC Staff Accounting Bulletin ("SAB") 119 (updated from SAB 102) into the ASC by aligning SEC recommended policies and procedures with ASC 326. ASU 2020-02 was effective immediately for Heartland and had no significant impact on its results of operations, financial position and liquidity.

ASU 2020-03

In March 2020, the FASB issued ASU 2020-03, "Codification Improvements to Financial Instruments," which revised a wide variety of topics in the ASC with the intent to make the ASC easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-03 was effective immediately upon its release, and the adoption did not have a material impact on Heartland's results of operations, financial position and liquidity.

ASU 2020-04

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform," which provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For loan and lease agreements that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate, and the modifications would be considered "minor" with the result that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement, with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 also provides numerous optional expedients for derivative accounting. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a Topic or an Industry Subtopic within the ASC, ASU 2020-04 must be applied prospectively for all eligible contract modifications for that Topic or Industry Subtopic. Heartland anticipates that ASU 2020-04 will simplify any modifications executed between the selected start date and December 31, 2022 that are directly related to LIBOR transition by allowing prospective recognition of the continuation of the contract, rather than extinguishment of the old contract that would result in writing off unamortized fees/costs. Management will continue to actively assess the impacts of ASU 2020-04 and the related opportunities and risks involved in the LIBOR transition.

NOTE 2: ACQUISITIONS

~~Blue Valley Ban Corp.~~Pending Acquisition

AIM Bancshares, Inc.

On ~~January 16, 2019,~~February 11, 2020, Heartland entered into a definitive merger agreement to acquire AIM Bancshares, Inc., and its wholly-owned subsidiary, AimBank, headquartered in Levelland, Texas. Shareholders of AIM Bancshares will receive 207.0 shares of Heartland common stock and $685.00 of cash for each share of AIM Bancshares. The transaction value will change due to fluctuations in the price of Heartland common stock and is subject to certain potential adjustments as set forth in the merger agreement. Simultaneous with the closing of the transaction, AimBank will merge into Heartland's Texas-based subsidiary, First Bank & Trust, and the combined entity will operate as First Bank & Trust. As of March 31, 2020, AimBank had total assets of $1.82 billion, $1.16 billion of gross loans outstanding, and $1.58 billion of deposits. Because the merger agreement was signed on February 11, 2020, and the transaction is expected to close in the third quarter of 2020, the transaction has no impact on Heartland's first quarter 2020 consolidated financial statements.

Rockford Bank and Trust Company

On November 30, 2019, Heartland's Illinois Bank & Trust subsidiary completed its acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company, headquartered in Rockford, Illinois. Rockford Bank and Trust Company was a wholly-owned subsidiary of Moline, Illinois-based QCR Holdings, Inc. As of the closing date, Rockford Bank and Trust Company had, at fair value, total assets of $495.7 million, which included $354.0 million of gross loans held to maturity, and $430.3 million of deposits. The all-cash payment was approximately $46.6 million.

Blue Valley Ban Corp.,

On May 10, 2019, Heartland completed the acquisition of Blue Valley Ban Corp. ("BVBC") 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~~Based on Heartland's closing 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~~$44.78 per share on May 10, 2019, the aggregate consideration paid to BVBC 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 $711.6shareholders was $92.3 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~~paid by delivery of ~~3,350,664~~2,060,258 shares of Heartland common stock. On the closing date, in addition to this merger consideration,

Heartland provided ~~FBLB~~BVBC the funds necessary to repay outstanding debt of ~~$3.9~~$6.9 million, and Heartland assumed ~~$8.2~~$16.1 million of trust preferred securities at fair value. Immediately ~~after~~following 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~~Blue Valley was merged with and continues to operate under its current name and management team as Heartland's eleventh state-chartered bank. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of FBLB.

~~Signature Bancshares, Inc.~~

On February 23, 2018, Heartland completed the acquisition of Signature Bancshares, Inc., parent company of Signature Bank, headquartered in Minnetonka, Minnesota. Under the terms of the definitive merger agreement, Heartland acquired Signature Bancshares, Inc. in a transaction valued at approximately $61.4 million, of which $7.8 million was cash, and the remainder was settled by delivery of 1,000,843 shares of Heartland common stock. Simultaneous with the close, Signature Bank merged into Heartland's wholly-owned ~~Minnesota~~Kansas subsidiary, Morrill & Janes Bank &and Trust ~~subsidiary,~~Company, and the combined entity operates under the ~~Minnesota~~ Bank ~~& Trust brand name. The transaction included,~~of Blue Valley brand. As of the closing date, BVBC had, at fair value, total assets of ~~$427.1~~$766.2 million, ~~including $324.5 million of gross~~total loans held to maturity of $542.0 million, and total 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~~$617.1 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of ~~Signature Bancshares, Inc.~~BVBC.

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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, 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
March 31, 2019
March 31, 2020										March 31, 2020
U.S. government corporations and agencies	$	26,873	$	10	$	(115	)	$	26,768	U.S. government corporations and agencies	$	9,796	$	120	$	—	$	9,916
Mortgage and asset-backed securities	1,889,977		6,476		(25,055		)	1,871,398		Mortgage and asset-backed securities	2,574,131		25,835		(79,962)		2,520,004
Obligations of states and political subdivisions	481,452		6,146		(2,643		)	484,955		Obligations of states and political subdivisions	915,045		29,927		(4,531)		940,441

Total debt securities	2,398,302		12,632		(27,813		)	2,383,121		Total debt securities	3,498,972		55,882		(84,493)		3,470,361
Equity securities with a readily determinable fair value	17,339		—		—			17,339		Equity securities with a readily determinable fair value	18,260		—		—		18,260
Total	$	2,415,641	$	12,632	$	(27,813	)	$	2,400,460	Total	$	3,517,232	$	55,882	$	(84,493)	$	3,488,621
December 31, 2018
December 31, 2019										December 31, 2019
U.S. government corporations and agencies	$	32,075	$	3	$	(127	)	$	31,951	U.S. government corporations and agencies	$	9,844	$	49	$	—	$	9,893
Mortgage and asset-backed securities	2,061,358		3,740		(38,400		)	2,026,698		Mortgage and asset-backed securities	2,579,081		17,200		(19,003)		2,577,278
Obligations of states and political subdivisions	382,101		919		(8,046		)	374,974		Obligations of states and political subdivisions	704,073		12,516		(9,399)		707,190

Total debt securities	2,475,534		4,662		(46,573		)	2,433,623		Total debt securities	3,292,998		29,765		(28,402)		3,294,361
Equity securities with a readily determinable fair value	17,086		—		—			17,086		Equity securities with a readily determinable fair value	18,435		—		—		18,435
Total	$	2,492,620	$	4,662	$	(46,573	)	$	2,450,709	Total	$	3,311,433	$	29,765	$	(28,402)	$	3,312,796

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

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Allowance for Credit Losses
March 31, 2020

Obligations of states and political subdivisions	$	92,072	$	9,303	$	—	$	101,375	$	(197)
Total	$	92,072	$	9,303	$	—	$	101,375	$	(197)
December 31, 2019

Obligations of states and political subdivisions	$	91,324	$	9,160	$	—	$	100,484	$	—
Total	$	91,324	$	9,160	$	—	$	100,484	$	—

As of March 31, 2020, Heartland had $13.6 million of accrued interest receivable, which is included in other assets on the consolidated balance sheet. Heartland does not consider accrued interest receivable in the carrying amount of financial assets held at amortized cost basis or in the allowance for credit losses calculation.

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Estimated
Fair
Value
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 March 31, ~~2019,~~2020, 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.


	March 31, 2019					March 31, 2020
	Amortized Cost		Estimated Fair Value			Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	29,138	$	29,100	Due in 1 year or less	$	13,010	$	13,115
Due in 1 to 5 years	51,367		50,972		Due in 1 to 5 years	28,459		28,965
Due in 5 to 10 years	123,062		123,289		Due in 5 to 10 years	77,800		80,445
Due after 10 years	304,758		308,362		Due after 10 years	805,572		827,832
Total debt securities	508,325		511,723		Total debt securities	924,841		950,357
Mortgage and asset-backed securities	1,889,977		1,871,398		Mortgage and asset-backed securities	2,574,131		2,520,004
Equity securities with a readily determinable fair value	17,339		17,339		Equity securities with a readily determinable fair value	18,260		18,260
Total investment securities	$	2,415,641	$	2,400,460	Total investment securities	$	3,517,232	$	3,488,621

The amortized cost and estimated fair value of debt securities held to maturity at March 31, ~~2019,~~2020, 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.


	March 31, 2019					March 31, 2020
	Amortized Cost		Estimated Fair Value			Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	6	$	6	Due in 1 year or less	$	3,357	$	3,398
Due in 1 to 5 years	12,966		13,200		Due in 1 to 5 years	16,681		17,158
Due in 5 to 10 years	58,150		61,138		Due in 5 to 10 years	60,368		65,394
Due after 10 years	16,967		20,896		Due after 10 years	11,666		15,425
Total debt securities					Total debt securities	92,072		101,375
Allowance for credit losses					Allowance for credit losses	(197)		—
Total investment securities	$	88,089	$	95,240	Total investment securities	$	91,875	$	101,375

As of March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, securities with a ~~fair~~carrying value of ~~$455.6 million~~$1.02 billion and ~~$524.8~~$509.6 million, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.

Gross gains and losses realized related to the sales of securities carried at fair value for the three-month periods ended March 31, ~~2019~~2020 and ~~2018,~~2019, are summarized as follows, in thousands:


	Three Months Ended March 31,					Three Months Ended March 31,
	2019		2018			2020		2019
Proceeds from sales	$	434,154	$	392,246	Proceeds from sales	$	328,890��	$	434,154
Gross security gains	2,408		3,013		Gross security gains	2,904		2,408
Gross security losses	833		1,572		Gross security losses	1,246		833

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 March 31, ~~2019,~~2020, and December 31, ~~2018.~~2019. 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 March 31, ~~2018,~~2019, and December 31, ~~2017,~~2018, respectively. ~~Securities for~~


Debt securities available for sale	Less than 12 months									12 months or longer						Total
	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count
March 31, 2020
U.S. government corporations and agencies	$	—	$	—	—	$	—	$	—	—	$	—	$	—	—
Mortgage and asset-backed securities	1,255,628		(65,624)		129	168,360		(14,338)		44	1,423,988		(79,962)		173
Obligations of states and political subdivisions	202,240		(4,531)		29	—		—		—	202,240		(4,531)		29



Total temporarily impaired securities	$	1,457,868	$	(70,155)	158	$	168,360	$	(14,338)	44	$	1,626,228	$	(84,493)	202
December 31, 2019
U.S. government corporations and agencies	$	—	$	—	—	$	—	$	—	—	$	—	$	—	—
Mortgage and asset-backed securities	1,231,732		(14,189)		150	241,232		(4,814)		58	1,472,964		(19,003)		208
Obligations of states and political subdivisions	387,534		(9,399)		50	—		—		—	387,534		(9,399)		50



Total temporarily impaired securities	$	1,619,266	$	(23,588)	200	$	241,232	$	(4,814)	58	$	1,860,498	$	(28,402)	258

Securities held to maturity

Less than 12 months

12 months or longer

Total

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

Fair
Value

Unrealized
Losses

Count

March 31, 2020

Obligations of states and political subdivisions

—

Total temporarily impaired securities

—

December 31, 2019

Obligations of states and political subdivisions

—

Total temporarily impaired securities

—

On January 1, 2020, Heartland adopted the amendments within ASU 2016-13, which ~~Heartland has taken credit-related~~replaced the legacy GAAP other-than-temporary impairment ("OTTI") ~~write-downs~~model with a credit loss model. The credit loss model under ASC 326-30, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are ~~categorized as being "less than 12 months" or "12 months or longer" in~~recognized once securities become impaired. See Note 1, "Basis of Presentation," to the consolidated financial statements included herein for a ~~continuous loss position based on~~discussion of the ~~point in time that~~impact of the ~~fair value declined to below the cost basis and not the period~~adoption of ~~time since the credit-related OTTI write-down.~~

Debt securities available for sale Less than 12 months 12 months or longer Total

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
March 31, 2019
U.S. government corporations and agencies $ 18,742
$ (95 ) $ 4,541
$ (20 ) $ 23,283
$ (115 )
Mortgage and asset-backed securities 227,902
(2,075 ) 926,176
(22,980 ) 1,154,078
(25,055 )
Obligations of states and political subdivisions 26,161
(98 ) 132,515
(2,545 ) 158,676
(2,643 )
Total temporarily impaired securities $ 272,805
$ (2,268 ) $ 1,063,232
$ (25,545 ) $ 1,336,037
$ (27,813 )
December 31, 2018
U.S. government corporations and agencies $ 24,902
$ (83 ) $ 4,577
$ (44 ) $ 29,479
$ (127 )
Mortgage and asset-backed securities 733,826
(9,060 ) 805,089
(29,340 ) 1,538,915
(38,400 )
Obligations of states and political subdivisions 34,990
(390 ) 258,143
(7,656 ) 293,133
(8,046 )
Total temporarily impaired securities $ 793,718
$ (9,533 ) $ 1,067,809
$ (37,040 ) $ 1,861,527
$ (46,573 )

Securities held to maturity Less than 12 months 12 months or longer Total

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses

Fair
Value

Unrealized
Losses
March 31, 2019
Obligations of states and political subdivisions $ —
$ —
$ —
$ —
$ —
$ —
Total temporarily impaired securities $ —
$ —
$ —
$ —
$ —
$ —
December 31, 2018
Obligations of states and political subdivisions $ 10,802
$ (17 ) $ 19,508
$ (479 ) $ 30,310
$ (496 )
Total temporarily impaired securities $ 10,802
$ (17 ) $ 19,508
$ (479 ) $ 30,310
$ (496 )

ASU 2016-13. Heartland reviews the investment securities portfolio at the security level on a quarterly basis ~~to monitor its exposure to OTTI. A determination as to whether a security's decline in fair value is other-than-temporary~~for potential credit losses, which takes into consideration numerous factors, and the relative significance of any single factor can vary by security. Some factors Heartland 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, no credit losses were recognized on these ~~investments are not considered other-than-temporarily impaired.~~securities during the three months ended March 31, 2020.

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, no credit losses were recognized on these ~~investments are not considered other-than-temporarily impaired.~~securities during the three months ended March 31, 2020.

~~There were no gross realized gains or losses on the sale of securities carried at fair value or~~The credit loss model under ASC 326-30, applicable to held to maturity debt securities, ~~with OTTI write-downs~~requires the recognition of lifetime expected credit losses through an allowance account at the time when the security is purchased. The following table presents, in thousands, the activity in the allowance for credit losses for securities held to maturity by major security type for the ~~three-month periods~~quarter ended March 31, ~~2019,~~2020:


	Obligations of states and political subdivisions
Balance at December 31, 2019	$	—
Impact of ASU 2016-13 adoption	158
Provision for credit losses	39
Balance at March 31, 2020	$	197

The following table summarizes, in thousands, the carrying amount of Heartland's held to maturity debt securities by investment rating as of March 31, ~~2018, respectively.~~2020, which are updated quarterly and used to monitor the credit quality of the securities:

~~Other investments, at cost, include equity~~


Rating	Obligations of states and political subdivisions
AAA	$	3,060
AA, AA+, AA-	22,929
A+, A, A-	11,266
BBB	6,044
Not Rated	48,773
Total	$	92,072

Included in other securities without a readily determinable fair value. Equity securities without a readily determinable fair value totaled $17.3 million and $17.1 million at March 31, 2019, and December 31, 2018, respectively. At March 31, 2019, and December 31, 2018, other investments at cost includedwere shares of stock in ~~the~~each Federal Home Loan ~~Banks~~Bank (the ~~"FHLBs"~~"FHLB") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of ~~$15.4~~$20.9 million at March 31, 2020 and ~~$16.6~~$16.8 million ~~respectively.~~at December 31, 2019.

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 March 31, ~~2019,~~2020, did not consider the investments to be other than temporarily impaired.

NOTE 4: LOANS

Loans as of March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, were as follows, in thousands:

March 31, 2019 December 31, 2018
Loans receivable held to maturity:
Commercial $ 2,042,594
$ 2,020,231
Commercial real estate 3,702,457
3,711,481
Agricultural and agricultural real estate 544,805
565,408
Residential real estate 630,433
673,603
Consumer 412,573
440,158
Gross loans receivable held to maturity 7,332,862
7,410,881
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


	March 31, 2020		December 31, 2019
Loans receivable held to maturity:
Commercial and industrial	$	2,550,490	$	2,530,809
Owner occupied commercial real estate	1,431,038		1,472,704
Non-owner occupied commercial real estate	1,551,787		1,495,877
Real estate construction	1,069,700		1,027,081
Agricultural and agricultural real estate	550,107		565,837
Residential real estate	792,540		832,277
Consumer	428,574		443,332
Total loans receivable held to maturity	8,374,236		8,367,917






Allowance for credit losses	(97,350)		(70,395)
Loans receivable, net	$	8,276,886	$	8,297,522

On January 1, 2020, Heartland ~~has certain lending policies~~ adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," and ~~procedures~~results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in ~~place that are designed~~accordance with previously applicable GAAP. Additionally, Heartland reclassified its loan categories to ~~provide for an acceptable level~~align more closely with Federal Deposit Insurance Corporation ("FDIC") reporting requirements and classification codes, and all prior periods have been adjusted. As of ~~credit risk. The board~~March 31, 2020, Heartland had $31.8 million 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.

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.

~~Under Heartland’s credit practices, a loan~~accrued interest receivable, which 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 basedincluded in other assets on the ~~present value of expected future cash flows discounted at~~consolidated balance sheet. Heartland does not consider accrued interest receivable in 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.allowance for credit losses calculation.

The following table shows the balance in the allowance for ~~loan~~credit losses at March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, and the related loan balances, disaggregated on the basis of ~~impairment~~measurement methodology, in thousands. ~~Loans evaluated under ASC 310-10-35 include~~As of March 31, 2020, loans ~~on nonaccrual status~~individually assessed are collateral dependent and ~~troubled debt restructurings, which are individually evaluated for impairment, and~~in the process of foreclosure or no longer share the same risk characteristics of the other ~~impaired~~ loans ~~deemed to have similar risk characteristics.~~in the pool. 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 the quarter ended March~~losses. Loans individually evaluated were considered impaired at December 31, 2019.


														Allowance For Credit Losses										Gross Loans Receivable Held to Maturity
	Allowance For Loan Losses						Gross Loans Receivable Held to Maturity							Individually Evaluated for Credit Losses		Collectively Evaluated for Credit Losses		Total		Loans Individually Evaluated for Credit Losses		Loans Collectively Evaluated for Credit Losses		Total
	Ending Balance Under ASC 310-10-35		Ending Balance Under ASC 450-20		Total		Ending Balance Evaluated for Impairment Under ASC 310-10-35		Ending Balance Evaluated for Impairment Under ASC 450-20		Total
March 31, 2019
Commercial	$	6,301	$	17,520	$	23,821	$	24,498	$	2,018,096	$	2,042,594
Commercial real estate	353		26,434		26,787		18,150		3,684,307		3,702,457
March 31, 2020													March 31, 2020
Commercial and industrial													Commercial and industrial	$	3,695	$	28,768	$	32,463	$	19,449	$	2,531,041	$	2,550,490
Owner occupied commercial real estate													Owner occupied commercial real estate	1,054		9,282		10,336		6,943		1,424,095		1,431,038
Non-owner occupied commercial real estate													Non-owner occupied commercial real estate	29		8,292		8,321		1,402		1,550,385		1,551,787
Real estate construction													Real estate construction	51		22,900		22,951		200		1,069,500		1,069,700
Agricultural and agricultural real estate	1,099		4,499		5,598		20,475		524,330		544,805		Agricultural and agricultural real estate	986		3,811		4,797		17,450		532,657		550,107
Residential real estate	153		1,452		1,605		18,619		611,814		630,433		Residential real estate	413		8,312		8,725		2,910		789,630		792,540
Consumer	653		4,175		4,828		5,826		406,747		412,573		Consumer	114		9,643		9,757		485		428,089		428,574

Total	$	8,559	$	54,080	$	62,639	$	87,568	$	7,245,294	$	7,332,862	Total	$	6,342	$	91,008	$	97,350	$	48,839	$	8,325,397	$	8,374,236
December 31, 2018
Commercial	$	5,733	$	18,772	$	24,505	$	24,202	$	1,996,029	$	2,020,231
Commercial real estate	218		25,320		25,538		14,388		3,697,093		3,711,481
December 31, 2019													December 31, 2019
Commercial and industrial													Commercial and industrial	$	6,276	$	24,511	$	30,787	$	31,814	$	2,498,995	$	2,530,809
Owner occupied commercial real estate													Owner occupied commercial real estate	351		7,863		8,214		9,468		1,463,236		1,472,704
Non-owner occupied commercial real estate													Non-owner occupied commercial real estate	33		7,769		7,802		1,730		1,494,147		1,495,877
Real estate construction													Real estate construction	—		11,599		11,599		685		1,026,396		1,027,081
Agricultural and agricultural real estate	686		4,267		4,953		15,951		549,457		565,408		Agricultural and agricultural real estate	916		4,757		5,673		18,554		547,283		565,837
Residential real estate	168		1,617		1,785		20,251		653,352		673,603		Residential real estate	176		1,328		1,504		20,678		811,599		832,277
Consumer	749		4,433		5,182		7,004		433,154		440,158		Consumer	419		4,397		4,816		4,123		439,209		443,332

Total	$	7,554	$	54,409	$	61,963	$	81,796	$	7,329,085	$	7,410,881	Total	$	8,171	$	62,224	$	70,395	$	87,052	$	8,280,865	$	8,367,917

The following ~~table presents~~tables present the amortized cost basis for loans on nonaccrual ~~loans,~~status and accruing loans past due 90 days or more ~~and performing~~at March 31, 2020, in thousands:


	Nonaccrual Loans with an Allowance for Credit Losses		Nonaccrual Loans with No Allowance for Credit Losses		Total Nonaccrual Loans		Accruing Loans Past Due 90+ Days
March 31, 2020
Commercial and industrial	$	15,541	$	11,466	$	27,007	$	—
Owner occupied commercial real estate	5,675		3,761		9,436		—
Non-owner occupied commercial real estate	364		1,264		1,628		—
Real estate construction	1,062		17		1,079		—
Agricultural and agricultural real estate	7,225		14,485		21,710		—
Residential mortgage	11,541		2,061		13,602		—
Consumer	4,599		219		4,818		—
Total	$	46,007	$	33,273	$	79,280	$	—

Heartland recognized $0 of interest income on nonaccrual loans during the three months ended March 31, 2020.

Heartland had $6.5 million of troubled debt restructured loans at March 31, ~~2019,~~2020, of which $3.6 million were classified as nonaccrual and $2.9 million were accruing according to the restructured terms. Heartland had $7.6 million of troubled debt restructured loans at December 31, ~~2018, in thousands:~~2019, of which $3.8 million were classified as nonaccrual and $3.8 million were accruing according to the restructured terms.

March 31, 2019 December 31, 2018
Nonaccrual loans $ 72,670
$ 67,833
Nonaccrual troubled debt restructured loans 4,624
4,110
Total nonaccrual loans $ 77,294
$ 71,943
Accruing loans past due 90 days or more $ 1,706
$ 726
Performing troubled debt restructured loans $ 3,460
$ 4,026

The following tables provide information on troubled debt restructured loans that were modified during the three-month periods ended March 31, ~~2019,~~2020, and March 31, ~~2018,~~2019, dollars in thousands:


													Three Months Ended March 31,
	Three Months Ended March 31,												2020								2019
	2019						2018						Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment			Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial	—	$	—	$	—		—	$	—	$	—
Commercial real estate	—	—		—			—	—		—
Total commercial and commercial real estate	—	—		—			—	—		—
Commercial and industrial												Commercial and industrial	—	$	—	$	—	—	$	—	$	—
Owner occupied commercial real estate												Owner occupied commercial real estate	—	—		—		—	—		—
Non-owner occupied commercial real estate												Non-owner occupied commercial real estate	—	—		—		—	—		—
Real estate construction												Real estate construction	—	—		—		—	—		—
Agricultural and agricultural real estate	—	—		—			—	—		—		Agricultural and agricultural real estate	—	—		—		—	—		—
Residential real estate	1	36		42			5	877		752		Residential real estate	1	32		32		1	36		42
Consumer	—	—		—		��	—	—		—		Consumer	—	—		—		—	—		—
Total	1	$	36	$	42		5	$	877	$	752	Total	1	$	32	$	32	1	$	36	$	42

The pre-modification and post-modification recorded investment represents amounts as of the date of loan modification. The difference between the pre-modification investment and post-modification investment amounts on Heartland's residential real estate ~~trouble~~troubled debt restructured loans for the ~~three-months~~three months ended March 31, ~~2019,~~2020, is due to principal deferment collected from government guarantees and capitalized interest and escrow. At March 31, ~~2019,~~2020, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructured loan. The table above does not include any loan modification made under COVID-19 modification programs. Refer to the "Overview" section of Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for further information on these modifications.

The following table shows troubled debt restructured loans for which there was a payment default during the ~~three month~~three-month periods ended March 31, ~~2019,~~2020, and March 31, ~~2018,~~2019, that had been modified during the twelve-month period prior to default, in thousands:

With Payment Defaults During the
Three Months Ended
March 31,
2019 2018
Number of Loans Recorded Investment Number of Loans Recorded Investment
Commercial —
$ —

—

$ —
Commercial real estate —
—

—

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

—

—
Residential real estate 1
42

3

519
Consumer —
—

—

—
Total 1
$ 42
3
$ 519


	With Payment Defaults During the Three Months Ended March 31,
	2020				2019
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Commercial and industrial	—	$	—	—	$	—
Owner occupied commercial real estate	—	—		—	—
Non-owner occupied commercial real estate	—	—		—	—
Real estate construction	—	—		—	—
Agricultural and agricultural real estate	—	—		—	—
Residential real estate	1	241		1	42
Consumer	—	—		—	—
Total	1	$	241	1	$	42

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 and categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration.

The "nonpass" category consists of ~~special mention,~~watch, substandard, doubtful and loss loans. The ~~"special mention"~~"watch" rating is attached to loans where the borrower exhibits negative trends in financial circumstances due to borrower specific or systemic conditions that, if left uncorrected, threaten the borrower's capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. These credits are closely monitored for improvement or deterioration.

The "substandard" rating is assigned to loans that are inadequately protected by the current net worth and ~~paying~~repaying capacity of the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that Heartland 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 no0 loans classified as loss or doubtful as of March 31, ~~2019. Loans are placed on "nonaccrual" when management does not expect to collect payments of principal~~2020 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.~~December 31, 2019.

The following table ~~presents~~shows the risk category of loans by loan category and year of origination as of March 31, 2020, in thousands:


	Amortized Cost Basis of Term Loans by Year of Origination
	2020		2019		2018		2017		2016		2015 and Prior		Revolving		Total
Commercial and industrial
Pass	$	115,467	$	449,215	$	248,480	$	295,304	$	138,032	$	395,428	$	746,177	$	2,388,103
Watch	5,931		10,902		8,927		11,106		8,438		745		33,670		79,719
Substandard	89		12,855		13,769		16,599		13,411		11,242		14,703		82,668
Commercial and industrial total	$	121,487	$	472,972	$	271,176	$	323,009	$	159,881	$	407,415	$	794,550	$	2,550,490
Owner occupied commercial real estate
Pass	$	75,869	$	316,692	$	296,556	$	192,402	$	134,910	$	272,086	$	40,197	$	1,328,712
Watch	284		4,426		3,278		24,877		5,323		5,451		60		43,699
Substandard	1,322		11,678		18,301		6,093		4,044		13,828		3,361		58,627
Owner occupied commercial real estate total	$	77,475	$	332,796	$	318,135	$	223,372	$	144,277	$	291,365	$	43,618	$	1,431,038
Non-owner occupied commercial real estate
Pass	$	98,574	$	413,112	$	280,142	$	205,981	$	130,152	$	328,567	$	30,433	$	1,486,961
Watch	260		2,102		8,873		4,864		3,630		7,290		—		27,019
Substandard	19,435		3,345		1,621		3,831		847		8,728		—		37,807
Non-owner occupied commercial real estate total	$	118,269	$	418,559	$	290,636	$	214,676	$	134,629	$	344,585	$	30,433	$	1,551,787
Real estate construction
Pass	$	52,053	$	427,330	$	338,112	$	113,541	$	38,848	$	38,446	$	13,395	$	1,021,725
Watch	—		9,237		10,215		393		15,040		1,223		824		36,932
Substandard	5,762		1,995		921		1,496		175		694		—		11,043
Real estate construction total	$	57,815	$	438,562	$	349,248	$	115,430	$	54,063	$	40,363	$	14,219	$	1,069,700
Agricultural and agricultural real estate
Pass	$	32,744	$	109,410	$	60,433	$	44,231	$	21,196	$	47,884	$	126,461	$	442,359
Watch	770		9,672		7,048		1,376		2,451		5,702		10,788		37,807
Substandard	3,399		8,789		21,158		6,509		5,282		15,112		9,692		69,941
Agricultural and agricultural real estate total	$	36,913	$	127,871	$	88,639	$	52,116	$	28,929	$	68,698	$	146,941	$	550,107
Residential real estate
Pass	$	21,366	$	89,884	$	136,425	$	106,682	$	65,243	$	299,054	$	37,805	$	756,459
Watch	—		3,111		885		1,848		357		7,295		—		13,496
Substandard	—		313		1,102		398		1,791		17,878		1,103		22,585
Residential real estate total	$	21,366	$	93,308	$	138,412	$	108,928	$	67,391	$	324,227	$	38,908	$	792,540
Consumer
Pass	$	8,972	$	37,316	$	25,875	$	16,919	$	5,593	$	25,825	$	295,687	$	416,187
Watch	—		339		451		198		216		865		1,946		4,015
Substandard	249		646		2,582		786		990		2,472		647		8,372
Consumer Total	$	9,221	$	38,301	$	28,908	$	17,903	$	6,799	$	29,162	$	298,280	$	428,574

Total Pass	$	405,045	$	1,842,959	$	1,386,023	$	975,060	$	533,974	$	1,407,290	$	1,290,155	$	7,840,506
Total Watch	7,245		39,789		39,677		44,662		35,455		28,571		47,288		242,687
Total Substandard	30,256		39,621		59,454		35,712		26,540		69,954		29,506		291,043
Total Loans	$	442,546	$	1,922,369	$	1,485,154	$	1,055,434	$	595,969	$	1,505,815	$	1,366,949	$	8,374,236

The following table shows Heartland's loan portfolio by credit quality indicator ~~at March~~as of December 31, 2019, ~~and December 31, 2018,~~ in thousands:












	Pass		Nonpass		Total
Commercial and industrial	$	2,352,131	$	178,678	$	2,530,809
Owner occupied commercial real estate	1,369,290		103,414		1,472,704
Non-owner occupied commercial real estate	1,429,760		66,117		1,495,877
Real estate construction	984,736		42,345		1,027,081
Agricultural and agricultural real estate	454,272		111,565		565,837
Residential real estate	790,226		42,051		832,277
Consumer	430,733		12,599		443,332
Total loans receivable held to maturity	$	7,811,148	$	556,769	$	8,367,917

Pass Nonpass Total
March 31, 2019
Commercial $ 1,907,620
$ 134,974
$ 2,042,594
Commercial real estate 3,510,161
192,296
3,702,457
  Total commercial and commercial real estate 5,417,781
327,270
5,745,051
Agricultural and agricultural real estate 440,927
103,878
544,805
Residential real estate 603,647
26,786
630,433
Consumer 398,695
13,878
412,573
  Total gross loans receivable held to maturity $ 6,861,050
$ 471,812
$ 7,332,862
December 31, 2018
Commercial $ 1,880,579
$ 139,652
$ 2,020,231
Commercial real estate 3,524,344
187,137
3,711,481
  Total commercial and commercial real estate 5,404,923
326,789
5,731,712
Agricultural and agricultural real estate 471,642
93,766
565,408
Residential real estate 645,478
28,125
673,603
Consumer 425,451
14,707
440,158
  Total gross loans receivable held to maturity $ 6,947,494
$ 463,387
$ 7,410,881

The nonpass category in the table above is comprised of approximately ~~48% special mention~~60% watch loans and ~~52%~~40% substandard loans as of ~~March~~December 31, 2019. The percent of nonpass loans on nonaccrual status as of ~~March~~December 31, 2019, was ~~16%~~14%. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified.

As of March 31, 2020, Heartland had $2.2 million of loans secured by residential real estate property that were in the process of foreclosure.

The following table sets forth information regarding Heartland's accruing and nonaccrual loans at March 31, 2020, and December 31, ~~2018, the nonpass category~~2019, 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, 2018, was 16%.~~ thousands:


	Accruing Loans
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual		Total Loans
March 31, 2020
Commercial and industrial	$	5,346	$	500	$	—	$	5,846	$	2,517,637	$	27,007	$	2,550,490
Owner occupied commercial real estate	1,462		1,028		—		2,490		1,419,112		9,436		1,431,038
Non-owner occupied commercial real estate	2,736		7,154		—		9,890		1,540,269		1,628		1,551,787
Real estate construction	1,940		587		—		2,527		1,066,094		1,079		1,069,700
Agricultural and agricultural real estate	2,789		280		—		3,069		525,328		21,710		550,107
Residential real estate	5,637		147		—		5,784		773,154		13,602		792,540
Consumer	1,783		259		—		2,042		421,714		4,818		428,574
Total gross loans receivable held to maturity	$	21,693	$	9,955	$	—	$	31,648	$	8,263,308	$	79,280	$	8,374,236
December 31, 2019
Commercial and industrial	$	5,121	$	904	$	3,899	$	9,924	$	2,491,110	$	29,775	$	2,530,809
Owner occupied commercial real estate	3,487		690		—		4,177		1,461,589		6,938		1,472,704
Non-owner occupied commercial real estate	614		81		—		695		1,493,619		1,563		1,495,877
Real estate construction	5,689		72		—		5,761		1,020,153		1,167		1,027,081
Agricultural and agricultural real estate	3,734		79		26		3,839		541,455		20,543		565,837
Residential real estate	4,166		24		180		4,370		814,840		13,067		832,277
Consumer	2,511		651		—		3,162		436,675		3,495		443,332
Total gross loans receivable held to maturity	$	25,322	$	2,501	$	4,105	$	31,928	$	8,259,441	$	76,548	$	8,367,917

Loans delinquent 30 to 89 days as a percent of total loans were ~~0.47%~~0.38% at March 31, ~~2019,~~2020, compared to ~~0.21%~~0.33% at December 31, ~~2018.~~2019. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified. All ~~impaired~~individually assessed loans are reviewed at least annually.

As of ~~March~~December 31, 2019, ~~Heartland had $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 March 31, 2019, and December 31, 2018, in thousands:~~

Accruing Loans

30-59 Days
Past Due
60-89 Days
Past Due
90 Days or
More
Past Due

Total
Past Due
Current Nonaccrual Total Loans
March 31, 2019
Commercial $ 8,253
$ 2,859
$ 325
$ 11,437
$ 2,006,358
$ 24,799
$ 2,042,594
Commercial real estate 5,870
4,942
1,264
12,076
3,674,676
15,705
3,702,457
Total commercial and commercial real estate 14,123
7,801
1,589
23,513
5,681,034
40,504
5,745,051
Agricultural and agricultural real estate 2,179
800
31
3,010
521,621
20,174
544,805
Residential real estate 4,224
110
—
4,334
613,667
12,432
630,433
Consumer 4,835
536
86
5,457
402,932
4,184
412,573
Total gross loans receivable held to maturity $ 25,361
$ 9,247
$ 1,706
$ 36,314
$ 7,219,254
$ 77,294
$ 7,332,862
December 31, 2018
Commercial $ 2,574
$ 205
$ —
$ 2,779
$ 1,991,525
$ 25,927
$ 2,020,231
Commercial real estate 4,819
—
726
5,545
3,694,259
11,677
3,711,481
Total commercial and commercial real estate 7,393
205
726
8,324
5,685,784
37,604
5,731,712
Agricultural and agricultural real estate 99
—
—
99
549,376
15,933
565,408
Residential real estate 5,147
49
—
5,196
655,329
13,078
673,603
Consumer 2,724
307
—
3,031
431,799
5,328
440,158
Total gross loans receivable held to maturity $ 15,363
$ 561
$ 726
$ 16,650
$ 7,322,288
$ 71,943
$ 7,410,881

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

Unpaid
Principal
Balance

Loan
Balance

Related
Allowance
Recorded

Year-
to-
Date
Avg.
Loan
Balance

Year-
to-
Date
Interest
Income
Recognized
March 31, 2019
Impaired loans with a related allowance:
Commercial $ 12,107
$ 12,096
$ 6,301
$ 12,046
$ 7
Commercial real estate 1,421
1,421
353
1,201
6
Total commercial and commercial real estate 13,528
13,517
6,654
13,247
13
Agricultural and agricultural real estate 3,280
3,280
1,099
2,225
1
Residential real estate 1,253
1,253
153
1,012
—
Consumer 1,272
1,270
653
1,275
6
Total loans held to maturity $ 19,333
$ 19,320
$ 8,559
$ 17,759
$ 20
Impaired loans without a related allowance:
Commercial $ 14,467
$ 12,402
$ —
$ 11,928
$ 330
Commercial real estate 16,809
16,729
—
14,008
54
Total commercial and commercial real estate 31,276
29,131
—
25,936
384
Agricultural and agricultural real estate 19,538
17,195
—
14,373
16
Residential real estate 17,370
17,366
—
17,933
76
Consumer 4,620
4,556
—
4,820
25
Total loans held to maturity $ 72,804
$ 68,248
$ —
$ 63,062
$ 501
Total impaired loans held to maturity:
Commercial $ 26,574
$ 24,498
$ 6,301
$ 23,974
$ 337
Commercial real estate 18,230
18,150
353
15,209
60
Total commercial and commercial real estate 44,804
42,648
6,654
39,183
397
Agricultural and agricultural real estate 22,818
20,475
1,099
16,598
17
Residential real estate 18,623
18,619
153
18,945
76
Consumer 5,892
5,826
653
6,095
31
Total impaired loans held to maturity $ 92,137
$ 87,568
$ 8,559
$ 80,821
$ 521


	Unpaid Principal Balance		Loan Balance		Related Allowance Recorded		Year-to- Date Avg. Loan Balance		Year-to- Date Interest Income Recognized
December 31, 2019
Impaired loans with a related allowance:
Commercial	$	11,727	$	11,710	$	6,276	$	11,757	$	6
Owner occupied commercial real estate	712		712		352		1,435		22
Non-owner occupied commercial real estate	138		138		33		—		—
Real estate construction	17		17		—		—		—
Agricultural and agricultural real estate	2,751		2,237		916		2,739		—
Residential real estate	1,378		1,378		176		1,116		—
Consumer	998		997		419		1,170		11
Total loans held to maturity	$	17,721	$	17,189	$	8,172	$	18,217	$	39
Impaired loans without a related allowance:
Commercial	$	22,525	$	20,104	$	—	$	19,141	$	782
Owner occupied commercial real estate	8,756		8,756		—		8,337		341
Non-owner occupied commercial real estate	1,592		1,592		—		1,515		62
Real estate construction	668		668		—		636		26
Agricultural and agricultural real estate	19,113		16,317		—		16,837		60
Residential real estate	19,382		19,300		—		17,073		280
Consumer	3,135		3,126		—		4,182		45
Total loans held to maturity	$	75,171	$	69,863	$	—	$	67,721	$	1,596
Total impaired loans held to maturity:
Commercial	$	34,252	$	31,814	$	6,276	$	30,898	$	788
Owner occupied commercial real estate	9,468		9,468		352		9,772		363
Non-owner occupied commercial real estate	1,730		1,730		33		1,515		62
Real estate construction	685		685		—		636		26
Agricultural and agricultural real estate	21,864		18,554		916		19,576		60
Residential real estate	20,760		20,678		176		18,189		280
Consumer	4,133		4,123		419		5,352		56
Total impaired loans held to maturity	$	92,892	$	87,052	$	8,172	$	85,938	$	1,635

Unpaid
Principal
Balance

Loan
Balance

Related
Allowance
Recorded

Year-to-
Date
Avg.
Loan
Balance

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

On ~~May 18, 2018, Heartland~~November 30, 2019, Heartland's Illinois Bank & Trust subsidiary completed the acquisition of ~~First Bank Lubbock Bancshares, Inc., parent company~~substantially all of ~~First~~the assets and substantially all of the deposits and certain other liabilities of Rockford Bank & Trust Company, headquartered in ~~Lubbock, Texas.~~Rockford, Illinois. As of ~~May 18, 2018, First~~November 30, 2019, Rockford Bank ~~Lubbock Bancshares, Inc.~~& Trust had gross loans of ~~$696.9~~$366.6 million, and the estimated fair value of the loans acquired was ~~$681.1~~$354.0 million.

On ~~February 23, 2018,~~May 10, 2019, Heartland ~~acquired Signature Bancshares, Inc.~~completed the acquisition of Blue Valley Ban Corp., parent company of ~~Signature~~ Bank ~~based~~of Blue Valley, headquartered in ~~Minnetonka, Minnesota.~~Overland Park, Kansas. As of ~~February 23, 2018, Signature Bancshares, Inc.~~May 10, 2019, Blue Valley Ban Corp. had gross loans of ~~$335.1~~$558.2 million, and the estimated fair value of the loans acquired was ~~$324.5~~$542.0 million.

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

NOTE 5: ALLOWANCE FOR CREDIT LOSSES

At March 31, 2019, and December 31, 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:

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
Commercial $ 3,804
$ 197,958
$ 201,762
$ 3,801
$ 243,693
$ 247,494
Commercial real estate 156
986,926
987,082
158
1,098,171
1,098,329
Agricultural and agricultural real estate —
14,942
14,942
—
27,115
27,115
Residential real estate 227
168,167
168,394
231
184,389
184,620
Consumer loans —
63,090
63,090
—
75,773
75,773
Total covered loans $ 4,187
$ 1,431,083
$ 1,435,270
$ 4,190
$ 1,629,141
$ 1,633,331

Changes in ~~accretable yield~~the allowance for credit losses on ~~acquired~~ loans ~~with evidence of credit deterioration at the date of acquisition~~ for the ~~three-month~~three month periods ended March 31, ~~2019,~~2020, and March 31, ~~2018,~~2019, were as follows, in thousands:









	Commercial and Industrial		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Mortgage		Consumer		Total
Balance at December 31, 2019	$	30,787	$	8,214	$	7,802	$	11,599	$	5,673	$	1,504	$	4,816	$	70,395
Impact of ASU 2016-13 adoption	3,147		(407)		(2,834)		3,413		(380)		4,817		4,315		12,071
Charge-offs	(5,596)				—		(21)		(253)		(79)		(352)		(6,301)
Recoveries	352		1		—		5		826		3		133		1,320
Provision	3,773		2,528		3,353		7,955		(1,069)		2,480		845		19,865
Balance at March 31, 2020	$	32,463	$	10,336	$	8,321	$	22,951	$	4,797	$	8,725	$	9,757	$	97,350

Three Months Ended
March 31,
2019 2018
Balance at beginning of period $ 227
$ 57
Original yield discount, net, at date of acquisition —
(56 )
Accretion (257 ) (199 )
Reclassification from nonaccretable difference⁽¹⁾
218
198
Balance at period end $ 188
$ —

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









	Commercial and Industrial		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Mortgage		Consumer		Total
Balance at December 31, 2018	$	26,306	$	6,525	$	7,430	$	9,679	$	4,914	$	1,813	$	5,296	$	61,963
Charge-offs	(980)		(23)		—		(54)		(379)		(140)		(374)		(1,950)
Recoveries	308		89		40		4		328		52		170		991
Provision	1,616		(261)		(344)		365		655		(102)		(294)		1,635
Balance at March 31, 2019	$	27,250	$	6,330	$	7,126	$	9,994	$	5,518	$	1,623	$	4,798	$	62,639

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 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 March 31, 2019, there was $64,000 of allowance recorded and $57,000 of allowance recorded at December 31, 2018, related to these ASC 310-30 loans. Provision expense of $7,000 and $0 was recorded for the three-month periods ended March 31, 2019, and 2018, respectively.

For loans acquired since January 2015, the preliminary estimate on the acquisition dates of the contractually required payments receivable for all nonimpaired loans acquired was $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~~credit losses on unfunded commitments for the ~~three-month periods~~three months ended March 31, ~~2019, and March 31, 2018,~~2020, were as ~~follows, in thousands:~~follows:


Balance at December 31, 2019	$	248
Impact of ASU 2016-13 adoption	13,604
Provision	1,616
Balance at March 31, 2020	$	15,468

Commercial
Commercial
Real Estate

Agricultural and Agricultural
Real Estate

Residential
Real Estate
Consumer Total
Balance at December 31, 2018 $ 24,505
$ 25,538
$ 4,953
$ 1,785
$ 5,182
$ 61,963
Charge-offs (644 ) (39 ) (379 ) (163 ) (725 ) (1,950 )
Recoveries 175
151
330
13
322
991
Provision (215 ) 1,137
694
(30 ) 49
1,635
Balance at March 31, 2019 $ 23,821
$ 26,787
$ 5,598
$ 1,605
$ 4,828
$ 62,639

Prior to the adoption of ASU 2016-13, the allowance for credit losses on unfunded commitments was considered immaterial.

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 (794 ) (125 ) —
(16 ) (1,289 ) (2,224 )
Recoveries 104
448
14
75
290
931
Provision 1,987
1,196
444
(142 ) 778
4,263
Balance at March 31, 2018 $ 19,395
$ 23,469
$ 4,716
$ 2,141
$ 8,935
$ 58,656

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

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

Heartland had goodwill of ~~$391.7~~$446.3 million at both March 31, ~~2019,~~2020, and December 31, ~~2018.~~2019. Heartland conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. There was no0 goodwill impairment as of the most recent assessment. Due to the COVID-19 pandemic and economic conditions, an interim qualitative assessment of goodwill was performed during the first quarter of 2020, and no goodwill impairment was identified.

Heartland recorded ~~$121.4~~$19.2 million of goodwill and ~~$13.9~~$1.8 million of core deposit intangibles in connection with the acquisition of ~~First~~substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank ~~Lubbock Bancshares, Inc., parent company of First Bank &~~and Trust Company, headquartered in ~~Lubbock, Texas~~Rockford, Illinois on ~~May 18, 2018.~~November 30, 2019.

Heartland recorded ~~$33.7~~$35.4 million of goodwill and ~~$7.7~~$11.4 million of core deposit intangibles in connection with the acquisition of ~~Signature Bancshares, Inc.~~Blue Valley Ban Corp., parent company of ~~Signature~~ Bank of Blue Valley, headquartered in ~~Minnetonka, Minnesota~~Overland Park, Kansas on ~~February 23, 2018.~~May 10, 2019.

The core deposit intangibles recorded with the ~~First Bank Lubbock Bancshares, Inc. and Signature Bancshares, Inc. acquisitions are~~Blue Valley Ban Corp. acquisition is not deductible for tax purposes and ~~are~~is expected to be amortized over a period of 10 years on an accelerated basis.

Goodwill related to the ~~First Bank Lubbock Bancshares, Inc. and Signature Bancshares, Inc. acquisitions~~Blue Valley Ban Corp. acquisition resulted from expected operational synergies, increased market presence, cross-selling opportunities, and expanded business lines and is not deductible for tax purposes.

The core deposit intangibles and goodwill recorded with the Rockford Bank and Trust Company acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities, is deductible for tax purposes and the core deposit intangibles are expected to be amortized over a period of 10 years on an accelerated basis.

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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, are presented in the table below, in thousands:


	March 31, 2019						December 31, 2018							March 31, 2020										December 31, 2019
	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:													Amortizing intangible assets:
Core deposit intangibles	$	83,640	$	39,236	$	44,404	$	83,640	$	36,403	$	47,237	Core deposit intangibles	$	96,821	$	51,309	$	45,512	$	96,821	$	48,338	$	48,483
Customer relationship intangibles	1,177		944		233		1,177		935		242		Customer relationship intangibles	1,177		982		195		1,177		972		205
Mortgage servicing rights	41,473		14,001		27,472		42,228		12,865		29,363		Mortgage servicing rights	8,262		4,137		4,125		7,886		2,265		5,621
Commercial servicing rights	6,902		5,406		1,496		6,834		5,125		1,709		Commercial servicing rights	6,990		5,895		1,095		6,952		5,837		1,115
Total	$	133,192	$	59,587	$	73,605	$	133,879	$	55,328	$	78,551	Total	$	113,250	$	62,323	$	50,927	$	112,836	$	57,412	$	55,424

On April ~~26,~~30, 2019, Dubuque Bank and Trust Company ~~signed an agreement to sell~~closed on the sale of substantially all its servicing rights portfolio, which contained loans with an unpaid principal balance of $3.31 billion to PNC Bank, N.A., 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~~$20.6 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of ~~April~~June 30, 2019. Cash of approximately $36.6 million was received during 2019, ~~when~~and Heartland recorded a gain on the ~~transaction closed.~~sale of this portfolio of approximately $14.5 million. In the agreement, which included customary terms and conditions, Dubuque Bank and Trust Company provided interim servicing of the loans until the transfer date, which was August 1, 2019.

The following table shows the estimated future amortization expense for amortizable intangible assets, ~~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
Nine months ending December 31, 2020	$	7,606	$	27	$	920	$	223	$	8,776
Year ending December 31,
2021	8,691		35		801		268		9,795
2022	7,102		34		687		239		8,062
2023	6,201		34		572		161		6,968
2024	5,108		33		458		94		5,693
2025	4,265		32		344		110		4,751
Thereafter	6,539		—		343		—		6,882
Total	$	45,512	$	195	$	4,125	$	1,095	$	50,927

Core
Deposit
Intangibles

Customer
Relationship
Intangibles

Mortgage
Servicing
Rights

Commercial
Servicing
Rights

Total
Nine months ending December 31, 2019 $ 6,949
$ 28
$ 736
$ 310
$ 8,023
Year ending December 31,
2020 8,230
36
1,431
331
10,028
2021 7,036
35
1,226
293
8,590
2022 5,634
35
1,022
246
6,937
2023 4,933
34
818
159
5,944
2024 4,008
33
613
86
4,740
Thereafter 7,614
32
613
71
8,330
Total $ 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 March 31, ~~2019.~~2020. 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 ~~$692.3~~$618.9 million at March 31, ~~2019~~2020 compared to ~~$648.9~~$616.7 million at December 31, ~~2018. Mortgage loans serviced for others at Dubuque Bank and Trust Company were $3.35 billion and $3.45 billion at March 31, 2019 and December 31, 2018, respectively.~~2019. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio ~~for First Bank & Trust~~ were approximately ~~$8.7~~$8.2 million at March 31, ~~2019~~2020 and ~~$5.9~~$5.0 million at December 31, 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. 2019.

At March 31, ~~2019,~~2020, the fair value of ~~First Bank and Trust's~~the mortgage servicing rights was estimated at ~~$6.5~~$4.1 million compared to ~~$7.1~~$5.6 million at December 31, ~~2018. The fair value of Dubuque Bank and Trust Company's mortgage servicing rights at March 31, 2019 was estimated at $37.1 million compared to $41.5 million at December 31, 2018.~~

2019. 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 of the mortgage servicing rights are considered in the calculation. The average constant prepayment rate was 17.50% for the ~~First Bank & Trust valuation was 12.00% as of~~ March 31, ~~2019~~2020 valuation compared to ~~10.30% at~~14.20% for the December 31, ~~2018.~~2019 valuation. The discount rate ~~for the First Bank & Trust valuation~~ was 9.03% atfor both March 31, ~~2019~~2020 and December 31, ~~2018.~~2019 valuations. The average capitalization rate for ~~First Bank & Trust during~~ the first three months of ~~2019~~2020 ranged from 92 95 to 98116 basis points compared to a range of 93 to 117 basis points ~~since acquisition on May 18, 2018.~~ for the first three months of 2019. Fees collected for the servicing of mortgage loans for others were $409,000 and $427,000 for the ~~three-months~~quarters ended March 31, ~~2019.~~2020 and March 31, 2019, respectively.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the three months ended March 31, ~~2019,~~2020, and March 31, ~~2018:~~

2019:

2019 2018
Balance at January 1, $ 29,363
$ 23,248
Originations 198
1,162
Amortization (1,500 ) (1,245 )
Valuation adjustment (589 ) —
Balance at period end $ 27,472
$ 23,165
Mortgage servicing rights, net to servicing portfolio 0.68 % 0.72 %


	2020			2019
Balance at January 1,	$	5,621		$	29,363
Originations	376			198
Amortization	(307)			(1,500)



Valuation allowance	(1,565)			(589)
Balance at period end	$	4,125		$	27,472

Mortgage servicing rights, net to servicing portfolio	0.67		%	0.68		%

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 ~~$95.0~~$77.6 million at March 31, ~~2019~~2020 and ~~$107.4~~$82.1 million at December 31, ~~2018.~~2019. 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 ~~$380,000~~$118,000 and ~~$420,000~~$380,000 for the ~~three-months~~quarter ended March 31, ~~2019,~~2020 and March 31, ~~2018,~~2019, 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 ~~11.37%~~15.77% to ~~14.44%~~19.85% as of March 31, ~~2019,~~2020, compared to ~~11.01%~~14.25% to ~~13.50%~~18.08% as of December 31, ~~2018.~~2019. The discount rate range was ~~12.71%~~11.02% to ~~16.13%~~14.37% for the March 31, ~~2019,~~2020, valuations compared to ~~13.44%~~10.65% to ~~16.96%~~13.94% for the December 31, ~~2018,~~2019, valuations. The capitalization rate for both ~~2019~~2020 and ~~2018~~2019 ranged from 310 to 445 basis points. The total fair value of Heartland's commercial servicing rights was estimated at ~~$1.9~~$1.4 million as of March 31, ~~2019,~~2020, and ~~$2.1~~$1.6 million as of December 31, ~~2018.~~2019.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the three-months ended March 31, ~~2019,~~2020, and March 31, ~~2018:~~2019:


	2020			2019
Balance at January 1,	$	1,115		$	1,709

Originations	38			68
Amortization	(58)			(281)

Balance at period end	$	1,095		$	1,496
Fair value of commercial servicing rights	$	1,407		$	1,926
Commercial servicing rights, net to servicing portfolio	1.41		%	1.58		%

2019 2018
Balance at January 1, $ 1,709
$ 2,609
Originations 68
21
Amortization (281 ) (322 )
Valuation allowance on commercial servicing rights —
(2 )
Balance at period end $ 1,496
$ 2,306
Fair value of commercial servicing rights $ 1,926
$ 2,781
Commercial servicing rights, net to servicing portfolio 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 March 31, ~~2019,~~2020, a ~~$589,000~~$524,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and ~~at December 31, 2018,~~ a ~~$58,000~~$2.0 million valuation allowance was required on the mortgage servicing ~~rights.~~rights 30-year tranche. At December 31, 2019, a $114,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $797,000 valuation allowance was required on the mortgage servicing rights 30-year tranche. At both March 31, 2020 and December 31, 2019, no0 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, 2018, no valuation allowance was required on commercial servicing rights with a term less than 20 years and no0 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 March 31, ~~2019,~~2020, and December 31, ~~2018:~~2019:


March 31, 2020													March 31, 2020	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	$	1,982	$	4,648	$	—	$	19,031	$	32,420	$	—
First Bank & Trust	1,644		1,519		125		5,462		4,940		522		First Bank & Trust	1,478		954		524		5,181		3,171		2,010
Total	$	3,626	$	6,167	$	125	$	24,493	$	37,360	$	522	Total	$	1,478	$	954	$	524	$	5,181	$	3,171	$	2,010
December 31, 2018
Dubuque Bank and Trust Company	$	2,195	$	4,636	$	—	$	20,025	$	36,901	$	—
December 31, 2019													December 31, 2019

First Bank & Trust	1,685		1,665		20		5,516		5,478		38		First Bank & Trust	1,482		1,368		114		5,050		4,253		797
Total	$	3,880	$	6,301	$	20	$	25,541	$	42,379	$	38	Total	$	1,482	$	1,368	$	114	$	5,050	$	4,253	$	797

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 March 31, ~~2019,~~2020, and December 31, ~~2018:~~2019:


March 31, 2020	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

Premier Valley Bank	1		12		—		125		145		—
Wisconsin Bank & Trust	132		237		—		837		1,013		—
Total	$	133	$	249	$	—	$	962	$	1,158	$	—
December 31, 2019

Premier Valley Bank	1		13		—		135		161		—
Wisconsin Bank & Trust	128		272		—		851		1,148		—
Total	$	129	$	285	$	—	$	986	$	1,309	$	—

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 $ —
$ —
$ —
$ —
$ —
$ —
Premier Valley Bank 37
65
—
168
178
—
Wisconsin Bank & Trust 212
387
—
1,079
1,296
—
Total $ 249
$ 452
$ —
$ 1,247
$ 1,474
$ —
December 31, 2018
Citywide Banks $ 1
$ 6
$ —
$ 18
$ 20
$ —
Premier Valley Bank 45
74
—
178
184
—
Wisconsin Bank & Trust 249
411
—
1,218
1,439
—
Total $ 295
$ 491
$ —
$ 1,414
$ 1,643
$ —

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 ~~$540,000~~$3.9 million of cash as collateral at March 31, ~~2019, and no cash~~2020 compared to $1.9 million at December 31, ~~2018.~~2019. At both March 31, 2020 and December 31, 2019, no0 collateral was required to be pledged by Heartland's ~~counterparties, compared to $770,000 collateral at December 31, 2018.~~counterparties.

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 three months ended March 31, ~~2019,~~2020, 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 ~~$165,000.~~$183,000. For the next twelve months, Heartland estimates that cash ~~receipts~~payments and reclassification from accumulated other comprehensive income to ~~reduce~~ interest expense will total ~~$660,000.~~$733,000.

Heartland entered into ~~six~~6 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~~6 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. During the first quarter of 2020, the interest rate swap transaction associated with Heartland Financial Statutory Trust VI, totaling $20.0 million, matured and the fixed rate debt has been converted to a variable rate subordinated debenture.

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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


													Notional Amount		Fair Value		Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity
March 31, 2020												March 31, 2020

Interest rate swap												Interest rate swap	$	25,000	$	(435)	Other liabilities	0.843	%	2.255	%	03/17/2021

	Notional Amount		Fair Value			Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity
March 31, 2019

Interest rate swap												Interest rate swap	24,667		(216)		Other liabilities	3.363		3.674		05/10/2021
Interest rate swap												Interest rate swap	25,000		(2,587)		Other liabilities	3.429		5.425		07/24/2028
Interest rate swap												Interest rate swap	20,000		(1,648)		Other liabilities	0.741		2.390		06/15/2024
Interest rate swap												Interest rate swap	20,000		(1,502)		Other liabilities	1.580		2.352		03/01/2024
Interest rate swap												Interest rate swap	6,000		(106)		Other liabilities	0.741		1.866		06/15/2021
Interest rate swap												Interest rate swap	3,000		(51)		Other liabilities	1.219		1.878		06/30/2021
December 31, 2019												December 31, 2019
Interest rate swap	$	25,000	$	50		Other assets	2.615	%	2.255	%	03/17/2021	Interest rate swap	$	25,000	$	(167)	Other liabilities	1.900	%	2.255	%	03/17/2021
Interest rate swap	20,000		(153		)	Other liabilities	2.795		3.355		01/07/2020	Interest rate swap	20,000		(67)		Other liabilities	2.043		3.355		01/07/2020
Interest rate swap	28,667		563			Other assets	4.993		3.674		05/10/2021	Interest rate swap	25,667		135		Other assets	4.215		3.674		05/10/2021
Interest rate swap	28,000		(897		)	Other liabilities	4.986		5.425		07/24/2028	Interest rate swap	25,750		(1,384)		Other liabilities	4.280		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		(614)		Other liabilities	1.894		2.390		06/15/2024
Interest rate swap	20,000		(99		)	Other liabilities	2.626		2.352		03/01/2024	Interest rate swap	20,000		(561)		Other liabilities	1.907		2.352		03/01/2024
Interest rate swap	6,000		62			Other assets	2.611		1.866		06/15/2021	Interest rate swap	6,000		(15)		Other liabilities	1.894		1.866		06/15/2021
Interest rate swap	3,000		35			Other assets	2.787		1.878		06/30/2021	Interest rate swap	3,000		(9)		Other liabilities	1.831		1.878		06/30/2021
December 31, 2018
Interest rate swap	$	25,000	$	191		Other assets	2.788	%	2.255	%	03/17/2021
Interest rate swap	20,000		(177		)	Other liabilities	2.408		3.355		01/07/2020
Interest rate swap	10,000		29			Other assets	2.822		1.674		03/26/2019
Interest rate swap	10,000		28			Other assets	2.788		1.658		03/18/2019
Interest rate swap	29,667		763			Other assets	4.887		3.674		05/10/2021
Interest rate swap	28,750		(572		)	Other liabilities	5.004		5.425		07/24/2028
Interest rate swap	20,000		157			Other assets	2.788		2.390		06/15/2024
Interest rate swap	20,000		185			Other assets	2.738		2.352		03/01/2024
Interest rate swap	6,000		105			Other Assets	2.788		1.866		06/15/2021
Interest rate swap	3,000		51			Other assets	2.787		1.878		06/30/2021

The table below identifies the gains and losses recognized on Heartland's derivative instruments designated as cash flow hedges for the three-month periods ended March 31, ~~2019,~~2020, and March 31, ~~2018,~~2019, 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 March 31, 2020											Three Months Ended March 31, 2020

Interest rate swaps											Interest rate swaps	$	(3,863)	Interest expense	$	183	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											Three Months Ended March 31, 2019

Interest rate swaps	$	(1,340	)	Interest expense	$	(165	)	Other income	$	—	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~~$3.9 million and ~~$2.5~~$3.4 million of cash as collateral for these fair value hedges at March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, respectively.

The table below identifies the notional amount, fair value and balance sheet category of Heartland's fair value hedges at March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


								Notional Amount	Fair Value		Balance Sheet Category
March 31, 2020							March 31, 2020
	Notional Amount		Fair Value			Balance Sheet Category
March 31, 2019
Fair value hedges	$	670	$	5		Other assets	Fair value hedges	21,149	(2,930)		Other liabilities
December 31, 2019							December 31, 2019

Fair value hedges	28,749		(900		)	Other liabilities	Fair value hedges	21,250	$	(1,253)	Other liabilities
December 31, 2018
Fair value hedges	$	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-month~~three month periods ended March 31, ~~2019,~~2020, and March 31, ~~2018,~~2019, in thousands:

Amount of Gain (Loss) Income Statement Category
Three Months Ended March 31, 2019
Fair value hedges $ (630 ) Interest income
Three Months Ended March 31, 2018
Fair value hedges $ 894
Interest income

Amount of Gain (Loss)

Income Statement Category

Three Months Ended March 31, 2020

Fair value hedges

(1,677)

Interest income

Three Months Ended March 31, 2019

Fair value hedges

894

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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


								Notional Amount		Fair Value		Balance Sheet Category
March 31, 2020							March 31, 2020
Embedded derivatives							Embedded derivatives	$	9,522	$	826	Other assets
	Notional Amount		Fair Value			Balance Sheet Category
March 31, 2019
December 31, 2019							December 31, 2019
Embedded derivatives	$	2,216	$	17		Other assets	Embedded derivatives	$	9,627	$	465	Other assets
Embedded derivatives	$	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-month periods ended March 31, ~~2019,~~2020, and March 31, ~~2018,~~2019, in thousands:

Amount of Gain (Loss)

Income Statement Category

Three Months Ended March 31, 2020

Embedded derivatives

361

Other noninterest income

Three Months Ended March 31, 2019

Embedded derivatives

889

Other noninterest income

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 ~~$7.2~~$48.9 million and ~~$2.0~~$20.2 million as of March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to pledge ~~$140,000~~$0 at March 31, ~~2019,~~2020, and ~~$680,000~~$0 at December 31, ~~2018.~~2019. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the three months ended March 31, ~~2019~~2020 and March 31, ~~2018, no~~2019, 0 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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


												Notional Amount		Fair Value		Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
March 31, 2020											March 31, 2020
Customer interest rate swaps											Customer interest rate swaps	$	415,024	$	47,476	Other assets	4.58	%	3.71	%
Customer interest rate swaps											Customer interest rate swaps	415,024		(47,476)		Other liabilities	3.71		4.58
December 31, 2019											December 31, 2019
Customer interest rate swaps											Customer interest rate swaps	$	374,191	$	16,927	Other assets	4.68	%	4.05	%
Customer interest rate swaps											Customer interest rate swaps	374,191		(16,927)		Other liabilities	4.05		4.68

	Notional Amount		Fair Value			Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
March 31, 2019
Customer interest rate swaps	$	233,665	$	7,654		Other assets	5.15	%	5.05	%
Customer interest rate swaps	233,665		(7,654		)	Other liabilities	5.05		5.15
December 31, 2018
Customer interest rate swaps	$	211,246	$	4,449		Other assets	5.10	%	4.96	%
Customer interest rate swaps	211,246		(4,449		)	Other liabilities	4.96		5.10

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 0 collateral ~~of $0~~ at both March 31, ~~2019,~~2020, and ~~$35,000 at~~ December 31, ~~2018.~~2019. Heartland's counterparties were required to pledge no0 collateral at both March 31, ~~2019~~2020 and December 31, ~~2018,~~2019, 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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


								Balance Sheet Category	Notional Amount		Fair Value
March 31, 2020							March 31, 2020
Interest rate lock commitments (mortgage)							Interest rate lock commitments (mortgage)	Other assets	$	70,051	$	2,457
	Balance Sheet Category	Notional Amount		Fair Value
March 31, 2019
Interest rate lock commitments (mortgage)	Other assets	$	25,318	$	800
Forward commitments	Other assets	1,000		—			Forward commitments	Other assets	5,000		30
Forward commitments	Other liabilities	46,000		(282		)	Forward commitments	Other liabilities	64,500		(1,273)
Undesignated interest rate swaps	Other liabilities	9,785		(507		)	Undesignated interest rate swaps	Other liabilities	9,522		(826)
Undesignated interest rate swaps	Other assets	2,216		17
December 31, 2018

December 31, 2019							December 31, 2019
Interest rate lock commitments (mortgage)	Other assets	$	22,451	$	725		Interest rate lock commitments (mortgage)	Other assets	$	20,356	$	681

Forward commitments	Other assets	—		—			Forward commitments	Other assets	16,000		15
Forward commitments	Other liabilities	51,500		(399		)	Forward commitments	Other liabilities	36,500		(113)
Undesignated interest rate swaps	Other liabilities	11,266		(453		)	Undesignated interest rate swaps	Other liabilities	9,627		(465)
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-month periods ended March 31, ~~2019,~~2020, and March 31, ~~2018,~~2019, in thousands:

Income Statement Category Gain (Loss) Recognized
Three Months Ended March 31, 2019
Interest rate lock commitments (mortgage) Net gains on sale of loans held for sale $ 264
Forward commitments Net gains on sale of loans held for sale 117
Undesignated interest rate swaps Other noninterest income 889
Three Months Ended March 31, 2018
Interest rate lock commitments (mortgage) Net gains on sale of loans held for sale $ 17
Forward commitments Net gains on sale of loans held for sale 115
Undesignated interest rate swaps Other noninterest income 277


	Income Statement Category	Gain (Loss) Recognized




Three Months Ended March 31, 2020
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	1,698
Forward commitments	Net gains on sale of loans held for sale	(1,146)
Undesignated interest rate swaps	Other noninterest income	(361)




Three Months Ended March 31, 2019
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	264

Forward commitments	Net gains on sale of loans held for sale	117
Undesignated interest rate swaps	Other noninterest income	889

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

Premises, Furniture and Equipment Held for Sale

Heartland values premises, furniture and equipment held for sale based on third-party 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. 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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, 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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, 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
March 31, 2020
Assets

Securities available for sale
U.S. government corporations and agencies	$	9,916	$	8,569	$	1,347	$	—
Mortgage and asset-backed securities	2,520,004		—		2,520,004		—
Obligations of states and political subdivisions	940,441		—		940,441		—

Equity securities with a readily determinable fair value	18,260		—		18,260		—
Derivative financial instruments⁽¹⁾	48,302		—		48,302		—
Interest rate lock commitments	2,457		—		—		2,457
Forward commitments	30		—		30		—
Total assets at fair value	$	3,539,410	$	8,569	$	3,528,384	$	2,457
Liabilities
Derivative financial instruments⁽²⁾	$	57,777	$	—	$	57,777	$	—
Forward commitments	1,273		—		1,273		—

Total liabilities at fair value	$	59,050	$	—	$	59,050	$	—
December 31, 2019
Assets

Securities available for sale
U.S. government corporations and agencies	$	9,893	$	8,503	$	1,390	$	—
Mortgage and asset-backed securities	2,577,278		—		2,577,278		—
Obligations of states and political subdivisions	707,190		—		707,190		—

Equity securities	18,435		—		18,435		—
Derivative financial instruments⁽¹⁾	17,527		—		17,527		—
Interest rate lock commitments	681		—		—		681

Total assets at fair value	$	3,331,019	$	8,503	$	3,321,835	$	681
Liabilities
Derivative financial instruments⁽²⁾	$	21,462	$	—	$	21,462	$	—
Forward commitments	113		—		113		—

Total liabilities at fair value	$	21,575	$	—	$	21,575	$	—

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

Total Fair Value Level 1 Level 2 Level 3
March 31, 2019
Assets
Securities available for sale
U.S. government corporations and agencies $ 26,768
$ 20,458
$ 6,310
$ —
Mortgage and asset-backed securities 1,871,398
—
1,871,398
—
Obligations of states and political subdivisions 484,955
—
484,955
—
Equity securities with a readily determinable fair value 17,339
—
17,339
—
Derivative financial instruments⁽¹⁾
8,403
—
8,403
—
Interest rate lock commitments 800
—
—
800
Total assets at fair value $ 2,409,663
$ 20,458
$ 2,388,405
$ 800
Liabilities
Derivative financial instruments⁽²⁾
$ 10,858
$ —
$ 10,858
$ —
Forward commitments 282
—
282
—
Total liabilities at fair value $ 11,140
$ —
$ 11,140
$ —
December 31, 2018
Assets
Securities available for sale
U.S. government corporations and agencies $ 31,951
$ 25,414
$ 6,537
$ —
Mortgage and asset-backed securities 2,026,698
—
2,026,698
—
Obligations of states and political subdivisions 374,974
—
374,974
—
Equity securities 17,086
—
17,086
—
Derivative financial instruments⁽¹⁾
6,539
—
6,539
—
Interest rate lock commitments 725
—
—
725
Total assets at fair value $ 2,457,973
$ 25,414
$ 2,431,834
$ 725
Liabilities
Derivative financial instruments⁽²⁾
$ 6,044
$ —
$ 6,044
$ —
Forward commitments 399
—
399
—
Total liabilities at fair value $ 6,443
$ —
$ 6,443
$ —

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

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


													Fair Value Measurements at March 31, 2020
	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	$	9,998	$	—	$	—	$	9,998	$	285
Commercial real estate	717		—		—		717		—
Collateral dependent loans:												Collateral dependent loans:
Commercial and industrial												Commercial and industrial	$	5,494	$	—	$	—	$	5,494	$	153
Owner occupied commercial real estate												Owner occupied commercial real estate	2,129		—		—		2,129		—
Non-owner occupied commercial real estate												Non-owner occupied commercial real estate	109		—		—		109		—
Real estate construction												Real estate construction	132		—		—		132		—
Agricultural and agricultural real estate	8,932		—		—		8,932		379			Agricultural and agricultural real estate	1,980		—		—		1,980		—
Residential real estate	1,207		—		—		1,207		4			Residential real estate	543		—		—		543		52
Consumer	633		—		—		633		—			Consumer	153		—		—		153		—
Total collateral dependent impaired loans	$	21,487	$	—	$	—	$	21,487	$	668
Total collateral dependent loans												Total collateral dependent loans	$	10,540	$	—	$	—	$	10,540	$	205
Loans held for sale	$	69,716	$	—	$	69,716	$	—	$	(1,107	)	Loans held for sale	$	22,957	$	—	$	22,957	$	—	$	(1,734)
Other real estate owned	$	5,391	$	—	$	—	$	5,391	$	452		Other real estate owned	$	6,074	$	—	$	—	$	6,074	$	66
Premises, furniture and equipment held for sale	$	7,030	$	—	$	—	$	7,030	$	—		Premises, furniture and equipment held for sale	$	2,967	$	—	$	—	$	2,967	$	—
Servicing rights	$	6,459	$	—	$	—	$	6,459	$	589		Servicing rights	$	4,125	$	—	$	—	$	4,125	$	1,579


	Fair Value Measurements at December 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
Collateral dependent impaired loans:
Commercial and industrial	$	15,173	$	—	$	—	$	15,173	$	1,114
Owner occupied commercial real estate	1,352		—		—		1,352		—
Non-owner occupied commercial real estate	1,305		—		—		1,305		—
Real estate construction	—		—		—		—		—
Agricultural and agricultural real estate	12,623		—		—		12,623		1,254
Residential real estate	4,978		—		—		4,978		82
Consumer	1,033		—		—		1,033		—
Total collateral dependent impaired loans	$	36,464	$	—	$	—	$	36,464	$	2,450
Loans held for sale	$	26,748	$	—	$	26,748	$	—	$	(980)

Other real estate owned	$	6,914	$	—	$	—	$	6,914	$	947
Premises, furniture and equipment held for sale	$	2,967	$	—	$	—	$	2,967	$	735
Servicing rights	$	5,621	$	—	$	—	$	5,621	$	911

Fair Value Measurements at
December 31, 2018
Total
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
Year-to-
Date (Gains)
Losses
Collateral dependent impaired loans:
Commercial $ 12,932
$ —
$ —
$ 12,932
$ 660
Commercial real estate 405
—
—
405
72
Agricultural and agricultural real estate 11,070
—
—
11,070
575
Residential real estate 478
—
—
478
—
Consumer 624
—
—
624
—
Total collateral dependent impaired loans $ 25,509
$ —
$ —

$ 25,509
$ 1,307
Loans held for sale $ 119,801
$ —
$ 52,577
$ 67,224
$ (1,870 )
Other real estate owned $ 6,153
$ —
$ —
$ 6,153
$ 2,647
Premises, furniture and equipment held for sale $ 7,258
$ —
$ —
$ 7,258
$ 59
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
3/31/2020

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Interest rate lock commitments

2,457

Discounted cash flows

Closing ratio

0-99% (88%)⁽¹⁾

Other real estate owned

6,074

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Servicing rights

4,125

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

2,967

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Collateral dependent impaired loans:

Commercial

5,494

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%⁽³⁾

Owner occupied commercial real estate

2,129

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-6%⁽³⁾

Non-owner occupied commercial real estate

109

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%⁽³⁾

Real estate construction

132

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%⁽³⁾

Agricultural and agricultural real estate

1,980

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-6%⁽³⁾

Residential real estate

543

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-11%⁽³⁾

Consumer

153

Modified appraised value

Third party valuation

(2)

Valuation discount

0-7%⁽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 PrimeWest Mortgage Corporation is 88%.

(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
12/31/2019

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Fair Value at

3/31/2019

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Interest rate lock commitments

800

Discounted cash flows

Closing ratio

0-99% (89%)⁽¹⁾

Interest rate lock commitments

681

Discounted cash flows

Closing ratio

0-99% (90%)⁽¹⁾

Other real estate owned

5,391

Modified appraised value

Third party appraisal

(2)

Other real estate owned

6,914

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)

Servicing rights

5,621

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

7,030

Modified appraised value

Third party appraisal

(2)

Premises, furniture and equipment held for sale

2,967

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Appraisal discount

0-10%⁽³⁾

Collateral dependent impaired loans:

Commercial

9,998

Modified appraised value

Third party appraisal

(2)

Commercial

15,173

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-18%⁽³⁾

Commercial real estate

717

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-9%⁽³⁾

Appraisal discount

0-25%⁽³⁾

Owner occupied commercial real estate

1,352

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-14%⁽³⁾

Non-owner occupied commercial real estate

1,305

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-14%⁽³⁾

Real estate construction

—

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-14%⁽³⁾

Agricultural and agricultural real estate

8,932

Modified appraised value

Third party appraisal

(2)

Agricultural and agricultural real estate

12,623

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%⁽³⁾

Appraisal discount

0-15%⁽³⁾

Residential real estate

1,207

Modified appraised value

Third party appraisal

(2)

Residential real estate

3,088

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-12%⁽³⁾

Appraisal discount

0-25%⁽³⁾

Consumer

633

Modified appraised value

Third party valuation

(2)

Consumer

988

Modified appraised value

Third party valuation

(2)

Valuation discount

0-9%⁽³⁾

Valuation discount

0-10%⁽³⁾

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

Fair Value at
12/31/2018

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)
Loans held for sale $ 67,224
Discounted cash flows Sales contract
⁽¹⁾
Interest rate lock commitments 725
Discounted cash flows Closing ratio
0-99% (91%)⁽²⁾
Other real estate owned 6,153
Modified appraised value Third party appraisal (3)
Appraisal discount
0-10%⁽⁴⁾
Servicing rights 7,143
Discounted cash flows Third party valuation
⁽⁵⁾
Premises, furniture and equipment held for sale 7,258
Modified appraised value Third party appraisal (3)
Appraisal discount
0-10%⁽⁴⁾
Other real estate owned 6,153
Modified appraised value Third party appraisal (3)
Appraisal discount
0-10%⁽⁴⁾
Collateral dependent impaired loans:
Commercial 12,932
Modified appraised value Third party appraisal (3)
Appraisal discount
0-8%⁽⁴⁾
Commercial real estate 405
Modified appraised value Third party appraisal (3)
Appraisal discount
0-19%⁽⁴⁾
Agricultural and agricultural real estate 11,070
Modified appraised value Third party appraisal (3)
Appraisal discount
0-24%⁽⁴⁾
Residential real estate 478
Modified appraised value Third party appraisal (3)
Appraisal discount
0-24%⁽⁴⁾
Consumer 624
Modified appraised value Third party valuation (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 Three Months Ended March 31, 2019			For the Year Ended December 31, 2018				For the Three Months Ended March 31, 2020		For the Year Ended December 31, 2019
Balance at January 1,	$	725		$	1,738		Balance at January 1,	$	681	$	725
Acquired interest rate lock commitments	—			1,383

Total gains (losses) included in earnings	264			(3,269		)	Total gains (losses) included in earnings	1,698		18
Issuances	2,081			2,962			Issuances	2,478		10,702
Settlements	(2,270		)	(2,089		)	Settlements	(2,400)		(10,764)
Balance at period end	$	800		$	725		Balance at period end	$	2,457	$	681

Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, were ~~$800,000~~$2.5 million and ~~$725,000,~~$681,000, respectively.

The table below is a summary of the estimated fair value of Heartland's financial instruments (as defined by ASC 825) as of March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, 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, 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 March 31, 2020
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	239,743	$	239,743	$	239,743	$	—	$	—
Time deposits in other financial institutions	3,568		3,568		3,568		—		—
Securities:

Carried at fair value	3,488,621		3,488,621		8,569		3,480,052		—
Held to maturity	91,875		101,375		—		101,375		—
Other investments	35,370		35,370		—		35,370		—
Loans held for sale	22,957		22,957		—		22,957		—
Loans, net:
Commercial and industrial	2,518,034		2,507,060		—		2,501,566		5,494
Owner occupied commercial real estate	1,420,702		1,456,304		—		1,454,175		2,129
Non-owner occupied commercial real estate	1,543,466		1,567,555		—		1,567,446		109
Real estate construction	1,046,749		1,076,645		—		1,076,513		132
Agricultural and agricultural real estate	545,310		552,823		—		550,843		1,980
Residential real estate	783,815		798,549		—		798,006		543
Consumer	418,817		431,583		—		431,430		153
Total Loans, net	8,276,893		8,390,519		—		8,379,979		10,540
Cash surrender value on life insurance	172,140		172,140		—		172,140		—
Derivative financial instruments⁽¹⁾	48,302		48,302		—		48,302		—
Interest rate lock commitments	2,457		2,457		—		—		2,457
Forward commitments	30		30		—		30		—
Financial liabilities:
Deposits
Demand deposits	3,696,974		3,696,974		—		3,696,974		—
Savings deposits	6,366,610		6,366,610		—		6,366,610		—
Time deposits	1,110,441		1,110,441		—		1,110,441		—
Deposits held for sale	—		—		—		—		—
Short term borrowings	121,442		121,442		—		121,442		—
Other borrowings	276,150		280,447		—		280,447		—
Derivative financial instruments⁽²⁾	57,777		57,777		—		57,777		—
Forward commitments	1,273		1,273		—		1,273		—

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


					Fair Value Measurements at March 31, 2019											Fair Value Measurements at December 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:											Financial assets:
Cash and cash equivalents	$	492,501	$	492,501	$	492,501	$	—	$	—	Cash and cash equivalents	$	378,734	$	378,734	$	378,734	$	—	$	—
Time deposits in other financial institutions	4,675		4,675		4,675		—		—		Time deposits in other financial institutions	3,564		3,564		3,564		—		—
Securities:											Securities:

Carried at fair value	2,400,460		2,400,460		20,458		2,380,002		—		Carried at fair value	3,312,796		3,312,796		8,503		3,304,293		—
Held to maturity	88,089		95,240		—		95,240		—		Held to maturity	91,324		100,484		—		100,484		—
Other investments	27,506		27,506		—		27,506		—		Other investments	31,321		31,321		—		31,321		—
Loans held for sale	69,716		69,716		—		69,716		—		Loans held for sale	26,748		26,748		—		26,748		—
Loans, net:											Loans, net:
Commercial	2,018,438		1,972,580		—		1,962,582		9,998
Commercial real estate	3,675,063		3,644,142		—		3,643,425		717
Commercial and industrial											Commercial and industrial	2,530,809		2,621,253		—		2,606,080		15,173
Owner occupied commercial real estate											Owner occupied commercial real estate	1,472,704		1,409,388		—		1,408,036		1,352
Non-owner occupied commercial real estate											Non-owner occupied commercial real estate	1,495,877		1,397,527		—		1,396,222		1,305
Real estate construction											Real estate construction	1,027,081		924,041		—		924,041		—
Agricultural and agricultural real estate	540,022		531,817		—		522,885		8,932		Agricultural and agricultural real estate	565,837		576,821		—		564,198		12,623
Residential real estate	627,619		613,086		—		611,879		1,207		Residential real estate	832,277		841,453		—		838,365		3,088
Consumer	407,763		405,120		—		404,487		633		Consumer	443,332		470,927		—		469,939		988
Total Loans, net	7,268,905		7,166,745		—		7,145,258		21,487		Total Loans, net	8,297,522		8,243,343		—		8,206,879		36,464
Cash surrender value on life insurance	163,764		163,764		—		163,764		—		Cash surrender value on life insurance	171,625		171,625		—		171,625		—
Derivative financial instruments⁽¹⁾	8,403		8,403		—		8,403		—		Derivative financial instruments⁽¹⁾	17,527		17,527		—		17,527		—
Interest rate lock commitments	800		800		—		—		800		Interest rate lock commitments	681		681		—		—		681

Financial liabilities:											Financial liabilities:
Deposits											Deposits
Demand deposits	3,118,909		3,118,909		—		3,118,909		—		Demand deposits	3,543,863		3,543,863		—		3,543,863		—
Savings deposits	5,145,929		5,145,929		—		5,145,929		—		Savings deposits	6,307,425		6,307,425		—		6,307,425		—
Time deposits	1,008,104		1,088,104		—		1,088,104		—		Time deposits	1,193,043		1,193,043		—		1,193,043		—
Deposits held for sale	118,564		111,742		—		111,742		—

Short term borrowings	104,314		104,314		—		104,314		—		Short term borrowings	182,626		182,626		—		182,626		—
Other borrowings	268,312		268,528		—		268,528		—		Other borrowings	275,773		278,169		—		278,169		—
Derivative financial instruments⁽²⁾	10,858		10,858		—		10,858		—
Derivative financial instruments⁽¹⁾											Derivative financial instruments⁽¹⁾	21,462		21,462		—		21,462		—
Forward commitments	282		282		—		282		—		Forward commitments	113		113		—		113		—

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

Fair Value Measurements at
December 31, 2018

Carrying
Amount

Estimated
Fair
Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable
Inputs
(Level 2)

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

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

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

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

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

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

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

Loans — The fair value of loans is determined using an exit price ~~methodology as prescribed by ASU 2016-01, which was effective on January 1, 2018.~~methodology. 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.

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.

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.

~~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.

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 and other service charges, credit card fee income, debit card income and other service charges and fees.

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders and other deposit account related fees. 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-months ended March 31, ~~2019,~~2020, and ~~2018,~~2019, in thousands:


	Three Months Ended March 31,							Three Months Ended March 31,
	2019			2018				2020		2019
In-scope of Topic 606							In-scope of Topic 606
Service charges and fees							Service charges and fees
Service charges and fees on deposit accounts	$	2,977		$	2,618		Service charges and fees on deposit accounts	$	3,438	$	2,977
Overdraft fees	2,744			2,208			Overdraft fees	2,809		2,744
Customer service fees	81			77
Customer service and other service fees							Customer service and other service fees	59		82
Credit card fee income	3,349			2,190			Credit card fee income	3,900		3,349
Debit card income	3,642			2,985			Debit card income	1,815		3,642
Other service charges	1			1

Total service charges and fees	$	12,794		$	10,079		Total service charges and fees	$	12,021	$	12,794
Trust fees	4,474			4,680			Trust fees	5,022		4,474
Brokerage and insurance commissions	734			907			Brokerage and insurance commissions	733		734
Total noninterest income in-scope of Topic 606	$	18,002		$	15,666		Total noninterest income in-scope of Topic 606	$	17,776	$	18,002

Out-of-scope of Topic 606							Out-of-scope of Topic 606
Loan servicing income	$	1,729		$	1,754		Loan servicing income	$	963	$	1,729
Securities gains/(losses), net	1,575			1,441			Securities gains/(losses), net	1,658		1,575
Unrealized gain/(loss) on equity securities, net	258			(28		)	Unrealized gain/(loss) on equity securities, net	(231)		258
Net gains on sale of loans held for sale	3,176			4,051			Net gains on sale of loans held for sale	4,660		3,176
Valuation adjustment on servicing rights	(589		)	(2		)	Valuation adjustment on servicing rights	(1,565)		(589)
Income on bank owned life insurance	899			614			Income on bank owned life insurance	498		899
Other noninterest income	1,667			1,220			Other noninterest income	2,058		1,667
Total noninterest income out-of-scope of Topic 606	8,715			9,050			Total noninterest income out-of-scope of Topic 606	8,041		8,715
Total noninterest income	$	26,717		$	24,716		Total noninterest income	$	25,817	$	26,717

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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, 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

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,~~

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 March 31, ~~2019, 368,071~~2020, 213,863 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")~~ASC Topic 718, "Compensation-Stock ~~Compensation"~~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~~Heartland's income tax expense included $25,000 of tax expense during the three months ended March 31, 2020 and a tax benefit of $336,000 during the three months ended March 31, 2019, 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.~~awards.

Restricted Stock Units

The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). In the first quarter of 2020, the Compensation Committee granted time-based RSUs with respect to 114,944 shares of common stock, and 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~~2020 and ~~2018~~2019 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~~three-year performance-based RSUs with respect to ~~34,848~~50,787 shares and ~~16,108~~34,848 shares of common stock in the first quarter of ~~2019~~2020 and ~~2018,~~2019 respectively. These performance-based RSUs will be earned based on satisfaction of performance targets for the ~~three-year~~three-year performance period ended December 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, 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~~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,~~2020, and March 31, ~~2018,~~2019, 0 and 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,~~2020, and ~~2018,~~2019, and changes during the three months ended March 31, ~~2019~~2020 and ~~2018,~~2019, follows:


	2020				2019
	Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value
Outstanding at January 1,	254,383	$	46.76	266,995	$	43.89
Granted	165,731	32.57		125,966	45.77
Vested	(86,441)	45.48		(117,122)	35.84
Forfeited	(11,929)	48.38		(13,364)	49.89
Outstanding at March 31,	321,744	$	40.14	262,475	$	48.07

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~~$2.2 million and ~~$1.9~~$2.4 million for the three-month periods ended March 31, ~~2019~~2020 and ~~2018.~~2019. As of March 31, ~~2019,~~2020, there were ~~$7.5~~$8.1 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.~~2031. All of Heartland's leases are classified as operating leases, and therefore, were previously not recognized on the consolidated balance sheet. With the adoption of ~~Topic 842,~~ASU 2016-02 "Leases" (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, 2020 and December 31, 2019, ~~(in thousands):~~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


	Classification	March 31, 2020		December 31, 2019
Operating lease right-of-use assets	Other assets	$	21,868	$	23,200
Operating lease liabilities	Accrued expenses and other liabilities	$	23,182	$	24,617

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, 2020 and 2019, in thousands:


		Three Months Ended March 31,
	Income Statement Category	2020		2019
Lease Cost
Operating lease cost	Occupancy expense	$	1,382	$	1,405
Variable lease cost	Occupancy expense	16		35

Total lease cost		$	1,398	$	1,440
Supplemental Information
Noncash reduction of ROU assets arising from lease modifications and terminations	Occupancy expense	$	358	$	1,209
Noncash reduction of lease liabilities arising from lease modifications and terminations	Occupancy expense	386		—

Supplemental balance sheet information		As of March 31, 2020
Weighted-average remaining operating lease term (in years)		6.5

Weighted-average discount rate for operating leases		3.00				%

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~~A maturity analysis of operating ~~leases with initial or remaining terms~~lease liabilities and reconciliation of ~~one year or more are presented in~~ the ~~table below~~undiscounted cash flows to the total of operating lease liabilities 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~~2020 are as follows, in thousands:


Nine months ending December 31, 2020	$	4,167
Year ending December 31,
2021	5,289
2022	4,065
2023	2,728
2024	2,015
Thereafter	7,300
Total lease payments	$	25,564
Less interest	(2,382)
Present value of lease liabilities	$	23,182

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, ~~2018.~~2019, as updated and supplemented in this Quarterly Report on Form 10-Q. 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.

The COVID-19 pandemic is adversely affecting Heartland and its customers, counterparties, employees and third-party service providers. The pandemic’s severity, its duration and the extent of its impact on Heartland’s business, financial condition, results of operations, liquidity and prospects remain uncertain. The deterioration in general business and economic conditions and turbulence in domestic or global financial markets caused by the COVID-19 pandemic have negatively affected Heartland’s net income, total equity and book value per common share, and continued economic deterioration could adversely affect the value of its assets and liabilities, reduce the availability of funding to Heartland, lead to a tightening of credit and increase stock price volatility. Some economists and investment banks believe that a recession or depression may result from the continued spread of COVID-19 and the economic consequences.

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, ~~2018.~~2019. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, ~~2018.~~2019 other than those in Note 1, "Basis of Presentation," of the consolidated financial statements included in this Quarterly Report on Form 10-Q related to Heartland's adoption of CECL.

OVERVIEW

Heartland is a multi-bank holding company providing banking, mortgage, wealth management, investments and insurance services to individuals and businesses. As of the date of this Quarterly Report on Form 10-Q, Heartland has eleven banking subsidiaries with 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~~credit losses, salaries and employee benefits, occupancy and equipment costs, professional fees, advertising, core deposit and customer relationship intangibles amortization and other real estate and loan collection expenses.

Net income available to common stockholders for the quarter ended March 31, ~~2019,~~2020, was ~~$31.5~~$20.0 million, or ~~$0.91~~$0.54 per diluted common share, compared to ~~$23.3~~$31.5 million, or ~~$0.76~~$0.91 per diluted common share, for the quarter ended March 31, ~~2018.~~2019.

Excluding provision for credit losses and acquisition, integration and restructuring costs (tax-effected), adjusted net income available to common stockholders (non-GAAP) was $38.1 million, or $1.03 of adjusted earnings per diluted common share (non-GAAP) for the first quarter of 2020, compared to $35.6 million (non-GAAP), or $1.03 per adjusted earnings per diluted common share (non-GAAP), for the first quarter of 2019. Return on average common equity was ~~9.56%~~4.98% and return on average assets was ~~1.13%~~0.61% for the first quarter of ~~2019,~~2020, compared to ~~9.32%~~9.56% and ~~0.97%~~1.13%, respectively, for the same quarter in ~~2018.~~2019. Return on average tangible common equity (non-GAAP) was 8.00% and adjusted return on average tangible common equity (non-GAAP) was 14.46% for the first quarter of 2020 compared to 15.24% and 17.11%, respectively, for the first quarter of 2019.

For the first quarter of ~~2019,~~2020, Heartland's net interest margin was ~~4.12% (4.18%~~3.81% (3.84% on a fully tax-equivalent basis) compared to ~~4.19% (4.26%~~4.12% (4.18% on a fully tax-equivalent basis) for the same quarter in ~~2018,~~2019, and the efficiency ratio was ~~65.23%~~61.82% and ~~68.21%~~64.93% for the first quarter of ~~2019~~2020 and ~~2018,~~2019, respectively.

The financial impact of the following transaction is included in the results of operations for the three-month period ended March 31, 2019, but not in the results of operations for the same period ended 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.

Total assets of Heartland were ~~$11.31~~$13.29 billion at March 31, ~~2019, a decrease~~2020, an increase of ~~$95.5~~$84.9 million or 1% since year-end ~~2018.~~2019. Securities represented ~~22%~~27% of total assets at March 31, ~~2019,~~2020, and ~~24%~~26% of total assets at December 31, ~~2018.~~

2019. Total loans held to maturity were ~~$7.33~~$8.37 billion at both 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 2019, the sale of two branches at Dubuque Bank~~2020, and ~~Trust Company was announced, which included $20.3 million of loans that were classified as held for sale at March~~December 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~~$11.17 billion as of March 31, ~~2019,~~2020, compared to ~~$9.40~~$11.04 billion at year-end ~~2018, a decrease~~2019, an increase of ~~$43.5~~$129.7 million or ~~less than~~ 1%. The deposits classified as held for sale in conjunction with the expected sale of two branches at Dubuque Bank and Trust Company totaled $77.0 million at March 31, 2019. Exclusive of this transaction, total deposits increased $33.5 million or less than 1% since December 31, 2018.

Total equity was ~~$1.37~~$1.55 billion at March 31, ~~2019,~~2020, compared to ~~$1.33~~$1.58 billion at year-end ~~2018.~~2019. Book value per common share was ~~$39.65~~$42.21 at March 31, ~~2019,~~2020, compared to ~~$38.44~~$43.00 at year-end ~~2018.~~2019. Heartland's unrealized loss on securities available for sale, net of applicable taxes, was ~~$11.4~~$21.2 million at March 31, ~~2019,~~2020, compared to an unrealized ~~loss~~gain of ~~$32.5 million,~~$969,000, net of applicable taxes, at December 31, ~~2018.~~2019.

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

COVID-19

In March 2020, the outbreak of the novel Coronavirus Disease 2019 ("COVID-19") was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States, as well as globally. Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses, which have led to a loss of revenues and a rapid increase in unemployment, material decreases in commodity prices and business valuations, disruptions in global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, emergency response legislation and an expectation that Federal Reserve will maintain a low interest rate environment for the foreseeable future.

Heartland implemented its pandemic management plan to protect employees and enable business continuity while providing relief and support to customers and communities facing challenges from the impacts of COVID-19, which included the following:

•enabled approximately 2/3rds of employees to work from home and canceled all in-person events and meetings;

•expanded paid time off program and enhanced health care coverage for COVID-19 related testing and treatments;

•implemented a 20% wage premium for customer-facing and call center employees;

•closed most bank lobbies and implemented drive-through only for in-person transactions;

•established alternating weekly staffing schedule for in-branch employees to limit potential cross-infection;

•announced a series of relief programs for consumers and small business customers, which include waiving account maintenance fees, ATM fees and early redemption penalties on CDs, and deferrals on loan payments;

•provided direct Small Business Administration ("SBA") guaranteed loans to customers via its participation in the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") Paycheck Protection Program ("PPP");

•participated in the CARES Act SBA loan payment and deferral program for existing SBA loans; and

•contributed $1.2 million to support non-profit organizations in communities served by Heartland and its subsidiary banks.

The economic disruption resulting from the COVID-19 pandemic will make it difficult for some customers to repay the principal and interest on their loans, and Heartland's subsidiary banks have started working with customers to modify the terms of certain existing loans. The following table shows the total exposure, which includes loans outstanding and unfunded loan commitments as of March 31, 2020, to customer segment profiles that Heartland believes will be more heavily impacted by COVID-19, in thousands:


Industry	Total Exposure⁽¹⁾		% of Gross Exposure⁽¹⁾
Lodging	$	498,596	4.47	%
Multi-family properties	436,931		3.92
Retail real estate	408,506		3.66
Retail trade	367,764		3.30
Restaurants and bars	247,239		2.22
Nursing homes/assisted living	126,267		1.13
Oil and gas	56,302		0.50
Childcare facilities	48,455		0.43
Gaming	34,790		0.31

(1) Total loans outstanding and unfunded commitments

As of May 1, 2020, loan modifications have been made on approximately $696.2 million of loans in Heartland's portfolio. Approximately 67% of these modifications are interest only for 90 days, and the remainder are primarily principal and interest deferments for 90 days. Heartland expects modifications to increase in the near term. In accordance with interagency guidance issued in March 2020, these modifications are not considered troubled debt restructurings.

Through early May 2020, Heartland's subsidiary banks received SBA approval for approximately 4,600 PPP loans totaling $1.18 billion, of which approximately 4,400 or $1.16 billion have been closed and funded.Under the CARES Act, PPP loans are 100% SBA guaranteed and borrowers may be eligible to have an amount up to the entire principal balance forgiven and paid by the SBA. PPP loans also carry a zero risk rating for regulatory capital purposes and the Federal Reserve has made available a liquidity facility to facilitate funding of PPP loans held by banks. Under current program rules, Heartland’s subsidiary banks are eligible to receive an estimated $35.1 million of fees based on PPP loans processed through early May 2020.

As of early May 2020, approximately $213.7 million in principal amount of existing SBA loans were eligible to participate in the SBA loan payment and deferral program, pursuant to which the SBA will pay the borrower’s principal, interest and fees for a period of six months.

COVID-19 Risks and Uncertainties

The spread of the pandemic has caused significant disruptions in the U.S. economy, including disruption of banking and other financial activity in the areas in which Heartland operates. While there has been no material impact to Heartland to date, COVID-19 could also potentially create widespread business continuity issues.

Government authorities, including the United States Congress, the President, and the Federal Reserve, have taken several actions designed to cushion the economic fallout from COVID-19. Most notably, the Coronavirus Aid, Relief and Economic Security (the "CARES Act") Act was signed into law at the end of March 2020. The CARES Act provides $2 trillion in funding to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. In addition to the general impact of COVID-19, certain provisions of the CARES Act, as well as other recent legislative and regulatory relief efforts, could have a material impact on Heartland's results of operations.

Heartland's business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, Heartland could experience a material adverse effect on its business, financial condition, results of operations and cash flows. The full extent of the impact of the COVID-19 pandemic, and resulting measures to curtail its spread, will depend on future developments which are highly uncertain, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or

mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among other future developments. Potentially material effects on Heartland’s business are discussed below.

Interest Income, Net Interest Margin and Fee Income

Heartland's interest income may be reduced due to lower interest rates, more loan modifications, delinquent interest payments, and related credit losses, resulting from the economic impact of COVID-19. During the three months ended March 31, 2020, Heartland significantly increased its allowance for credit losses. The allowance for credit losses is increased through provisions for credit losses which are deducted from net interest income on Heartland’s consolidated statements of income. In keeping with guidance from regulators, Heartland is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments occur, interest income and fees accrued would need to be reversed. In such a scenario, interest income and net interest margin could be negatively impacted in future periods.

However, any reduction in interest income could be offset by additional interest and fee income earned on PPP loans. The interest rate on the PPP loans is 1%, and under current program rules, Heartland’s subsidiary banks are eligible to receive an estimated $35.1 million of fees based on PPP loans processed as of May 5, 2020. At this time, Heartland is unable to project the impact of interest deferrals and interest earned on PPP loans on Heartland's net interest margin in future periods.

Heartland's fee income could be reduced due to COVID-19. In keeping with guidance from regulators, Heartland is actively working with COVID-19 affected customers to waive fees from a variety of sources, as previously described. At this time, Heartland believes that these reductions in fees are temporary in nature. However, Heartland is unable to project the materiality of the impact to fee income in future periods.

Capital and Liquidity

While Heartland believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its regulatory capital ratios could be adversely impacted by further credit losses. Heartland relies on cash on hand as well as dividends from its subsidiary banks to service its debt. If Heartland's capital deteriorates such that its subsidiary banks are unable to pay dividends to Heartland for an extended period of time, it may not be able to service its debt.

Heartland maintains access to multiple sources of liquidity, and future access to these sources may be adversely impacted by the economic disruption of the COVID-19 pandemic. Wholesale funding markets have remained open, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time, it could have an adverse effect on Heartland's net interest margin. If an extended recession causes large numbers deposit customers to withdraw their funds, Heartland might become more reliant on volatile or more expensive sources of funding.

Asset Valuation

Currently, Heartland does not expect COVID-19 to affect its ability to account for the assets on its balance sheet on a timely basis; however, this ability could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, Heartland does not anticipate significant changes in the methodology used to determine the fair value of assets measured in accordance with GAAP.

The COVID-19 pandemic and its lingering effects could cause a further and sustained decline in Heartland's stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on its goodwill or core deposit and customer relationships intangibles that could result in an impairment charge being recorded for that period. In the event that Heartland concludes that all or a portion of its goodwill or core deposit and customer relationship intangibles is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. However, such a charge would have no impact on tangible capital or regulatory capital.

Processes, Controls and Business Continuity Plan

As previously discussed, Heartland has invoked its pandemic management plan that includes a remote working strategy. Heartland does not anticipate incurring additional material costs related to its continued deployment of the remote working strategy. No material unmitigated operational or internal control challenges or risks have been identified to date. Heartland does not anticipate significant challenges in maintaining systems and controls due to its continued business resiliency and measures taken to manage employee and workplace safety. Heartland monitors the resiliency of its critical services providers and does not anticipate significant business disruptions at this time. Heartland does not currently face any material resource constraints through the implementation of its business continuity plans.

Credit

As a result of the current economic environment caused by the COVID-19 pandemic, Heartland is engaging in more frequent communication with borrowers to better understand their creditworthiness and the challenges faced. These communications should allow Heartland to respond proactively as borrower needs and issues arise. Should economic conditions worsen, Heartland could be required to further increase its allowance for credit losses and record additional credit loss expense. It is likely that Heartland's asset quality measures could worsen during future measurement periods if the effects of the COVID-19 pandemic are prolonged.

Stock Price Volatility

Capital market disruptions from the COVID-19 pandemic could cause a further and sustained decline in the price of Heartland’s common stock.

RECENT DEVELOPMENTS

~~Regulatory Developments~~Adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)"

On January 1, 2020, Heartland adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," commonly referred to as "CECL." The impact of Heartland's adoption of CECL on January 1, 2020 ("Day 1") resulted in the following:

~~Enactment~~•an increase of $12.1 million to the allowance for credit losses related to loans, which included a reclassification of $6.0 million of purchased credit impaired loan discount on previously acquired loans, and a cumulative-effect adjustment to retained earnings totaling $4.6 million, net of taxes of $1.5 million;

•an increase of $13.6 million to the allowance for unfunded commitments and a cumulative-effect adjustment to retained earnings totaling $10.2 million, net of taxes of $3.4 million, and

•established an allowance for credit losses for Heartland's held to maturity debt securities of $158,000 and a cumulative-effect adjustment to retained earnings totaling $118,000, net of taxes of $40,000.

The allowance calculation under CECL is an expected loss model, which encompasses expected losses over the life of the ~~Economic Growth, Regulatory Relief,~~loan and ~~Consumer Protection Act~~held to maturity securities portfolios, including expected losses due to changes in ~~May 2018 significantly altered several provisions of the Dodd-Frank Act, including how stress tests are run. Bank holding companies with assets of less than $100 billion,~~economic conditions and forecasts, such as those caused by the COVID-19 pandemic. Heartland ~~are no longer subject~~recorded $21.5 million of provision for credit losses in the first quarter of 2020, primarily due to ~~company-run stress testing requirements~~a deteriorating economic outlook resulting in ~~accordance with the Dodd-Frank Act, which included publishing~~an increase in expected credit losses. For more information, see "Provision for Credit Losses" and "Allowance for Credit Losses" below.

Entered into a summary of results. In response to the initial provisions of the Dodd-Frank Act, Heartland has added staff, enhanced risk management processes and invested in upgraded information systems and technology. In addition, management continues to run internal stress tests as a component of the comprehensive risk management and capital planning process.

Other provisions of the Dodd-Frank Act, such as the Durbin Amendment, which restricts interchange fees, remain in place. The Durbin Amendment, which 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 2018 debit card volume, the negative impact of the Durbin Amendment would be approximately $6.0 million annually to Heartland's noninterest income.

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

~~Blue Valley Ban Corp.~~Definitive Merger Agreement

with AIM Bancshares, Inc.

On ~~January 16, 2019,~~February 11, 2020, Heartland entered into a definitive merger agreement to acquire ~~Blue Valley Ban Corp.,~~AIM Bancshares, Inc. and its wholly-owned subsidiary, ~~Bank of Blue Valley,~~AimBank, headquartered in ~~Overland Park, Kansas. As of the announcement date,~~Levelland, Texas. In the transaction, ~~in which~~ all ~~of the~~ issued and outstanding shares of ~~Blue Valley Ban Corp.~~AIM Bancshares stock will be exchanged for shares of Heartland common stock ~~was valued at approximately $93.9 million. Simultaneous with the closing~~and cash. Shareholders of ~~the~~AIM Bancshares will receive 207.0 shares of Heartland common stock and $685.00 of cash for each share of AIM Bancshares. The transaction ~~Bank of Blue Valley~~value 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~~change due to fluctuations in the price of Heartland common stock and is subject to certain potential adjustments ~~and~~as set forth in the merger agreement. Simultaneous with the closing of the transaction, ~~is subject to customary closing conditions.~~AimBank will merge with and into Heartland's Lubbock, Texas-based subsidiary, First Bank and Trust. The transaction is expected to close in the ~~second~~third quarter of ~~2019~~2020 with a systems conversion planned for the ~~third~~fourth quarter of ~~2019.~~2020. As of March 31, ~~2019, Bank of Blue Valley~~2020, AimBank had total assets of approximately ~~$711.6 million,~~$1.82 billion, which included ~~approximately $564.1 million~~$1.16 billion of gross loans outstanding, and approximately ~~$587.2 million~~$1.58 billion of deposits.

The foregoing description of the 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 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.

On April 26, 2019, Dubuque Bank and Trust Company signed an agreement to sell substantially all its mortgage servicing rights to PNC Bank, N.A., headquartered in Pittsburgh, Pennsylvania. The servicing rights had an estimated fair value of $37.0 million and a book value of $21.0 million as of March 31, 2019. 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. 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 be in August 2019.


FINANCIAL HIGHLIGHTS							FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)	Three Months Ended March 31,						(Dollars in thousands, except per share data)	Three Months Ended March 31,
	2019			2018				2020			2019
STATEMENT OF INCOME DATA							STATEMENT OF INCOME DATA
Interest income	$	120,721		$	101,214		Interest income	$	131,049		$	120,721
Interest expense	17,766			9,630			Interest expense	18,538			17,766
Net interest income	102,955			91,584			Net interest income	112,511			102,955
Provision for loan losses	1,635			4,263
Net interest income after provision for loan losses	101,320			87,321
Provision for credit losses							Provision for credit losses	21,520			1,635
Net interest income after provision for credit losses							Net interest income after provision for credit losses	90,991			101,320
Noninterest income	26,717			24,716			Noninterest income	25,817			26,717
Noninterest expenses	88,230			83,646			Noninterest expenses	90,859			88,230
Income taxes	8,310			5,123			Income taxes	5,909			8,310
Net income	31,497			23,268
Preferred dividends	—			(13		)

Net income available to common stockholders	$	31,497		$	23,255		Net income available to common stockholders	$	20,040		$	31,497

Key Performance Ratios							Key Performance Ratios
Annualized return on average assets	1.13		%	0.97		%	Annualized return on average assets	0.61		%	1.13		%
Annualized return on average common equity (GAAP)	9.56		%	9.32		%	Annualized return on average common equity (GAAP)	4.98		%	9.56		%
Annualized return on average tangible common equity (non-GAAP)⁽¹⁾	15.24		%	13.85		%	Annualized return on average tangible common equity (non-GAAP)⁽¹⁾	8.00		%	15.24		%
Annualized adjusted return on average tangible common equity (non-GAAP)⁽¹⁾							Annualized adjusted return on average tangible common equity (non-GAAP)⁽¹⁾	14.46		%	17.11		%
Annualized ratio of net charge-offs to average loans	0.05		%	0.08		%	Annualized ratio of net charge-offs to average loans	0.24		%	0.05		%
Annualized net interest margin (GAAP)	4.12		%	4.19		%	Annualized net interest margin (GAAP)	3.81		%	4.12		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)⁽¹⁾	4.18		%	4.26		%	Annualized net interest margin, fully tax-equivalent (non-GAAP)⁽¹⁾	3.84		%	4.18		%
Efficiency ratio, fully tax-equivalent (non-GAAP)⁽¹⁾	65.23		%	68.21		%	Efficiency ratio, fully tax-equivalent (non-GAAP)⁽¹⁾	61.82		%	64.93		%

(1) Refer to "Non-GAAP Measures" in this Quarterly Report on Form 10-Q 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.							(1) Refer to "Non-GAAP Measures" in this Quarterly Report on Form 10-Q for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.

FINANCIAL HIGHLIGHTS
(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%.


Dollars in thousands, expect per share data	As Of and For the Quarter Ended
	3/31/2020			12/31/2019			9/30/2019			6/30/2019			3/31/2019
BALANCE SHEET DATA
Investments	$	3,615,866		$	3,435,441		$	3,137,575		$	2,681,419		$	2,516,055
Loans held for sale	22,957			26,748			35,427			34,575			69,716
Total net loans receivable held to maturity	8,374,236			8,367,917			7,971,608			7,853,051			7,331,544
Allowance for credit losses	97,350			70,395			66,222			63,850			62,639
Total assets	13,294,509			13,209,597			12,569,262			12,160,290			11,312,495
Total deposits⁽¹⁾	11,174,025			11,044,331			10,469,856			10,108,557			9,352,942
Long-term obligations	276,150			275,773			278,417			282,863			268,312

Common equity	1,553,714			1,578,137			1,563,843			1,521,787			1,372,102

Common Share Data
Book value per common share (GAAP)	$	42.21		$	43.00		$	42.62		$	41.48		$	39.65
Tangible book value per common share (non-GAAP)⁽²⁾	$	28.84		$	29.51		$	29.62		$	28.40		$	27.04

Common shares outstanding, net of treasury stock	36,807,217			36,704,278			36,696,190			36,690,061			34,603,611
Tangible common equity ratio (non-GAAP)⁽²⁾	8.29		%	8.52		%	8.99		%	8.92		%	8.60		%

(1) Excludes deposits held for sale.
(2) Refer to "Non-GAAP Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.

~~FINANCIAL HIGHLIGHTS, continued~~

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

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

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

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

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

Total assets (GAAP) $ 11,312,495
$ 11,408,006
$ 11,335,132
$ 11,301,920
$ 10,055,863
    Less goodwill 391,668
391,668
391,668
391,668
270,305
    Less core deposit and customer relationship intangibles, net 44,637
47,479
50,071
52,698
41,063
Total tangible assets (non-GAAP) $ 10,876,190
$ 10,968,859
$ 10,893,393
$ 10,857,554
$ 9,744,495
Tangible common equity ratio (non-GAAP) 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 "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 RECONCILIATIONS

(Dollars in thousands, except per share data)


	As Of and For the Quarter Ended
	3/31/2020			12/31/2019			9/30/2019			6/30/2019			3/31/2019
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common stockholders (GAAP)	$	20,040		$	37,851		$	34,612		$	45,169		$	31,497
Plus core deposit and customer relationship intangibles amortization, net of tax⁽¹⁾	2,355			2,305			2,291			2,617			2,245
Net income excluding intangible amortization (non-GAAP)	$	22,395		$	40,156		$	36,903		$	47,786		$	33,742

Average common equity (GAAP)	$	1,619,682		$	1,570,258		$	1,541,369		$	1,442,388		$	1,336,250
Less average goodwill	446,345			433,374			427,097			410,642			391,668
Less average core deposit and customer relationship intangibles, net	47,632			49,389			51,704			49,868			46,490
Average tangible common equity (non-GAAP)	$	1,125,705		$	1,087,495		$	1,062,568		$	981,878		$	898,092
Annualized return on average common equity (GAAP)	4.98		%	9.56		%	8.91		%	12.56		%	9.56		%
Annualized return on average tangible common equity (non-GAAP)	8.00		%	14.65		%	13.78		%	19.52		%	15.24		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net Interest Income (GAAP)	$	112,511		$	112,745		$	111,321		$	106,708		$	102,955
Plus tax-equivalent adjustment⁽¹⁾	1,131			1,109			1,140			1,268			1,412
Net interest income, fully tax-equivalent (non-GAAP)	$	113,642		$	113,854		$	112,461		$	107,976		$	104,367

Average earning assets	$	11,891,455		$	11,580,295		$	11,102,581		$	10,552,166		$	10,129,957

Annualized net interest margin (GAAP)	3.81		%	3.86		%	3.98		%	4.06		%	4.12		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)	3.84		%	3.90		%	4.02		%	4.10		%	4.18		%
Purchase accounting discount	0.09		%	0.17		%	0.23		%	0.18		%	0.16		%


	As Of and For the Quarter Ended
	3/31/2020			12/31/2019			9/30/2019			6/30/2019			3/31/2019
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)
Common equity (GAAP)	$	1,553,714		$	1,578,137		$	1,563,843		$	1,521,787		$	1,372,102
Less goodwill	446,345			446,345			427,097			427,097			391,668
Less core deposit and customer relationship intangibles, net	45,707			48,688			49,819			52,718			44,637
Tangible common equity (non-GAAP)	$	1,061,662		$	1,083,104		$	1,086,927		$	1,041,972		$	935,797

Common shares outstanding, net of treasury stock	36,807,217			36,704,278			36,696,190			36,690,061			34,603,611
Common equity (book value) per share (GAAP)	$	42.21		$	43.00		$	42.62		$	41.48		$	39.65
Tangible book value per common share (non-GAAP)	$	28.84		$	29.51		$	29.62		$	28.40		$	27.04

Reconciliation of Tangible Common Equity Ratio (non-GAAP)
Tangible common equity (non-GAAP)	$	1,061,662		$	1,083,104		$	1,086,927		$	1,041,972		$	935,797

Total assets (GAAP)	$	13,294,509		$	13,209,597		$	12,569,262		$	12,160,290		$	11,312,495
Less goodwill	446,345			446,345			427,097			427,097			391,668
Less core deposit and customer relationship intangibles, net	45,707			48,688			49,819			52,718			44,637
Total tangible assets (non-GAAP)	$	12,802,457		$	12,714,564		$	12,092,346		$	11,680,475		$	10,876,190
Tangible common equity ratio (non-GAAP)	8.29		%	8.52		%	8.99		%	8.92		%	8.60		%

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


Reconciliation of Efficiency Ratio (non-GAAP)	For the Quarter Ended
				3/31/2020				12/31/2019				9/30/2019				6/30/2019				3/31/2019
Net interest income (GAAP)	$	112,511			$	112,745			$	111,321			$	106,708			$	102,955
Tax-equivalent adjustment⁽¹⁾	1,131				1,109				1,140				1,268				1,412
Fully tax-equivalent net interest income	113,642				113,854				112,461				107,976				104,367
Noninterest income	25,817				28,030				29,400				32,061				26,717
Securities gains, net	(1,658)				(491)				(2,013)				(3,580)				(1,575)
Unrealized (gain)/loss on equity securities, net	231				(11)				(144)				(112)				(258)
Gain on extinguishment of debt	—				—				(375)				—				—
Valuation adjustment on servicing rights	1,565				(668)				626				364				589
Adjusted revenue (non-GAAP)	$	139,597			$	140,714			$	139,955			$	136,709			$	129,840

Total noninterest expenses (GAAP)	$	90,859			$	92,866			$	92,967			$	75,098			$	88,230
Less:
Core deposit and customer relationship intangibles amortization	2,981				2,918				2,899				3,313				2,842
Partnership investment in tax credit projects	184				3,038				3,052				1,465				475
(Gain)/loss on sales/valuation of assets, net	16				1,512				356				(18,286)				(3,004)
Acquisition, integration and restructuring costs	1,376				537				1,500				929				3,614
Adjusted noninterest expenses (non-GAAP)	$	86,302			$	84,861			$	85,160			$	87,677			$	84,303
Efficiency ratio, fully tax-equivalent (non-GAAP)	61.82		%		60.31		%		60.85		%		64.13		%		64.93		%

Acquisition, integration and restructuring costs
Salaries and employee benefits	$	44			$	—			$	100			$	100			$	616
Occupancy	—				11				—				10				1,194
Furniture and equipment	24				7				(4)				84				—
Professional fees	996				462				855				624				424
Advertising	89				31				115				52				5
(Gain)/loss on sales/valuations of assets, net	—				—				—				—				1,003
Other noninterest expenses	223				26				434				59				372
Total acquisition, integration and restructuring costs	$	1,376			$	537			$	1,500			$	929			$	3,614
After tax impact on diluted earnings per share⁽¹⁾	$	0.03			$	0.01			$	0.03			$	0.02			$	0.08

Reconciliation of Adjusted Net Income and Adjusted Diluted EPS (non-GAAP)
Net income (GAAP)	$	20,040			$	37,851			$	34,612			$	45,169			$	31,497
Provision for credit losses⁽¹⁾	17,001				3,873				4,109				3,885				1,292
Acquisition, integration and restructuring costs⁽¹⁾	1,087				424				1,185				734				2,855
Adjusted net income (non-GAAP)	$	38,128			$	42,148			$	39,906			$	49,788			$	35,644
Diluted earnings per share (GAAP)	$	0.54			$	1.03			$	0.94			$	1.26			$	0.91
Adjusted diluted earnings per share (non-GAAP)	$	1.03			$	1.14			$	1.08			$	1.39			$	1.03

Reconciliation of Annualized Adjusted Return on Average Tangible Common Equity (non-GAAP)
Adjusted net income (non-GAAP)	$	38,128			$	42,148			$	39,906			$	49,788			$	35,644
Plus core deposit and customer relationship intangibles amortization, net of tax⁽¹⁾	2,355				2,305				2,291				2,617				2,245
Adjusted net income excluding intangible amortization (non-GAAP)	$	40,483			$	44,453			$	42,197			$	52,405			$	37,889
Average tangible common equity (non-GAAP)	$	1,125,705			$	1,087,495			$	1,062,568			$	981,878			$	898,092
Annualized adjusted return on average tangible common equity (non-GAAP)	14.46		%		16.22		%		15.76		%		21.41		%		17.11		%

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

Non-GAAP Financial Measures

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

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

•Annualized return on average tangible common ~~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 use of equity, 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.~~the reconciliation.

•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 financial condition and capital strength.

•Adjusted net income and adjusted diluted earnings per share exclude tax-effected provision for credit losses and acquisition, integration and restructuring costs. Management believes the presentation of these non-GAAP measures are useful to compare net income and earnings per share results excluding the variability of credit loss provisions and acquisition, integration and restructuring costs.

•Annualized adjusted return on average tangible common equity is adjusted net income excluding intangible amortization calculated as (1) net income excluding (A) tax-effected provision for credit losses, (B) tax-effected acquisition, integration and restructuring costs and (C) tax-effected core deposit and customer relationship intangibles amortization, divided by (2) average common equity less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.

RESULTS OF OPERATIONS

Net Interest Margin and Net Interest Income

Net interest margin, expressed as a percentage of average earning assets, was 4.12% (4.18% on a fully tax-equivalent basis) during the first quarter of 2019, compared to 4.19% (4.26% on a fully tax-equivalent basis) during the first quarter of 2018. Heartland's success in maintaining ~~its~~competitive net interest margin has been the result of an increase in average earning assets and a favorable deposit ~~mix.~~mix for the quarters ended March 31, 2020 and 2019. 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~~Growth in interest income on a tax-equivalent basis was largely due to the ~~first quarter~~increase in average earning assets primarily from recent acquisitions. Increases in total interest expense were a result of ~~2019, Heartland's net~~increases in average interest ~~margin included 16 basis points of purchase accounting discount amortization compared to 22 basis points in the same quarter of 2018.~~bearing liabilities from acquired and organic growth, which were partially offset by declining interest rates. 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~~GAAP. Refer to the financial ~~tables~~highlights above for a reconciliation of annualized net interest margin on a fully tax-equivalent basis to GAAP.

~~Growth in~~Net interest ~~income~~margin, expressed as a percentage of average earning assets, was 3.81% (3.84% on a fully tax-equivalent basis) during the first quarter of 2020, compared to 4.12% (4.18% on a fully tax-equivalent basis) during the first quarter of 2019. For the first quarter of 2020, Heartland's net interest margin included 9 basis ~~was primarily due~~points of purchase accounting discount amortization on loans compared to ~~recent increases~~16 basis points in ~~market interest rates and~~ the ~~increase in average earning assets.~~ same quarter of 2019.

Total interest income for the first quarter of ~~2019~~2020 was ~~$120.7~~$131.0 million, an increase of ~~$19.5~~$10.3 million or ~~19%~~9%, compared to ~~$101.2~~$120.7 million recorded in the first quarter of ~~2018.~~2019. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were $1.1 million for the first quarter of 2020 and $1.4 million for the first quarter of ~~2019 and $1.5 million for the first quarter of 2018.~~2019. With these adjustments, total interest income on a tax-equivalent basis was $132.2 million for the first quarter of 2020, an increase of $10.0 million or 8%, compared to $122.1 million for the first quarter of ~~2019, an increase of $19.4 million or 19%, compared to $102.8 million for the first quarter of 2018.~~2019.

Average earning assets increased ~~$1.27~~$1.76 billion or ~~14%~~17% to $11.89 billion from $10.13 billion in the first quarter of ~~2018,~~2019, which was primarily attributable to ~~the acquisitions completed in 2018.~~recent acquisitions. The average interest rate on earning assets ~~increased 19~~decreased 42 basis points to ~~4.89%~~4.47% for the first quarter of ~~2019~~2020 compared to ~~4.70%~~4.89% for the same quarter in ~~2018.~~

~~Increases in total interest expense were~~2019, which was primarily due to recent ~~increases~~decreases in market interest ~~rates and deposit growth from recent acquisitions.~~ rates.

Total interest expense for the first quarter of ~~2019~~2020 was ~~$17.8~~$18.5 million, an increase of ~~$8.1 million~~$772,000 or ~~84%~~4% from ~~$9.6~~$17.8 million in the first quarter of ~~2018.~~2019, which was the result of an increase in average interest bearing liabilities partially offset by declining interest rates. The average interest rate paid on Heartland's interest bearing deposits decreased by 8 basis points to 0.79% for the first quarter of 2020 compared to 0.87% for the first quarter of 2019. The average interest rate paid on savings deposits was ~~0.80%~~0.65% during the first quarter of ~~2019~~2020 compared to ~~0.35%~~0.80% for the first quarter of ~~2018,~~2019, and the average interest rate paid on time deposits was 1.58% for the first quarter of 2020 compared to 1.23% for the first quarter of ~~2019 compared to 0.88% for the first quarter of 2018.~~2019. The average interest rate paid on Heartland's borrowings was ~~3.96%~~3.81% for the first quarter of ~~2019~~2020 compared to ~~3.66%~~3.96% in the first quarter of ~~2018.~~2019.

For the quarter ended March 31, ~~2019,~~2020, average interest bearing liabilities were ~~$6.62~~$7.84 billion, an increase of ~~$927.8 million~~$1.22 billion or ~~16%~~18%, from ~~$5.69~~$6.62 billion for the quarter ended March 31, ~~2018.~~2019. Average interest bearing deposits increased ~~$889.5 million~~$1.27 billion or ~~17%~~21% to ~~$6.16~~$7.42 billion for the quarter ended March 31, ~~2019,~~2020, from ~~$5.27~~$6.16 billion in the same quarter in ~~2018.~~2019, as a result of acquired and organic growth. Average borrowings ~~increased $38.3~~decreased $48.4 million or 9%10% to ~~$466.2~~$417.8 million during the first quarter of ~~2019~~2020 from ~~$427.9~~$466.2 million during the same quarter in ~~2018. The increase in Heartland's average interest bearing liabilities is primarily attributable to recent acquisitions.~~2019.

Net interest income increased ~~$11.4~~$9.6 million or ~~12%~~9% to $112.5 million in the first quarter of 2020 from $103.0 million in the first quarter of ~~2019 from $91.6 million in the first quarter of 2018.~~2019. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $113.6 million during the first quarter of 2020, an increase of $9.3 million or 9% from $104.4 million during the first quarter of ~~2019, an increase of $11.2 million or 12% from $93.1 million during the first quarter of 2018.~~2019.

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~~tables set forth certain information relating to Heartland's average consolidated balance sheets and ~~reflects~~reflect the yield on average earning assets and the cost of average interest bearing liabilities for the periods indicated, in thousands. Such

yields and costs are calculated by dividing income or expense by the average balance of assets or liabilities. Average balances are derived from daily balances, and nonaccrual loans and loans held for sale are included in each respective loan category. Assets that receive favorable tax treatment are evaluated on a tax-equivalent basis assuming a federal income tax rate of 21%. 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⁾

	For the Quarter Ended
	March 31, 2020										December 31, 2019								March 31, 2019
	Average Balance		Interest		Rate		Average Balance		Interest		Rate		Average Balance		Interest		Rate
Earning Assets
Securities:
Taxable	$	3,132,103	$	21,731	2.79	%	$	3,033,480	$	22,581	2.95	%	$	2,169,016	$	15,876	2.97	%
Nontaxable⁽¹⁾	288,535		2,763		3.85		271,792		2,661		3.88		391,724		3,915		4.05
Total securities	3,420,638		24,494		2.88		3,305,272		25,242		3.03		2,560,740		19,791		3.13
Interest on deposits with other banks and short-term investments	181,320		721		1.60		251,599		953		1.50		218,445		1,292		2.40
Federal funds sold	—		—		—		—		—		—		560		4		2.90
Loans:⁽²⁾⁽³⁾
Commercial and industrial⁽¹⁾	2,607,513		32,454		5.01		2,444,961		32,006		5.19		2,137,168		30,389		5.77
Owner occupied commercial real estate	1,433,160		18,581		5.21		1,416,338		19,241		5.39		1,262,567		17,531		5.63
Non-owner occupied commercial real estate	1,472,268		19,530		5.34		1,388,677		18,952		5.41		1,326,014		17,423		5.33
Real estate construction	1,045,836		12,845		4.94		1,003,797		13,645		5.39		825,634		11,871		5.83
Agricultural and agricultural real estate	552,968		7,039		5.12		566,419		7,314		5.12		566,878		7,203		5.15
Residential mortgage	819,730		10,421		5.11		830,277		10,454		5.00		880,825		10,286		4.74
Consumer	432,745		6,095		5.66		440,007		6,504		5.86		413,769		6,343		6.22
Less: allowance for loan losses	(74,723)		—		—		(67,052)		—		—		(62,643)		—		—
Net loans	8,289,497		106,965		5.19		8,023,424		108,116		5.35		7,350,212		101,046		5.58
Total earning assets	11,891,455		132,180		4.47	%	11,580,295		134,311		4.60	%	10,129,957		122,133		4.89	%
Nonearning Assets	1,256,718						1,218,475						1,137,257
Total Assets	$	13,148,173					$	12,798,770					$	11,267,214
Interest Bearing Liabilities⁽⁴⁾
Savings	$	6,277,528	$	10,082	0.65	%	$	5,986,007	$	11,790	0.78	%	$	5,121,179	$	10,083	0.80	%
Time deposits	1,146,619		4,500		1.58		1,135,025		4,611		1.61		1,034,744		3,130		1.23
Short-term borrowings	141,807		296		0.84		115,680		271		0.93		195,390		889		1.85
Other borrowings	275,987		3,660		5.33		276,989		3,785		5.42		270,836		3,664		5.49
Total interest bearing liabilities	7,841,941		18,538		0.95	%	7,513,701		20,457		1.08	%	6,622,149		17,766		1.09
Noninterest Bearing Liabilities⁽³⁾
Noninterest bearing deposits	3,547,046						3,583,611						3,200,281
Accrued interest and other liabilities	139,504						131,200						108,534
Total noninterest bearing liabilities	3,686,550						3,714,811						3,308,815
Common Equity	1,619,682						1,570,258						1,336,250
Total Liabilities and Common Equity	$	13,148,173					$	12,798,770					$	11,267,214
Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾			$	113,642					$	113,854					$	104,367
Net interest spread⁽¹⁾					3.52	%					3.52	%					3.80	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets					3.84	%					3.90	%					4.18	%










(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) In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to align more closely with FDIC codes. All prior period balances have been adjusted.
(4) Includes deposits held for sale.

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~~Credit Losses

The allowance for ~~loan~~credit losses is established through provision expense to provide, in Heartland management's opinion, an appropriate allowance for ~~loan~~credit losses. The following table shows the components of Heartland's provision for credit losses for the three months ended March 31, 2020 and 2019, in thousands:


	Three Months Ended March 31,
	2020		2019
Provision for credit losses-loans	$	19,865	$	1,635
Provision for credit losses-unfunded commitments⁽¹⁾	1,616		—
Provision for credit losses-held to maturity securities⁽²⁾	39		—
Total provision expense	$	21,520	$	1,635

(1) Prior to the adoption of ASU 2016-13, the provision for unfunded commitments was immaterial, and therefore prior periods are not presented.
(2) Prior to the adoption of ASU 2016-13, there was no requirement to record provision for credit losses for held to maturity securities.

The provision for ~~loan~~credit losses ~~decreased $2.6~~on loans was $19.9 million for the first quarter of 2020 compared to $1.6 million for the first quarter of ~~2019 compared to $4.3 million for the first quarter of 2018.~~2019. The ~~impact of the closure of the Citizen's Finance offices~~increase in the first quarter of ~~2019 resulted~~2020 was primarily due to a deteriorating economic outlook resulting in ~~net recoveries of $93,000~~an increase in ~~the first quarter of 2019 compared to net charge-offs of $706,000 in the~~expected credit losses.

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, which was a decrease of $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, such as economic conditions, considered when determining the appropriateness of the allowance for ~~loan~~credit losses, Heartland's provision for ~~loan~~credit losses will vary from quarter to quarter. For additional details on the specific factors considered in establishing the allowance for ~~loan~~credit losses, refer to the discussion of critical accounting policies set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Heartland's Annual Report on Form 10-K for the year ended December 31, ~~2018, and~~2019, the information ~~under~~in Note 1, "Basis of Presentation," to the ~~caption~~consolidated financial statements included herein, "Allowance For ~~Loan~~Credit Losses" and "Provision for Credit Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 5, "Allowance for Credit Losses," to the consolidated financial statements included herein.

Heartland believes the allowance for ~~loan~~credit losses as of March 31, ~~2019,~~2020, was at a level commensurate with the overall risk exposure of the loan portfolio. However, if current economic conditions ~~should~~resulting from COVID-19 continue or further 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~~credit losses. Due to the deteriorating economic conditions resulting from the COVID-19 pandemic, Heartland expects provision for credit losses to remain elevated.

Noninterest Income

The tables below show Heartland's noninterest income for the three-month periods ended March 31, ~~2019,~~2020, and ~~2018,~~2019, in thousands:


	Three Months Ended March 31,												Three Months Ended March 31,
	2019			2018			Change			% Change			2020		2019		Change		% Change
Service charges and fees	$	12,794		$	10,079		$	2,715		27	%	Service charges and fees	$	12,021	$	12,794	$	(773)	(6)	%
Loan servicing income	1,729			1,754			(25		)	(1	)	Loan servicing income	963		1,729		(766)		(44)
Trust fees	4,474			4,680			(206		)	(4	)	Trust fees	5,022		4,474		548		12
Brokerage and insurance commissions	734			907			(173		)	(19	)	Brokerage and insurance commissions	733		734		(1)		—
Securities gains, net	1,575			1,441			134			9		Securities gains, net	1,658		1,575		83		5
Unrealized (gain)/loss on equity securities, net	258			(28		)	286			1,021
Unrealized gain/(loss) on equity securities, net												Unrealized gain/(loss) on equity securities, net	(231)		258		(489)		(190)

Net gains on sale of loans held for sale	3,176			4,051			(875		)	(22	)	Net gains on sale of loans held for sale	4,660		3,176		1,484		47
Valuation adjustment on servicing rights	(589		)	(2		)	(587		)	(29,350	)	Valuation adjustment on servicing rights	(1,565)		(589)		(976)		166
Income on bank owned life insurance	899			614			285			46		Income on bank owned life insurance	498		899		(401)		(45)
Other noninterest income	1,667			1,220			447			37		Other noninterest income	2,058		1,667		391		23
Total noninterest income	$	26,717		$	24,716		$	2,001		8	%	Total noninterest income	$	25,817	$	26,717	$	(900)	(3)	%

Total noninterest income totaled $25.8 million during the first quarter of 2020 compared to $26.7 million during the first quarter of 2019, ~~compared to $24.7 million during~~a decrease of $900,000 or 3%. The changes for the ~~first~~ quarter were primarily the result of ~~2018, an increase of $2.0 million or 8%. This increase reflected~~ higher ~~service charges and fees, net securities gains and other noninterest income, which were partially offset by decreased~~ net gains on sale of loans held for sale, which was offset by lower service charges and ~~an increased~~fees, loan servicing income, and valuation adjustment on servicing rights.

Service Charges and Fees

The following tables summarize the changes in service charges and fees for the three-month periods ended March 31, ~~2019,~~2020, and ~~2018,~~2019, in thousands:


	Three Months Ended March 31,									Three Months Ended March 31,
	2019		2018		Change		% Change			2020		2019		Change		% Change
Service charges and fees on deposit accounts	$	2,977	$	2,618	$	359	14	%	Service charges and fees on deposit accounts	$	3,438	$	2,977	$	461	15	%
Overdraft fees	2,744		2,208		536		24		Overdraft fees	2,809		2,744		65		2
Customer service fees	81		77		4		5
Customer service and other service fees									Customer service and other service fees	59		82		(23)		(28)
Credit card fee income	3,349		2,190		1,159		53		Credit card fee income	3,900		3,349		551		16
Debit card income	3,642		2,985		657		22		Debit card income	1,815		3,642		(1,827)		(50)
Other service charges	1		1		—		—

Total service charges and fees	$	12,794	$	10,079	$	2,715	27	%	Total service charges and fees	$	12,021	$	12,794	$	(773)	(6)	%

Total service charges and fees ~~increased $2.7~~decreased $773,000 or 6% to $12.0 million ~~or 27%~~during the first quarter of 2020 compared to $12.8 million during the first quarter of 2019, ~~compared to $10.1 million during the first quarter of 2018.~~ as increases in credit card fee income and service charges and fees on deposit accounts were offset by a decrease in debit card income.

Service charges and fees on deposit accounts increased ~~$359,000~~$461,000 or ~~14%~~15% to $3.4 million for the first quarter of 2020 compared to $3.0 million for the first quarter of ~~2019 compared~~2019. Overdraft fees increased $65,000 or 2% to ~~$2.6~~$2.8 million for the first quarter of ~~2018. Overdraft fees increased $536,000 or 24%~~2020 compared to $2.7 million for the first quarter of ~~2019 compared to $2.2 million for the first quarter of 2018. These~~2019. The increases in service charges and fees on deposit accounts and overdraft fees were primarily attributable to a larger demand deposit customer base, a portion of which is attributable to the acquisitions completed in ~~2018.~~2019.

Fees associated with credit card services were $3.9 million during the first quarter of 2020 compared to $3.3 million during the first quarter of 2019, ~~compared to $2.2 million during the first quarter of 2018,~~ an increase of ~~$1.2 million~~$551,000 or ~~53%~~16%. 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 $657,000~~decreased $1.8 million or ~~22%~~50% to $1.8 million for the first quarter of 2020 compared to $3.6 million for the first quarter of ~~2019 compared~~2019. The decrease was primarily attributable to ~~$3.0 million for the first quarter of 2018. Based on estimated calculations using 2018 debit card income, Heartland estimates~~ the impact of the Durbin Amendment, which ~~Heartland expects~~restricts interchange fees to ~~be subject~~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. The Durbin Amendment was effective for Heartland on July 1, ~~2019, will reduce debit card income by approximately $6.0 million on an annualized basis.~~2019.

Loan Servicing Income

The following tables show the changes in loan servicing income for the three-month periods ended March 31, ~~2019,~~2020, and ~~2018,~~2019, in thousands:


	Three Months Ended March 31,												Three Months Ended March 31,
	2019			2018			Change			% Change			2020		2019		Change		% Change
Commercial and agricultural loan servicing fees⁽¹⁾	$	683		$	749		$	(66	)	(9	)%	Commercial and agricultural loan servicing fees⁽¹⁾	$	861	$	683	$	178	26	%
Residential mortgage servicing fees	2,546			2,250			296			13		Residential mortgage servicing fees	409		2,546		(2,137)		(84)
Mortgage servicing rights amortization	(1,500		)	(1,245		)	(255		)	(20	)	Mortgage servicing rights amortization	(307)		(1,500)		1,193		80
Total loan servicing income	$	1,729		$	1,754		$	(25	)	(1	)%	Total loan servicing income	$	963	$	1,729	$	(766)	(44)	%

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

Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which are dependent upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. Loan servicing income totaled $963,000 during the first quarter of 2020 compared to $1.7 million during the first quarter of 2019, ~~compared to $1.8 million during the first quarter of 2018,~~ a decrease of ~~$25,000~~$766,000 or 1%44%. ~~Due~~The decrease was due to the sale of the mortgage servicing rights portfolio of Dubuque Bank and Trust Company, which occurred on April 30, ~~2019, net loan servicing income related to residential mortgage loans is expected to decrease by approximately $500,000 in the second quarter of 2019 and $800,000 in future quarters.~~2019. This transaction ~~does~~did not impact the residential mortgage servicing portfolio of Heartland's PrimeWest Mortgage Corporation subsidiary.

~~Securities Gains, Net~~

Securities gains, net, totaled $1.6 million for the first quarter of 2019 compared to net securities gains of $1.4 million for the first quarter of 2018, which was an increase of $134,000 or 9%. Heartland's net unrealized loss on securities available for sale totaled $15.2 million at March 31, 2019, compared to $52.8 million at March 31, 2018.

Net Gains on Sale of Loans Held for Sale

During the first quarter of ~~2019,~~2020, net gains on sale of loans held for sale totaled ~~$3.2~~$4.7 million compared to ~~$4.1~~$3.2 million during the same period in ~~2018, a decrease~~2019, an increase of ~~$875,000~~$1.5 million or ~~22%, which~~47%. The increase was primarily due to ~~the outsourcing of Heartland's legacy~~an increase in residential mortgage ~~lending operations~~loan refinancing activity in response to the ~~fourth quarter of 2018.~~recent declines in mortgage interest rates.

~~Other Noninterest Income~~Valuation Adjustment on Servicing Rights

~~Other noninterest income totaled $1.7~~The valuation adjustment on servicing rights increased $976,000 to $1.6 million and $1.2 million for 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~~2020 from $589,000 in the ~~second~~first quarter of ~~2019.~~2019, primarily due to recent declines in mortgage interest rates.

Noninterest Expense

The tables below show Heartland's noninterest expenses for the three-month periods ended March 31, ~~2019,~~2020, and ~~2018,~~2019, in thousands:

Three Months Ended
March 31,
2019 2018 Change % Change
Salaries and employee benefits $ 50,285
$ 48,710
$ 1,575
3 %
Occupancy 6,607
6,043
564
9
Furniture and equipment 2,692
2,749
(57 ) (2 )
Professional fees 11,379
9,448
1,931
20
Advertising 2,325
1,940
385
20
Core deposit and customer relationship intangibles amortization 2,842
1,863
979
53
Other real estate and loan collection expenses 701
732
(31 ) (4 )
Gain on sales/valuations of assets, net (3,004 ) (197 ) (2,807 ) (1,425 )
Restructuring expenses 3,227
2,564
663
26
Other noninterest expenses 11,176
9,794
1,382
14
Total noninterest expenses $ 88,230
$ 83,646
$ 4,584
5 %


	Three Months Ended March 31,
	2020		2019		Change		% Change
Salaries and employee benefits	$	49,957	$	50,285	$	(328)	(1)	%
Occupancy	6,471		6,607		(136)		(2)
Furniture and equipment	3,108		2,692		416		15
Professional fees	12,473		10,995		1,478		13

Advertising	2,205		2,320		(115)		(5)
Core deposit and customer relationship intangibles amortization	2,981		2,869		112		4
Other real estate and loan collection expenses, net	334		701		(367)		(52)
(Gain)/loss on sales/valuations of assets, net	16		(3,004)		3,020		(101)
Acquisition, integration and restructuring costs	1,376		3,614		(2,238)		(62)
Partnership investment in tax credit projects	184		475		(291)		(61)
Other noninterest expenses	11,754		10,676		1,078		10
Total noninterest expenses	$	90,859	$	88,230	$	2,629	3	%

For the first quarter of ~~2019,~~2020, noninterest expenses totaled ~~$88.2~~$90.8 million compared to ~~$83.6~~$88.2 million during the first quarter of ~~2018,~~2019, an increase of ~~$4.6~~$2.6 million or 5%3%. ~~The most significant increases were related to salaries~~

Notable changes in noninterest expense categories for the three months ended March 31, 2020 and ~~employee benefits, professional fees, core deposit~~2019 are as follows:

Furniture and ~~customer relationship intangibles amortization, gain on sales/valuations of assets, net,~~equipment

Furniture and ~~restructuring expenses. The increases~~equipment expenses totaled $3.1 million in ~~occupancy, advertising and other noninterest expenses are primarily related to the acquisitions completed in 2018.~~

~~Salaries and Employee Benefits~~

~~The largest component of noninterest expenses, salaries and employee benefits, increased $1.6 million or 3% during the~~ first quarter of ~~2019 as compared to the same quarter in 2018. Base salary expense totaled $32.3 million and $31.2 million for the first quarter of 2019 and 2018, respectively,~~2020, which was an increase of ~~$1.1~~$416,000 or 15% from $2.7 million or 3%. This increase is primarily related to the acquisitions completed in 2018. Stock compensation expense for restricted stock units and employee stock purchase plan expense increased $398,000 or 24% to $2.1 millionrecorded in the first quarter of ~~2019 compared to $1.9 million~~2019. Equipment expenses of $321,000 in the first quarter of ~~2018. Retirement plan and 401K expenses totaled $2.7 million in~~2020 were related to purchases to allow employees to work from home due to the first quarter of 2019 compared to $2.3 million in the first quarter of 2018, which was an increase of $409,000 or 18%. Heartland had total full-time equivalent employees of 1,976 on March 31, 2019, compared to 2,022 on March 31, 2018.COVID-19 pandemic.

Professional Fees

Professional fees for the first quarter of ~~2019~~2020 totaled ~~$11.4~~$12.5 million compared to ~~$9.4~~$11.0 million for the same quarter of ~~2018,~~2019, which was an increase of ~~$1.9~~$1.5 million or ~~20%~~13%. The increase is primarily attributable to ~~professional fees incurred at~~ the ~~entities acquired~~amortization of expenses related to the Salesforce and nCino implementation.

Gain/Loss on Sales/Valuations of Assets, Net

Net loss on sales/valuations of assets increased $3.0 million as losses totaled $16,000 in ~~2018, model validation expenses, and increased advisory services associated with the higher level of regulation resulting from Heartland having assets over $10 billion.~~

~~Core Deposit and Customer Relationship Intangibles Amortization~~

~~Core deposit and customer relationship intangibles amortization was $2.8 million for~~ the first quarter of ~~2019~~2020 compared to ~~$1.9~~gains of $3.0 million ~~for~~in the ~~same~~first quarter of ~~2018, which was an increase of $979,000 or 53%. Included~~2019. The gains recorded in ~~this increase was a $379,000 write-off of core deposit intangibles related~~2019 were primarily attributable to the branch sales at Wisconsin Bank & ~~Trust during~~Trust.

Acquisition, integration and restructuring costs

Acquisition, integration and restructuring costs totaled $1.4 million in the first quarter of ~~2019. The remainder~~2020, which was a decrease of $2.2 million or 62% from $3.6 million in 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~~same quarter of ~~2019 compared to $197,000 for the first quarter of 2018, which was an increase of $2.8 million.~~2019. In the first quarter of 2019, ~~a gain~~Heartland recorded $2.2 million of ~~$3.5 million was recorded~~anticipated lease buyout expense, fixed asset disposals and software discontinuation fees related to the ~~sale~~discontinuation of ~~two branches at Wisconsin Bank & Trust.~~Heartland's legacy mortgage operations and consumer finance business.

~~Restructuring Expenses~~Other noninterest expenses

~~Restructuring~~Other noninterest expenses totaled ~~$3.2~~$11.8 million ~~and $2.6~~for the first quarter of 2020 compared to $10.7 million for the first quarter of 2019, ~~and 2018, respectively. In the first quarter~~which was an increase of 2019, the restructuring expenses consisted of severance and retention payments for legacy mortgage and Citizens' Finance Co. employees, software discontinuation fees and expected lease buyouts. In the first quarter of 2018, the restructuring expenses were$1.1 million or 10%. The increase was primarily ~~related~~attributable 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 systems.recent acquisitions.

Efficiency Ratio

One of Heartland's top priorities ishas been to improve its efficiency ratio, on a fully tax-equivalent basis, bywith the goal of reducing it to ~~the low~~below 60% ~~range.~~. During the first quarter of ~~2019,~~2020, Heartland's efficiency ratio on a fully tax-equivalent basis decreased by ~~298~~311 basis points to ~~65.23%~~61.82% in comparison with ~~68.21%~~64.93% for the quarter ended March 31, ~~2018. Management has taken actions to improve its~~2019. The improvement of the efficiency ratio ~~including restructuring its mortgage lending operations and optimizing bank branch locations. Additionally, systems conversions~~was primarily attributable to higher fully tax-equivalent net interest income, which increased $9.3 million or 9% to $113.6 million for the first quarter of ~~newly acquired entities are completed as soon as possible after~~2020 from $104.4 million for the ~~closing~~first quarter of ~~the transaction in order to optimize cost savings. Heartland's efficiency ratio will vary from quarter to quarter as a result of merger and acquisition activities.~~2019.

Income Taxes

Heartland's effective tax rate was 22.77% for the first quarter of 2020 compared to 20.88% for the first quarter of 2019. The following items impacted Heartland's first quarter 2020 and 2019 ~~compared to 18.04%~~tax calculations:

•Solar energy tax credits of $76,000 and $314,000 for the first quarter of ~~2018.~~ 2020 and 2019, respectively.

•Federal low-income housing tax credits ~~included in the determination~~ of ~~Heartland's income taxes totaled~~$195,000 and $281,000 for the first quarter of 2020 and 2019, ~~compared to $307,000 for~~respectively.

•New markets tax credits of $75,000 during the first quarter of ~~2018. Included~~2020 compared to $0 in ~~Heartland's~~the first quarter ~~2019 tax calculation was a solar energy tax credit totaling $314,000. The tax-exempt~~of 2019.

•Tax-exempt interest income as a percentage of pre-tax income ~~declined~~increased to ~~13.35%~~16.40% during the first quarter of ~~2019 from 20.46% during~~2020 compared to 13.35% for the first quarter of ~~2018.~~2019.

~~Heartland's income taxes included~~•Tax expense of $25,000 in the first quarter of 2020 compared to a tax benefit of $336,000 ~~and $611,000 for~~in the ~~three-month periods ended March 31,~~first quarter of 2019 ~~and 2018, respectively,~~ resulting from the vesting of ~~outstanding~~ restricted stock unit ~~awards and options.~~awards. The majority of Heartland's restricted stock unit awards vest in the first quarter of each year.

FINANCIAL CONDITION

Total assets of Heartland were ~~$11.31~~$13.29 billion at March 31, ~~2019, a decrease~~2020, an increase of ~~$95.5~~$84.9 million or 1% since December 31, ~~2018.~~2019. Securities represented ~~22%~~27% and ~~24%~~26% of total assets at March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, respectively.

Lending Activities

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

~~The~~In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to more closely align with FDIC codes. All prior periods shown in this Quarterly Report on Form 10-Q have been adjusted.

Heartland originates commercial and industrial loans and owner occupied commercial real estate ~~loan portfolio includes~~loans for a wide ~~range~~variety of business ~~loans,~~purposes, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and real estate. Although most loans are made on a secured basis, loans may be made on an unsecured basis if warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. Commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The risks in the commercial and industrial portfolio include the unpredictability of the cash flow of the borrowers and the variability in the value of the collateral securing the loans. Owner occupied commercial real estate loans are dependent upon the cash flow of the borrowers and the collateral value of the real estate.

Non-owner occupied commercial real estate loans provide financing for various non-owner occupied or income producing properties. Real estate construction loans are generally short-term or interim loans that provide financing for acquiring or developing commercial income properties, multi-family projects or single-family residential homes. The collateral that Heartland requires for most of these loans is based upon the discounted market value of the collateral. ~~The primary repayment risks of~~Non-owner occupied commercial real estate loans are ~~that~~typically dependent, in large part, on sufficient income from the ~~cash flow~~properties securing the loans to cover the operating expenses and debt service. Real estate construction loans involve additional risks because funds are advanced based upon estimates of costs and the estimated value of the ~~borrowers may be unpredictable, and the collateral securing these~~completed project. Additionally, real estate construction loans

~~may fluctuate in value. Heartland seeks to minimize these risks~~ have a greater risk of default in a ~~variety~~weaker economy because the source of ~~ways. The underwriting analysis includes credit verification, analysis of global cash flows, appraisals~~repayment is reliant on the successful and ~~a review~~timely sale of the ~~financial condition of the borrower.~~project. Personal guarantees are frequently required as a tertiary form of repayment. In addition, when underwriting loans for commercial real estate, careful consideration is given to the property's operating history, future operating projections, current and projected occupancy, location and physical condition. ~~Heartland also utilizes government guaranteed lending through the U.S. Small Business Administration~~

Agricultural 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~~agricultural real estate loans, many of which are secured by crops, machinery and real estate, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. Agricultural and agricultural real estate loans present unique credit risks relating to adverse weather conditions, loss of livestock due to disease or other reasons, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural and agricultural real estate loans is dependent upon the profitable operation or management of the agricultural entity. Loans secured by farm equipment, livestock or crops may not provide an adequate source of repayment because of damage or depreciation. In underwriting agricultural and agricultural real estate loans, lending personnel work closely with their customers to review budgets and cash flow projections for crop production for the ensuing year. These budgets and cash flow projections are monitored closely during the year and reviewed with the customers at least annually. Lending personnel ~~also~~ work closely with governmental agencies, including the U.S. Small Business Administration and U.S. Department of Agriculture's Rural Development Business and Industry Program Farm Service Agency, to help agricultural customers obtain credit enhancement products, such as loan guarantees, longer-term funding or interest ~~assistance.~~assistance, to reduce risk.

Residential real estate loans are originated for the purchase or refinancing of single family residential properties. Residential real estate loans are dependent upon the borrower's ability to repay the loan and the underlying collateral value. During the fourth quarter of 2018, Heartland entered into arrangements with third parties to offer residential mortgage loans to customers in many of its markets. In addition, the acquisition in 2018 of First Bank & Trust in Lubbock, Texas, included its wholly owned mortgage subsidiary, PrimeWest Mortgage Corporation. PrimeWest Mortgage Corporation provides mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of customers in several of Heartland's southwestern markets. PrimeWest Mortgage Corporation services the loans it sells into the secondary market.

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

Total loans held to maturity were ~~$7.33~~$8.37 billion at both March 31, ~~2019, compared to $7.41 billion at~~2020, and December 31, ~~2018, a decrease of $76.2 million or 1%. During the first quarter of~~ 2019, the sale of two branches at Dubuque Bank and Trust Company was announced, which included $20.3 million of loans 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 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~~$6.3 million or less than 1%. ~~Excluding $14.9 million of commercial and commercial real estate loans classified as held for sale during~~The following table shows 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, 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 sale during the quarter, agricultural and agricultural real estate loans decreased $14.0 million or 2%changes in loan balances by loan category since December 31, ~~2018.~~2019, in thousands:

~~Residential mortgage loans decreased $43.2 million or 6%~~


	March 31, 2020		December 31, 2019		$ Change		% Change
Commercial and industrial	$	2,550,490	$	2,530,809	$	19,681	1	%
Owner occupied commercial real estate	1,431,038		1,472,704		(41,666)		(3)
Non-owner occupied commercial real estate	1,551,787		1,495,877		55,910		4
Real estate construction	1,069,700		1,027,081		42,619		4
Agricultural and agricultural real estate	550,107		565,837		(15,730)		(3)
Residential mortgage	792,540		832,277		(39,737)		(5)
Consumer	428,574		443,332		(14,758)		(3)
	$	8,374,236	$	8,367,917	$	6,319	—	%

The decreases in the residential and consumer loan balances were primarily due to ~~$630.4 million at March 31, 2019, from $673.6 million at year-end. Excluding $2.0 million of~~the recent declines in residential mortgage ~~loans classified as held for sale during the quarter, residential mortgage loans decreased $41.2 million or 6% since year-end.~~interest rates.

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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:

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


	March 31, 2020						December 31, 2019
	Amount		Percent		Amount		Percent
Loans receivable held to maturity:
Commercial and industrial	$	2,550,490	30.46	%	$	2,530,809	30.24	%
Owner occupied commercial real estate	1,431,038		17.09		1,472,704		17.60
Non-owner occupied commercial real estate	1,551,787		18.53		1,495,877		17.88
Real estate construction	1,069,700		12.77		1,027,081		12.27
Agricultural and agricultural real estate	550,107		6.57		565,837		6.76
Residential mortgage	792,540		9.46		832,277		9.95
Consumer	428,574		5.12		443,332		5.30
Gross loans receivable held to maturity	8,374,236		100.00	%	8,367,917		100.00	%






Allowance for credit losses	(97,350)				(70,395)
Loans receivable, net	$	8,276,886			$	8,297,522

Loans secured by real estate, either fully or partially, totaled $4.74 billion or 65% of gross loans at March 31, 2019. At March 31, 2019, approximately 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 March 31, 2019, and December 31, 2018, are listed below, in thousands:

LOANS SECURED BY REAL ESTATE
March 31, 2019 December 31, 2018
Residential real estate, excluding residential construction and residential lot loans $ 1,079,352
$ 1,119,942
Industrial, manufacturing, business and commercial 670,440
805,265
Agriculture 266,010
270,023
Retail 479,469
435,680
Office 485,794
485,262
Land development and lots 202,513
216,665
Hotel, resort and hospitality 280,285
233,735
Multi-family 324,198
311,319
Food and beverage 142,630
130,981
Warehousing 169,721
186,436
Health services 204,410
182,882
Residential construction 161,116
171,116
All other 269,165
255,145
Total loans secured by real estate $ 4,735,103
$ 4,804,451

Allowance ~~For Loan~~for Credit Losses

On January 1, 2020, Heartland adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," which replaces the incurred loss methodology with a current expected credit loss ("CECL") methodology. Additionally, CECL required an allowance for unfunded commitments to be calculated using a current expected credit loss methodology. Heartland's CECL methodology is comprised of three parts: a quantitative calculation, a qualitative calculation, and an economic forecasting component.

The process utilized by Heartland to determine the appropriateness of the allowance for ~~loan~~credit losses is considered a critical accounting practice for Heartland and has ~~remained consistent over the past several years.~~been updated to be in accordance with CECL as of January 1, 2020. All prior periods are presented in accordance with prior GAAP. The allowance for ~~loan~~credit losses represents management's estimate of ~~identified and unidentified probable~~lifetime losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for ~~loan~~credit losses, refer to the critical accounting policies section of Heartland's Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019 and Note 1, "Basis of Presentation," of the consolidated financial statements included in this Quarterly Report on Form 10-Q.

~~Nonperforming~~The table below presents the changes in the allowance for credit losses for loans ~~were $79.0~~during the three-month periods ended March 31, 2020 and 2019, in thousands:


	Three Months Ended March 31,
	2020			2019
Balance at beginning of period	$	70,395		$	61,963
Impact of ASU 2016-13 adoption	12,071			—
Provision for credit losses	19,865			1,635
Recoveries on loans previously charged off	1,320			991
Charge-offs on loans	(6,301)			(1,950)
Balance at end of period	$	97,350		$	62,639

Allowance for credit losses on loans as a percent of loans	1.16		%	0.85		%
Annualized ratio of net charge offs to average loans	0.24		%	0.05		%

Heartland's allowance for credit losses for loans totaled $82.5 million ~~or 1.08%~~after adoption of ~~total~~CECL on January 1, 2020, which was an increase of $12.1 million since year-end 2019. Heartland recorded provision for credit losses for loans of $19.9 million in the first quarter of 2020 compared to $1.6 million in the first quarter of 2019. The allowance for credit losses for loans totaled $97.4 million and $70.4 million at March 31, 2020, and December 31, 2019, respectively.

The allowance for credit losses for loans at March 31, ~~2019,~~2020, was 1.16% of loans compared to ~~$72.7 million or 0.98%~~0.84% of ~~total~~ loans at December 31, ~~2018.~~2019. Net charge offs for the first quarter of 2020 totaled $5.0 million compared to $959,000 for the first quarter of 2019, which was a $4.0 million increase. The increase was primarily attributable to a $3.2 million charge off on a commercial and industrial loan for which a full reserve had been previously established.

The following table shows, in thousands, the changes in Heartland's allowance for unfunded commitments for the three-month periods ended March 31, 2020 and 2019:


	Three Months Ended March 31,
	2020		2019
Balance at beginning of period⁽¹⁾	$	248	$	—
Impact of ASU 2016-13 adoption	13,604		—
Provision for credit losses	1,616		—
Balance at end of period	$	15,468	$	—
(1) Prior to the adoption of ASU 2016-13, the allowance for unfunded commitments was immaterial, and therefore prior periods have not been shown in this table.

Heartland's allowance for unfunded commitments totaled $13.9 million after the adoption of CECL on January 1, 2020. Prior to January 1, 2020, the allowance for unfunded commitments was immaterial. Heartland recorded $1.6 million of provision for credit losses related to ~~two agribusiness relationships that were originated~~unfunded loan commitments in ~~Heartland's Midwestern markets.~~the first quarter of 2020. At March 31, ~~2019, approximately $42.4 million or 54% of Heartland's nonperforming loans had individual loan balances exceeding $1.0~~2020, the allowance for unfunded commitments was $15.5 million, and ~~represented loans to seventeen borrowers. At March 31, 2019, and December 31, 2018,~~ Heartland had ~~$7.9 million and $7.7 million, respectively,~~$2.78 billion of ~~nonperforming residential real estate loans that were repurchased under various Government National Mortgage Association ("GNMA") or other guaranteed~~unfunded loan ~~programs.~~ commitments.

The ~~portion of~~

~~Heartland's nonperforming nonresidential real estate loans covered by government guarantees totaled $12.7~~total allowance for lending related credit losses was $112.8 million at March 31, ~~2019, compared to $7.7 million at~~2020, which was 1.35% of loans as of March 31, 2020. The following table shows, in thousands, the components of Heartland's allowance for lending related credit losses as of March 31, 2020, January 1, 2020, and December 31, ~~2018.~~2019:

~~The~~


	March 31, 2020						January 1, 2020⁽¹⁾						December 31, 2019⁽²⁾
	Amount		Percentage of Allowance		Amount		Percentage of Allowance		Amount		Percentage of Allowance
Quantitative	$	77,447	68.65	%	$	82,829	85.99	%	$	41,691	59.22	%
Qualitative	26,027		23.07		11,468		11.91		28,704		40.78
Economic Forecast	9,344		8.28		2,021		2.10		—		—
Total	$	112,818	100.00	%	$	96,318	100.00	%	$	70,395	100.00	%

(1) January 1, 2020 is included to show the impact of the adoption of ASU 2016-13 on the components of the allowance for lending related credit losses.
(2) The allowance for unfunded commitments was immaterial prior to the adoption of ASU 2016-13 and therefore not included in prior periods.

Heartland's quantitative allowance totaled $77.4 million or 69% of Heartland's total allowance for ~~loan~~lending related credit losses ~~was 0.85% and 0.84% of loans~~ at March 31, ~~2019~~2020 compared to $82.8 million or 86% of the total allowance for lending related credit losses on January 1, 2020, and December 31, 2018, respectively, and 79.29% and 85.27% of nonperforming loans at March 31, 2019, and December 31, 2018, respectively. Excluding the acquired loans covered by the valuation reserves, the ratio$41.7 million or 59% of the allowance for loan losses at December 31, 2019. The increase in the quantitative component on January 1, 2020, was primarily attributable to ~~outstanding~~the addition of $1.80 billion of previously acquired loans ~~was 1.01% and 1.03%~~to the allowance calculation.

The quantitative allowance of Heartland's total allowance for lending related credit losses decreased to $77.4 million at March 31, ~~2019,~~2020 compared to $82.8 million at January 1, 2020. The decrease in the quantitative portion was primarily due to the decrease of individually assessed loans, which declined to $48.8 million at March 31, 2020 from $67.4 million at January 1, 2020. The allowance for credit losses on individually assessed loans totaled $6.3 million at March 31, 2020 compared to $11.4 million at January 1, 2020, which was a decrease of $5.1 million or 44%.

Heartland's qualitative allowance totaled $26.0 million or 23% of Heartland's total allowance for lending related credit losses at March 31, 2020 compared to $11.5 million or 12% of the total allowance for lending related credit losses on January 1, 2020, and $28.7 million or 41% of the allowance for loan losses at December 31, ~~2018, respectively.~~ 2019. The change in methodology to an expected loss model from an incurred loss model resulted in the reduction of the qualitative allowance of $17.2 million or 60% to $11.5 million at January 1, 2020, compared to $28.7 million at December 31, 2019.

The qualitative allowance component of Heartland’s total allowance for lending related credit losses increased to $26.0 million or 23% of the total allowance at March 31 2020, compared to $11.5 million or 12% on January 1, 2020. As described in Note 1, "Basis of Presentation," of the consolidated financial statements included in this Quarterly Report on Form 10-Q, in determining the appropriate level of this qualitative component, management assesses several risk factors including an overall assessment of "other external factors." At the end of the first quarter of 2020, in making its assessment, management increased the level of other external factors risk from the initial day 1 (January 1, 2020) assessment of moderate to high. This change reflected the uncertainty of both the economic forecasting and quantitative allowance component results given the high level of market and economic volatility that existed at the end of the quarter due to the COVID-19 pandemic. While several of the qualitative factors increased during the quarter, the change in the other external factors was the primary driver of the overall increase in the qualitative allowance for the quarter ended March 31, 2020.

Economic forecasting was not required prior to January 1, 2020. Heartland has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in Heartland's methodology. Heartland’s initial January 1, 2020 allowance calculation utilized a two-year reasonable and supportable forecast period which resulted in an economic forecasting allowance of $2.0 million or 2% of the total allowance for lending related credit losses.

At March 31, ~~2019, valuation reserves~~2020, Heartland utilized Moody's March 27, 2020, baseline forecast scenario, which was the most currently available forecast and included the potential impact of COVID-19. Because of the economic deterioration and uncertainty associated with COVID-19, the reasonable and supportable forecast period was reduced to one year, which resulted in an allowance of $9.3 million or 8% of the total allowance for lending related credit losses at March 31, 2020.

Credit Quality and Nonperforming Assets

Heartland's nonpass loans totaled ~~$36.7 million and covered $1.47 billion~~6.4% of ~~acquired loans. At~~total loans as of March 31, 2020 compared to 6.7% of total loans as of December 31, ~~2018, valuation reserves totaled $40.9 million~~2019. As of March 31, 2020, Heartland's nonpass loans consisted of approximately 45% watch loans and ~~covered $1.63 billion~~55% substandard loans. The percent of ~~acquired~~nonpass loans on nonaccrual status as of March 31, 2020, was 15%. As of December 31, 2019, Heartland's nonpass loans were comprised of approximately 60% watch loans and 40% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, 2019, was 14%. Loans delinquent 30-89 days as a percent of total loans was ~~0.47%~~0.38% at March 31, ~~2019,~~2020, in comparison with ~~0.21%~~0.33% at December 31, 2018. The increase in loans delinquent 30-89 days was primarily attributable to recently acquired portfolios and one large credit resolved in the near term. Management believes the increase in delinquencies in the acquired portfolios is due to the implementation of Heartland's underwriting and closing processes at the new entities and is not indicative of the underlying credit quality.2019.

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

Three Months Ended
March 31,
2019 2018
Balance at beginning of period $ 61,963
$ 55,686
Provision for loan losses 1,635
4,263
Recoveries on loans previously charged off 991
931
Charge-offs on loans (1,950 ) (2,224 )
Balance at end of period $ 62,639
$ 58,656
Annualized ratio of net charge offs to average loans 0.05 % 0.08 %

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


	March 31,									December 31,
	2020			2019			2019			2018
Nonaccrual loans	$	79,280		$	77,294		$	76,548		$	71,943
Loans contractually past due 90 days or more	—			1,706			4,105			726
Total nonperforming loans	79,280			79,000			80,653			72,669
Other real estate	6,074			5,391			6,914			6,153
Other repossessed assets	17			8			11			459
Total nonperforming assets	$	85,371		$	84,399		$	87,578		$	79,281







Performing troubled debt restructured loans⁽¹⁾	$	2,858		$	3,460		$	3,794		$	4,026
Nonperforming loans to total loans	0.95		%	1.08		%	0.96		%	0.98		%
Nonperforming assets to total loans plus repossessed property	1.02		%	1.15		%	1.05		%	1.07		%
Nonperforming assets to total assets	0.64		%	0.75		%	0.66		%	0.69		%

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

NONPERFORMING ASSETS March 31, December 31,
2019 2018 2018 2017
Nonaccrual loans $ 77,294
$ 64,806
$ 71,943
$ 62,581
Loans contractually past due 90 days or more 1,706
22
726
830
Total nonperforming loans 79,000
64,828
72,669
63,411
Other real estate 5,391
11,801
6,153
10,777
Other repossessed assets 8
423
459
411
Total nonperforming assets $ 84,399
$ 77,052
$ 79,281
$ 74,599
Performing troubled debt restructured loans⁽¹⁾
$ 3,460
$ 3,206
$ 4,026
$ 6,617
Nonperforming loans to total loans 1.08 % 0.96 % 0.98 % 0.99 %
Nonperforming assets to total loans plus repossessed property 1.15 % 1.14 % 1.07 % 1.17 %
Nonperforming assets to total assets 0.75 % 0.77 % 0.69 % 0.76 %

(1) Represents accruing troubled debt restructured loans performing according to their restructured terms.
The performing troubled debt restructured loans above do not include any loan modifications made under COVID-19 modification programs. Refer to the "Overview" section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, for further information on these modifications.

The schedules below summarize the changes in Heartland's nonperforming assets during the first three months of ~~2019,~~2020, in thousands:


	Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
December 31, 2019	$	80,653	$	6,914	$	11	$	87,578
Loan foreclosures	(251)		245		6		—
Net loan charge-offs	(4,981)		—		—		(4,981)
Acquired nonperforming assets	—		—		—		—
New nonperforming loans	15,796		—		—		15,796
Reduction of nonperforming loans⁽¹⁾	(11,937)		—		—		(11,937)
OREO/Repossessed assets sales proceeds	—		(1,019)		—		(1,019)
OREO/Repossessed assets writedowns, net	—		(66)		—		(66)
Net activity at Citizens Finance Co.	—		—		—		—
March 31, 2020	$	79,280	$	6,074	$	17	$	85,371
(1) Includes principal reductions and transfers to performing status.

Nonperforming
Loans

Other
Real Estate
Owned

Other
Repossessed
Assets

Total
Nonperforming
Assets
December 31, 2018 $ 72,669
$ 6,153
$ 459
$ 79,281
Loan foreclosures (1,786 ) 1,694
92
—
Net loan charge-offs (959 ) —
—
(959 )
New nonperforming loans 15,314
—
—
15,314
Reduction of nonperforming loans⁽¹⁾
(6,238 ) —
—
(6,238 )
OREO/Repossessed assets sales proceeds —
(2,004 ) (88 ) (2,092 )
OREO/Repossessed assets writedowns, net —
(452 ) (10 ) (462 )
Net activity at Citizens Finance Co. —
—
(445 ) (445 )
March 31, 2019 $ 79,000
$ 5,391
$ 8
$ 84,399

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

Nonperforming loans were $79.3 million or 0.95% of total loans at March 31, 2020, compared to $80.7 million or 0.96% of total loans at December 31, 2019. At March 31, 2020, approximately $39.8 million or 50% of Heartland's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to thirteen borrowers. The portion of Heartland's nonperforming nonresidential real estate loans covered by government guarantees totaled $17.9 million at March 31, 2020, compared to $18.1 million at December 31, 2019.

Heartland expects that nonperforming assets and delinquent loans will increase through 2020 as customers' ability to repay is adversely impacted by economic disruptions caused by COVID-19.

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%~~27% and ~~24%~~26% of total assets at March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, respectively. Total securities carried at fair value as of March 31, ~~2019,~~2020, were ~~$2.40~~$3.49 billion, ~~a decrease~~an increase of ~~$50.2~~$175.8 million or 2%5% from ~~$2.45~~$3.31 billion at December 31, ~~2018.~~2019.

The table below presents the composition of the securities portfolio, including securities carried at fair value, held to maturity securities, net of allowance for credit losses, and other, by major category, as of March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


	March 31, 2020						December 31, 2019
	Amount		Percent		Amount		Percent
U.S. government corporations and agencies	$	9,916	0.27	%	$	9,893	0.29	%
Mortgage and asset-backed securities	2,520,004		69.70		2,577,278		75.02
Obligation of states and political subdivisions	1,032,316		28.55		798,514		23.24

Equity securities	18,260		0.50		18,435		0.54
Other securities	35,370		0.98		31,321		0.91
Total securities	$	3,615,866	100.00	%	$	3,435,441	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%~~70% at March 31, ~~2019,~~2020, compared to 75% at December 31, ~~2018.~~2019. Heartland's securities portfolio had an expected modified duration of ~~4.34~~5.84 years as of March 31, ~~2019,~~2020, compared to ~~4.01~~6.17 years as of year-end ~~2018.~~2019.

At March 31, ~~2019,~~2020, Heartland had ~~$27.5~~$35.4 million of other securities, including capital stock in each Federal Home Loan Bank ("FHLB") of which each of its bank subsidiaries is a member. All of these securities were classified as other securities held at cost.

Deposits

Total deposits were ~~$9.35~~$11.17 billion as of March 31, ~~2019,~~2020, compared to ~~$9.40~~$11.04 billion at December 31, ~~2018, a decrease~~2019, an increase of ~~$43.5~~$129.7 million or ~~less than~~ 1%. The ~~deposits classified as held for sale~~following table shows the changes in conjunction with the sale of two branches at Dubuque Bank and Trust Company totaled $77.0 million at March 31, 2019. Exclusive of this transaction, total deposits increased $33.5 million or less than 1% since December 31, 2018. Deposits changesdeposit balances by deposit 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.~~2019, in thousands:


	March 31, 2020		December 31, 2019		$ Change		% Change
Demand deposits	$	3,696,974	$	3,543,863	$	153,111	4	%
Savings deposits	6,366,610		6,307,425		59,185		1
Time deposits	1,110,441		1,193,043		(82,602)		(7)
	$	11,174,025	$	11,044,331	$	129,694	1	%

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, 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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


	March 31, 2020						December 31, 2019
	Amount		Percent		Amount		Percent
Demand	$	3,696,974	33.09	%	$	3,543,863	32.09	%
Savings	6,366,610		56.97		6,307,425		57.11
Time	1,110,441		9.94		1,193,043		10.80
Total	$	11,174,025	100.00	%	$	11,044,331	100.00	%

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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


	March 31, 2020		December 31, 2019
Securities sold under agreement to repurchase	$	51,910	$	84,486
Federal funds purchased	2,250		2,450
Advances from the FHLB	55,000		81,198

Other short-term borrowings	12,282		14,492
Total	$	121,442	$	182,626

March 31, 2019 December 31, 2018
Securities sold under agreement to repurchase $ 65,696
$ 80,124
Federal funds purchased 3,650
35,400
Advances from the FHLB 25,000
100,838
Other short-term borrowings 9,968
10,648
Total $ 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 ~~$104.3~~$121.4 million at March 31, ~~2019,~~2020, compared to ~~$227.0~~$182.6 million at year-end ~~2018,~~2019, a decrease of ~~$122.7~~$61.2 million or ~~54%~~34%.

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 ~~$65.7~~$51.9 million at March 31, ~~2019,~~2020, compared to ~~$80.1~~$84.5 million at December 31, ~~2018,~~2019, a decrease of ~~$14.4~~$32.6 million or ~~18%~~39%.

~~Also included in short-term borrowings is a~~Heartland renewed its $30.0 million revolving credit line agreement ~~Heartland has~~ with an unaffiliated bank ~~primarily~~on June 14, 2019. This revolving credit line agreement is included in short-term borrowings, and the primary purpose of this credit line agreement is to provide liquidity to Heartland. ~~The~~Heartland had no advances on this line during the first three months of 2020, and the outstanding balance was $0 at both March 31, ~~2019,~~2020, and December 31, ~~2018.~~2019.

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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


	March 31, 2020		December 31, 2019
Advances from the FHLB	$	2,806	$	2,835

Trust preferred securities	145,588		145,343

Note payable to unaffiliated bank	49,667		51,417
Contracts payable for purchase of real estate and other assets	3,768		1,892
Subordinated notes	74,321		74,286

Total	$	276,150	$	275,773

March 31, 2019 December 31, 2018
Advances from the FHLB $ 3,350
$ 3,399
Trust preferred securities 131,105
130,913
Senior notes —
5,000
Note payable to unaffiliated bank 56,667
58,417
Contracts payable for purchase of real estate and other assets 1,932
1,953
Subordinated notes 74,178
74,143
Other borrowings 1,080
1,080
Total $ 268,312

$ 274,905

As of March 31, ~~2019,~~2020, the amount of other borrowings was ~~$268.3~~$276.2 million, ~~a decrease~~an increase of ~~$6.6 million~~$377,000 or 2%less than 1% since year-end ~~2018. The decrease since year-end 2018 was due to scheduled principal payments in accordance with the debt agreements.~~2019.

Heartland has a non-revolving credit facility with an unaffiliated bank, which provides a borrowing capacity of up to $70.0 million. At March 31, ~~2019, $56.7~~2020, $49.7 million was outstanding on this non-revolving credit line compared to ~~$58.4~~$51.4 million outstanding at December 31, ~~2018.~~2019. At March 31, ~~2019,~~2020, Heartland had ~~$8.3~~$14.8 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 March 31, ~~2019,~~2020, is as follows, in thousands:

Amount

Issued

Issuance

Date

Interest

Rate

Interest

Rate as of 3/31/19⁽¹⁾

Maturity

Date

Callable

Date

Amount
Issued

Issuance
Date

Interest
Rate

Interest

Rate as of 3/31/20⁽¹⁾

Maturity
Date

Callable
Date

Heartland Financial Statutory Trust IV

10,310

03/17/2004

2.75% over LIBOR

5.36%

⁽²⁾

03/17/2034

06/17/2018

Heartland Financial Statutory Trust IV

10,310

03/17/2004

2.75% over LIBOR

3.59%

⁽²⁾

03/17/2034

06/17/2020

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

4.12%

⁽³⁾

04/07/2036

07/07/2019

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

3.16%

04/07/2036

07/07/2020

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

4.09%

⁽⁴⁾

09/15/2037

06/15/2019

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

2.22%

⁽³⁾

09/15/2037

06/15/2020

Heartland Financial Statutory Trust VII

20,619

06/26/2007

1.48% over LIBOR

4.11%

⁽⁵⁾

09/01/2037

06/01/2019

Heartland Financial Statutory Trust VII

18,042

06/26/2007

1.48% over LIBOR

3.06%

⁽⁴⁾

09/01/2037

06/01/2020

Morrill Statutory Trust I

9,017

12/19/2002

3.25% over LIBOR

5.86%

12/26/2032

06/26/2018

Morrill Statutory Trust I

9,111

12/19/2002

3.25% over LIBOR

4.48%

12/26/2032

06/26/2020

Morrill Statutory Trust II

8,670

12/17/2003

2.85% over LIBOR

5.46%

12/17/2033

06/17/2019

Morrill Statutory Trust II

8,781

12/17/2003

2.85% over LIBOR

3.69%

12/17/2033

06/17/2020

Sheboygan Statutory Trust I

6,462

09/17/2003

2.95% over LIBOR

5.56%

09/17/2033

06/17/2019

Sheboygan Statutory Trust I

6,550

09/17/2003

2.95% over LIBOR

3.79%

09/17/2033

06/17/2020

CBNM Capital Trust I

4,371

09/10/2004

3.25% over LIBOR

5.86%

12/15/2034

06/15/2019

CBNM Capital Trust I

4,421

09/10/2004

3.25% over LIBOR

3.99%

12/15/2034

06/15/2020

Citywide Capital Trust III

6,398

12/19/2003

2.80% over LIBOR

5.55%

12/19/2033

07/23/2019

Citywide Capital Trust III

6,452

12/19/2003

2.80% over LIBOR

4.57%

12/19/2033

07/23/2020

Citywide Capital Trust IV

4,252

09/30/2004

2.20% over LIBOR

4.85%

09/30/2034

05/23/2019

Citywide Capital Trust IV

4,310

09/30/2004

2.20% over LIBOR

3.88%

09/30/2034

05/23/2020

Citywide Capital Trust V

11,579

05/31/2006

1.54% over LIBOR

4.15%

07/25/2036

06/15/2019

Citywide Capital Trust V

11,804

05/31/2006

1.54% over LIBOR

2.28%

07/25/2036

06/15/2020

OCGI Statutory Trust III

2,991

06/27/2002

3.65% over LIBOR

6.25%

⁽⁶⁾

09/30/2032

06/30/2019

OCGI Statutory Trust III

2,999

06/27/2002

3.65% over LIBOR

4.87%

⁽⁵⁾

09/30/2032

06/30/2020

OCGI Capital Trust IV

5,300

09/23/2004

2.50% over LIBOR

5.11%

⁽⁷⁾

12/15/2034

06/15/2019

OCGI Capital Trust IV

5,356

09/23/2004

2.50% over LIBOR

3.24%

⁽⁶⁾

12/15/2034

06/15/2020

BVBC Capital Trust II

7,208

04/10/2003

3.25% over LIBOR

5.01%

04/24/2033

07/24/2020

BVBC Capital Trust III

9,092

07/29/2005

1.60% over LIBOR

3.05%

09/30/2035

06/30/2020

Total trust preferred costs

145,674

Less: deferred issuance costs

(86)

131,207

145,588

(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.

(1) Effective weighted average interest rate as of March 31, 2020, was 4.17% 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, 2020, 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, 2020, was 3.87% 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, 2020, was 3.83% 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, 2020, was 5.53% 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, 2020, 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. Under Basel III, Heartland must hold a conservation buffer above the adequately capitalized risk-based capital ratios; however, the transition provisions related to the conservation buffer 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. 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)
March 31, 2019	14.37		%	12.77		%	11.24		%	10.08		%
March 31, 2020													March 31, 2020	13.91		%	12.22		%	10.79		%	9.85		%
Minimum capital requirement	8.00		%	6.00		%	4.50		%	4.00		%	Minimum capital requirement	8.00		%	6.00		%	4.50		%	4.00		%
Well capitalized requirement	10.00		%	8.00		%	6.50		%	5.00		%	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			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			Risk-weighted assets	$	10,212,321		$	10,212,321		$	10,212,321		N/A
Average Assets	N/A			N/A			N/A			$	10,845,274		Average Assets	N/A			N/A			N/A			$	12,670,412

December 31, 2018	13.72		%	12.16		%	10.66		%	9.73		%
December 31, 2019													December 31, 2019	13.75		%	12.31		%	10.88		%	10.10		%
Minimum capital requirement	8.00		%	6.00		%	4.50		%	4.00		%	Minimum capital requirement	8.00		%	6.00		%	4.50		%	4.00		%
Well capitalized requirement	10.00		%	8.00		%	6.50		%	5.00		%	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
Minimum capital requirement, including fully-phased in capital conservation buffer													Minimum capital requirement, including fully-phased in capital conservation buffer	10.50		%	8.50		%	7.00		%	N/A
Risk-weighted assets	$	8,756,130		$	8,756,130		$	8,756,130		N/A			Risk-weighted assets	$	10,098,515		$	10,098,515		$	10,098,515		N/A
Average Assets	N/A			N/A			N/A			$	10,946,440		Average Assets	N/A			N/A			N/A			$	12,318,135

At March 31, 2020, and December 31, 2019, retained earnings that could be available for the payment of dividends to meet the minimum capital requirements totaled $544.1 million and $533.9 million, respectively. Retained earnings that could be available for the payment of dividends to Heartland from its banks totaled approximately ~~$352.4~~$340.3 million and ~~$311.3~~$331.5 million at March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, respectively, under the capital requirements to remain well capitalized. At

On February 11, 2020, Heartland announced the planned acquisition of AIM Bancshares, Inc. AimBank, the wholly-owned subsidiary of AIM Bancshares, Inc. had $1.82 billion in assets as of March 31, ~~2019,~~2020. With the completion of this pending acquisition, Heartland is expected to exceed $15.0 billion in assets, and ~~December 31, 2018, retained earnings that could~~Heartland will no longer be ~~available for the payment of dividends~~able to include its trust preferred securities as Tier 1 Capital. However, Heartland expects to remain well-capitalized under ~~the most restrictive minimum~~all regulatory capital ratio requirements ~~totaled $523.7 million and $486.5 million, respectively.~~after its assets exceed $15.0 billion.

On ~~July 29, 2016,~~August 8, 2019, Heartland filed a universal shelf registration statement with the SEC to register debt or equity securities. This shelf registration statement, which was effective immediately, ~~provides~~provided Heartland with the ability to raise capital, subject to market conditions and SEC rules and limitations, if Heartland's board of directors ~~decides~~decided to do so. This registration statement ~~will permit~~permitted Heartland, from time to time, in one or more public offerings, to offer debt securities, subordinated notes, common stock, preferred stock, rights or any combination of these securities. The amount of securities that may behave been offered iswas not specified in the registration statement, and the terms of any future offerings ~~will~~were to be established at the time of the offering. ~~In November 2016, Heartland offered and sold 1,379,690 shares of its common stock pursuant to this registration statement.~~

COMMITMENTS, CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Heartland enters into mortgage banking derivatives, which are classified as free standing derivatives. These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of such 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 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 derivative financial instruments.

Heartland also enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit and standby letters of 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 March 31, ~~2019,~~2020, and December 31, ~~2018,~~2019, commitments to extend credit aggregated ~~$2.33~~$2.78 billion and ~~$2.47~~$2.97 billion, respectively. Standby letters of credit aggregated ~~$72.9~~$74.3 million at March 31, ~~2019,~~2020, and ~~$71.9~~$79.5 million at December 31, ~~2018.~~2019.

Contractual obligations and other commitments were disclosed in Heartland's Annual Report on Form 10-K for the year ended December 31, ~~2018. Except for the agreement to acquire Blue Valley Ban Corp. described below, there~~2019. There have been no material changes to Heartland's contractual obligations and other commitments since that report was filed.

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.

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

Through PrimeWest Mortgage Corporation, 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~~included 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 March 31, ~~2019,~~2020, Heartland had ~~$492.5~~$239.7 million of cash and cash equivalents, time deposits in other financial institutions of ~~$4.7~~$3.6 million and securities carried at fair value of ~~$2.40~~$3.49 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, Heartland intends to rely on deposit growth and additional FHLB borrowings as needed in the future.

Additional funding is provided by long-term debt and short-term borrowings. In the event of short-term liquidity needs, Heartland's 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,~~2020, Heartland had ~~$104.3~~$121.4 million of short-term borrowings outstanding.

As of March 31, ~~2019,~~2020, Heartland had ~~$268.3~~$276.2 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure. Additionally, the subsidiary banks' FHLB memberships give them the ability to borrow funds for short-term and long-term purposes under a variety of programs. At March 31, ~~2019,~~2020, Heartland had ~~$1.44~~$1.67 billion of borrowing capacity under these programs. Additionally, at March 31, 2020, Heartland had $490.2 million of borrowing capacity at the Federal Reserve Bank's discount window.

Each of Heartland's subsidiary banks has been approved by their respective Federal Reserve bank for the Paycheck Protection Program Liquidity Fund ("PPPLF") and access to the PPPLF has been tested. Heartland anticipates increased utilization of the PPPLF through the third quarter of 2020 as customers utilize their loan proceeds for payroll and payroll related purposes. Through early May 2020, Heartland's subsidiary banks received SBA approval for approximately 4,600 PPP loans totaling $1.18 billion, of which approximately 4,400 or $1.16 billion have been closed and funded.

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

At the parent company level, routine funding requirements consist primarily of dividends paid to stockholders, debt service on revolving credit arrangements and trust preferred securities issuances, repayment requirements under other debt obligations and payments for acquisitions. The parent company obtains the funding to meet these obligations from dividends paid by its bank subsidiaries and the issuance of debt and equity securities. Heartland has a revolving credit agreement and non-revolving credit line with an unaffiliated bank, which was renewed on June 14, 2019. Heartland's revolving credit agreement ~~with an unaffiliated bank~~ has $30.0 million of maximum borrowing capacity, of which none was outstanding at March 31, ~~2019. Heartland also has a non-revolving credit line with the same unaffiliated bank.~~2020. At March 31, ~~2019, $8.3~~2020, $14.8 million was available on ~~this~~the non-revolving credit line. These credit agreements contain specific financial covenants, all of which Heartland complied with as of March 31, ~~2019.~~2020.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a regular basis by the asset/liability committees of Heartland's bank subsidiaries and, on a consolidated basis, by Heartland's executive management and board of directors. 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 three months of ~~2019.~~2020.

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 March 31, ~~2019,~~2020, and March 31, ~~2018,~~2019, provided the following results, in thousands:


	2019				2018					2020						2019
	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									Year 1
Down 100 Basis Points	$	400,843	(3.30	)%	$	362,642	(3.02	)%	Down 100 Basis Points	$	426,450	(2.20)	%	$	400,843	(3.30)	%
Base	$	414,540			$	373,953			Base	$	436,047	—	%	$	414,540	—	%
Up 200 Basis Points	$	437,779	5.61	%	$	377,453	0.94	%	Up 200 Basis Points	$	455,706	4.51	%	$	437,779	5.61	%
Year 2									Year 2
Down 100 Basis Points	$	382,215	(7.80	)%	$	346,225	(7.41	)%	Down 100 Basis Points	$	394,839	(9.45)	%	$	382,215	(7.80)	%
Base	$	416,785	0.54	%	$	379,901	1.59	%	Base	$	417,950	(4.15)	%	$	416,785	0.54	%
Up 200 Basis Points	$	464,301	12.00	%	$	404,390	8.14	%	Up 200 Basis Points	$	466,853	7.06	%	$	464,301	12.00	%

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.

ITEM 4. CONTROLS AND PROCEDURES

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

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

•During the quarter ended March 31, ~~2019,~~2020, 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.~~reporting other than the adoption of internal controls over financial reporting due to the implementation of FASB ASU-2016-13, "Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," as amended and commonly referred to as CECL.

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 ~~2018~~2019 Annual Report on Form ~~10-K. Please refer~~10-K with the exception of the addition of the following risk factors:

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on Heartland's business, results of operation and financial condition, and such effects are highly uncertain and difficult to predict.

Global health concerns related to the COVID-19 pandemic and related government actions taken to reduce the spread of the virus have negatively impacted the macroeconomic environment, and the pandemic has significantly increased economic uncertainty and abruptly reduced economic activity. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. The pandemic has adversely impacted and could potentially further adversely impact Heartland's workforce and operations, and the operations of its customers and business partners. In particular, Heartland may experience adverse financial consequences due to a number of factors, including, but not limited to:

•increased credit losses due to financial strain on its customers as a result of the pandemic and governmental actions, specifically on loans to borrowers in the lodging, retail trade, restaurant and bar, nursing home/assisted living, oil and gas, childcare facilities, and gaming industries, and loans to borrowers that are secured by multi-family properties or retail real estate;

•declines in collateral values;

•disruptions if a significant portion of Heartland’s workforce is unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic; Heartland has modified its business practices, including restricting employee travel, and implementing work-from-home arrangements, and it may be necessary for Heartland to take further actions as may be required by government authorities or as Heartland determines are in the best interests of its employees, customers and business partners; there is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19 or will otherwise be satisfactory to government authorities.

•increased demand on Heartland’s liquidity as it meets borrowers’ needs and covers expenses related to the pandemic management plan; reduced liquidity may negatively affect Heartland’s capital and leverage ratios, and although not currently contemplated, reduce or force suspension of dividends;

•third-party disruptions, including negative effects on network providers and other suppliers, which have been, and may further be, affected by, stay-at-home orders, market volatility and other factors that increase their risks of business disruption or that may otherwise affect their ability to perform under the terms of any agreements with Heartland or provide essential services;

•increased cyber and payment fraud risk due to increased online and remote activity; and

•other operational failures due to changes in Heartland's normal business practices because of the pandemic and governmental actions to contain it.

These factors may remain prevalent for a significant period of time and may continue to adversely affect Heartland's business, results of operations and financial condition even after the COVID-19 pandemic has subsided.

Governmental authorities worldwide have taken unprecedented measures to stabilize economic markets and support economic growth.The success of these measures is unknown, and they may not be sufficient to address the negative economic effects of COVID-19 or avert severe and prolonged reductions in economic activity.

Heartland's subsidiary banks ("the Banks") are participating lenders in the PPP, a loan program administered through the SBA, that was created to help eligible businesses, organizations and self-employed persons fund their operational costs during the

COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes Heartland and the Banks to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Under the PPP, lending banks are generally entitled to rely on borrower representations and certifications of eligibility to participate in the program, and lending banks may also be held harmless by the SBA in certain circumstances for actions taken in reliance on borrower representations and certifications. Notwithstanding the foregoing, the Banks have been, and may continue to be, exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Banks.

Heartland and the Banks' participation in and execution of these and other measures taken by governments and regulatory authorities in response to the COVID-19 pandemic could result in reputational harm and has resulted in, and may continue to result in, litigation, including class actions, or regulatory and government actions and proceedings. Such actions may result in judgments, settlements, penalties, and fines levied against Heartland and the Banks.

Heartland's current period results of operations are not necessarily indicative of results that may be expected for any other interim period or for the year as a whole. While the COVID-19 outbreak had a material impact on the provision for credit losses, Heartland is unable to fully predict the impact that COVID-19 will have on its financial position and results of operations due to numerous uncertainties. Heartland will continue to assess the potential impacts on its financial position and results of operations.

The extent to which the COVID-19 pandemic impacts Heartland's business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, Heartland may continue to experience materially adverse impacts to its business as a result of the virus’s global economic impact, including the availability of credit, adverse impacts on liquidity and any recession that has occurred or may occur in the future.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change. Heartland does not yet know the full extent of the impacts on its business, operations or the economy as a whole. However, the effects could have a material impact on Heartland's results of operations and heighten many of the known risks described in the "Risk Factors" section of ~~Heartland's~~the Annual Report on Form 10-K ~~report~~ for ~~disclosures regarding~~ the ~~risks and uncertainties related to Heartland's business.~~year ended December 31, 2019.

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

On March 17, 2020, Heartland's board of directors ~~has~~ authorized management to acquire and hold up to ~~500,000 shares~~5% of ~~common stock~~capital or $77.7 million as of March 31, 2020, as treasury shares at any one time. Heartland and its affiliated purchasers made no purchases of its common stock during the quarter ended March 31, ~~2019.~~2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits



~~10.1~~2.1				Agreement and Plan of Merger between Heartland Financial USA, Inc. and ~~Blue Valley Ban Corp.,~~AIM Bancshares, Inc. dated ~~January 16, 2019 (incorporated~~February 11, 2020. (inc orporated by ~~reference~~re ference to Exhibit ~~10.27~~2.4 to the ~~Registrant’s~~R egistra nt's Annual Report on Form 10-K filed on ~~February 27, 2019)~~F ebruary 26, 2020).

~~10.2~~31.1			⁽¹⁾	~~Deferred Compensation Plan dated April 30, 2019 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 6, 2019).~~

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

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

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

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

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

______________

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

~~(2)~~ Filed or furnished herewith.

SIGNATURES

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


HEARTLAND FINANCIAL USA, INC.
(Registrant)


~~HEARTLAND FINANCIAL USA, INC.~~
~~(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: May ~~7, 2019~~8, 2020



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



HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
	March 31, 2019 (Unaudited)			December 31, 2018
ASSETS
Cash and due from banks	$	174,198		$	223,135
Interest bearing deposits with other banks and other short-term investments	318,303			50,495
Cash and cash equivalents	492,501			273,630
Time deposits in other financial institutions	4,675			4,672
Securities:
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	27,506			28,396
Loans held for sale	69,716			119,801
Loans receivable:
Held to maturity	7,331,544			7,407,697
Allowance for loan and lease losses	(62,639		)	(61,963		)
Loans receivable, net	7,268,905			7,345,734
Premises, furniture and equipment, net	183,185			187,418
Premises, furniture and equipment held for sale	7,030			7,258
Other real estate, net	5,391			6,153
Goodwill	391,668			391,668
Core deposit intangibles and customer relationship intangibles, net	44,637			47,479
Servicing rights, net	28,968			31,072
Cash surrender value on life insurance	163,764			162,892
Other assets	136,000			114,841
TOTAL ASSETS	$	11,312,495		$	11,408,006
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	3,118,909		$	3,264,737
Savings	5,145,929			5,107,962
Time	1,088,104			1,023,730
Total deposits	9,352,942			9,396,429
Deposits held for sale	118,564			106,409
Short-term borrowings	104,314			227,010
Other borrowings	268,312			274,905
Accrued expenses and other liabilities	96,261			78,078
TOTAL LIABILITIES	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 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	745,596			743,095
Retained earnings	603,506			579,252
Accumulated other comprehensive loss	(11,604		)	(31,649		)
TOTAL STOCKHOLDERS' EQUITY	1,372,102			1,325,175
TOTAL LIABILITIES AND EQUITY	$	11,312,495		$	11,408,006

See accompanying notes to consolidated financial statements.



	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
Commercial	$	3,804	$	197,958	$	201,762	$	3,801	$	243,693	$	247,494
Commercial real estate	156		986,926		987,082		158		1,098,171		1,098,329
Agricultural and agricultural real estate	—		14,942		14,942		—		27,115		27,115
Residential real estate	227		168,167		168,394		231		184,389		184,620
Consumer loans	—		63,090		63,090		—		75,773		75,773
Total covered loans	$	4,187	$	1,431,083	$	1,435,270	$	4,190	$	1,629,141	$	1,633,331



	Commercial			Commercial Real Estate			Agricultural and Agricultural Real Estate			Residential Real Estate			Consumer			Total
Balance at December 31, 2018	$	24,505		$	25,538		$	4,953		$	1,785		$	5,182		$	61,963
Charge-offs	(644		)	(39		)	(379		)	(163		)	(725		)	(1,950		)
Recoveries	175			151			330			13			322			991
Provision	(215		)	1,137			694			(30		)	49			1,635
Balance at March 31, 2019	$	23,821		$	26,787		$	5,598		$	1,605		$	4,828		$	62,639



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

(1) The significant unobservable input related to the loans held for sale was the third party sales contract Heartland entered into prior to December 31, 2018. The sale of these consumer loans closed on January 11, 2019.
(2) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data.
(3) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal.
(4) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral.
(5) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups.



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



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



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.



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
	March 31, 2019		December 31, 2018
Residential real estate, excluding residential construction and residential lot loans	$	1,079,352	$	1,119,942
Industrial, manufacturing, business and commercial	670,440		805,265
Agriculture	266,010		270,023
Retail	479,469		435,680
Office	485,794		485,262
Land development and lots	202,513		216,665
Hotel, resort and hospitality	280,285		233,735
Multi-family	324,198		311,319
Food and beverage	142,630		130,981
Warehousing	169,721		186,436
Health services	204,410		182,882
Residential construction	161,116		171,116
All other	269,165		255,145
Total loans secured by real estate	$	4,735,103	$	4,804,451



NONPERFORMING ASSETS	March 31,						December 31,
	2019			2018			2018			2017
Nonaccrual loans	$	77,294		$	64,806		$	71,943		$	62,581
Loans contractually past due 90 days or more	1,706			22			726			830
Total nonperforming loans	79,000			64,828			72,669			63,411
Other real estate	5,391			11,801			6,153			10,777
Other repossessed assets	8			423			459			411
Total nonperforming assets	$	84,399		$	77,052		$	79,281		$	74,599
Performing troubled debt restructured loans⁽¹⁾	$	3,460		$	3,206		$	4,026		$	6,617
Nonperforming loans to total loans	1.08		%	0.96		%	0.98		%	0.99		%
Nonperforming assets to total loans plus repossessed property	1.15		%	1.14		%	1.07		%	1.17		%
Nonperforming assets to total assets	0.75		%	0.77		%	0.69		%	0.76		%

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



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	%