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,~~June 30, 2017

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

For transition period __________ 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) 589-2000

(Registrant's telephone number, including area code)

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

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



Large accelerated filer x		Accelerated Filer ¨
Non-accelerated filer ¨	(Do not check if a smaller reporting company)
Smaller reporting company ¨		Emerging growth company ¨

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

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

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 3,~~August 2, 2017, the Registrant had outstanding ~~26,674,871~~29,917,388 shares of common stock, $1.00 par value per share.

HEARTLAND FINANCIAL USA, INC.

Form 10-Q Quarterly Report

Table of Contents



Part I
Item 1.	Financial Statements
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Mine Safety Disclosures
Item 5.	Other Information
Item 6.	Exhibits
	10.1 Form of ~~Time-Based~~Director Restricted Stock Unit Award Agreement under the Heartland Financial USA, Inc. 2012 Long-Term Incentive Plan
	10.2 ~~Form of Performance-Based Restricted Stock Unit Award Agreement One-Year Performance Period under the~~Revolving Credit Line Promissory Note dated June 14, 2017, between Heartland Financial USA, Inc. ~~2012 Long-Term Incentive Plan~~and Bankers Trust Company
	10.3 ~~Form of Performance-Based Restricted Stock Unit Award Agreement Three-Year Performance Period under the~~Promissory Note dated June 14, 2017, between Heartland Financial USA, Inc. ~~2012 Long-Term Incentive Plan~~and Bankers Trust Company
	31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
	31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
	32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101 Financial statements formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, and (vi) the Notes to Consolidated Financial Statements.

PART I

ITEM 1. FINANCIAL STATEMENTS

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

March 31, 2017 (Unaudited) December 31, 2016
ASSETS
Cash and due from banks $ 129,386
$ 151,290
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments 43,765
7,434
Cash and cash equivalents 173,151
158,724
Time deposits in other financial institutions 41,539
2,105
Securities:
Available for sale, at fair value (cost of $1,938,457 at March 31, 2017, and $1,893,947 at December 31, 2016) 1,893,528
1,845,864
Held to maturity, at cost (fair value of $272,797 at March 31, 2017, and $274,799 at December 31, 2016) 260,616
263,662
Other investments, at cost 21,557
21,560
Loans held for sale 49,009
61,261
Loans receivable:
Held to maturity 5,361,604
5,351,719
Allowance for loan losses (54,999 ) (54,324 )
Loans receivable, net 5,306,605
5,297,395
Premises, furniture and equipment, net 164,183
163,614
Premises, furniture and equipment held for sale 1,242
414
Other real estate, net 11,188
9,744
Goodwill 141,461
127,699
Core deposit intangibles and customer relationship intangibles, net 24,068
22,775
Servicing rights, net 35,441
35,778
Cash surrender value on life insurance 117,613
112,615
Other assets 120,644
123,869
TOTAL ASSETS $ 8,361,845
$ 8,247,079
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand $ 2,319,256
$ 2,202,036
Savings 3,940,146
3,788,089
Time 830,459
857,286
Total deposits 7,089,861
6,847,411
Short-term borrowings 155,025
306,459
Other borrowings 282,051
288,534
Accrued expenses and other liabilities 53,596
63,759
TOTAL LIABILITIES 7,580,533
7,506,163
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share; authorize 17,604 shares; none issued or outstanding at both March 31, 2017, and December 31, 2016) —
—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both March 31, 2017, and December 31, 2016) —
—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both March 31, 2017, and December 31, 2016, none issued or outstanding at both March 31, 2017, and December 31, 2016) —
—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both March 31, 2017, and December 31, 2016; 745 shares issued and outstanding at March 31, 2017, and 1,078 shares issued and outstanding at December 31, 2016) 938
1,357
Common stock (par value $1 per share; 30,000,000 shares authorized at both March 31, 2017, and December 31, 2016; issued 26,674,121 shares at March 31, 2017, and 26,119,929 shares at December 31, 2016) 26,674
26,120
Capital surplus 351,423
328,376
Retained earnings 431,219
416,109
Accumulated other comprehensive income (loss) (28,942 ) (31,046 )
Treasury stock at cost (0 shares at both March 31, 2017, and December 31, 2016) —
—
TOTAL STOCKHOLDERS' EQUITY 781,312
740,916
TOTAL LIABILITIES AND EQUITY $ 8,361,845
$ 8,247,079

See accompanying notes to consolidated financial statements.



HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
	June 30, 2017 (Unaudited)			December 31, 2016
ASSETS
Cash and due from banks	$	141,100		$	151,290
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments	40,676			7,434
Cash and cash equivalents	181,776			158,724
Time deposits in other financial institutions	30,241			2,105
Securities:
Available for sale, at fair value (cost of $1,825,837 at June 30, 2017, and $1,893,947 at December 31, 2016)	1,789,441			1,845,864
Held to maturity, at cost (fair value of $273,394 at June 30, 2017, and $274,799 at December 31, 2016)	259,586			263,662
Other investments, at cost	21,094			21,560
Loans held for sale	48,848			61,261
Loans receivable:
Held to maturity	5,325,082			5,351,719
Allowance for loan losses	(54,051		)	(54,324		)
Loans receivable, net	5,271,031			5,297,395
Premises, furniture and equipment, net	162,423			163,614
Premises, furniture and equipment held for sale	580			414
Other real estate, net	9,269			9,744
Goodwill	141,461			127,699
Core deposit intangibles and customer relationship intangibles, net	22,850			22,775
Servicing rights, net	34,736			35,778
Cash surrender value on life insurance	120,281			112,615
Other assets	111,104			123,869
TOTAL ASSETS	$	8,204,721		$	8,247,079
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	2,355,410		$	2,202,036
Savings	3,704,579			3,788,089
Time	870,180			857,286
Total deposits	6,930,169			6,847,411
Short-term borrowings	139,130			306,459
Other borrowings	281,096			288,534
Accrued expenses and other liabilities	48,356			63,759
TOTAL LIABILITIES	7,398,751			7,506,163
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both June 30, 2017, and December 31, 2016)	—			—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both June 30, 2017, and December 31, 2016)	—			—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both June 30, 2017, and December 31, 2016, none issued or outstanding at both June 30, 2017, and December 31, 2016)	—			—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both June 30, 2017, and December 31, 2016; 745 shares issued and outstanding at June 30, 2017, and 1,078 shares issued and outstanding at December 31, 2016)	938			1,357
Common stock (par value $1 per share; 40,000,000 shares authorized at June 30, 2017, and 30,000,000 shares authorized at December 31, 2016; issued 26,701,226 shares at June 30, 2017, and 26,119,929 shares at December 31, 2016)	26,701			26,120
Capital surplus	352,500			328,376
Retained earnings	450,228			416,109
Accumulated other comprehensive income (loss)	(24,397		)	(31,046		)
Treasury stock at cost (0 shares at both June 30, 2017, and December 31, 2016)	—			—
TOTAL STOCKHOLDERS' EQUITY	805,970			740,916
TOTAL LIABILITIES AND EQUITY	$	8,204,721		$	8,247,079

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data)
	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2017			2016
INTEREST INCOME:
Interest and fees on loans	$	66,898		$	68,425		$	68,094		$	69,809		$	134,992		$	138,234
Interest on securities:
Taxable	8,253			8,644			8,599			7,952			16,852			16,687
Nontaxable	5,191			3,510			5,020			3,566			10,211			7,076
Interest on federal funds sold	—			10			3			1			3			11
Interest on interest bearing deposits in other financial institutions	209			95			345			3			554			7
TOTAL INTEREST INCOME	80,551			80,684			82,061			81,331			162,612			162,015
INTEREST EXPENSE:
Interest on deposits	3,730			4,173			4,163			4,021			7,893			8,194
Interest on short-term borrowings	137			329			90			519			227			848
Interest on other borrowings (includes $397 and $506 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended March 31, 2017 and 2016, respectively)	3,656			3,475
Interest on other borrowings (includes $300 and $465 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended June 30, 2017 and 2016, respectively, and $697 and $971 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the six months ended June 30, 2017 and 2016, respectively)							3,228			3,673			6,884			7,148
TOTAL INTEREST EXPENSE	7,523			7,977			7,481			8,213			15,004			16,190
NET INTEREST INCOME	73,028			72,707			74,580			73,118			147,608			145,825
Provision for loan losses	3,641			2,067			889			2,118			4,530			4,185
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	69,387			70,640			73,691			71,000			143,078			141,640
NONINTEREST INCOME:
Service charges and fees	9,457			7,162			9,696			8,022			19,153			15,184
Loan servicing income	1,724			1,268			1,351			1,292			3,075			2,560
Trust fees	3,631			3,813			3,979			3,625			7,610			7,438
Brokerage and insurance commissions	1,036			1,022			976			886			2,012			1,908
Securities gains, net (includes $2,482 and $3,756 of net security gains reclassified from accumulated other comprehensive income for the three months ended March 31, 2017 and 2016, respectively)	2,482			3,526
Securities gains, net (includes $1,392 and $4,622 of net security gains reclassified from accumulated other comprehensive income for the three months ended June 30, 2017 and 2016, respectively, $3,874 and $8,378 of net security gains reclassified from accumulated other comprehensive income for the six months ended June 30, 2017 and 2016, respectively)							1,392			4,622			3,874			8,148
Net gains on sale of loans held for sale	6,147			11,065			6,817			11,270			12,964			22,335
Valuation allowance on commercial servicing rights	5			—			19			(46		)	24			(46		)
Income on bank owned life insurance	617			522			656			591			1,273			1,113
Other noninterest income	794			1,200			738			764			1,532			1,964
TOTAL NONINTEREST INCOME	25,893			29,578			25,624			31,026			51,517			60,604
NONINTEREST EXPENSES:
Salaries and employee benefits	41,767			41,714			41,126			41,985			82,893			83,699
Occupancy	5,073			5,003			5,056			5,220			10,129			10,223
Furniture and equipment	2,501			2,113			2,586			2,442			5,087			4,555
Professional fees	8,309			7,010			7,583			7,486			15,892			14,496
FDIC insurance assessments	807			1,168			909			1,120			1,716			2,288
Advertising	2,424			1,284			1,359			1,551			3,783			2,835
Core deposit intangibles and customer relationship intangibles amortization	1,171			1,895			1,218			1,297			2,389			3,192
Other real estate and loan collection expenses	828			572			365			659			1,193			1,231
Loss on sales/valuations of assets, net	412			313
(Gain)/loss on sales/valuations of assets, net							(112		)	(43		)	300			270
Other noninterest expenses	8,448			9,237			9,208			9,303			17,656			18,540
TOTAL NONINTEREST EXPENSES	71,740			70,309			69,298			71,020			141,038			141,329
INCOME BEFORE INCOME TAXES	23,540			29,909			30,017			31,006			53,557			60,915
Income taxes (includes $778 and $1,212 of income tax expense reclassified from accumulated other comprehensive income for the three months ended March 31, 2017 and 2016, respectively)	5,530			9,900
Income taxes (includes $407 and $1,551 of income tax expense reclassified from accumulated other comprehensive income for the three months ended June 30, 2017 and 2016, respectively, $1,185 and $2,763 of income tax expense reclassified from accumulated other comprehensive income for the six months ended June 30, 2017 and 2016, respectively)							8,059			10,036			13,589			19,936
NET INCOME	18,010			20,009			21,958			20,970			39,968			40,979
Preferred dividends	(19		)	(168		)	(13		)	(52		)	(32		)	(220		)
Interest expense on convertible preferred debt	5			—			4			31			9			31
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	17,996		$	19,841		$	21,949		$	20,949		$	39,945		$	40,790
EARNINGS PER COMMON SHARE - BASIC	$	0.68		$	0.84		$	0.82		$	0.85		$	1.51		$	1.69
EARNINGS PER COMMON SHARE - DILUTED	$	0.68		$	0.82		$	0.81		$	0.84		$	1.49		$	1.66
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.11		$	0.10		$	0.11		$	0.10		$	0.22		$	0.20

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)	HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)						HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)
	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2017			2016
NET INCOME	$	18,010		$	20,009		$	21,958		$	20,970		$	39,968		$	40,979
OTHER COMPREHENSIVE INCOME
Securities:
Net change in unrealized gain on securities	5,379			20,067			9,683			3,903			15,062			23,970
Reclassification adjustment for net gains realized in net income	(2,482		)	(3,756		)	(1,392		)	(4,622		)	(3,874		)	(8,378		)
Net change in non-credit related other than temporary impairment	—			7			—			—			—			7
Income taxes	(1,111		)	(6,524		)	(3,238		)	289			(4,349		)	(6,235		)
Other comprehensive income on securities	1,786			9,794
Other comprehensive income (loss) on securities							5,053			(430		)	6,839			9,364
Derivatives used in cash flow hedging relationships:
Net change in unrealized gain (loss) on derivatives	136			(3,423		)
Net change in unrealized loss on derivatives							(809		)	(2,044		)	(673		)	(5,467		)
Reclassification adjustment for net losses on derivatives realized in net income	397			506			300			465			697			971
Income taxes	(215		)	1,074			1			598			(214		)	1,672
Other comprehensive income (loss) on cash flow hedges	318			(1,843		)
Other comprehensive income	2,104			7,951
Other comprehensive loss on cash flow hedges							(508		)	(981		)	(190		)	(2,824		)
Other comprehensive income (loss)							4,545			(1,411		)	6,649			6,540
TOTAL COMPREHENSIVE INCOME	$	20,114		$	27,960		$	26,503		$	19,559		$	46,617		$	47,519

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,						Six Months Ended June 30,
	2017			2016			2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	18,010		$	20,009		$	39,968		$	40,979
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,023			7,713			14,566			14,841
Provision for loan losses	3,641			2,067			4,530			4,185
Net amortization of premium on securities	7,226			7,846			13,997			16,204
Securities gains, net	(2,482		)	(3,526		)	(3,874		)	(8,148		)
Stock based compensation	1,782			1,087			2,763			2,386
Write downs and losses on sales of assets, net	412			313			300			270
Loans originated for sale	(164,324		)	(227,823		)	(369,579		)	(546,050		)
Proceeds on sales of loans held for sale	180,404			234,516			390,683			554,427
Net gains on sale of loans held for sale	(3,828		)	(8,475		)	(8,691		)	(16,132		)
Decrease in accrued interest receivable	93			787			1,876			1,651
Decrease in prepaid expenses	84			598			936			683
Increase in accrued interest payable	825			637			(130		)	(406		)
Capitalization of servicing rights	(2,226		)	(2,590		)	(4,406		)	(6,203		)
Valuation allowance on commercial servicing rights	(5		)	—			(24		)	46
Net excess tax benefit from stock based compensation	888			1,100			989			1,100
Other, net	(13,767		)	(9,855		)	(11,989		)	(8,316		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	33,756			24,404			71,915			51,517
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of securities available for sale	221,637			303,448			624,008			622,375
Proceeds from the sale of securities held to maturity	—			4,057			—			4,057
Proceeds from the sale of other investments	—			2,830			—			4,116
Proceeds from the redemption of time deposits in other financial institutions	5,867			—			5,867			—
Proceeds from the maturity of and principal paydowns on securities available for sale	47,515			35,379			102,506			82,513
Proceeds from the maturity of and principal paydowns on securities held to maturity	2,823			3,254			3,655			3,962
Proceeds from the maturity of and principal paydowns on time deposits in other financial institutions	3,185			—			14,483			250
Proceeds from the maturity of and principal paydowns on other investments	1,521			—			2,017			—
Purchase of securities available for sale	(312,769		)	(362,764		)	(666,588		)	(594,135		)
Purchase of other investments	(968		)	(226		)	(1,001		)	(1,867		)
Net decrease in loans	80,916			78,502			113,369			98,232
Purchase of bank owned life insurance policies							(2,000		)	—
Capital expenditures	(3,588		)	(898		)	(5,683		)	(7,360		)
Net cash and cash equivalents received in acquisitions	33,698			8,084			33,698			8,084
Proceeds from the sale of equipment	3			—			1,692			485
Proceeds on sale of OREO and other repossessed assets	585			2,384			4,352			3,161
NET CASH PROVIDED BY INVESTING ACTIVITIES	$	80,425		$	74,050		$	230,375		$	223,873


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands)
	Three Months Ended March 31,						Six Months Ended June 30,
	2017			2016			2017			2016
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits	22,799			1,098			58,953			71,488
Net increase in savings deposits	88,767			661
Net decrease in savings deposits							(146,800		)	(9,979		)
Net decrease in time deposit accounts	(50,612		)	(131,373		)	(10,891		)	(277,871		)
Net increase (decrease) in short-term borrowings	(131,068		)	1,077
Net decrease in short-term borrowings							(161,963		)	(63,807		)
Proceeds from short term FHLB advances	60,939			5,000			86,139			210,000
Repayments of short term FHLB advances	(81,305		)	(10,000		)	(91,505		)	(172,150		)
Proceeds from other borrowings							—			40,000
Repayments of other borrowings	(6,432		)	(5,501		)	(7,503		)	(14,495		)
Redemption of preferred stock	—			(81,698		)	—			(81,698		)
Purchase of treasury stock	(160		)	(1,227		)	(217		)	(1,698		)
Proceeds from issuance of common stock	218			563			398			1,101
Dividends paid	(2,900		)	(2,625		)	(5,849		)	(5,130		)
NET CASH USED BY FINANCING ACTIVITIES	(99,754		)	(224,025		)	(279,238		)	(304,239		)
Net increase (decrease) in cash and cash equivalents	14,427			(125,571		)	23,052			(28,849		)
Cash and cash equivalents at beginning of year	158,724			258,799			158,724			258,799
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	173,151		$	133,228		$	181,776		$	229,950
Supplemental disclosures:
Cash paid for income/franchise taxes	$	5		$	2,305		$	5,860		$	12,570
Cash paid for interest	$	6,698		$	7,340		$	15,134		$	16,595
Loans transferred to OREO	$	2,680		$	442		$	4,912		$	1,359
Purchases of securities available for sale, accrued, not paid	$	3,654		$	—
Purchases of securities available for sale, accrued, not settled							$	—		$	64
Sales of securities available for sale, accrued, not settled	$	—		$	17,189		$	—		$	2,201
Conversion of convertible debt to common stock	$	167		$	—		$	167		$	—
Conversion of Series D preferred stock to common stock	$	419		$	—		$	419		$	—
Stock consideration granted for acquisitions	$	22,589		$	57,433		$	22,589		$	57,433

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Dollars in thousands, except per share data)	HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Dollars in thousands, except per share data)																			HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Dollars in thousands, except per share data)
	Heartland Financial USA, Inc. Stockholders' Equity																			Heartland Financial USA, Inc. Stockholders' Equity
	Preferred Stock			Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Equity			Preferred Stock			Common Stock		Capital Surplus		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Equity
Balance at January 1, 2016	$	81,698		$	22,436	$	216,436	$	348,630		$	(6,027	)	$	—		$	663,173		$	81,698		$	22,436	$	216,436	$	348,630		$	(6,027	)	$	—		$	663,173
Comprehensive income								20,009			7,951						27,960										40,979			6,540						47,519
Cash dividends declared:
Series C Preferred, $2.50 per share								(168		)							(168		)								(168		)							(168		)
Common, $0.10 per share								(2,457		)							(2,457		)
Series D Preferred, $17.50 per share																											(52		)							(52		)
Common, $0.20 per share																											(4,910		)							(4,910		)
Redemption of Series C Preferred Stock	(81,698		)														(81,698		)	(81,698		)														(81,698		)
Issuance of Series D Preferred Stock	3,777																3,777			3,777																3,777
Purchase of 20,070 shares of common stock														(1,227		)	(1,227		)
Issuance of 2,104,305 shares of common stock				2,084		55,787								1,225			59,096
Purchase of 33,503 shares of common stock																																	(1,698		)	(1,698		)
Issuance of 2,141,186 shares of common stock																							2,108		55,860								1,666			59,634
Stock based compensation						1,087											1,087								2,386											2,386
Balance at March 31, 2016	$	3,777		$	24,520	$	273,310	$	366,014		$	1,924		$	(2	)	$	669,543
Balance at June 30, 2016																				$	3,777		$	24,544	$	274,682	$	384,479		$	513		$	(32	)	$	687,963
Balance at January 1, 2017	$	1,357		$	26,120	$	328,376	$	416,109		$	(31,046	)	$	—		$	740,916		$	1,357		$	26,120	$	328,376	$	416,109		$	(31,046	)	$	—		$	740,916
Comprehensive income								18,010			2,104						20,114										39,968			6,649						46,617
Cash dividends declared:
Series D Preferred, $17.50 per share								(19		)							(19		)
Common, $0.11 per share								(2,881		)							(2,881		)
Series D Preferred, $35.00 per share																											(32		)							(32		)
Common, $0.22 per share																											(5,817		)							(5,817		)
Conversion of Series D preferred stock	(419		)														(419		)	(419		)														(419		)
Purchase of 3,338 shares of common stock														(160		)	(160		)
Issuance of 557,530 shares of common stock				554		21,265								160			21,979
Purchase of 4,611 shares of common stock																																	(217		)	(217		)
Issuance of 585,908 shares of common stock																							581		21,361								217			22,159
Stock based compensation						1,782											1,782								2,763											2,763
Balance at March 31, 2017	$	938		$	26,674	$	351,423	$	431,219		$	(28,942	)	$	—		$	781,312
Balance at June 30, 2017																				$	938		$	26,701	$	352,500	$	450,228		$	(24,397	)	$	—		$	805,970

See accompanying notes to consolidated financial statements.	See accompanying notes to consolidated financial statements.																			See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, 2016, included in the Form 10-K of Heartland Financial USA, Inc. ("Heartland") filed with the Securities and Exchange Commission ("SEC") on March 1, 2017. ~~Accordingly, foot~~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,~~June 30, 2017, are not necessarily indicative of the results expected for the year ending December 31, 2017.

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~~three- and six-month periods ended ~~March 31,~~June 30, 2017 and 2016, are shown in the table below:


	Three Months Ended March 31,						Three Months Ended June 30,
(Dollars and number of shares in thousands, except per share data)	2017			2016			2017			2016
Net income attributable to Heartland	$	18,010		$	20,009
Net income							$	21,958		$	20,970
Preferred dividends and discount							(13		)	(52		)
Interest expense on convertible preferred debt							4			31
Net income available to common stockholders							$	21,949		$	20,949
Weighted average common shares outstanding for basic earnings per share							26,687			24,524
Assumed incremental common shares issued upon exercise of stock options and non-vested restricted stock units							286			451
Weighted average common shares for diluted earnings per share							26,973			24,975
Earnings per common share — basic							$	0.82		$	0.85
Earnings per common share — diluted							$	0.81		$	0.84
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation							—			—

							Six Months Ended June 30,
(Dollars and number of shares in thousands, except per share data)							2017			2016
Net income							$	39,968		$	40,979
Preferred dividends	(19		)	(168		)	(32		)	(220		)
Interest expense on convertible preferred debt	5			—			9			31
Net income available to common stockholders	$	17,996		$	19,841		$	39,945		$	40,790
Weighted average common shares outstanding for basic earnings per share	26,335			23,657			26,512			24,093
Assumed incremental common shares issued upon exercise of stock options and non-vested restricted stock units	293			460			286			448
Weighted average common shares for diluted earnings per share	26,628			24,117			26,798			24,541
Earnings per common share — basic	$	0.68		$	0.84		$	1.51		$	1.69
Earnings per common share — diluted	$	0.68		$	0.82		$	1.49		$	1.66
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	—			57			—			—

Stock-Based Compensation

Heartland may grant, through its Nominating and Compensation Committee (the "Compensation Committee"), non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and cash incentive awards, under its 2012 Long-Term Incentive Plan (the "Plan"). The Plan was originally approved by stockholders in May 2012 and was amended effective March 8, 2016, to increase the number of shares of common stock authorized for issuance and make certain other changes to the Plan. As of ~~March 31,~~June 30, 2017, ~~507,226~~494,046 shares of common stock were available for issuance under future awards that may be granted under the Plan to employees and directors of, and service providers to, Heartland or its subsidiaries.

Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718, "~~Compensation-Stock Compensation~~"Compensation-Stock Compensation" requires the measurement of the cost of employee services received in exchange for an award of equity instruments based upon the fair value of the award on the grant date. The cost of the award is based upon its fair value estimated on the date of grant and recognized in the consolidated statements of income over the vesting period of the award. The fair market value of restricted stock and restricted stock units is based on the fair value of the underlying shares of common stock on the date of grant. The fair value of stock options is estimated on the date of grant using the Black-Scholes model.

The amount of tax benefit related to the exercise, vesting and forfeiture of equity-based awards reflected as a tax benefit in Heartland's income tax expense was ~~$888,000~~$989,000 during the ~~three~~six months ended ~~March 31,~~June 30, 2017. Prior to the adoption of ASU 2016-09 on January 1, 2017, $1.1 million of tax benefit related to the exercise, vesting and forfeiture of equity based awards was reflected in additional paid-in-capital during the ~~three~~six months ended ~~March 31,~~June 30, 2016.

Restricted Stock Units

The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). In the first quarter of 2017, the Compensation Committee granted time-based RSUs with respect to 55,665 shares of common stock, and in the first quarter of 2016, the Compensation Committee granted time-based RSUs with respect to 72,644 shares of common stock to selected ~~officers.~~officers and employees. The time-based RSUs represent the right, without payment, to receive shares of Heartland common stock at a specified date in the future. These time-based RSUs vest over three years in equal installments on the first, second and third anniversaries of the grant date. The time-based RSUs will be settled in common stock upon vesting, and will not be entitled to dividends until vested. The time-based RSUs may also vest upon death or disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement). The retiree is required to sign a non-solicitation and non-compete agreement as a condition to vesting.

In addition to the time-based RSUs referenced in the preceding paragraph, the Compensation Committee granted performance-based RSUs with respect to 27,570 shares of common stock in the first quarter of 2017, and 35,516 shares of common stock in the first quarter of 2016. These performance-based RSUs are earned based on satisfaction of performance targets for the fiscal years ended December 31, 2017, and December 31, 2016, respectively, and then fully vest two years after the end of the performance period. For the grants awarded in 2017, the portion of the RSUs earned based on performance vests on December 31, 2019, and for the grants awarded in 2016, the portion of the RSUs earned based on performance vests on December 31, 2018, subject to employment on the respective vesting dates. The performance-based RSUs vest to the extent that they are earned upon death or disability, upon a change in control or upon a "qualified retirement."

The Compensation Committee also granted three-year performance-based RSUs with respect to 9,032 shares of common stock in the first quarter of 2017, and 11,408 shares of common stock in the first quarter of 2016. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance period ended December 31, 2019 and December 31, 2018, respectively. These performance-based RSUs ~~will~~or a portion thereof may vest in 2020 and 2019, respectively, after measurement of performance in relation to the performance targets.

Upon death, disability, or a "qualified retirement," all performance-based RSUs granted in 2016 remain outstanding and are earned based on actual performance at the end of each performance period. All RSUs granted on or after March 8, 2016, become fully vested upon a change in control if (1) they are not assumed by the successor corporation or (2) upon an involuntary termination of the participant's employment within two years after the change in control.

The Compensation Committee ~~also grants~~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~~six months ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, 015,978 and ~~150~~22,153 time-based RSUs, respectively, were granted to directors and new employees.

A summary of the RSUs outstanding as of ~~March 31,~~June 30, 2017 and 2016, and changes during the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016, follows:


	2017				2016				2017				2016
	Shares		Weighted-Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value
Outstanding at January 1	346,817		$	27.61	353,195		$	25.53	346,817		$	27.61	353,195		$	25.53
Granted	92,267		47.50		119,718		29.05		108,245		47.21		141,721		29.79
Vested	(103,897	)	24.74		(83,982	)	20.79		(125,840	)	26.32		(117,898	)	23.40
Forfeited	(7,765	)	31.03		(2,078	)	27.17		(10,563	)	31.78		(10,892	)	27.13
Outstanding at March 31	327,422		$	34.04	386,853		$	27.53
Outstanding at June 30									318,659		$	34.64	366,126		$	27.60

Total compensation costs recorded for RSUs were ~~$1.7~~$2.7 million and ~~$1.1~~$2.4 million for the ~~three-month~~six-month periods ended ~~March 31,~~June 30, 2017 and 2016. As of ~~March 31,~~June 30, 2017, there were ~~$5.4~~$5.3 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2020.

Options

Although the Plan provides authority to the Compensation Committee to grant stock options, no options were granted during the first ~~three~~six months of 2017 and 2016. Prior to 2009, options were typically granted annually with an expiration date ten years after the date of grant. Vesting was generally over a five-year service period with equal portions of a grant becoming exercisable at three years, four years, and five years after the date of grant. A summary of the stock options outstanding as of ~~March 31,~~June 30, 2017 and 2016, and changes during the ~~three~~six months ended ~~March 31,~~June 30, 2017 and 2016, follows:


	2017				2016				2017				2016
	Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price
Outstanding at January 1	26,400		$	18.60	125,950		$	24.08	26,400		$	18.60	125,950		$	24.08
Granted	—		—		—		—		—		—		—		—
Exercised	(5,500	)	18.60		(19,750	)	21.60		(8,250	)	18.60		(35,000	)	23.53
Forfeited	—		—		(1,250	)	21.60		(500	)	18.60		(1,500	)	21.10
Outstanding at March 31	20,900		$	18.60	104,950		$	24.58
Options exercisable at March 31	20,900		$	18.60	104,950		$	24.58
Outstanding at June 30									17,650		$	18.60	89,450		$	24.34
Options exercisable at June 30									17,650		$	18.60	89,450		$	24.34

At ~~March 31,~~June 30, 2017, the vested options totaled ~~20,900~~17,650 shares with a weighted average exercise price of $18.60 per share and a weighted average remaining contractual life of ~~0.82~~0.57 years. The intrinsic value (the difference between the market price and the aggregate exercise price) for the vested options as of ~~March 31,~~June 30, 2017, was ~~$655,000.~~$503,000. The intrinsic value for the total of all options exercised during the ~~three~~six months ended ~~March 31,~~June 30, 2017, was ~~$161,000.~~$237,000.

The exercise price of stock options granted is established by the Compensation Committee, but the exercise price for the stock options may not be less than the fair market value of the shares on the date that the option is granted or, if greater, the par value of a share of stock. Each option granted is exercisable in full at any time or from time to time, subject to vesting provisions, as determined by the Compensation Committee and as provided in the option agreement, but such time may not exceed ten years from the grant date. Cash received from options exercised was ~~$102,000~~$153,000 for the ~~three~~six months ended ~~March 31,~~June 30, 2017, and ~~$427,000~~$824,000 for the ~~three~~six months ended ~~March 31,~~June 30, 2016.

~~Total~~No compensation costs were recorded for options ~~were $0 for~~during both ~~three~~six month periods ended ~~March 31,~~June 30, 2017 and 2016. There are no unrecorded compensation costs related to options at ~~March 31,~~June 30, 2017. No stock options vested during the ~~three-month~~six-month periods ended ~~March 31,~~June 30, 2017 and 2016.

Subsequent Events - Heartland has evaluated subsequent events that may require recognition or disclosure through the filing date of this Quarterly Report on Form 10-Q with the SEC. ~~Based on~~On July 7, 2017, Heartland completed the acquisition of Citywide Banks of Colorado, Inc., parent company of Citywide Banks, based in Denver, Colorado. See Note 2, "Acquisitions," for further details regarding this ~~evaluation, Heartland has determined that none of these events were required to be recognized or disclosed in the consolidated financial statements and related notes.~~transaction.

Effect of New Financial Accounting Standards

In May 2014, the FASB issued ASU 2014-09, ""Revenue from Contracts with Customers." The amendment clarifies the principles for recognizing revenue and develops a common revenue standard. The amendment outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that “an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” In applying the revenue model to contracts within its scope, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance does not apply to certain contracts within the scope of other ASC Topics, such as lease contracts, insurance contracts, financing arrangements, financial instruments, guarantees other than product or service warranties and nonmonetary exchanges between entities in the same line of business to facilitate sales to customers. Heartland continues to evaluate noninterest income contracts affected by the new guidance by analyzing contracts and current accounting practices to determine if a change is appropriate. The amendment is largely consistent with existing guidance and current practices. Heartland intends to adopt the accounting standard in 2018, as required, which may require a change in the recognition of certain recurring revenue streams within trust and investment management fees; however, Heartland's preliminary analysis suggests the adoption of these amendments are not expected to have a significant effect on Heartland's results of operations, financial position and liquidity.

In January 2016, the FASB issued ~~guidance~~ ASU 2016-01, ""Recognition and Measurement of Financial Assets and Financial ~~Liabilitie~~Liabilities."~~s."~~ The amendments in ASU 2016-01 to Subtopic 825-10, Financial Instruments, ~~contain~~make the following ~~elements:~~changes: (1) require equity investments to be measured at fair value with changes in fair value recognized in net income; (2) simplify the

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

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

In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation (Topic 718)." The amendments in this ASU simplify several aspects of the accounting for share-based payments, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption iswas permitted for any interim or annual period prior to the effective date. ~~An entity that elects early adoption must adopt all of the amendments in the same period.~~ Heartland adopted this ASU on January 1, 2017, as required, using a prospective transition method. The requirement to report the excess tax benefit or shortfall related to settlements of share-based payment awards in earnings as an increase or decrease to tax expense has been applied to settlements occurring on or after January 1, 2017, and the impact of applying ~~that~~the guidance reduced reported income tax expense by ~~$888,000.~~$989,000.

ASU 2016-09 also requires that all income ~~tax-related~~tax related cash flows resulting from share-based payments be reported as an operating activity in the consolidated statements of cash flow. Previously income tax benefits resulting from the settlement of a share-based ~~payment~~ award were reported as a reduction of operating cash flows and an increase to financing cash flows to the extent that those benefits exceeded the income tax benefits reported in earnings during the period in which the share-based ~~payment~~ awards vested. Heartland elected to adopt the change in cash flow classification on a retrospective basis, which resulted in a $1.1 million increase to net cash from operating activities and a corresponding decrease to net cash from financing activities in the accompanying consolidated statement of cash flows for the ~~three~~six months ended ~~March 31,~~June 30, 2016. Heartland has elected to account for forfeitures as they occur.

In June 2016, the FASB issued ASU 2016-13, ""Financial Instruments - Credit Losses (Topic 326)."." The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU indicate that an entity should not use the length of time a security has been in an unrealized loss position to avoid recording a credit loss. In addition, in determining whether a credit loss exists, the amendments in this ASU also remove the requirements to consider the historical and implied volatility of the fair value of a security and recoveries or declines in fair value after the balance sheet date. The ~~amendment is~~amendments are 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~~Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Heartland intends to adopt the accounting standard in 2020, as ~~required, and is currently evaluating~~required. Heartland has formed a committee to review the standard, understand the potential impact of this guidance on its results of operations, financial position and ~~liquidity.~~liquidity, and oversee the implementation of the standard.

In August 2016, the FASB issued ASU 2016-15, ""Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments."" The amendments in this update address eight specific cash flow issues with the objective of reducing the

existing diversity in practice. The ~~amendment is~~amendments are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity ~~early~~ adopts the amendments early in an interim period, any adjustments ~~should~~must be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The amendments in this update ~~should~~must be applied using a retrospective transition method to each period presented. Heartland intends to adopt this ASU in 2018, as required, and is currently evaluating the potential impact on its results of operations, financial position, and liquidity.

In January 2017, the FASB issued ASU ~~2017-4,~~2017-04, "Intangibles - Goodwill and Other (Topic 350)."This amendment is to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Instead, an entity will perform only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing the impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized ~~should not~~cannot exceed the total amount of goodwill allocated to that reporting unit. An entity will still have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied prospectively. Early adoption is permitted, including in an interim period for impairment tests performed after January 1, 2017. Heartland intends to adopt this ASU in the third quarter of 2020, consistent with the annual impairment test as of September 30, ~~each year,~~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 ~~should~~must be reflected as toof the beginning of the fiscal year that includes the interim period. The amendments ~~should~~must be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Heartland intends to adopt this ASU in 2019, as required, and is currently evaluating the potential impact on its results of operations, financial position, and liquidity.

NOTE 2: ACQUISITIONS

Citywide Banks of Colorado, Inc.

remainder was settled by ~~shareholders~~delivery of ~~Citywide Banks of Colorado, Inc., and bank regulatory authorities. The transaction is also subject to Heartland stockholders approving an increase in the number of authorized~~3,216,161 shares of Heartland common ~~stock at the 2017 annual meeting of stockholders. The transaction is expected to close in the third quarter of 2017, and simultaneous~~stock. Simultaneous with the ~~closing,~~close, Citywide Banks ~~will merge~~merged into Heartland's Centennial Bank and Trust ~~subsidiary. The~~subsidiary, and the combined entity ~~will operate~~operates as Citywide Banks. ~~As of March 31, 2017,~~Prior to the acquisition, Citywide Banks had total assets of ~~$1.35~~$1.38 billion, including ~~$982.0 million~~$1.00 billion in net loans outstanding, and ~~$1.17~~$1.20 billion of ~~deposits.~~deposits as of June 30, 2017.

Founders Bancorp

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

CIC Bancshares, Inc.

On February 5, 2016, Heartland completed the acquisition of CIC Bancshares, Inc., parent company of Centennial Bank, headquartered in Denver, Colorado. The purchase price was approximately $76.9 million, which was paid by delivery of 2,003,235 shares of Heartland common stock and cash of $15.7 million. In addition, Heartland issued a new series of convertible preferred

stock with a fair value of $3.8 million and assumed convertible notes and subordinated debt totaling approximately $7.9 million. Simultaneous with the closing of the transaction, Centennial Bank merged into Heartland's Summit Bank & Trust, with the resulting institution operating under the name, Centennial Bank and Trust. As of the close date, the transaction included, at fair value, total assets of $772.6 million, total loans of $581.5 million, and total deposits of $648.1 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of CIC Bancshares, Inc.

NOTE 3: SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of securities available for sale as of ~~March 31,~~June 30, 2017, and December 31, 2016, 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, 2017
June 30, 2017
U.S. government corporations and agencies	$	15,027	$	71	$	(31	)	$	15,067	$	5,474	$	15	$	(18	)	$	5,471
Mortgage-backed securities	1,319,662		3,859		(34,994		)	1,288,527		1,293,984		4,451		(35,907		)	1,262,528
Obligations of states and political subdivisions	588,559		2,997		(16,963		)	574,593		503,998		3,942		(9,198		)	498,742
Corporate debt securities										7,164		22		—			7,186
Total debt securities	1,923,248		6,927		(51,988		)	1,878,187		1,810,620		8,430		(45,123		)	1,773,927
Equity securities	15,209		132		—			15,341		15,217		297		—			15,514
Total	$	1,938,457	$	7,059	$	(51,988	)	$	1,893,528	$	1,825,837	$	8,727	$	(45,123	)	$	1,789,441
December 31, 2016
U.S. government corporations and agencies	$	4,716	$	16	$	(32	)	$	4,700	$	4,716	$	16	$	(32	)	$	4,700
Mortgage-backed securities	1,321,760		7,026		(38,286		)	1,290,500		1,321,760		7,026		(38,286		)	1,290,500
Obligations of states and political subdivisions	553,020		2,436		(19,312		)	536,144		553,020		2,436		(19,312		)	536,144
Corporate debt securities										—		—		—			—
Total debt securities	1,879,496		9,478		(57,630		)	1,831,344		1,879,496		9,478		(57,630		)	1,831,344
Equity securities	14,451		69		—			14,520		14,451		69		—			14,520
Total	$	1,893,947	$	9,547	$	(57,630	)	$	1,845,864	$	1,893,947	$	9,547	$	(57,630	)	$	1,845,864

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of ~~March 31,~~June 30, 2017, and December 31, 2016, 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, 2017
June 30, 2017
Obligations of states and political subdivisions	260,616		13,176		(995		)	272,797		$	259,586	$	14,541	$	(733	)	$	273,394
Total	$	260,616	$	13,176	$	(995	)	$	272,797	$	259,586	$	14,541	$	(733	)	$	273,394
December 31, 2016
Obligations of states and political subdivisions	263,662		12,282		(1,145		)	274,799		$	263,662	$	12,282	$	(1,145	)	$	274,799
Total	$	263,662	$	12,282	$	(1,145	)	$	274,799	$	263,662	$	12,282	$	(1,145	)	$	274,799

At ~~March 31,~~June 30, 2017, approximately ~~77%~~80% of Heartland's mortgage-backed securities ~~are issuances of~~were issued by government-sponsored enterprises.

The amortized cost and estimated fair value of debt securities available for sale at ~~March 31,~~June 30, 2017, 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, 2017				June 30, 2017
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	380	$	380	$	—	$	—
Due in 1 to 5 years	47,478		47,375		31,665		31,842
Due in 5 to 10 years	96,785		94,282		109,520		107,787
Due after 10 years	458,943		447,623		375,451		371,770
Total debt securities	603,586		589,660		516,636		511,399
Mortgage-backed securities	1,319,662		1,288,527		1,293,984		1,262,528
Equity securities	15,209		15,341		15,217		15,514
Total investment securities	$	1,938,457	$	1,893,528	$	1,825,837	$	1,789,441

The amortized cost and estimated fair value of debt securities held to maturity at ~~March 31,~~June 30, 2017, 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, 2017				June 30, 2017
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	1,993	$	2,022	$	2,540	$	2,571
Due in 1 to 5 years	19,307		20,246		19,096		20,031
Due in 5 to 10 years	89,388		92,873		91,643		95,611
Due after 10 years	149,928		157,656		146,307		155,181
Total investment securities	$	260,616	$	272,797	$	259,586	$	273,394

As of ~~March 31,~~June 30, 2017, and December 31, 2016, securities with a fair value of ~~$714.5~~$688.2 million and $810.6 million, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required ~~and~~or permitted by law.

Gross gains and losses realized related to the sales of securities available for sale for the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017 and 2016, are summarized as follows, in thousands:


	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016		2017		2016
Proceeds from sales	$	221,637	$	303,448	$	402,371	$	318,927	$	624,008	$	622,375
Gross security gains	3,830		4,558		2,667		5,095		6,497		9,653
Gross security losses	1,339		682		1,275		473		2,614		1,155

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,~~June 30, 2017, and December 31, 2016. 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 months.~~more. The reference point for determining how long an investment was in an unrealized loss position was ~~March 31,~~June 30, 2016, and December 31, 2015,, respectively. Securities for which Heartland has taken credit-related other-than-temporary impairment ("OTTI") write-downs are categorized as being "less than 12 months" or "12 months or longer" in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.



Securities available for sale	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2017
U.S. government corporations and agencies	$	4,956	$	(18	)	$	—	$	—		$	4,956	$	(18	)
Mortgage-backed securities	572,527		(16,692		)	337,238		(19,215		)	909,765		(35,907		)
Obligations of states and political subdivisions	301,940		(8,120		)	16,226		(1,078		)	318,166		(9,198		)
Total debt securities	879,423		(24,830		)	353,464		(20,293		)	1,232,887		(45,123		)
Equity securities	—		—			—		—			—		—
Total temporarily impaired securities	$	879,423	$	(24,830	)	$	353,464	$	(20,293	)	$	1,232,887	$	(45,123	)
December 31, 2016
U.S. government corporations and agencies	$	4,185	$	(32	)	$	—	$	—		$	4,185	$	(32	)
Mortgage-backed securities	744,202		(23,527		)	272,449		(14,759		)	1,016,651		(38,286		)
Obligations of states and political subdivisions	414,151		(19,309		)	251		(3		)	414,402		(19,312		)
Total debt securities	1,162,538		(42,868		)	272,700		(14,762		)	1,435,238		(57,630		)
Equity securities	—		—			—		—			—		—
Total temporarily impaired securities	$	1,162,538	$	(42,868	)	$	272,700	$	(14,762	)	$	1,435,238	$	(57,630	)

Securities 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, 2017
U.S. government corporations and agencies $ 4,071
$ (31 ) $ —
$ —
$ 4,071
$ (31 )
Mortgage-backed securities 696,073
(17,851 ) 316,686
(17,143 ) 1,012,759
(34,994 )
Obligations of states and political subdivisions 454,072
(16,960 ) 250
(3 ) 454,322
(16,963 )
Total debt securities 1,154,216
(34,842 ) 316,936
(17,146 ) 1,471,152
(51,988 )
Equity securities —
—
—
—
—
—
Total temporarily impaired securities $ 1,154,216
$ (34,842 ) $ 316,936
$ (17,146 ) $ 1,471,152
$ (51,988 )
December 31, 2016
U.S. government corporations and agencies $ 4,185
$ (32 ) $ —
$ —
$ 4,185
$ (32 )
Mortgage-backed securities 744,202
(23,527 ) 272,449
(14,759 ) 1,016,651
(38,286 )
Obligations of states and political subdivisions 414,151
(19,309 ) 251
(3 ) 414,402
(19,312 )
Total debt securities 1,162,538
(42,868 ) 272,700
(14,762 ) 1,435,238
(57,630 )
Equity securities —
—
—
—
—
—
Total temporarily impaired securities $ 1,162,538
$ (42,868 ) $ 272,700
$ (14,762 ) $ 1,435,238
$ (57,630 )



Securities held to maturity	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2017
Obligations of states and political subdivisions	$	18,925	$	(144	)	$	3,032	$	(589	)	$	21,957	$	(733	)
Total temporarily impaired securities	$	18,925	$	(144	)	$	3,032	$	(589	)	$	21,957	$	(733	)
December 31, 2016
Obligations of states and political subdivisions	$	31,479	$	(884	)	$	2,017	$	(261	)	$	33,496	$	(1,145	)
Total temporarily impaired securities	$	31,479	$	(884	)	$	2,017	$	(261	)	$	33,496	$	(1,145	)

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, 2017
Obligations of states and political subdivisions 24,248
(752 ) 2,024
(243 ) 26,272
(995 )
Total temporarily impaired securities $ 24,248
$ (752 ) $ 2,024
$ (243 ) $ 26,272
$ (995 )
December 31, 2016
Obligations of states and political subdivisions 31,479
(884 ) 2,017
(261 ) 33,496
(1,145 )
Total temporarily impaired securities $ 31,479
$ (884 ) $ 2,017
$ (261 ) $ 33,496
$ (1,145 )

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

In the first quarter of 2016, Heartland sold the mortgage-backed securities in the held to maturity portfolio because the credit quality of the securities showed further deterioration, and it was unlikely Heartland would recover the remaining basis of the securities prior to maturity. The significant deterioration of the credit quality of these securities was inconsistent with Heartland's original intent upon purchase and classification of these held to maturity securities. The carrying value of these securities was $4.4 million, and the associated realized gross gains were $89,000, and the realized gross losses were $439,000.

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

price recovery or to maturity and does not believe it will be required to sell the securities before maturity, these investments are not considered other-than-temporarily impaired.

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

There were no ~~gross realized gains and no gross realized losses on the sale of~~ available for sale ~~securities with OTTI write-downs for the period ended March 31, 2017. Additionally, there were no gross realized gains and no gross realized losses on the sale of~~or held to maturity securities with OTTI write-downs held as of or for the six-month period ended ~~March 31,~~June 30, 2017. There were no gross realized gains and $85,000 of gross realized losses on the sale of available for sale securities with OTTI writedowns for the six-month period ended ~~March 31,~~June 30, 2016. Additionally, there were no gross realized gains and $439,000 of gross realized losses on the sale of held to maturity securities with OTTI write-downs for the six-month period ended ~~March 31,~~June 30, 2016.

The following table shows the detail of OTTI write-downs on debt securities included in earnings and the related changes in other accumulated comprehensive income ("AOCI") for the same securities, in thousands:


	Three Months Ended March 31,					Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016			2017		2016		2017		2016
Recorded as part of gross realized losses:
Credit related OTTI	$	—	$	—		$	—	$	—	$	—	$	—
Intent to sell OTTI	—		—			—		—		—		—
Total recorded as part of gross realized losses	—		—			—		—		—		—
Recorded directly to AOCI for non-credit related impairment:
Residential mortgage backed securities	—		—			—		—		—		—
Reduction of non-credit related impairment related to security sales	—		(120		)	—		—		—		(120		)
Accretion of non-credit related impairment	—		(7		)	—		—		—		(7		)
Total changes to AOCI for non-credit related impairment	—		(127		)	—		—		—		(127		)
Total OTTI losses (accretion) recorded on debt securities, net	$	—	$	(127	)	$	—	$	—	$	—	$	(127	)

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

The Heartland banks are required by federal law to maintain FHLB stock as members of the various ~~FHLBs as required by these institutions.~~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, ~~they are~~the FHLB stock is less liquid than other marketable equity securities, and ~~their~~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,~~June 30, 2017, did not consider the investments to be other than temporarily impaired.

NOTE 4: LOANS

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


	March 31, 2017			December 31, 2016			June 30, 2017			December 31, 2016
Loans receivable held to maturity:
Commercial	$	1,314,393		$	1,287,265		$	1,344,323		$	1,287,265
Commercial real estate	2,535,355			2,538,582			2,458,688			2,538,582
Agricultural and agricultural real estate	481,125			489,318			495,243			489,318
Residential real estate	604,902			617,924			596,385			617,924
Consumer	427,962			420,613			431,052			420,613
Gross loans receivable held to maturity	5,363,737			5,353,702			5,325,691			5,353,702
Unearned discount	(668		)	(699		)	(639		)	(699		)
Deferred loan fees	(1,465		)	(1,284		)	30			(1,284		)
Total net loans receivable held to maturity	5,361,604			5,351,719			5,325,082			5,351,719
Allowance for loan losses	(54,999		)	(54,324		)	(54,051		)	(54,324		)
Loans receivable, net	$	5,306,605		$	5,297,395		$	5,271,031		$	5,297,395

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

The commercial and commercial real estate loan portfolio includes a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and real estate. Although most loans are made on a secured basis, loans may be made on an unsecured basis ~~where~~if warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. Commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The collateral that Heartland requires for most of these loans is based upon the discounted market value of the collateral. The primary repayment risks of commercial loans are that the cash flow of the borrowers may be unpredictable, and the collateral securing these loans may fluctuate in value. Heartland seeks to minimize these risks in a variety of ways. The underwriting analysis includes credit verification, analysis of global cash flows, appraisals and a review of the financial condition of the borrower. Personal guarantees are frequently required as a tertiary form of repayment. In addition, when underwriting loans for commercial real estate, careful consideration is given to the property's operating history, future operating projections, current and projected occupancy, location and physical condition. Heartland also utilizes government guaranteed lending through the U.S. Small Business Administration and the U.S. Department of Agriculture's Rural Development Business and Industry Program to assist customers with longer-term funding and to reduce risk.

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

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

secondary market with servicing rights retained. This practice allows Heartland to better manage interest rate risk and liquidity risk. The Heartland bank subsidiaries participate in lending programs sponsored by U.S. government agencies such as Veterans Administration and Federal Home Administration when justified by market conditions. As of ~~March 31,~~June 30, 2017, Heartland had ~~$2.6~~$5.1 million of loans secured by residential real estate property that were in the process of foreclosure.

Consumer lending includes motor vehicle, home improvement, home equity and small personal credit lines. Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than one-to-four-family residential mortgage loans. Consumer loan collections are dependent on the borrower's continuing financial stability, and are therefore more likely to be affected by adverse personal circumstances. Risk is reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate. Heartland's consumer finance subsidiaries, Citizens Finance Co. and Citizens Finance of Illinois Co., typically lend to borrowers with past credit problems or limited credit histories, and these loans comprise approximately 18% of Heartland's total consumer loan portfolio.

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

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

The following table shows the balance in the allowance for loan losses at ~~March 31,~~June 30, 2017, and December 31, 2016, and the related loan balances, disaggregated on the basis of impairment methodology, in thousands. Loans evaluated under ASC 310-10-35 include loans on nonaccrual status and troubled debt restructurings, which are individually evaluated for impairment, and other impaired loans deemed to have similar risk characteristics. All other loans are collectively evaluated for impairment under ASC 450-20. Heartland has made no significant changes to the accounting for the allowance for loan losses ~~policy~~ during 2017.


	Allowance For Loan Losses						Gross Loans Receivable Held to Maturity						Allowance For Loan Losses						Gross Loans Receivable Held to Maturity
	Ending Balance Under ASC 310-10-35		Ending Balance Under ASC 450-20		Total		Ending Balance Evaluated for Impairment Under ASC 310-10-35		Ending Balance Evaluated for Impairment Under ASC 450-20		Total		Ending Balance Under ASC 310-10-35		Ending Balance Under ASC 450-20		Total		Ending Balance Evaluated for Impairment Under ASC 310-10-35		Ending Balance Evaluated for Impairment Under ASC 450-20		Total
March 31, 2017
June 30, 2017
Commercial	$	1,763	$	14,417	$	16,180	$	3,989	$	1,310,404	$	1,314,393	$	2,164	$	15,004	$	17,168	$	7,298	$	1,337,025	$	1,344,323
Commercial real estate	2,666		21,131		23,797		34,549		2,500,806		2,535,355		3,018		18,843		21,861		29,639		2,429,049		2,458,688
Agricultural and agricultural real estate	41		3,942		3,983		13,243		467,882		481,125		143		3,689		3,832		11,781		483,462		495,243
Residential real estate	496		1,687		2,183		26,978		577,924		604,902		416		1,847		2,263		28,757		567,628		596,385
Consumer	1,397		7,459		8,856		6,149		421,813		427,962		1,207		7,720		8,927		5,904		425,148		431,052
Total	$	6,363	$	48,636	$	54,999	$	84,908	$	5,278,829	$	5,363,737	$	6,948	$	47,103	$	54,051	$	83,379	$	5,242,312	$	5,325,691
December 31, 2016
Commercial	$	1,318	$	13,447	$	14,765	$	3,712	$	1,283,553	$	1,287,265	$	1,318	$	13,447	$	14,765	$	3,712	$	1,283,553	$	1,287,265
Commercial real estate	2,671		21,648		24,319		45,217		2,493,365		2,538,582		2,671		21,648		24,319		45,217		2,493,365		2,538,582
Agricultural and agricultural real estate	816		3,394		4,210		16,730		472,588		489,318		816		3,394		4,210		16,730		472,588		489,318
Residential real estate	497		1,766		2,263		25,726		592,198		617,924		497		1,766		2,263		25,726		592,198		617,924
Consumer	1,451		7,316		8,767		5,988		414,625		420,613		1,451		7,316		8,767		5,988		414,625		420,613
Total	$	6,753	$	47,571	$	54,324	$	97,373	$	5,256,329	$	5,353,702	$	6,753	$	47,571	$	54,324	$	97,373	$	5,256,329	$	5,353,702

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


	March 31, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Nonaccrual loans	$	61,789	$	62,591	$	63,277	$	62,591
Nonaccrual troubled debt restructured loans	1,079		1,708		2,116		1,708
Total nonaccrual loans	$	62,868	$	64,299	$	65,393	$	64,299
Accruing loans past due 90 days or more	$	872	$	86	$	698	$	86
Performing troubled debt restructured loans	$	11,010	$	10,380	$	11,157	$	10,380

The following tables provide information on troubled debt restructured loans that were modified during the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, dollars in thousands:



	Three Months Ended June 30,
	2017					2016
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial	3	$	131	$	131	1	$	100	$	100
Commercial real estate	—	—		—		1	179		179
Total commercial and commercial real estate	3	131		131		2	279		279
Agricultural and agricultural real estate	—	—		—		—	—		—
Residential real estate	11	1,455		1,455		—	—		—
Consumer	—	—		—		—	—		—
Total	14	$	1,586	$	1,586	2	$	279	$	279


	Three Months Ended March 31,										Six Months Ended June 30,
	2017					2016					2017					2016
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial	—	$	—	$	—	—	$	—	$	—	3	$	131	$	131	1	$	100	$	100
Commercial real estate	—	—		—		—	—		—		—	—		—		1	179		179
Total commercial and commercial real estate	—	—		—		—	—		—		3	131		131		2	279		279
Agricultural and agricultural real estate	—	—		—		—	—		—		—	—		—		—	—		—
Residential real estate	3	348		348		—	—		—		14	1,803		1,803		—	—		—
Consumer	—	—		—		—	—		—		—	—		—		—	—		—
Total	3	$	348	$	348	—	$	—	$	—	17	$	1,934	$	1,934	2	$	279	$	279

The pre-modification and post-modification recorded investment represents amounts as of the date of loan modification. Since the modifications onof these loans have been only interest rate concessions and term extensions, not principal reductions, the pre-modification and post-modification recorded investment amounts are the same. At ~~March 31,~~June 30, 2017, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructuring.

~~Heartland had no~~

The following table shows troubled debt restructured loans for which there was a payment default during the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, that had been modified during the twelve-month period prior to ~~default:~~default, in thousands:



	With Payment Defaults During the Following Periods
	Three Months Ended June 30,
	2017			2016
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Commercial	—	$	—	1	$	100
Commercial real estate	—	—		—	—
Total commercial and commercial real estate	—	—		1	100
Agricultural and agricultural real estate	—	—		—	—
Residential real estate	2	150		—	—
Consumer	—	—		—	—
Total	2	$	150	1	$	100



	With Payment Defaults During the Following Periods
	Six Months Ended June 30,
	2017			2016
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Commercial	—	$	—	1	$	100
Commercial real estate	—	—		—	—
Total commercial and commercial real estate	—	—		1	100
Agricultural and agricultural real estate	—	—		—	—
Residential real estate	2	150		—	—
Consumer	—	—		—	—
Total	2	$	150	1	$	100

Heartland's internal rating system is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category, categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration. The "nonpass" category consists of special mention, substandard, doubtful and loss loans. The "special mention" rating is attached to loans where the borrower exhibits negative trends in financial ~~trends~~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 ~~sound~~ net worth and paying capacity of the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that Heartland will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following weaknesses: deteriorating financial trends, lack of earnings, inadequate debt service capacity, excessive debt and/or lack of liquidity. The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring ~~classification~~the rating of the loan as ~~loss~~"loss" until the exact status of the loan can be determined. The ~~"loss"~~loss rating is assigned to loans considered uncollectible. As of ~~March 31,~~June 30, 2017, Heartland had no loans classified as doubtful and no loans classified as loss. Loans are placed on "nonaccrual" when management does not expect to collect payments of principal and interest in full or

when principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured and in the process of collection.

The following table presents loans by credit quality indicator at ~~March 31,~~June 30, 2017, and December 31, 2016, in thousands:


	Pass		Nonpass		Total		Pass		Nonpass		Total
March 31, 2017
June 30, 2017
Commercial	$	1,216,550	$	97,843	$	1,314,393	$	1,253,136	$	91,187	$	1,344,323
Commercial real estate	2,362,759		172,596		2,535,355		2,293,014		165,674		2,458,688
Total commercial and commercial real estate	3,579,309		270,439		3,849,748		3,546,150		256,861		3,803,011
Agricultural and agricultural real estate	415,716		65,409		481,125		428,619		66,624		495,243
Residential real estate	569,322		35,580		604,902		561,650		34,735		596,385
Consumer	416,515		11,447		427,962		420,560		10,492		431,052
Total gross loans receivable held to maturity	$	4,980,862	$	382,875	$	5,363,737	$	4,956,979	$	368,712	$	5,325,691
December 31, 2016
Commercial	$	1,187,557	$	99,708	$	1,287,265	$	1,187,557	$	99,708	$	1,287,265
Commercial real estate	2,379,632		158,950		2,538,582		2,379,632		158,950		2,538,582
Total commercial and commercial real estate	3,567,189		258,658		3,825,847		3,567,189		258,658		3,825,847
Agricultural and agricultural real estate	424,311		65,007		489,318		424,311		65,007		489,318
Residential real estate	584,626		33,298		617,924		584,626		33,298		617,924
Consumer	409,474		11,139		420,613		409,474		11,139		420,613
Total gross loans receivable held to maturity	$	4,985,600	$	368,102	$	5,353,702	$	4,985,600	$	368,102	$	5,353,702

The nonpass category in the table above is comprised of approximately ~~54%~~52% special mention loans and ~~46%~~48% substandard loans as of ~~March 31,~~June 30, 2017. The percent of nonpass loans on nonaccrual status as of ~~March 31,~~June 30, 2017, was ~~17%~~18%. As of December 31, 2016, the nonpass category in the table above was comprised of approximately 47% special mention loans and 53% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, 2016, was 17%. Loans delinquent 30 to 89 days as a percent of total loans were ~~0.44%~~0.38% at ~~March 31,~~June 30, 2017, compared to 0.37% at December 31, 2016. Changes in credit risk are monitored on a ~~continuous~~regular basis and changes in risk ratings are made when identified. All impaired loans are reviewed at least annually.

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


	Accruing Loans														Accruing Loans
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual		Total Loans		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual		Total Loans
March 31, 2017
June 30, 2017
Commercial	$	11,940	$	2,421	$	291	$	14,652	$	1,296,900	$	2,841	$	1,314,393	$	3,891	$	64	$	516	$	4,471	$	1,332,816	$	7,036	$	1,344,323
Commercial real estate	3,618		310		500		4,428		2,506,236		24,691		2,535,355		7,483		816		166		8,465		2,430,808		19,415		2,458,688
Total commercial and commercial real estate	15,558		2,731		791		19,080		3,803,136		27,532		3,849,748		11,374		880		682		12,936		3,763,624		26,451		3,803,011
Agricultural and agricultural real estate	347		—		61		408		469,918		10,799		481,125		1,436		610		—		2,046		481,415		11,782		495,243
Residential real estate	2,141		163		—		2,304		581,850		20,748		604,902		2,023		196		—		2,219		570,556		23,610		596,385
Consumer	2,014		746		20		2,780		421,393		3,789		427,962		3,349		616		16		3,981		423,521		3,550		431,052
Total gross loans receivable held to maturity	$	20,060	$	3,640	$	872	$	24,572	$	5,276,297	$	62,868	$	5,363,737	$	18,182	$	2,302	$	698	$	21,182	$	5,239,116	$	65,393	$	5,325,691
December 31, 2016
Commercial	$	1,127	$	219	$	77	$	1,423	$	1,281,241	$	4,601	$	1,287,265	$	1,127	$	219	$	77	$	1,423	$	1,281,241	$	4,601	$	1,287,265
Commercial real estate	886		3,929		—		4,815		2,513,069		20,698		2,538,582		886		3,929		—		4,815		2,513,069		20,698		2,538,582
Total commercial and commercial real estate	2,013		4,148		77		6,238		3,794,310		25,299		3,825,847		2,013		4,148		77		6,238		3,794,310		25,299		3,825,847
Agricultural and agricultural real estate	199		3,191		—		3,390		472,597		13,331		489,318		199		3,191		—		3,390		472,597		13,331		489,318
Residential real estate	4,986		846		—		5,832		590,626		21,466		617,924		4,986		846		—		5,832		590,626		21,466		617,924
Consumer	3,455		1,021		9		4,485		411,925		4,203		420,613		3,455		1,021		9		4,485		411,925		4,203		420,613
Total gross loans receivable held to maturity	$	10,653	$	9,206	$	86	$	19,945	$	5,269,458	$	64,299	$	5,353,702	$	10,653	$	9,206	$	86	$	19,945	$	5,269,458	$	64,299	$	5,353,702

The majority of Heartland's impaired loans are ~~those that are~~on nonaccrual or have had their terms restructured in a troubled debt restructuring. The following tables present, by category of loan, impaired loans, the unpaid contractual loan balances at ~~March 31,~~June 30, 2017, and December 31, 2016; the outstanding loan balances recorded on the consolidated balance sheets at ~~March 31,~~June 30, 2017, and December 31, 2016; any related allowance recorded for those loans as of ~~March 31,~~June 30, 2017, and December 31, 2016; the average outstanding loan balances recorded on the consolidated balance sheets during the ~~three months~~three- and six-months ended ~~March 31,~~June 30, 2017, and year ended December 31, 2016; and the interest income recognized on the impaired loans during the ~~three-month period~~three- and six-month periods ended ~~March 31,~~June 30, 2017, and year ended December 31, 2016, in thousands:


	Unpaid Contractual Balance		Loan Balance		Related Allowance Recorded		Year- to- Date Avg. Loan Balance		Year- to- Date Interest Income Recognized		Unpaid Contractual Balance		Loan Balance		Related Allowance Recorded		Quarter- to- Date Avg. Loan Balance		Quarter- to- Date Interest Income Recognized		Year- to- Date Avg. Loan Balance		Year- to- Date Interest Income Recognized
March 31, 2017
June 30, 2017
Impaired loans with a related allowance:
Commercial	$	2,841	$	2,829	$	1,763	$	2,776	$	137	$	5,773	$	5,773	$	2,164	$	3,889	$	2	$	3,311	$	5
Commercial real estate	12,423		12,423		2,666		13,635		4		11,395		11,395		3,018		12,182		3		12,847		7
Total commercial and commercial real estate	15,264		15,252		4,429		16,411		141		17,168		17,168		5,182		16,071		5		16,158		12
Agricultural and agricultural real estate	575		575		41		2,013		5		1,238		1,238		143		784		—		1,407		—
Residential real estate	2,464		2,464		496		3,103		10		1,960		1,960		416		1,883		1		2,479		11
Consumer	2,473		2,473		1,397		2,480		11		2,377		2,377		1,207		2,421		11		2,437		22
Total impaired loans with a related allowance	$	20,776	$	20,764	$	6,363	$	24,007	$	167	$	22,743	$	22,743	$	6,948	$	21,159	$	17	$	22,481	$	45
Impaired loans without a related allowance:
Commercial	$	1,201	$	1,160	$	—	$	1,650	$	59	$	1,605	$	1,525	$	—	$	1,660	$	59	$	1,656	$	118
Commercial real estate	23,203		22,126		—		27,545		196		19,046		18,244		—		19,502		140		23,505		336
Total commercial and commercial real estate	24,404		23,286		—		29,195		255		20,651		19,769		—		21,162		199		25,161		454
Agricultural and agricultural real estate	12,668		12,668		—		13,512		35		10,543		10,543		—		10,887		—		12,148		—
Residential real estate	24,518		24,514		—		24,061		77		26,800		26,797		—		26,644		41		25,228		118
Consumer	3,676		3,676		—		3,755		19		3,527		3,527		—		3,606		23		3,663		42
Total impaired loans without a related allowance	$	65,266	$	64,144	$	—	$	70,523	$	386	$	61,521	$	60,636	$	—	$	62,299	$	263	$	66,200	$	614
Total impaired loans held to maturity:
Commercial	$	4,042	$	3,989	$	1,763	$	4,426	$	196	$	7,378	$	7,298	$	2,164	$	5,549	$	61	$	4,967	$	123
Commercial real estate	35,626		34,549		2,666		41,180		200		30,441		29,639		3,018		31,684		143		36,352		343
Total commercial and commercial real estate	39,668		38,538		4,429		45,606		396		37,819		36,937		5,182		37,233		204		41,319		466
Agricultural and agricultural real estate	13,243		13,243		41		15,525		40		11,781		11,781		143		11,671		—		13,555		—
Residential real estate	26,982		26,978		496		27,164		87		28,760		28,757		416		28,527		42		27,707		129
Consumer	6,149		6,149		1,397		6,235		30		5,904		5,904		1,207		6,027		34		6,100		64
Total impaired loans held to maturity	$	86,042	$	84,908	$	6,363	$	94,530	$	553	$	84,264	$	83,379	$	6,948	$	83,458	$	280	$	88,681	$	659



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

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

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

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

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


	March 31, 2017						December 31, 2016						June 30, 2017						December 31, 2016
	Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans		Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans		Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans		Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans
Commercial	$	1,962	$	94,339	$	96,301	$	2,198	$	99,082	$	101,280	$	1,505	$	70,535	$	72,040	$	2,198	$	99,082	$	101,280
Commercial real estate	2,294		617,124		619,418		2,079		622,117		624,196		2,539		570,903		573,442		2,079		622,117		624,196
Agricultural and agricultural real estate	—		1,339		1,339		—		181		181		—		1,265		1,265		—		181		181
Residential real estate	187		147,389		147,576		186		157,468		157,654		195		137,862		138,057		186		157,468		157,654
Consumer loans	—		49,023		49,023		—		47,368		47,368		—		45,417		45,417		—		47,368		47,368
Total loans	$	4,443	$	909,214	$	913,657	$	4,463	$	926,216	$	930,679	$	4,239	$	825,982	$	830,221	$	4,463	$	926,216	$	930,679

Changes in accretable yield on acquired loans with evidence of credit deterioration at the date of acquisition for the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, were as follows, in thousands:


	For the Three Months Ended						Three Months Ended June 30,						Six Months Ended June 30,
	March 31, 2017			March 31, 2016			2017			2016			2017			2016
Balance at beginning of year	$	182		$	557
Balance at beginning of period							$	136		$	305		$	182		$	557
Original yield discount, net, at date of acquisitions	—			19			—			—			—			19
Accretion	(173		)	(273		)	(201		)	(193		)	(374		)	(466		)
Reclassification from nonaccretable difference⁽¹⁾	127			2			166			56			293			58
Balance at end of period	$	136		$	305
Balance at period end							$	101		$	168		$	101		$	168

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

For loans acquired since January 2015, on the acquisition dates the preliminary estimate of the contractually required payments receivable for all loans with evidence of credit deterioration since origination was $21.0 million, and the estimated fair value of ~~the~~these loans was $13.1 million. At ~~March 31,~~June 30, 2017, a majority of these loans were valued based upon the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of ~~underlying~~such collateral, and the timing and amount of the cash flows could not be reasonably estimated. At ~~March 31,~~June 30, 2017, and December 31, 2016, there was an allowance for loan losses of ~~$589,000~~$128,000 and $588,000, respectively, related to these ASC 310-30 loans. Provision expense of ~~$1,000~~$0 and ~~$124,000~~$267,000 was recorded for the ~~three-month~~three month periods ended ~~March 31,~~June 30, 2017, and 2016, respectively. Provision expense of $1,000 and $391,000 was recorded for the six month periods ended June 30, 2017, and 2016, respectively.

For loans acquired since January 2015, the preliminary estimate on the acquisition dates ~~the preliminary estimate~~ of the contractually required payments receivable for all nonimpaired loans acquired ~~in the acquisitions~~ was $1.65 billion, and the estimated fair value of the loans was $1.60 billion.

NOTE 5: ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, were as follows, in thousands:

Commercial
Commercial
Real Estate
Agricultural
Residential
Real Estate
Consumer Total
Balance at December 31, 2016 $ 14,765
$ 24,319
$ 4,210
$ 2,263
$ 8,767
$ 54,324
Charge-offs (230 ) (608 ) (871 ) (265 ) (1,744 ) (3,718 )
Recoveries 234
212
1
2
303
752
Provision 1,411
(126 ) 643
183
1,530
3,641
Balance at March 31, 2017 $ 16,180
$ 23,797
$ 3,983
$ 2,183
$ 8,856
$ 54,999



	Commercial			Commercial Real Estate			Agricultural			Residential Real Estate			Consumer			Total
Balance at March 31, 2017	$	16,180		$	23,797		$	3,983		$	2,183		$	8,856		$	54,999
Charge-offs	(1,126		)	(1		)	(17		)	(134		)	(1,488		)	(2,766		)
Recoveries	54			602			2			5			266			929
Provision	2,060			(2,537		)	(136		)	209			1,293			889
Balance at June 30, 2017	$	17,168		$	21,861		$	3,832		$	2,263		$	8,927		$	54,051

	Commercial			Commercial Real Estate			Agricultural			Residential Real Estate			Consumer			Total
Balance at December 31, 2016	$	14,765		$	24,319		$	4,210		$	2,263		$	8,767		$	54,324
Charge-offs	(1,356		)	(609		)	(888		)	(399		)	(3,232		)	(6,484		)
Recoveries	288			814			3			7			569			1,681
Provision	3,471			(2,663		)	507			392			2,823			4,530
Balance at June 30, 2017	$	17,168		$	21,861		$	3,832		$	2,263		$	8,927		$	54,051


																		Commercial			Commercial Real Estate			Agricultural		Residential Real Estate			Consumer			Total
Balance at March 31, 2016																		$	16,374		$	20,495		$	4,028	$	1,851		$	6,990		$	49,738
Charge-offs																		(249		)	(1,103		)	—		(105		)	(1,494		)	(2,951		)
Recoveries																		143			2,443			4		4			257			2,851
Provision																		(743		)	1,133			68		315			1,345			2,118
Balance at June 30, 2016																		$	15,525		$	22,968		$	4,100	$	2,065		$	7,098		$	51,756

	Commercial			Commercial Real Estate			Agricultural		Residential Real Estate			Consumer			Total			Commercial			Commercial Real Estate			Agricultural		Residential Real Estate			Consumer			Total
Balance at December 31, 2015	$	16,095		$	19,532		$	3,887	$	1,934		$	7,237		$	48,685		$	16,095		$	19,532		$	3,887	$	1,934		$	7,237		$	48,685
Charge-offs	(98		)	(312		)	—		(37		)	(1,158		)	(1,605		)	(347		)	(1,415		)	—		(142		)	(2,652		)	(4,556		)
Recoveries	176			146			3		20			246			591			319			2,589			7		24			503			3,442
Provision	201			1,129			138		(66		)	665			2,067			(542		)	2,262			206		249			2,010			4,185
Balance at March 31, 2016	$	16,374		$	20,495		$	4,028	$	1,851		$	6,990		$	49,738
Balance at June 30, 2016																		$	15,525		$	22,968		$	4,100	$	2,065		$	7,098		$	51,756

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

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

Heartland had goodwill of $141.5 million at ~~March 31,~~June 30, 2017, and $127.7 million at December 31, 2016. Heartland conducts its annual internal assessment of the goodwill both ~~collectively~~at the consolidated level and at its subsidiaries as of September 30. There was no goodwill impairment as of the most recent assessment.

Heartland recorded $13.8 million of goodwill and $2.5 million of core deposit intangibles in connection with the acquisition of Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California on February 28, 2017. The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition, Heartland recognized core deposit intangibles of $2.5 million that are expected to be amortized over a period of 10 years on an accelerated basis. The core deposit intangibles associated with this transaction are not deductible for tax purposes.

Heartland recorded $29.8 million of goodwill in connection with the acquisition of CIC Bancshares, Inc., parent company of Centennial Bank, based in Denver, Colorado on February 5, 2016. ~~The goodwill associated with this transaction is not deductible for tax purposes. As part of this acquisition,~~In addition, Heartland recognized core deposit intangibles of $6.4 million ~~that~~and commercial servicing rights of $190,000 with this acquisition.

The core deposit intangibles recorded with the Founders Bancorp and CIC Bancshares, Inc., acquisitions are not deductible for tax purposes and are expected to be amortized over a period of 10 years on an accelerated basis. ~~The core deposit intangibles associated with this transaction are not deductible for tax purposes. In addition, Heartland recognized commercial servicing rights of $190,000.~~

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

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

March 31, 2017 December 31, 2016

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount
Amortizing intangible assets:
Core deposit intangibles $ 45,968
$ 22,211
$ 23,757
$ 43,504
$ 21,049
$ 22,455
Mortgage servicing rights 51,302
19,343
31,959
50,467
18,379
32,088
Customer relationship intangible 1,177
866
311
1,177
857
320
Commercial servicing rights 6,597
3,115
3,482
6,504
2,814
3,690
Total $ 105,044
$ 45,535
$ 59,509
$ 101,652
$ 43,099
$ 58,553



	June 30, 2017						December 31, 2016
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	45,968	$	23,418	$	22,550	$	43,504	$	21,049	$	22,455
Customer relationship intangibles	1,177		877		300		1,177		857		320
Mortgage servicing rights	51,969		20,337		31,632		50,467		18,379		32,088
Commercial servicing rights	6,637		3,533		3,104		6,504		2,814		3,690
Total	$	105,751	$	48,165	$	57,586	$	101,652	$	43,099	$	58,553

The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands:


	Core Deposit Intangibles		Mortgage Servicing Rights		Customer Relationship Intangible		Commercial Servicing Rights		Total		Core Deposit Intangibles		Customer Relationship Intangibles		Mortgage Servicing Rights		Commercial Servicing Rights		Total
Nine months ending December 31, 2017	$	3,577	$	6,784	$	30	$	632	$	11,023
Six months ending December 31, 2017											$	2,369	$	20	$	4,937	$	397	$	7,723
Year ending December 31,
2018	4,261		6,294		39		789		11,383		4,261		39		6,674		744		11,718
2019	3,741		5,395		38		638		9,812		3,741		38		5,720		596		10,095
2020	3,264		4,496		37		476		8,273		3,264		36		4,767		443		8,510
2021	2,716		3,596		35		408		6,755		2,716		35		3,814		378		6,943
2022	1,876		2,697		34		323		4,930		1,876		34		2,860		304		5,074
Thereafter	4,322		2,697		98		216		7,333		4,323		98		2,860		242		7,523
Total	$	23,757	$	31,959	$	311	$	3,482	$	59,509	$	22,550	$	300	$	31,632	$	3,104	$	57,586

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of ~~March 31,~~June 30, 2017. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others were approximately $4.34 billion and $4.31 billion as of ~~March 31,~~June 30, 2017, and December 31, 2016, respectively. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately ~~$27.3~~$25.8 million and $21.4 million as of ~~March 31,~~June 30, 2017, and December 31, 2016, respectively. The fair value of Heartland's mortgage servicing rights was estimated at $~~47.6~~43.6 million at ~~March 31,~~June 30, 2017, and $45.2 million at December 31, 2016.

Heartland's mortgage servicing rights portfolio is comprised of loans serviced for the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association. The servicing rights portfolio is separated into 15- and 30-year tranches, and the servicing rights portfolio is an asset of one of Heartland's subsidiaries.

The fair value of mortgage servicing rights is calculated based upon either a discounted cash flow ~~analysis.~~analysis or market indication. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings are considered in the calculation. The average constant prepayment rate was ~~9.39%~~10.30% and 9.63% for the ~~March 31,~~June 30, 2017, and December 31, 2016, valuations, respectively. The discount rate was 9.25% and 9.26% for the ~~March 31,~~June 30, 2017, and December 31, 2016, valuations, respectively. The average capitalization rate for the first ~~three~~six months of 2017 ranged from ~~100~~94 to 150 basis points compared to the range of 88 to 135 basis points for 2016. Fees collected for the servicing of mortgage loans for others were $3.2 million and ~~$2.9~~$3.0 million for the ~~three~~quarters ended June 30, 2017, and June 30, 2016, respectively and $6.4 million and $5.9 million for the six months ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, respectively.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the ~~three~~six months ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016:


	2017			2016			2017			2016
Balance at January 1,	$	32,088		$	30,314		$	32,088		$	30,314
Originations	2,132			2,395			4,273			5,799
Amortization	(2,261		)	(2,259		)	(4,729		)	(4,826		)
Balance at March 31,	$	31,959		$	30,450
Balance at period end							$	31,632		$	31,287
Fair value of mortgage servicing rights	$	47,564		$	45,210		$	43,597		$	39,881
Mortgage servicing rights, net to servicing portfolio	0.74		%	0.74		%	0.73		%	0.74		%

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 ~~$160.7~~$149.2 million at ~~March~~June 30, 2017 and $164.6 million at December 31, ~~2017.~~2016. The commercial servicing rights portfolio is separated into two tranches at the respective Heartland subsidiary, loans with a term of less than 20 years and loans with a term of more than 20 ~~years, at each subsidiary.~~years. Fees collected for the servicing of commercial loans for others were ~~$415,000~~$376,000 and ~~$80,000~~$375,000 for the ~~three~~quarter ended June 30, 2017, and June 30, 2016, respectively, and $791,000 and $455,000 for the six months ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, respectively.

The fair value of each commercial servicing rights portfolio is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds and servicing costs, are considered in the calculation. The range of average constant prepayment rates for the ~~portfolio~~ valuations was ~~6.72%~~6.68% to ~~8.07%~~7.78% as of ~~March 31,~~June 30, 2017, compared to 6.96% to 7.88% as of December 31, 2016. The discount rate range was ~~12.07%~~12.15% to ~~13.69%~~13.72% for the ~~March 31,~~June 30, 2017, valuations compared to 12.44% to

13.88% for the December 31, 2016, valuations. The capitalization rate for 2017 ranged from 310 to 445 basis points compared to 310 to 445 basis points for 2016. The total fair value of Heartland's commercial servicing rights was estimated at ~~$4.0~~$3.7 million as of ~~March~~June 30, 2017, and $4.8 million as of December 31, ~~2017.~~2016.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the ~~three~~six months ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016:


	2017			2016			2017			2016
Balance at January 1,	$	3,690		$	4,611		$	3,690		$	4,611
Purchased commercial servicing rights	—			190			—			190
Originations	93			195			133			404
Amortization	(306		)	(536		)	(743		)	(792		)
Valuation allowance on commercial servicing rights	5			—			24			(46		)
Balance at March 31,	$	3,482		$	4,460
Balance at period end							$	3,104		$	4,367
Fair value of commercial servicing rights	$	4,040		$	4,899		$	3,678		$	4,791
Commercial servicing rights, net to servicing portfolio	2.17		%	2.35		%	2.08		%	2.44		%

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,~~June 30, 2017, no valuation allowance was required on commercial servicing rights with a term less than 20 years and a ~~$28,000~~$9,000 valuation allowance was required on commercial servicing rights with a term greater than 20 years. At December 31, 2016, no valuation allowance was required on commercial servicing rights with a term less than 20 years and a $33,000 valuation allowance was required on commercial servicing rights with a term greater than 20 years.

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


March 31, 2017	Book Value- Less than 20 Years		Fair Value- Less than 20 Years		Impairment- Less than 20 Years		Book Value- More than 20 Years		Fair Value- More than 20 Years		Impairment- More than 20 Years
June 30, 2017													Book Value- Less than 20 Years		Fair Value- Less than 20 Years		Impairment- Less than 20 Years		Book Value- More than 20 Years		Fair Value- More than 20 Years		Impairment- More than 20 Years
Centennial Bank and Trust	$	17	$	18	$	—	$	103	$	114	$	—	$	14	$	17	$	—	$	50	$	63	$	—
Premier Valley Bank	131		161		—		345		317		28		117		149		—		331		322		9
Wisconsin Bank & Trust	748		929		—		2,166		2,501		—		662		860		—		1,939		2,267		—
Total	$	896	$	1,108	$	—	$	2,614	$	2,932	$	28	$	793	$	1,026	$	—	$	2,320	$	2,652	$	9
December 31, 2016
Centennial Bank and Trust	$	19	$	23	$	—	$	107	$	114	$	—	$	19	$	23	$	—	$	107	$	114	$	—
Premier Valley Bank	156		180		—		359		326		33		156		180		—		359		326		33
Wisconsin Bank & Trust	833		997		—		2,249		2,487		—		833		997		—		2,249		2,487		—
Total	$	1,008	$	1,200	$	—	$	2,715	$	2,927	$	33	$	1,008	$	1,200	$	—	$	2,715	$	2,927	$	33

NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

Heartland uses derivative financial instruments as part of its interest rate risk management strategy. As part of the strategy, Heartland considers the use of interest rate swaps, caps, floors, collars, and certain interest rate lock commitments and forward sales of securities related to mortgage banking activities. Heartland's current strategy includes the use of interest rate swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, Heartland is facilitating back-to-back loan swaps to assist customers in managing interest rate risk. Heartland's objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. Heartland is exposed to credit risk in the event

of nonperformance by counterparties to financial instruments. Heartland minimizes this risk by entering into derivative contracts with counterparties that meet Heartland’s credit standards, and the contracts contain collateral provisions protecting the at-risk party. Heartland has not experienced any losses from nonperformance by these counterparties. Heartland monitors counterparty risk in accordance with the provisions of ASC 815.

In addition, interest rate-related derivative instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by credit ratings of each counterparty. Heartland was required to pledge ~~$1.8~~$3.1 million and $2.2 million of cash as collateral at ~~March 31,~~June 30, 2017, and December 31, 2016, respectively. No collateral was required to be pledged by Heartland's counterparties ~~were required to pledge $0~~ at both ~~March 31,~~June 30, 2017, and December 31, 2016.

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~~six months ended ~~March 31,~~June 30, 2017, the change in net unrealized losses on cash flow hedges reflects changes in the fair value of the swaps and reclassification from accumulated other comprehensive income to interest expense totaling ~~$397,000.~~$697,000. For the next twelve months, Heartland estimates that cash payments and reclassification from accumulated other comprehensive income to interest expense will total ~~$1.6~~$1.2 million.

Heartland executed an interest rate swap transaction on April 5, 2011, with an effective date of April 20, 2011, to effectively convert $15.0 million of variable rate amortizing debt to fixed rate debt. For accounting purposes, this swap transaction was designated as a cash flow hedge of the changes in cash flows attributable to changes in one-month LIBOR, the benchmark interest rate being hedged. This interest rate swap transaction expired on April 20, 2016.

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

million of Heartland's subordinated debentures that reset quarterly on a specified reset date. At inception, Heartland asserted that the underlying principal balance would remain outstanding throughout the hedge transaction, making it probable that sufficient LIBOR-based interest payments would exist through the maturity date of the swaps.

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

Heartland entered into an interest rate swap transaction on May 10, 2016, to effectively convert $40.0 million of amortizing term debt from variable rate debt to fixed rate debt. For accounting purposes, this swap is designated as a cash flow hedge of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments on the amortizing term debt that resets monthly on a specified reset date. The swap expires on May 10, 2021.

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


	Notional Amount		Fair Value			Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity	Notional Amount		Fair Value			Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity
March 31, 2017
June 30, 2017
Interest rate swap	$	25,000	$	(346	)	Other liabilities	1.148	%	2.255	%	03/17/2021	$	25,000	$	(425	)	Other liabilities	1.267	%	2.255	%	03/17/2021
Interest rate swap	—		—			Other liabilities	—	%	3.220	%	03/01/2017	—		—			Other liabilities	—	%	3.220	%	03/01/2017
Interest rate swap	20,000		(996		)	Other liabilities	1.009	%	3.355	%	01/07/2020	20,000		(955		)	Other liabilities	1.150	%	3.355	%	01/07/2020
Interest rate swap	10,000		(17		)	Other liabilities	1.153	%	1.674	%	03/26/2019	10,000		(22		)	Other liabilities	1.296	%	1.674	%	03/26/2019
Interest rate swap	10,000		(16		)	Other liabilities	1.148	%	1.658	%	03/18/2019	10,000		(21		)	Other liabilities	1.267	%	1.658	%	03/18/2019
Interest rate swap	36,667		633			Other assets	3.358	%	3.674	%	05/10/2021	35,667		553			Other assets	3.617	%	3.674	%	05/10/2021
Interest rate swap⁽¹⁾	20,000		(207		)	Other liabilities	—	%	2.390	%	06/15/2024
Interest rate swap												20,000		(432		)	Other liabilities	1.246	%	2.390	%	06/15/2024
Interest rate swap	20,000		(253		)	Other liabilities	1.055	%	2.352	%	03/01/2024	20,000		(409		)	Other liabilities	1.202	%	2.352	%	03/01/2024
December 31, 2016
Interest rate swap	$	25,000	$	(447	)	Other liabilities	0.993	%	2.255	%	03/17/2021	$	25,000	$	(447	)	Other liabilities	0.993	%	2.255	%	03/17/2021
Interest rate swap	20,000		(114		)	Other liabilities	0.931	%	3.220	%	03/01/2017	20,000		(114		)	Other liabilities	0.931	%	3.220	%	03/01/2017
Interest rate swap	20,000		(1,145		)	Other liabilities	0.868	%	3.355	%	01/07/2020	20,000		(1,145		)	Other liabilities	0.868	%	3.355	%	01/07/2020
Interest rate swap	10,000		(42		)	Other liabilities	0.997	%	1.674	%	03/26/2019	10,000		(42		)	Other liabilities	0.997	%	1.674	%	03/26/2019
Interest rate swap	10,000		(41		)	Other liabilities	0.993	%	1.658	%	03/18/2019	10,000		(41		)	Other liabilities	0.993	%	1.658	%	03/18/2019
Interest rate swap	37,667		530			Other assets	3.164	%	3.674	%	05/10/2021	37,667		530			Other assets	3.164	%	3.674	%	05/10/2021
Interest rate swap⁽¹⁾	20,000		(214		)	Other liabilities	—	%	2.390	%	06/15/2024	20,000		(214		)	Other liabilities	—	%	2.390	%	06/15/2024
Interest rate swap⁽²⁾	20,000		(262		)	Other Liabilities	—	%	2.352	%	03/01/2024	20,000		(262		)	Other Liabilities	—	%	2.352	%	03/01/2024

(1) This swap is a forward starting swap with a weighted average pay rate of 2.390% beginning on June 15, 2017. No interest payments are required related to this swap until September 15, 2017.
(2) This swap is a forward starting swap with a weighted average pay rate of 2.352% beginning on March 1, 2017. No interest payments are required on this swap until June 1, 2017.
(1) This swap is a forward starting swap with a weighted average pay rate of 2.390% beginning on June 15, 2017. No interest payments are required on this swap until September 15, 2017.												(1) This swap is a forward starting swap with a weighted average pay rate of 2.390% beginning on June 15, 2017. No interest payments are required on this swap until September 15, 2017.
(2) This swap is a forward starting swap with a weighted average pay rate of 2.352% beginning on March 1, 2017. No interest payments were required on this swap until June 1, 2017.												(2) This swap is a forward starting swap with a weighted average pay rate of 2.352% beginning on March 1, 2017. No interest payments were required on this swap until June 1, 2017.

The table below identifies the gains and losses recognized on Heartland's derivative instruments designated as cash flow hedges for the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, in thousands:


	Effective Portion							Ineffective Portion			Effective Portion							Ineffective Portion
	Recognized in OCI			Reclassified from AOCI into Income				Recognized in Income on Derivatives			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)		Amount of Gain (Loss)			Category	Amount of Gain (Loss)			Category	Amount of Gain (Loss)
Three Months Ended March 31, 2017
Three Months Ended June 30, 2017
Interest rate swaps	$	533		Interest expense	$	(397	)	Other income	$	—	$	(509	)	Interest expense	$	(300	)	Other income	$	—
Three Months Ended March 31, 2016
Six Months Ended June 30, 2017
Interest rate swaps	$	(2,917	)	Interest expense	$	(506	)	Other income	$	—	$	24		Interest expense	$	(697	)	Other income	$	—
Three Months Ended June 30, 2016
Interest rate swaps											$	(1,579	)	Interest expense	$	(465	)	Other income	$	—
Six Months Ended June 30, 2016
Interest rate swaps											$	(4,496	)	Interest expense	$	(971	)	Other income	$	—

Fair Value ~~Hedge~~Hedges

Heartland uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. Heartland uses hedge accounting in accordance with ASC 815, with the unrealized gains and losses, representing the change in fair value of the derivative and the change in fair value of the risk being hedged on the related loan, being recorded in the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest income and interest expense in the consolidated statements of income. Heartland uses statistical regression to assess hedge effectiveness, both at the inception of the hedge as well as on a continual basis. The regression analysis involves regressing the periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.

Heartland was required to pledge $4.3 million and $5.0 million of cash as collateral for these fair value hedges at ~~both March 31,~~June 30, 2017, and December 31, ~~2016.~~

2016, respectively.

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


	Notional Amount		Fair Value			Balance Sheet Category	Notional Amount		Fair Value			Balance Sheet Category
March 31, 2017
June 30, 2017
Fair value hedges	$	36,144	$	(1,432	)	Other liabilities	$	35,973	$	(1,474	)	Other liabilities
December 31, 2016
Fair value hedges	$	40,807	$	(1,626	)	Other liabilities	$	40,807	$	(1,626	)	Other liabilities

The table below identifies the gains and losses recognized on Heartland's fair value hedges for the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, in thousands:


	Amount of Gain (Loss)			Income Statement Category	Amount of Gain (Loss)			Income Statement Category
Three Months Ended March 31, 2017
Three Months Ended June 30, 2017
Fair value hedges	$	194		Interest income	$	(42	)	Interest income
Three Months Ended March 31, 2016
Six Months Ended June 30, 2017
Fair value hedges	$	(1,222	)	Interest income	$	152		Interest income
Three Months Ended June 30, 2016
Fair value hedges					$	(888	)	Interest income
Six Months Ended June 30, 2016
Fair value hedges					$	(2,110	)	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,~~June 30, 2017, and December 31, 2016, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category	Notional Amount		Fair Value		Balance Sheet Category
March 31, 2017
June 30, 2017
Embedded derivatives	$	14,418	$	987	Other assets	$	14,294	$	989	Other assets
December 31, 2016
Embedded derivatives	$	14,549	$	1,104	Other assets	$	14,549	$	1,104	Other assets

The table below identifies the gains and losses recognized on Heartland's embedded derivatives for the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, in thousands:

Amount of Gain (Loss)

Income Statement Category

Amount of Gain (Loss)

Income Statement Category

Three Months Ended March 31, 2017

Three Months Ended June 30, 2017

Embedded derivatives

117

Other noninterest income

)

Other noninterest income

Three Months Ended March 31, 2016

Six Months Ended June 30, 2017

Embedded derivatives

272

Other noninterest income

115

Other noninterest income

Three Months Ended June 30, 2016

Embedded derivatives

144

Other noninterest income

Six Months Ended June 30, 2016

Embedded derivatives

416

Other noninterest income

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

At ~~March 31,~~June 30, 2017, and December 31, 2016, the remaining shares to be issued upon conversion totaled 14,353 and 20,481, respectively. The embedded conversion option is reported at fair value on the consolidated balance sheets using the Black-Scholes model. The following table identifies, in thousands, the notional amount, fair value, balance sheet category and income statement category for the change in fair value of the embedded conversion option as of ~~March 31,~~June 30, 2017, and December 31, 2016:


	Notional Amount		Fair Value			Balance Sheet Category	Notional Amount		Fair Value			Balance Sheet Category
March 31, 2017
June 30, 2017
Embedded conversion option	$	391	$	(325	)	Other liabilities	$	391	$	(285	)	Other liabilities
December 31, 2016
Embedded conversion option	$	558	$	(422	)	Other liabilities	$	558	$	(422	)	Other liabilities

The table below identifies the gains and losses recognized on Heartland's embedded conversion options for the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, in thousands:


	Amount of Gain (Loss)			Income Statement Category	Amount of Gain (Loss)			Income Statement Category
Three Months Ended March 31, 2017
Three Months Ended June 30, 2017
Embedded conversion option	$	97		Other noninterest income	$	40		Other noninterest income
Three Months Ended March 31, 2016
Six Months Ended June 30, 2017
Embedded conversion option	$	(100	)	Other noninterest income	$	137		Other noninterest income
Three Months Ended June 30, 2016
Embedded conversion option					$	(197	)	Other noninterest income
Six Months Ended June 30, 2016
Embedded conversion option					$	(297	)	Other noninterest income

~~Back-To-Back~~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 ~~$997,000 and~~ $1.8 million ~~as of March 31,~~at both June 30, 2017, and December 31, 2016, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to pledge $768,000 at both ~~March 31,~~June 30, 2017, and December 31, 2016. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the ~~three~~six months ended ~~March 31,~~June 30, 2017 and ~~March 31,~~June 30, 2016, no gain or loss was recognized. The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as loan swaps at ~~March 31,~~June 30, 2017, and December 31, 2016, in thousands:


	Notional Amount		Fair Value			Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate		Notional Amount		Fair Value			Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
March 31, 2017
June 30, 2017
Customer interest rate swaps	$	73,780	$	1,658		Other assets	4.75	%	3.74	%	$	85,391	$	1,822		Other assets	4.72	%	3.90	%
Customer interest rate swaps	73,780		(1,658		)	Other liabilities	3.74	%	4.75	%	85,391		(1,822		)	Other liabilities	3.90	%	4.72	%
December 31, 2016
Customer interest rate swaps	$	69,594	$	1,588		Other assets	4.66	%	3.47	%	$	69,594	$	1,588		Other assets	4.66	%	3.47	%
Customer interest rate swaps	69,594		(1,588		)	Other liabilities	3.47	%	4.66	%	69,594		(1,588		)	Other liabilities	3.47	%	4.66	%

Other Free Standing Derivatives

Heartland has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments. Heartland enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on the commitments to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on the consolidated balance sheets, with the changes in fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting treatment. Heartland was required to pledge ~~$30,000~~collateral of $838,000 at ~~March 31,~~June 30, 2017, and $0 at December 31, 2016. Heartland's counterparties were required to pledge ~~$8,000~~$0 and $2.9 million at ~~March 31,~~June 30, 2017, and December 31, 2016, respectively, 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,~~June 30, 2017, and December 31, 2016, in thousands:


	Balance Sheet Category	Notional Amount		Fair Value			Balance Sheet Category	Notional Amount		Fair Value
March 31, 2017
June 30, 2017
Interest rate lock commitments (mortgage)	Other assets	$	92,528	$	3,745		Other assets	$	92,780	$	3,011
Forward commitments	Other assets	48,392		176			Other assets	103,750		323
Forward commitments	Other liabilities	123,944		(634		)	Other liabilities	101,623		(418		)
Undesignated interest rate swaps	Other liabilities	14,418		(987		)	Other liabilities	14,294		(989		)
December 31, 2016
Interest rate lock commitments (mortgage)	Other assets	$	80,465	$	2,790		Other assets	$	80,465	$	2,790
Forward commitments	Other assets	142,750		2,546			Other assets	142,750		2,546
Forward commitments	Other liabilities	59,276		(266		)	Other liabilities	59,276		(266		)
Undesignated interest rate swaps	Other liabilities	15,564		(1,126		)	Other liabilities	15,564		(1,126		)

The table below identifies the income statement category of the gains and losses recognized in income on Heartland's other free standing derivative instruments not designated as hedging instruments for the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, in thousands:


	Income Statement Category	Gain (Loss) Recognized			Income Statement Category	Gain (Loss) Recognized
Three Months Ended March 31, 2017
Three Months Ended June 30, 2017
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	1,062		Gains on sale of loans held for sale	$	(404	)
Forward commitments	Net gains on sale of loans held for sale	(2,739		)	Gains on sale of loans held for sale	364
Undesignated interest rate swaps	Other noninterest income	117			Other noninterest income	(20		)
Three Months Ended March 31, 2016
Six Months Ended June 30, 2017
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	4,727		Net gains on sale of loans held for sale	$	658
Forward commitments	Net gains on sale of loans held for sale	(1,489		)	Net gains on sale of loans held for sale	(2,375		)
Undesignated interest rate swaps	Other noninterest income	(316		)	Other noninterest income	137
Three Months Ended June 30, 2016
Interest rate lock commitments (mortgage)					Gains on sale of loans held for sale	$	1,081
Forward commitments					Gains on sale of loans held for sale	(753		)
Undesignated interest rate swaps					Other noninterest income	(54		)
Six Months Ended June 30, 2016
Interest rate lock commitments (mortgage)					Net gains on sale of loans held for sale	$	5,808
Forward commitments					Net gains on sale of loans held for sale	(2,242		)
Undesignated interest rate swaps					Other noninterest income	(370		)

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

Fair Value Hierarchy

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

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

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

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

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

Assets

Securities Available for Sale and Held to Maturity

Securities available for sale are recorded at fair value on a recurring basis. Securities held to maturity are generally recorded at cost and are recorded at fair value only to the extent a decline in fair value is determined to be other-than-temporary. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury securities. Level 2 securities include U.S. government and agency securities, mortgage-backed securities and private collateralized mortgage obligations, municipal bonds and corporate debt securities. Level 3 securities consist primarily of Z-TRANCHE mortgage-backed securities and corporate debt securities. On a quarterly basis, a secondary independent pricing service is used for a sample of securities to validate the pricing from Heartland's primary pricing service.

Loans Held for Sale

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

Loans Held to Maturity

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

Premises, Furniture and Equipment Held for Sale

Heartland values premises, furniture and equipment held for sale based on third-party appraisals less estimated disposal costs. Heartland considers third party appraisals, as well as independent fair value assessments from Realtors or persons involved in selling bank premises, furniture and equipment, in determining the fair value of particular properties. Accordingly, the valuation of premises, furniture and equipment held for sale is subject to significant external and internal judgment. Heartland periodically reviews premises, furniture and equipment held for sale to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. Premises, furniture and equipment held for sale are classified as nonrecurring Level 3 in the fair value hierarchy.

Mortgage Servicing Rights

Mortgage servicing rights assets represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. Heartland uses the amortization method (i.e., the lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, to determine the carrying value of its mortgage servicing rights. The fair value for servicing assets is determined through discounted cash flow analysis, ~~and~~which utilizes discount rates, prepayment speeds and delinquency rate assumptions as ~~inputs.~~inputs, or market indications. All of ~~these~~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,~~June 30, 2017, and December 31, 2016, 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,~~June 30, 2017, and December 31, 2016, in thousands, aggregated by the level in the fair value hierarchy within which those measurements fall:


	Total Fair Value		Level 1		Level 2		Level 3		Total Fair Value		Level 1		Level 2		Level 3
March 31, 2017
June 30, 2017
Assets
Securities available for sale
U.S. government corporations and agencies	$	15,067	$	10,496	$	4,571	$	—	$	5,471	$	3,508	$	1,963	$	—
Mortgage-backed securities	1,288,527		—		1,288,527		—		1,262,528		—		1,262,528		—
Obligations of states and political subdivisions	574,593		—		574,593		—		498,742		—		498,742		—
Corporate debt securities									7,186		—		7,186		—
Equity securities	15,341		—		15,341		—		15,514		—		15,514		—
Derivative financial instruments⁽¹⁾	3,278		—		3,278		—		3,364		—		3,364		—
Interest rate lock commitments	3,745		—		—		3,745		3,011		—		—		3,011
Forward commitments	176		—		176		—		323		—		323		—
Total assets at fair value	$	1,900,727	$	10,496	$	1,886,486	$	3,745	$	1,796,139	$	3,508	$	1,789,620	$	3,011
Liabilities
Derivative financial instruments⁽²⁾	$	6,237	$	—	$	6,237	$	—	$	6,834	$	—	$	6,834	$	—
Forward commitments	634		—		634		—		418		—		418		—
Total liabilities at fair value	$	6,871	$	—	$	6,871	$	—	$	7,252	$	—	$	7,252	$	—
December 31, 2016
Assets
Securities available for sale
U.S. government corporations and agencies	$	4,700	$	517	$	4,183	$	—	$	4,700	$	517	$	4,183	$	—
Mortgage-backed securities	1,290,500		—		1,288,276		2,224		1,290,500		—		1,288,276		2,224
Obligations of states and political subdivisions	536,144		—		536,144		—		536,144		—		536,144		—
Equity securities	14,520		—		14,520		—		14,520		—		14,520		—
Derivative financial instruments⁽¹⁾	3,222		—		3,222		—		3,222		—		3,222		—
Interest rate lock commitments	2,790		—		—		2,790		2,790		—		—		2,790
Forward commitments	2,546		—		2,546		—		2,546		—		2,546		—
Total assets at fair value	$	1,854,422	$	517	$	1,848,891	$	5,014	$	1,854,422	$	517	$	1,848,891	$	5,014
Liabilities
Derivative financial instruments⁽²⁾	$	7,027	$	—	$	7,027	$	—	$	7,027	$	—	$	7,027	$	—
Forward commitments	266		—		266		—		266		—		266		—
Total liabilities at fair value	$	7,293	$	—	$	7,293	$	—	$	7,293	$	—	$	7,293	$	—

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

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


	Fair Value Measurements at March 31, 2017										Fair Value Measurements at June 30, 2017
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Year-to- Date 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	$	1,216	$	—	$	—	$	1,216	$	—	$	3,695	$	—	$	—	$	3,695	$	78
Commercial real estate	1,490		—		—		1,490		375		868		—		—		868		309
Agricultural and agricultural real estate	534		—		—		534		—		1,095		—		—		1,095		—
Residential real estate	2,097		—		—		2,097		—		1,664		—		—		1,664		—
Consumer	1,076		—		—		1,076		—		1,169		—		—		1,169		—
Total collateral dependent impaired loans	$	6,413	$	—	$	—	$	6,413	$	375	$	8,491	$	—	$	—	$	8,491	$	387
Other real estate owned	$	11,188	$	—	$	—	$	11,188	$	274	$	9,269	$	—	$	—	$	9,269	$	392
Premises, furniture and equipment held for sale	$	1,242			$	—	$	1,242	$	—	$	580	$	—	$	—	$	580	$	112
Commercial servicing rights	$	317	$	—	$	—	$	317	$	—	$	322	$	—	$	—	$	322	$	(24	)


	Fair Value Measurements at December 31, 2016											Fair Value Measurements at December 31, 2016
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Year-to- Date 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	$	1,683	$	—	$	—		$	1,683	$	41	$	1,683	$	—	$	—		$	1,683	$	41
Commercial real estate	3,026		—		—			3,026		527		3,026		—		—			3,026		527
Agricultural and agricultural real estate	1,955		—		—			1,955		—		1,955		—		—			1,955		—
Residential real estate	3,565		—		—			3,565		85		3,565		—		—			3,565		85
Consumer	1,193		—		—			1,193		—		1,193		—		—			1,193		—
Total collateral dependent impaired loans	$	11,422	$	—	$	—	—	$	11,422	$	653	$	11,422	$	—	$	—	—	$	11,422	$	653
Other real estate owned	$	9,744	$	—	$	—		$	9,744	$	1,341	$	9,744	$	—	$	—		$	9,744	$	1,341
Premises, furniture and equipment held for sale	$	414	$	—	$	—		$	414	$	35	$	414	$	—	$	—		$	414	$	35
Commercial servicing rights	$	326	$	—	$	—		$	326	$	33	$	326	$	—	$	—		$	326	$	33

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

Fair Value at 3/31/17

Valuation Technique

Unobservable Input

Range (Weighted Average)

Fair Value at 6/30/17

Valuation Technique

Unobservable Input

Range (Weighted Average)

Z-TRANCHE Securities

—

Discounted cash flows

Pretax discount rate

—

Discounted cash flows

Pretax discount rate

—

Actual defaults

—

Actual defaults

—

Actual deferrals

—

Actual deferrals

—

Interest rate lock commitments

3,745

Discounted cash flows

Closing ratio

0-99% (87%)⁽¹⁾

3,011

Discounted cash flows

Closing ratio

0-99% (88%)⁽¹⁾

Premises, furniture and equipment held for sale

1,242

Modified appraised value

Third party appraisal

(2)

580

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽⁴⁾

Appraisal discount

0-8%⁽⁴⁾

Commercial servicing rights

317

Discounted cash flows

Third party valuation

(3)

322

Discounted cash flows

Third party valuation

(3)

Other real estate owned

11,188

Modified appraised value

Third party appraisal

(2)

9,269

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%

Appraisal discount

0-10%

Collateral dependent impaired loans:

Commercial

1,216

Modified appraised value

Third party appraisal

(2)

3,695

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%⁽⁴⁾

Appraisal discount

0-15%⁽⁴⁾

Commercial real estate

1,490

Modified appraised value

Third party appraisal

(2)

868

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-11%⁽⁴⁾

Appraisal discount

0-15%⁽⁴⁾

Agricultural and agricultural real estate

534

Modified appraised value

Third party appraisal

(2)

1,095

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽⁴⁾

Appraisal discount

0-15%⁽⁴⁾

Residential real estate

2,097

Modified appraised value

Third party appraisal

(2)

1,664

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽⁴⁾

Appraisal discount

0-10%⁽⁴⁾

Consumer

1,076

Modified appraised value

Third party valuation

(2)

1,169

Modified appraised value

Third party valuation

(2)

Valuation discount

0-12%⁽⁴⁾

Valuation discount

0-18%⁽⁴⁾

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

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

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

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



	Fair Value at 12/31/16		Valuation Technique		Unobservable Input	Range (Weighted Average)
Z-TRANCHE Securities	$	2,224	Discounted cash flows		Pretax discount rate	7.50 - 9.50%
					Actual defaults	21.77 - 37.62% (33.11%)
					Actual deferrals	10.44 - 26.29% (14.81%)
Interest rate lock commitments	2,790		Discounted cash flows	��	Closing ratio	0-99% (89%)⁽¹⁾
Premises, furniture and equipment held for sale	414		Modified appraised value		Third party appraisal	(2) 0-8%⁽⁴⁾
Commercial servicing rights	326		Discounted cash flows		Third party valuation	(3)
Other real estate owned	9,744		Modified appraised value		Third party appraisal	(2)
					Appraisal discount	0-10%
Collateral dependent impaired loans:
Commercial	1,683		Modified appraised value		Third party appraisal	(2)
					Appraisal discount	0-8%⁽⁴⁾
Commercial real estate	3,026		Modified appraised value		Third party appraisal	(2)
					Appraisal discount	0-7%⁽⁴⁾
Agricultural and agricultural real estate	1,955		Modified appraised value		Third party appraisal	(2)
					Appraisal discount	0-10%⁽⁴⁾
Residential real estate	3,565		Modified appraised value		Third party appraisal	(2)
					Appraisal discount	0-8%⁽⁴⁾
Consumer	1,193		Modified appraised value		Third party valuation	(2)
					Valuation discount	0-11%⁽⁴⁾

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

The changes in fair value of the Z-TRANCHE securities, Level 3 assets that are measured on a recurring basis, are summarized in the following table, in thousands:


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

The changes in fair value of the interest rate lock commitments, which are Level 3 financial instruments measured on a recurring basis, are summarized in the following table, in thousands:


	For the Three Months Ended March 31, 2017			For the Year Ended December 31, 2016			For the Six Months Ended June 30, 2017			For the Year Ended December 31, 2016
Balance at January 1,	$	2,790		$	3,168		$	2,790		$	3,168
Total gains (losses) included in earnings	1,062			(1,564		)	658			(1,564		)
Issuances	382			5,373			726			5,373
Settlements	(489		)	(4,187		)	(1,163		)	(4,187		)
Balance at period end	$	3,745		$	2,790		$	3,011		$	2,790

Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at ~~March 31,~~June 30, 2017, and December 31, 2016, were ~~$3.7~~$3.0 million and $2.8 million, respectively.

The tables below summarize the estimated fair value of Heartland's financial instruments as defined by ASC 825 as of ~~March 31,~~June 30, 2017, and December 31, 2016, in thousands. The carrying amounts in the following tables are recorded in the consolidated balance sheets under the indicated captions. In accordance with ASC 825, the assets and liabilities that are not financial instruments are not included in the disclosure, such as the value of the mortgage servicing rights, premises, furniture and equipment, premises, furniture and equipment held for sale, 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, 2017										Fair Value Measurements at June 30, 2017
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	173,151	$	173,151	$	173,151	$	—	$	—	$	181,776	$	181,776	$	181,776	$	—	$	—
Time deposits in other financial institutions	41,539		41,539		41,539		—		—		30,241		30,241		30,241		—		—
Securities:
Available for sale	1,893,528		1,893,528		10,496		1,883,032		—		1,789,441		1,789,441		3,508		1,785,933		—
Held to maturity	260,616		272,797		—		272,797		—		259,586		273,394		—		273,394		—
Other investments	21,557		21,557		—		21,362		195		21,094		21,094		—		20,899		195
Loans held for sale	49,009		49,009		—		49,009		—		48,848		48,848		—		48,848		—
Loans, net:
Commercial	1,297,723		1,271,354		—		1,270,138		1,216		1,327,156		1,317,463		—		1,313,768		3,695
Commercial real estate	2,510,614		2,514,151		—		2,512,661		1,490		2,436,824		2,419,476		—		2,418,608		868
Agricultural and agricultural real estate	477,867		479,134		—		478,600		534		492,175		493,369		—		492,274		1,095
Residential real estate	601,314		591,256		—		589,159		2,097		592,778		584,089		—		582,425		1,664
Consumer	419,087		421,627		—		420,551		1,076		422,098		424,708		—		423,539		1,169
Total Loans, net	5,306,605		5,277,522		—		5,271,109		6,413		5,271,031		5,239,105		—		5,230,614		8,491
Derivative financial instruments⁽¹⁾	3,278		3,278		—		3,278		—		3,364		3,364		—		3,364		—
Interest rate lock commitments	3,745		3,745		—		—		3,745		3,011		3,011		—		—		3,011
Forward commitments	176		176		—		176		—		323		323		—		323		—
Financial liabilities:
Deposits
Demand deposits	2,319,256		2,319,256		—		2,319,256		—		2,355,410		2,355,410		—		2,355,410		—
Savings deposits	3,940,146		3,940,146		—		3,940,146		—		3,704,579		3,704,579		—		3,704,579		—
Time deposits	830,459		830,459		—		830,459		—		870,180		870,180		—		870,180		—
Short term borrowings	155,025		155,025		—		155,025		—		139,130		139,130		—		139,130		—
Other borrowings	282,051		282,346		—		282,346		—		281,096		281,348		—		281,348		—
Derivative financial instruments⁽²⁾	6,237		6,237		—		6,237		—		6,834		6,834		—		6,834		—
Forward commitments	634		634		—		634		—		418		418		—		418		—

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


					Fair Value Measurements at December 31, 2016										Fair Value Measurements at December 31, 2016
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	158,724	$	158,724	$	158,724	$	—	$	—	$	158,724	$	158,724	$	158,724	$	—	$	—
Time deposits in other financial institutions	2,105		2,105		2,105		—		—		2,105		2,105		2,105		—		—
Securities:
Available for sale	1,845,864		1,845,864		517		1,843,123		2,224		1,845,864		1,845,864		517		1,843,123		2,224
Held to maturity	263,662		274,799		—		274,799		—		263,662		274,799		—		274,799		—
Other investments	21,560		21,560		—		21,365		195		21,560		21,560		—		21,365		195
Loans held for sale	61,261		61,261		—		61,261		—		61,261		61,261		—		61,261		—
Loans, net:
Commercial	1,272,089		1,258,754		—		1,257,071		1,683		1,272,089		1,258,754		—		1,257,071		1,683
Commercial real estate	2,513,446		2,506,858		—		2,503,832		3,026		2,513,446		2,506,858		—		2,503,832		3,026
Agricultural and agricultural real estate	485,820		487,001		—		485,046		1,955		485,820		487,001		—		485,046		1,955
Residential real estate	614,207		604,233		—		600,668		3,565		614,207		604,233		—		600,668		3,565
Consumer	411,833		414,266		—		413,073		1,193		411,833		414,266		—		413,073		1,193
Total Loans, net	5,297,395		5,271,112		—		5,259,690		11,422		5,297,395		5,271,112		—		5,259,690		11,422
Derivative financial instruments⁽¹⁾	3,222		3,222		—		3,222		—		3,222		3,222		—		3,222		—
Interest rate lock commitments	2,790		2,790		—		—		2,790		2,790		2,790		—		—		2,790
Forward commitments	2,546		2,546		—		2,546		—		2,546		2,546		—		2,546		—
Financial liabilities:
Deposits
Demand deposits	2,202,036		2,202,036		—		2,202,036		—		2,202,036		2,202,036		—		2,202,036		—
Savings deposits	3,788,089		3,788,089		—		3,788,089		—		3,788,089		3,788,089		—		3,788,089		—
Time deposits	857,286		857,286		—		857,286		—		857,286		857,286		—		857,286		—
Short term borrowings	306,459		306,459		—		306,459		—		306,459		306,459		—		306,459		—
Other borrowings	288,534		288,534		—		288,534		—		288,534		288,534		—		288,534		—
Derivative financial instruments⁽²⁾	7,027		7,027		—		7,027		—		7,027		7,027		—		7,027		—
Forward commitments	266		266		—		266		—		266		266		—		266		—

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

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

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

Securities — For securities either held to maturity, available for sale or trading, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. For Level 3 securities, Heartland utilizes independent pricing provided by third party vendors or brokers.

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

Loans — The fair value of loans is estimated using an entrance price concept by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. 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.

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

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

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

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

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

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

NOTE 9: SEGMENT REPORTING

Heartland has identified two operating segments for purposes of financial reporting: community and other banking, and retail mortgage banking. These segments were determined based on the products and services provided or the type of customers served and are consistent with the information used by Heartland's key decision makers to make operating decisions and to assess Heartland's performance. The following tables present financial information ~~from~~for Heartland's operating segments for the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017, and ~~March 31,~~June 30, 2016, in thousands:



	Three Months Ended June 30,
	2017							2016
	Community and Other Banking		Retail Mortgage Banking			Total		Community and Other Banking		Retail Mortgage Banking		Total
Net interest income	$	73,445	$	1,135		$	74,580	$	71,895	$	1,223	$	73,118
Provision for loan losses	889		—			889		2,118		—		2,118
Total noninterest income	18,250		7,374			25,624		19,899		11,127		31,026
Total noninterest expense	60,564		8,734			69,298		59,694		11,326		71,020
Income (loss) before taxes	$	30,242	$	(225	)	$	30,017	$	29,982	$	1,024	$	31,006
Average Loans, for the period	$	5,334,723	$	42,103		$	5,376,826	$	5,507,542	$	75,336	$	5,582,878
Segment Assets, at period end	$	8,122,172	$	82,549		$	8,204,721	$	8,082,153	$	122,248	$	8,204,401


	Three Months Ended March 31,													Six Months Ended June 30,
	2017							2016						2017							2016
	Community and Other Banking		Retail Mortgage Banking			Total		Community and Other Banking		Retail Mortgage Banking		Total		Community and Other Banking		Retail Mortgage Banking			Total		Community and Other Banking		Retail Mortgage Banking		Total
Net interest income	$	72,183	$	845		$	73,028	$	71,583	$	1,124	$	72,707	$	145,628	$	1,980		$	147,608	$	143,478	$	2,347	$	145,825
Provision for loan losses	3,641		—			3,641		2,067		—		2,067		4,530		—			4,530		4,185		—		4,185
Total noninterest income	19,034		6,859			25,893		18,537		11,041		29,578		37,284		14,233			51,517		38,436		22,168		60,604
Total noninterest expense	63,212		8,528			71,740		59,739		10,570		70,309		123,776		17,262			141,038		119,433		21,896		141,329
Income (loss) before taxes	$	24,364	$	(824	)	$	23,540	$	28,314	$	1,595	$	29,909	$	54,606	$	(1,049	)	$	53,557	$	58,296	$	2,619	$	60,915
Average Loans, for the period	$	5,334,659	$	30,995		$	5,365,654	$	5,296,191	$	61,911	$	5,358,102	$	5,334,722	$	36,549		$	5,371,271	$	5,401,867	$	68,623	$	5,470,490
Segment Assets, at period end	$	8,291,723	$	70,122		$	8,361,845	$	8,141,960	$	111,819	$	8,253,779	$	8,122,172	$	82,549		$	8,204,721	$	8,082,153	$	122,248	$	8,204,401

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

SAFE HARBOR STATEMENT

This document (including any information incorporated herein by reference) contains, and future oral and written statements of Heartland and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the business, financial condition, results of operations, plans, objectives and future performance of Heartland. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of Heartland's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Although Heartland has made these statements based on management's experience and best estimate of future events, there may be events or factors that management has not anticipated, and the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2016. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and Heartland undertakes no obligation to update any statement in light of new information or future events.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances. Among other things, the estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on Heartland's reported financial position and results of operations are described as critical accounting policies in Heartland's Annual Report on Form 10-K for the year ended December 31, 2016. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since the year ended December 31, 2016.

OVERVIEW

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 valuation adjustment on commercial servicing rights also affects Heartland's results of operations. Heartland's principal operating expenses, aside from interest expense, consist of the provision for loan losses, salaries and employee benefits, occupancy and equipment costs, professional fees, Federal Deposit Insurance Corporation ("FDIC") insurance premiums, advertising and other real estate and loan collection expenses.

Net income available to common stockholders for the quarter ended ~~March 31,~~June 30, 2017, was ~~$18.0~~$21.9 million, or ~~$0.68~~$0.81 per diluted common share, compared to ~~$19.8~~$20.9 million, or ~~$0.82~~$0.84 per diluted common share, for the quarter ended ~~March 31,~~June 30, 2016. Return on average common equity was ~~9.71%~~11.13% and return on average assets was ~~0.89%~~1.06% for the ~~first~~second quarter of 2017, compared to ~~12.68%~~12.58% and ~~0.99%~~1.03%, respectively, for the same quarter in 2016.

~~Results~~Net income available to common stockholders for the first six months of 2017 was $39.9 million, or $1.49 per diluted common share, compared to $40.8 million, or $1.66 per diluted common share, for the first six months of 2016. Return on average common equity was 10.44% and return on average assets was 0.97% for the first six months of 2017, compared to 12.63% and 1.01%, respectively, for the same period in 2016.

For the second quarter of 2017, ~~in comparison with the first quarter of 2016 were mixed.~~ Heartland experienced ~~strong non-time deposit growth,~~ a solid net interest margin of 3.94% (4.14% on a fully tax-equivalent basis) compared to 3.95% (4.12% on a fully tax-equivalent basis) for the same quarter in 2016, and anthe efficiency ratio improved to 65.61% from 67.95%. For the six-month period ended June 30, 2017, Heartland's net interest margin remained strong at 3.95% (4.15% on a fully tax-equivalent basis) compared to 3.98% (4.15% on a fully tax-equivalent basis) for the same period in 2016, and the tangible common equity ~~ratio; however, weakness~~ratio improved 137 basis points to 7.97% at June 30, 2017 from 6.60% at June 30, 2016. The increase in ~~loan growth~~average earning assets of $139.4 million or 2% from the second quarter of 2016, and ~~lower~~$182.8 million or 2% from the six-month period ended June 30, 2016, contributed to Heartland's strong financial performance. Weaker residential mortgage loan activity ~~led to earnings that were slightly below~~and decreased securities gains, net, partially offset these improvements for both the ~~company's expectations.~~three- and six-month periods ended June 30, 2017, and 2016.

On February 28, 2017, Heartland completed the acquisition of Founders Bancorp, parent company of Founders Community Bank, based in San Luis Obispo, California. Based on Heartland's closing common stock price of $49.55 per share as of February 28, 2017, the aggregate consideration was $31.0 million, with 30% of the consideration paid in cash and 70% by delivery of Heartland common stock. Simultaneous with the closing of the transaction, Founders Community Bank merged into Heartland's Premier Valley Bank subsidiary. As of the close date, Founders Community Bank had, at fair value, total assets of $213.3 million, total loans of $96.4 million and total deposits of $181.5 million. The systems conversion for this transaction occurred two weeks after the closing.

On ~~February 13,~~July 7, 2017, Heartland ~~entered into a definitive merger agreement with~~completed the acquisition of Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado. ~~Under~~Simultaneous with the ~~terms of the definitive merger agreement, Heartland~~

~~will acquire~~close, Citywide Banks of Colorado Inc. in a transaction valued at approximately $203.0 million as of the announcement date, subject to certain adjustments. Citywide Banks of Colorado, Inc. common shareholders will receive a combination of Heartland common stock and cash. The transaction is subject to customary closing conditions, including approval by the shareholders of Citywide Banks of Colorado, Inc. and bank regulatory authorities. The transaction is also subject to Heartland stockholders approving an increase in the number of authorized shares of Heartland common stock at the 2017 annual meeting of stockholders. The transaction is expected to close in the third quarter of 2017, and simultaneous with the closing, Citywide Banks will mergemerged into Heartland's Centennial Bank and Trust subsidiary. The aggregate consideration was approximately $211.2 million, of which $58.6 million was cash, and the remainder was settled by delivery of 3,216,161 shares of Heartland common stock. The combined entity ~~will operate~~operates as Citywide Banks. As of ~~March 31,~~June 30, 2017, Citywide Banks had total assets of ~~$1.35~~$1.38 billion, including ~~$982.0 million~~$1.00 billion in net loans outstanding, and ~~$1.17~~$1.20 billion of deposits.

The systems conversion for this transaction is scheduled to be completed in the fourth quarter of 2017.

Total assets of Heartland were ~~$8.36~~$8.20 billion at ~~March 31,~~June 30, 2017, ~~an increase~~a decrease of ~~$114.8~~$42.4 million or 1% since year-end 2016. ~~Included in this increase, at fair value, were~~Exclusive of the $213.9 million of assets acquired at fair value in the Founders Bancorp ~~transaction.~~transaction, total assets decreased $256.3 million or 3% since December 31, 2016. Securities represented 25% of total assets at June 30, 2017, and 26% of total assets at ~~both March 31, 2017 and~~ December 31, 2016.

Total loans held to maturity were ~~$5.36~~$5.33 billion at ~~March 31,~~June 30, 2017, compared to $5.35 billion at year-end 2016, ~~an increase~~a decrease of ~~$9.9~~$26.6 million. This ~~increase~~change includes $96.4 million of total loans held to maturity, at fair value, acquired in the Founders Bancorp transaction.

Exclusive of this transaction, total loans held to maturity decreased $123.1 million or 2% since December 31, 2016.

Exclusive of this transaction, total deposits decreased $98.7 million since December 31, 2016.

Common stockholders' equity was ~~$780.4~~$805.0 million at ~~March 31,~~June 30, 2017, compared to $739.6 million at year-end 2016. Book value per common share was ~~$29.26~~$30.15 at ~~March 31,~~June 30, 2017, compared to $28.31 at year-end 2016. Heartland's unrealized loss on securities available for sale, net of applicable taxes, was ~~$28.4~~$23.3 million at ~~March 31,~~June 30, 2017, compared to aan unrealized loss of $30.2 million, ~~unrealized loss,~~ net of applicable taxes, at December 31, 2016.

FINANCIAL HIGHLIGHTS


(Dollars in thousands, except per share data)	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2017			2016
STATEMENT OF INCOME DATA
Interest income	$	80,551		$	80,684		$	82,061		$	81,331		$	162,612		$	162,015
Interest expense	7,523			7,977			7,481			8,213			15,004			16,190
Net interest income	73,028			72,707			74,580			73,118			147,608			145,825
Provision for loan losses	3,641			2,067			889			2,118			4,530			4,185
Net interest income after provision for loan losses	69,387			70,640			73,691			71,000			143,078			141,640
Noninterest income	25,893			29,578			25,624			31,026			51,517			60,604
Noninterest expenses	71,740			70,309			69,298			71,020			141,038			141,329
Income taxes	5,530			9,900			8,059			10,036			13,589			19,936
Net income	18,010			20,009			21,958			20,970			39,968			40,979
Preferred dividends	(19		)	(168		)	(13		)	(52		)	(32		)	(220		)
Interest expense on convertible preferred debt	5			—			4			31			9			31
Net income available to common stockholders	$	17,996		$	19,841		$	21,949		$	20,949		$	39,945		$	40,790

Key Performance Ratios
Annualized return on average assets	0.89		%	0.99		%	1.06		%	1.03		%	0.97		%	1.01		%
Annualized return on average common equity (GAAP)	9.71		%	12.68		%	11.13		%	12.58		%	10.44		%	12.63		%
Annualized return on average common tangible equity (non-GAAP)⁽¹⁾	12.25		%	16.45		%
Annualized return on average tangible common equity (non-GAAP)⁽¹⁾							14.07		%	16.32		%	13.18		%	16.38		%
Annualized ratio of net charge-offs to average loans	0.22		%	0.08		%	0.14		%	0.01		%	0.18		%	0.04		%
Annualized net interest margin (GAAP)	3.95		%	4.02		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)⁽²⁾	4.16		%	4.19		%
Efficiency ratio, fully tax-equivalent⁽³⁾	69.95		%	66.90		%


(Dollars in thousands, except per share data)	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2017			2016
Reconciliation of Return on Average Common Tangible Equity (non-GAAP)⁽⁴⁾
Annualized net interest margin (GAAP)							3.94		%	3.95		%	3.95		%	3.98		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)⁽²⁾							4.14		%	4.12		%	4.15		%	4.15		%
Efficiency ratio, fully tax-equivalent⁽³⁾							65.61		%	67.95		%	67.75		%	67.43		%

Reconciliation of Return on Average Tangible Common Equity (non-GAAP)⁽⁴⁾
Net income available to common shareholders (GAAP)	$	17,996		$	19,841		$	21,949		$	20,949		$	39,945		$	40,790

Average common stockholders' equity (GAAP)	751,671			629,294			$	791,039		$	669,930		$	771,464		$	649,612
Less average goodwill	132,440			119,750			141,461			127,700			136,976			123,727
Less average other intangibles, net	23,225			24,436			23,649			25,883			23,438			25,159
Average common tangible equity (non-GAAP)	$	596,006		$	485,108
Average tangible common equity (non-GAAP)							$	625,929		$	516,347		$	611,050		$	500,726
Annualized return on average common equity (GAAP)	9.71		%	12.68		%	11.13		%	12.58		%	10.44		%	12.63		%
Annualized return on average common tangible equity (non-GAAP)	12.25		%	16.45		%
Annualized return on average tangible common equity (non-GAAP)							14.07		%	16.32		%	13.18		%	16.38		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)⁽⁵⁾
Net Interest Income (GAAP)	$	73,028		$	72,707		$	74,580		$	73,118		$	147,608		$	145,825
Plus tax-equivalent adjustment⁽⁷⁾	3,860			3,041			3,796			3,146			7,656			6,187
Net interest income - tax-equivalent (non-GAAP)	$	76,888		$	75,748		$	78,376		$	76,264		$	155,264		$	152,012

Average earning assets	$	7,502,496		$	7,276,703		$	7,586,256		$	7,446,849		$	7,544,609		$	7,361,775
Net interest margin (GAAP)	3.95		%	4.02		%	3.94		%	3.95		%	3.95		%	3.98		%
Net interest margin, fully tax-equivalent (non-GAAP)	4.16		%	4.19		%	4.14		%	4.12		%	4.15		%	4.15		%

Reconciliation of Non-GAAP Measure-Efficiency Ratio⁽⁶⁾
Net Interest Income (GAAP)	$	73,028		$	72,707		$	74,580		$	73,118		$	147,608		$	145,825
Plus tax-equivalent adjustment⁽⁷⁾	3,860			3,041			3,796			3,146			7,656			6,187
Net interest income - tax-equivalent (non-GAAP)	76,888			75,748			78,376			76,264			155,264			152,012
Noninterest income	25,893			29,578			25,624			31,026			51,517			60,604
Securities gains, net	(2,482		)	(3,526		)	(1,392		)	(4,622		)	(3,874		)	(8,148		)
Adjusted income	$	100,299		$	101,800		$	102,608		$	102,668		$	202,907		$	204,468

Total noninterest expenses	$	71,740		$	70,309		$	69,298		$	71,020		$	141,038		$	141,329
Less:
Core deposit intangibles and customer relationship intangibles amortization	1,171			1,895			1,218			1,297			2,389			3,192
Partnership investment in historic rehabilitation tax credits	—			—
Partnership investment in tax credit projects							876			—			876			—
(Gain)/loss on sales/valuations of assets, net	412			313			(112		)	(43		)	300			270
Adjusted noninterest expenses	$	70,157		$	68,101		$	67,316		$	69,766		$	137,473		$	137,867

Efficiency ratio, fully tax-equivalent (non-GAAP)	69.95		%	66.90		%	65.61		%	67.95		%	67.75		%	67.43		%

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

FINANCIAL HIGHLIGHTS, continued


(Dollars in thousands, except per share data)	For the Quarters Ended																As Of and For the Quarter Ended
	3/31/2017			12/31/2016			9/30/2016				6/30/2016			3/31/2016			6/30/2017			3/31/2017			12/31/2016			9/30/2016			6/30/2016
BALANCE SHEET DATA
Investments	$	2,175,701		$	2,131,086		$	1,943,080			$	1,859,695		$	1,984,141		$	2,070,121		$	2,175,701		$	2,131,086		$	1,943,080		$	1,859,695
Loans held for sale	49,009			61,261			78,317				82,538			76,565			48,848			49,009			61,261			78,317			82,538
Total loans receivable⁽¹⁾	5,361,604			5,351,719			5,438,715				5,482,258			5,503,005			5,325,082			5,361,604			5,351,719			5,438,715			5,482,258
Allowance for loan losses	(54,999		)	(54,324		)	(54,653		)		(51,756		)	(49,738		)	54,051			54,999			54,324			54,653			51,756
Total assets	8,361,845			8,247,079			8,202,215				8,204,401			8,253,779			8,204,721			8,361,845			8,247,079			8,202,215			8,204,401
Total deposits	7,089,861			6,847,411			6,912,693				6,837,572			6,924,320			6,930,169			7,089,861			6,847,411			6,912,693			6,837,572
Long-term obligations	282,051			288,534			294,493				296,895			265,760			281,096			282,051			288,534			294,493			296,895
Preferred equity	938			1,357			1,357				3,777			3,777			938			938			1,357			1,357			3,777
Common stockholders’ equity	780,374			739,559			703,031				684,186			665,766			805,032			780,374			739,559			703,031			684,186

Common Share Data
Book value per common share (GAAP)	$	29.26		$	28.31		$	28.48			$	27.88		$	27.15		$	30.15		$	29.26		$	28.31		$	28.48		$	27.88
Tangible book value per common share (non-GAAP)⁽²⁾	$	23.05		$	22.55		$	22.34			$	21.65		$	20.86		$	24.00		$	23.05		$	22.55		$	22.34		$	21.65
ASC 320 effect on book value per common share	$	(1.06	)	$	(1.15	)	$	0.03			$	0.21		$	0.23		$	(0.87	)	$	(1.06	)	$	(1.15	)	$	0.03		$	0.21
Common shares outstanding, net of treasury stock	26,674,121			26,119,929			24,681,380				24,543,376			24,519,928			26,701,226			26,674,121			26,119,929			24,681,380			24,543,376
Tangible common equity ratio (non-GAAP)⁽³⁾	7.50		%	7.28		%	6.85		%		6.60		%	6.32		%	7.97		%	7.50		%	7.28		%	6.85		%	6.60		%

Reconciliation of Tangible Book Value Per Common Share (non-GAAP)⁽⁴⁾
Common stockholders' equity (GAAP)	$	780,374		$	739,559		$	703,031			$	684,186		$	665,766		$	805,032		$	780,374		$	739,559		$	703,031		$	684,186
Less goodwill	141,461			127,699			127,699				127,699			127,699			141,461			141,461			127,699			127,699			127,699
Less core deposit intangibles and customer relationship intangibles, net	24,068			22,775			23,922				25,213			26,510			22,850			24,068			22,775			23,922			25,213
Tangible common stockholders' equity (non-GAAP)	$	614,845		$	589,085		$	551,410			$	531,274		$	511,557		$	640,721		$	614,845		$	589,085		$	551,410		$	531,274
										��
Common shares outstanding, net of treasury stock	26,674,121			26,119,929			24,681,380				24,543,376			24,519,928			26,701,226			26,674,121			26,119,929			24,681,380			24,543,376
Common stockholders' equity (book value) per share (GAAP)	$	29.26		$	28.31		$	28.48			$	27.88		$	27.15		$	30.15		$	29.26		$	28.31		$	28.48		$	27.88
Tangible book value per common share (non-GAAP)	$	23.05		$	22.55		$	22.34			$	21.65		$	20.86		$	24.00		$	23.05		$	22.55		$	22.34		$	21.65

Reconciliation of Tangible Common Equity Ratio (non-GAAP)⁽⁵⁾
Total assets (GAAP)	$	8,361,845		$	8,247,079		$	8,202,215			$	8,204,401		$	8,253,779		$	8,204,721		$	8,361,845		$	8,247,079		$	8,202,215		$	8,204,401
Less goodwill	141,461			127,699			127,699				127,699			127,699			141,461			141,461			127,699			127,699			127,699
Less core deposit intangibles and customer relationship intangibles, net	24,068			22,775			23,922				25,213			26,510			22,850			24,068			22,775			23,922			25,213
Total tangible assets (non-GAAP)	$	8,196,316		$	8,096,605		$	8,050,594			$	8,051,489		$	8,099,570		$	8,040,410		$	8,196,316		$	8,096,605		$	8,050,594		$	8,051,489
Tangible common equity ratio (non-GAAP)	7.50		%	7.28		%	6.85		%		6.60		%	6.32		%	7.97		%	7.50		%	7.28		%	6.85		%	6.60		%
																																(1) Excludes loans held for sale.	(2) Refer to the "Reconciliation of Tangible Book Value Per Common Share (non-GAAP)" table.	(3) Refer to the "Reconciliation of Tangible Common Equity Ratio (non-GAAP)" table.	(4) Tangible book value per common share is total common stockholders' equity less goodwill and core deposit and customer relationship intangibles, net, divided by common shares outstanding, net of treasury. This amount is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate the financial condition and capital strength of Heartland. This measure should not be considered a substitute for operating results determined in accordance with GAAP.	(5) The tangible common equity ratio is total common stockholders' equity less goodwill and core deposit intangibles, net divided by total assets less goodwill and core deposit intangibles, net. This ratio is a non-GAAP financial measure but has been included as it is considered to be a critical metric with which to analyze and evaluate the financial condition and capital strength of Heartland. This measure should not be considered a substitute for operating results determined in accordance with GAAP.

RESULTS OF OPERATIONS

Net Interest Income

Net interest margin, expressed as a percentage of average earning assets, was ~~3.95% (4.16% on a fully tax-equivalent basis) during the first quarter of 2017, compared to 3.96%~~3.94% (4.14% on a fully tax-equivalent basis) during the ~~fourth~~second quarter of ~~2016 and 4.02% (4.19%~~2017, compared to 3.95% (4.12% on a fully tax-equivalent basis) during the ~~first~~second quarter of 2016. Heartland's success in maintaining net interest margin at or near the 4.00% level has been the result of continuous loan and deposit pricing ~~discipline and management's ability to shift dollars from the securities portfolio into the loan portfolio.~~discipline. 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. See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for a description of our use of net interest income on a fully tax-equivalent basis, which is not defined by GAAP, and a reconciliation of annualized net interest margin on a fully tax-equivalent basis to GAAP.

Interest income for the ~~first~~second quarter of 2017 was ~~$80.6~~$82.1 million, ~~a decrease~~an increase of ~~$133,000~~$730,000 or ~~less than~~ 1%, compared to the ~~$80.7~~$81.3 million recorded in the ~~first~~second quarter of 2016. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were ~~$3.9~~$3.8 million for the ~~first~~second quarter of 2017 and ~~$3.0~~$3.1 million for the ~~first~~second quarter of 2016. With these adjustments, interest income on a tax-equivalent basis was ~~$84.4~~$85.9 million for the ~~first~~second quarter of 2017, an increase of ~~$686,000,~~$1.4 million, compared to ~~$83.7~~$84.5 million for the second quarter of 2016. For the first six months of 2017, interest income increased $597,000 or less than 1% to $162.6 million from $162.0 million for the first ~~quarter~~six months of 2016. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were $7.7 million and $6.2 million for the first six months of 2017 and 2016, respectively. With these adjustments, interest income on a tax-equivalent basis was $170.3 million during the first six months of 2017 compared to $168.2 million during the first six months of 2016, an increase of $2.1 million or 1%. The increase in interest income on a tax-equivalent basis during 2017 was primarily due to ~~increases~~an increase in average earning assets, which totaled ~~$7.50~~$7.59 billion during the ~~first~~second quarter of 2017 compared to ~~$7.28~~$7.45 billion during the second quarter of 2016, a $139.4 million or 2% increase. For the first six months of 2017, average earning assets were $7.54 billion compared to $7.36 billion during the first ~~quarter~~six months of 2016, ~~a $225.8~~an increase of $182.8 million or 3% increase. A majority of the growth in average earning assets during both comparable periods was attributable to the CIC Bancshares, Inc. acquisition completed on February 5, 2016, and the Founders Bancorp acquisition completed on February 28, 2017.2%.

Interest expense for the ~~first~~second quarter of 2017 was $7.5 million, a decrease of ~~$454,000~~$732,000 or 6%9% from ~~$8.0~~$8.2 million in the ~~first~~second quarter of 2016. ~~Average~~Interest expense for the first six months of 2017 was $15.0 million compared to $16.2 million for the first six months of 2016, a decrease of $1.2 million or 7%. For the quarter ended June 30, 2017, average interest bearing liabilities ~~decreased $82.2~~were $5.15 billion, a decrease of $217.2 million or 2%4%, from $5.36 billion for the quarter ended ~~March 31, 2017, as compared to the same quarter in~~June 30, 2016. In addition, the average interest rate paid on Heartland's interest bearing deposits and borrowings declined 4 basis points to 0.58% in the second quarter of 2017 from 0.62% in the second quarter of 2016. Average interest bearing liabilities decreased $149.8 million or 3% for the first six months of 2017 compared to the first six months in 2016, while the average interest rate paid on Heartland's interest bearing deposits and borrowings declined 2 basis points to 0.59% in the first six months of 2017 from 0.61% in the first ~~quarter~~six months of ~~2016 to 0.59% in the first quarter of 2017.~~2016. The average interest rate paid on savings deposits was ~~0.22%~~0.26% during the ~~first~~second quarter of 2017 compared to ~~0.21%~~0.22% for the ~~first~~second quarter of 2016, and the average interest rate paid on time deposits was ~~0.79% during~~0.80% for both the ~~first~~second quarter of 2017 and 2016. For the first six months of 2017, the average interest rate paid on savings deposits was 0.24% compared to ~~0.80% during~~0.22% for the first ~~quarter~~six months of 2016, and the average interest rate paid on time deposits was 0.80% for both six-month periods ending June 30, 2017, and 2016.

Net interest income increased ~~$321,000~~$1.5 million or ~~less than 1%~~2% to ~~$73.0~~$74.6 million in the ~~first~~second quarter of 2017 from ~~$72.7~~$73.1 million in the ~~first~~second quarter of 2016. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled ~~$76.9~~$78.4 million during the ~~first~~second quarter of 2017, an increase of ~~$1.1~~$2.1 million or 3% from $76.3 million during the second quarter of 2016. For the first six months of 2017, net interest income increased $1.8 million or 1% to $147.6 million from $145.8 million recorded in the first six months of 2016. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $155.3 million during the first six months of 2017, an increase of $3.3 million or 2% from ~~$75.7~~$152.0 million recorded during the first ~~quarter~~six months of 2016.

Heartland attempts to manage its balance sheet to minimize the effect that a change in interest rates has on its net interest margin. Heartland plans to continue to work toward improving both its earning assets and funding mix through targeted organic growth strategies, which management believes will result in additional net interest income. Heartland believes its net interest income simulations reflect a well-balanced and manageable interest rate posture. Approximately ~~38%~~39% of Heartland's commercial and agricultural loan portfolios consist of floating rate loans that reprice based upon changes in the national prime or LIBOR interest ~~rate. Approximately 21%~~rate, and approximately 9% of these floating rate loans have interest rate floors that are currently in ~~effect, so that an upward movement in the national prime interest rate or LIBOR would not have an immediate positive effect on Heartland's interest income.~~effect. Item 3 of Part I of this Form 10-Q report contains additional information about the results of Heartland's most recent net interest income simulations. Note 7 to the consolidated financial statements included in this Quarterly Report on Form 10-Q contains a detailed discussion of the derivative instruments Heartland has utilized to manage its interest rate risk.

The following table sets forth certain information relating to Heartland's average consolidated balance sheets and reflects the yield on average earning assets and the cost of average interest bearing liabilities for the periods indicated, in thousands. Such yields and costs are calculated by dividing income or expense by the average balance of assets or liabilities. Average balances are derived from daily balances, and nonaccrual loans and loans held for sale are included in each respective loan category. Assets that receive tax favorable treatment are evaluated on a tax-equivalent basis assuming a federal income tax rate of 35%. Tax favorable assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent yield is calculated by adding the tax savings to the interest earned on tax favorable assets and dividing this amount by the average balance of the tax favorable assets.



ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾ Dollars in thousands
	For the Quarter Ended
	June 30, 2017								June 30, 2016
	Average Balance			Interest			Rate		Average Balance			Interest			Rate
Earning Assets
Securities:
Taxable	$	1,516,745		$	8,599		2.27	%	$	1,468,896		$	7,903		2.16	%
Nontaxable⁽¹⁾	624,915			7,723			4.96		430,086			5,486			5.13
Total securities	2,141,660			16,322			3.06		1,898,982			13,389			2.84
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments	121,778			345			1.14		10,727			52			1.95
Federal funds sold	1,262			3			0.95		5,114			1			0.08
Loans:⁽²⁾
Commercial and commercial real estate⁽¹⁾	3,824,061			46,912			4.92		3,866,861			46,889			4.88
Residential mortgage	633,344			6,509			4.12		803,952			8,286			4.15
Agricultural and agricultural real estate⁽¹⁾	488,222			5,807			4.77		481,625			5,504			4.60
Consumer	431,199			8,289			7.71		430,440			8,273			7.73
Fees on loans				1,670			—		—			2,083			—
Less: allowance for loan losses	(55,270		)	—			—		(50,852		)	—			—
Net loans	5,321,556			69,187			5.21		5,532,026			71,035			5.16
Total earning assets	7,586,256			85,857			4.54	%	7,446,849			84,477			4.56	%
Nonearning Assets	747,045								764,477
Total Assets	$	8,333,301							$	8,211,326
Interest Bearing Liabilities
Savings	$	3,881,219		$	2,505		0.26	%	$	3,699,971		$	2,028		0.22	%
Time, $100,000 and over	350,786			727			0.83		421,151			733			0.70
Other time deposits	479,164			931			0.78		586,810			1,260			0.86
Short-term borrowings	153,565			90			0.24		373,768			519			0.56
Other borrowings	281,509			3,228			4.60		281,777			3,673			5.24
Total interest bearing liabilities	5,146,243			7,481			0.58	%	5,363,477			8,213			0.62	%
Noninterest Bearing Liabilities
Noninterest bearing deposits	2,338,957								2,098,327
Accrued interest and other liabilities	56,124								75,815
Total noninterest bearing liabilities	2,395,081								2,174,142
Stockholders' Equity	791,977								673,707
Total Liabilities and Stockholders' Equity	$	8,333,301							$	8,211,326
Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾				$	78,376							$	76,264
Net interest spread⁽¹⁾							3.96	%							3.94	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets⁽³⁾							4.14	%							4.12	%
Interest bearing liabilities to earning assets	67.84		%						72.02		%

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

Net interest income, fully tax-equivalent (non-GAAP)				$	78,376							$	76,264
Adjustments for tax-equivalent interest⁽¹⁾				(3,796		)						(3,146		)
Net interest income (GAAP)				$	74,580							$	73,118

Average Earning Assets	$	7,586,256							$	7,446,849
Annualized net interest margin (GAAP)							3.94	%							3.95	%
Annualized net interest margin, fully taxable equivalent (non-GAAP)							4.14	%							4.12	%

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


ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾ For the Three Months Ended March 31, 2017 and 2016
ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾ Dollars in thousands																	ANALYSIS OF AVERAGE BALANCES, TAX-EQUIVALENT YIELDS AND RATES⁽¹⁾ Dollars in thousands
																	For the Six Months Ended
	2017								2016								June 30, 2017								June 30, 2016
	Average Balance			Interest			Rate		Average Balance			Interest			Rate		Average Balance			Interest			Rate		Average Balance			Interest			Rate
Earning Assets
Securities:
Taxable	$	1,449,054		$	8,253		2.31	%	$	1,453,350		$	8,644		2.39	%	$	1,483,087		$	16,852		2.29	%	$	1,488,664		$	16,547		2.24	%
Nontaxable⁽¹⁾	645,534			7,986			5.02		417,224			5,400			5.21		635,168			15,709			4.99		423,655			10,886			5.17
Total securities	2,094,588			16,239			3.14		1,870,574			14,044			3.02		2,118,255			32,561			3.10		1,912,319			27,433			2.88
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments	96,270			209			0.88		66,716			95			0.57		109,095			554			1.02		11,180			147			2.64
Federal funds sold	314			—			—		31,126			10			0.13		791			3			0.76		18,120			11			0.12
Loans:⁽²⁾
Commercial and commercial real estate⁽¹⁾	3,813,258			45,913			4.88		3,743,940			46,754			5.02		3,818,689			92,825			4.90		3,805,401			93,643			4.95
Residential mortgage	646,532			6,683			4.19		734,134			7,599			4.16		639,902			13,192			4.16		769,043			15,885			4.15
Agricultural and agricultural real estate⁽¹⁾	483,079			5,554			4.66		467,978			5,729			4.92		485,665			11,361			4.72		474,801			11,233			4.76
Consumer	422,785			8,053			7.72		412,050			7,923			7.73		427,015			16,342			7.72		421,245			16,196			7.73
Fees on loans				1,760			—					1,571			—					3,430			—					3,654			—
Less: allowance for loan losses	(54,330		)	—			—		(49,815		)	—			—		(54,803		)	—			—		(50,334		)	—			—
Net loans	5,311,324			67,963			5.19		5,308,287			69,576			5.27		5,316,468			137,150			5.20		5,420,156			140,611			5.22
Total earning assets	7,502,496			84,411			4.56	%	7,276,703			83,725			4.63	%	7,544,609			170,268			4.55	%	7,361,775			168,202			4.59	%
Nonearning Assets	731,014								748,367								739,072								756,423
Total Assets	$	8,233,510							$	8,025,070							$	8,283,681							$	8,118,198
Interest Bearing Liabilities
Savings	$	3,838,001		$	2,105		0.22	%	$	3,556,207		$	1,894		0.21	%	$	3,859,730		$	4,610		0.24	%	$	3,628,089		$	3,922		0.22	%
Time, $100,000 and over	348,782			725			0.84		498,620			871			0.70		349,789			1,452			0.84		459,885			1,604			0.70
Other time deposits	484,336			900			0.75		642,301			1,408			0.88		481,736			1,831			0.77		614,556			2,668			0.87
Short-term borrowings	235,432			137			0.24		311,161			329			0.43		194,272			227			0.24		342,464			848			0.50
Other borrowings	284,404			3,656			5.21		264,875			3,475			5.28		282,948			6,884			4.91		273,326			7,148			5.26
Total interest bearing liabilities	5,190,955			7,523			0.59	%	5,273,164			7,977			0.61	%	5,168,475			15,004			0.59	%	5,318,320			16,190			0.61	%
Noninterest Bearing Liabilities
Noninterest bearing deposits	2,225,702								1,981,882								2,282,642								2,040,105
Accrued interest and other liabilities	63,895								74,253								59,989								75,034
Total noninterest bearing liabilities	2,289,597								2,056,135								2,342,631								2,115,139
Stockholders' Equity	752,958								695,771								772,575								684,739
Total Liabilities and Stockholders' Equity	$	8,233,510							$	8,025,070							$	8,283,681							$	8,118,198
Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾				$	76,888							$	75,748							$	155,264							$	152,012
Net interest spread⁽¹⁾							3.97	%							4.02	%							3.96	%							3.98	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets⁽³⁾							4.16	%							4.19	%							4.15	%							4.15	%
Interest bearing liabilities to earning assets	69.19		%						72.47		%						68.51		%						72.24		%

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

Net interest income, fully tax-equivalent (non-GAAP)				$	76,888							$	75,748							$	155,264							$	152,012
Adjustments for tax-equivalent interest⁽¹⁾				(3,860		)						(3,041		)						(7,656		)						(6,187		)
Net interest income (GAAP)				$	73,028							$	72,707							$	147,608							$	145,825

Average Earning Assets	$	7,502,496							$	7,276,703							$	7,544,609							$	7,361,775
Annualized net interest margin (GAAP)							3.95	%							4.02	%							3.95	%							3.98	%
Annualized net interest margin, fully tax-equivalent (non-GAAP)							4.16	%							4.19	%							4.15	%							4.15	%

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

Provision For Loan Losses

The allowance for loan losses is established through provision expense to provide, in Heartland management's opinion, an appropriate allowance for loan losses. The provision for loan losses was ~~$3.6 million~~$889,000 for the ~~first~~second quarter of 2017 compared to $2.1 million for the second quarter of 2016. For the first ~~quarter~~six months of 2017, the provision for loan losses was $4.5 million compared to $4.2 million for the first six months of 2016. In determining that the allowance for loan losses is appropriate, management uses factors that include the overall composition of the loan portfolio, general economic conditions, types of loans, loan collateral values, past loss experience, loan delinquencies, substandard credits, and doubtful credits. For additional details on the specific factors considered in establishing the allowance for loan losses, refer to the discussion of critical accounting policies set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Heartland's Annual Report on Form 10-K for the year ended December 31, 2016, and the information under the caption "Allowance For Loan Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 5 to the consolidated financial statements included herein.

Given the size of Heartland's loan portfolio, the level of organic loan growth, acquired loans that move out of the purchase accounting pool, changes in credit quality and the variability that can occur in the factors considered when determining the appropriateness of the allowance for loan losses, Heartland's quarterly provision for loan losses will vary from quarter to quarter. During the ~~first~~second quarter of 2017, Heartland’s credit quality was stable as nonperforming and delinquent loan levels were largely ~~unchanged.~~unchanged, and the charge-offs in the quarter at Heartland's subsidiary banks were primarily attributable to loans with a specific reserve that had been provided for in previous quarters. As a result, the ~~$3.6 million~~ provision inexpense recorded for both the ~~first quarter of~~three- and six-month periods ended June 30, 2017, was primarily due to the movement of acquired loans out of the purchase accounting pool and minor fluctuations in the variables that management uses to determine the allowance.

Heartland believes the allowance for loan losses as of ~~March 31,~~June 30, 2017, was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions should become more unfavorable, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses.

Noninterest Income

The table below shows Heartland's noninterest income for the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017 and 2016, in thousands:



	Three Months Ended June 30,
	2017		2016			Change			% Change
Service charges and fees	$	9,696	$	8,022		$	1,674		21	%
Loan servicing income	1,351		1,292			59			5
Trust fees	3,979		3,625			354			10
Brokerage and insurance commissions	976		886			90			10
Securities gains, net	1,392		4,622			(3,230		)	(70	)
Net gains on sale of loans held for sale	6,817		11,270			(4,453		)	(40	)
Valuation adjustment on commercial servicing rights	19		(46		)	65			141
Income on bank owned life insurance	656		591			65			11
Other noninterest income	738		764			(26		)	(3	)
Total noninterest income	$	25,624	$	31,026		$	(5,402	)	(17	)%


	Three Months Ended March 31,									Six Months Ended June 30,
	2017		2016		Change			% Change		2017		2016			Change			% Change
Service charges and fees	$	9,457	$	7,162	$	2,295		32	%	$	19,153	$	15,184		$	3,969		26	%
Loan servicing income	1,724		1,268		456			36		3,075		2,560			515			20
Trust fees	3,631		3,813		(182		)	(5	)	7,610		7,438			172			2
Brokerage and insurance commissions	1,036		1,022		14			1		2,012		1,908			104			5
Securities gains, net	2,482		3,526		(1,044		)	(30	)	3,874		8,148			(4,274		)	(52	)
Net gains on sale of loans held for sale	6,147		11,065		(4,918		)	(44	)	12,964		22,335			(9,371		)	(42	)
Valuation adjustment on commercial servicing rights	5		—		5			100		24		(46		)	70			152
Income on bank owned life insurance	617		522		95			18		1,273		1,113			160			14
Other noninterest income	794		1,200		(406		)	(34	)	1,532		1,964			(432		)	(22	)
Total noninterest income	$	25,893	$	29,578	$	(3,685	)	(12	)%	$	51,517	$	60,604		$	(9,087	)	(15	)%

Noninterest income totaled ~~$25.9~~$25.6 million during the ~~first~~second quarter of 2017 compared to ~~$29.6~~$31.0 million during the ~~first~~second quarter of 2016, a decrease of ~~$3.7~~$5.4 million or ~~12%~~17%. ~~This~~For the six-month period ended on June 30, noninterest income totaled $51.5 million during 2017 compared to $60.6 million during 2016, a decrease of $9.1 million or 15%. Decreases in noninterest income for both the quarterly and six-month period comparisons reflected lower ~~securities gains and decreased~~ net gains on sale of loans held for sale and securities gains, net, the effect of which was partially offset by increased service charges and fees.

Service charges and fees increased ~~$2.3~~$1.7 million or ~~32%~~21% to $9.7 million during the ~~first~~second quarter of 2017 compared to $8.0 million recorded during the second quarter of 2016 and $4.0 million or 26% to $19.2 million during the first ~~quarter~~six months of 2017 compared $15.2 million for the first six months of 2016. Service charges on checking and savings accounts recorded during the ~~first~~second quarter of 2017 were ~~$2.1~~$2.3 million compared to ~~$1.9~~$2.1 million during the ~~first~~second quarter of 2016, an increase of ~~$234,000~~$210,000 or 10%. For the six months ended June 30, service charges on checking and savings accounts totaled $4.4 million during 2017 compared to $3.9 million during 2016, an increase of $476,000 or 12%. Overdraft fees were ~~$2.2~~$2.3 million during the ~~first~~second quarter of 2017 compared to ~~$2.0~~$2.1 million during the ~~first~~second quarter of 2016, an increase of ~~$242,000~~$172,000 or ~~12%~~8%. Overdraft fees increased $414,000 or 10% to $4.5 million for the six months ended June 30, 2017 compared to $4.1 million for the same period in 2016. Interchange revenue from activity on bank debit cards, along with surcharges on ATM activity, resulted in service charges and fees of ~~$3.0~~$2.9 million during the ~~first~~second quarter of 2017 compared to ~~$2.3~~$2.6 million during the ~~first~~second quarter of 2016, an increase of ~~$687,000~~$333,000 or ~~29%~~13%. These ~~increases~~same fees were $5.9 million during first six months of 2017 compared to $4.9 million during the first six months of 2016, an increase of $1.0 million or 21%. Increases in service charges and fees were primarily attributable to a larger demand deposit customer base, a portion of which is attributable to the acquisitions completed during the first quarters of 2016 and 2017. Fees associated with credit card services were ~~$2.0~~$2.2 million during the ~~first~~second quarter of 2017 compared to ~~$909,000~~$1.2 million during the ~~first~~second quarter of 2016, an increase of ~~$1.1~~$1.0 million or ~~124%~~77%. For the first six months of 2017, these fees were $4.2 million compared to $2.1 million during the first six months of 2016, an increase of $2.1 million or 97%. This increase resulted primarily

from efforts to increase the level of commercial credit card services provided at Heartland's subsidiary banks, including at the newly acquired banks in California and Colorado. Heartland recently enhanced its card payment solutions for businesses with the rollout of a more robust expense management service that provides business customers the ability to more efficiently manage their card-based spending.

Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which are dependent upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. Loan servicing income totaled ~~$1.7~~$1.4 million during the ~~first~~second quarter of 2017 compared to $1.3 million during the ~~first~~second quarter of 2016, an increase of ~~$456,000~~$59,000 or ~~36%~~5%. On a six-month comparative basis, loan servicing income totaled $3.1 million during 2017 compared to $2.6 million during 2016, an increase of $515,000 or 20%. Loan servicing income related to the servicing of commercial and agricultural loans totaled ~~$813,000~~$604,000 during the ~~first~~second quarter of 2017 compared to ~~$597,000~~$870,000 during the ~~first~~second quarter of 2016, ~~an increase~~a decrease of ~~$216,000~~$266,000 or ~~36%~~31%. For the first six months of the year, fees collected for commercial and agricultural loan servicing totaled $1.4 million for 2017 compared to $1.5 million in 2016, a decrease of $50,000 or 3%. Fees collected for the servicing of mortgage loans, primarily for government sponsored entities, were $3.2 million during the ~~first~~second quarter of 2017 compared to ~~$2.9~~$3.0 million during the ~~first~~second quarter of 2016, an increase of ~~$241,000~~$226,000 or 8%. For the first six months of the year, fees collected for the servicing of mortgage loans, primarily for government sponsored entities, were $6.4 million during 2017 compared to $5.9 million during 2016, an increase of $468,000 or 8%. Included in and offsetting loan servicing income is the amortization of ~~capitalized~~mortgage servicing rights, which was ~~$2.3~~$2.5 million during the ~~first~~second quarter of ~~both~~ 2017 and ~~2016.~~compared to $2.6 million during the second quarter of 2016, a decrease of $99,000 or 4%. For the first six months of the year, the amortization of mortgage servicing rights was $4.7 million during 2017 compared to $4.8 million during 2016, a decrease of $96,000 or 2%. The portfolio of mortgage loans serviced primarily for government sponsored entities by Heartland totaled approximately $4.34 billion at ~~March 31,~~June 30, 2017, compared to ~~$4.11~~$4.20 billion at ~~March 31,~~June 30, 2016.

The following table summarizes Heartland's residential mortgage loan activity during the most recent five quarters, in thousands:


	As Of and For the Quarter Ended															As Of and For the Quarter Ended
	3/31/2017			12/31/2016			9/30/2016			6/30/2016			3/31/2016			6/30/2017			3/31/2017			12/31/2016			9/30/2016			6/30/2016
Mortgage Servicing Fees	$	3,172		$	3,116		$	3,111		$	2,989		$	2,931		$	3,215		$	3,172		$	3,116		$	3,111		$	2,989
Mortgage Servicing Rights Amortization	(2,261		)	(2,698		)	(2,968		)	(2,567		)	(2,259		)	(2,468		)	(2,261		)	(2,698		)	(2,968		)	(2,567		)
Total Residential Mortgage Loan Servicing Income	$	911		$	418		$	143		$	422		$	672		$	747		$	911		$	418		$	143		$	422
Net Gains On Sale of Residential Mortgage Loans	$	5,947		$	5,664		$	11,061		$	10,707		$	10,368		$	6,628		$	5,947		$	5,664		$	11,061		$	10,707
Total Residential Mortgage Loan Applications	$	248,614		$	304,018		$	445,107		$	440,907		$	406,999		$	308,113		$	248,614		$	304,018		$	445,107		$	440,907
Residential Mortgage Loans Originated	$	161,851		$	278,065		$	324,337		$	324,633		$	238,266		$	216,637		$	161,851		$	278,065		$	324,337		$	324,633
Residential Mortgage Loans Sold	$	172,521		$	269,333		$	315,917		$	302,448		$	220,381		$	180,296		$	172,521		$	269,333		$	315,917		$	302,448
Residential Mortgage Loan Servicing Portfolio	$	4,338,311		$	4,308,580		$	4,259,459		$	4,203,429		$	4,112,519		$	4,340,243		$	4,338,311		$	4,308,580		$	4,259,459		$	4,203,429

Net gains on sale of loans held for sale totaled ~~$6.1~~$6.8 million during the ~~first~~second quarter of 2017 compared to ~~$11.1~~$11.3 million during the ~~first~~second quarter of 2016, a decrease of ~~$4.9~~$4.5 million or ~~44%~~40%. During the first six months of 2017, net gains on sale of loans held for sale totaled $13.0 million compared to $22.3 million during the same period in 2016, a decrease of $9.4 million or 42%. These gains result primarily from the gain or loss on sales of mortgage loans into the secondary market, related fees and fair value marks on the associated derivatives. Mortgage loan applications were ~~$248.6~~$308.1 million in the ~~first~~second quarter of 2017 compared to ~~$407.0~~$440.9 million in the ~~first~~second quarter of 2016, a decrease of ~~$158.4~~$132.8 million or ~~39%~~30%. During the first six months of 2017, mortgage loan applications were $556.7 million compared to $847.9 million during the same period in 2016, a decrease of $291.2 million or 34%. The volume of mortgage loans sold totaled ~~$172.5~~$180.3 million during the ~~first~~second quarter of 2017, a ~~$47.9~~$122.2 million or ~~22%~~40% decrease from the ~~$220.4~~$302.4 million sold during the ~~first~~second quarter of 2016. ~~Similar~~During the first six months of 2017, mortgage loans sold totaled $352.8 million compared to ~~trends~~$522.8 million during the same period in ~~the mortgage loan market as~~2016, a ~~whole,~~decrease of $170.0 million or 33%. Heartland has experienced ~~a dramatic decline in~~weakened demand for mortgage loan refinancings ~~in the last two quarters~~ as interest rates increased during this period. In addition, the first quarter of the year is seasonally slow for the home purchases market. These two factors led to a significant decline in Heartland's mortgage loan production during the first quarter of 2017.have increased. The percentage of residential mortgage loans that represented refinancings was ~~36%~~25% during the ~~first~~second quarter of 2017 compared to ~~42%~~33% in the second quarter of 2016. For the six months ended June 30, 2017, mortgage loan refinancings were 30% of originations compared to 37% of originations during the first ~~quarter~~six months of 2016. Net gains on sale of loans held for sale also includes gains on the sale of commercial and agricultural loans, which totaled ~~$200,000~~$189,000 during the ~~first~~second quarter of 2017 compared to ~~$697,000~~$567,000 during the second quarter of 2016. During the first six months of 2017, gains on sales of commercial and agricultural loans totaled $389,000 compared to $1.3 million during the same period in 2016.

Trust fees increased $354,000 or 10% to $4.0 million recorded in the second quarter of 2017 from $3.6 million recorded in the second quarter of 2016. For the six-month period ended June 30, 2017, trust fees increased $172,000 or 2% to $7.6 million for the six months ended June 30, 2017, compared to $7.4 million for the same six-month period in 2016. Heartland derives trust fees from providing personal and corporate trust, employee benefit plan and estate administration. Heartland provides both discretionary and non-discretionary investment management services with respect to trust assets under administration. The market value of trust assets under administration totaled $2.10 billion at June 30, 2017, compared to $1.96 billion at December 31, 2016, and $2.27 billion at June 30, 2016. These values fluctuate throughout the year as market conditions improve or decline.

Securities gains, net, totaled $1.4 million for the second quarter of 2017 compared to $4.6 million for the second quarter of 2016, which is a decrease of $3.2 million or 70%. For the first six months of 2017, securities gains, net, totaled $3.9 million compared to $8.1 million during the first ~~quarter~~six months of ~~2016.~~2016, a decrease of $4.3 million or 52%.

Other noninterest income was ~~$794,000~~$738,000 during the ~~first~~second quarter of 2017 compared to ~~$1.2 million~~$764,000 during the ~~first~~second quarter of 2016, a decrease of ~~$406,000~~$26,000 or ~~34%~~3%. For the first six months of 2017, other noninterest income totaled $1.5 million compared to $2.0 million during the first six months of 2016, a decrease of $432,000 or 22%. The decrease was primarily attributable to the reimbursement received in the first quarter of 2016 from a customer for loan workout expenses that had been incurred and paid in prior years.

Noninterest Expenses

The table below shows Heartland's noninterest expenses for the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017 and 2016, in thousands:



	Three Months Ended June 30,
	2017			2016			Change			% Change
Salaries and employee benefits	$	41,126		$	41,985		$	(859	)	(2	)%
Occupancy	5,056			5,220			(164		)	(3	)
Furniture and equipment	2,586			2,442			144			6
Professional fees	7,583			7,486			97			1
FDIC insurance assessments	909			1,120			(211		)	(19	)
Advertising	1,359			1,551			(192		)	(12	)
Core deposit intangibles and customer relationship intangibles amortization	1,218			1,297			(79		)	(6	)
Other real estate and loan collection expenses	365			659			(294		)	(45	)
(Gain)/loss on sales/valuations of assets, net	(112		)	(43		)	(69		)	160
Other noninterest expenses	9,208			9,303			(95		)	(1	)
Total noninterest expenses	$	69,298		$	71,020		$	(1,722	)	(2	)%


	Three Months Ended March 31,									Six Months Ended June 30,
	2017		2016		Change			% Change		2017		2016		Change			% Change
Salaries and employee benefits	$	41,767	$	41,714	$	53		—	%	$	82,893	$	83,699	$	(806	)	(1	)%
Occupancy	5,073		5,003		70			1		10,129		10,223		(94		)	(1	)
Furniture and equipment	2,501		2,113		388			18		5,087		4,555		532			12
Professional fees	8,309		7,010		1,299			19		15,892		14,496		1,396			10
FDIC insurance assessments	807		1,168		(361		)	(31	)	1,716		2,288		(572		)	(25	)
Advertising	2,424		1,284		1,140			89		3,783		2,835		948			33
Core deposit intangibles and customer relationship intangibles amortization	1,171		1,895		(724		)	(38	)	2,389		3,192		(803		)	(25	)
Other real estate and loan collection expenses	828		572		256			45		1,193		1,231		(38		)	(3	)
Loss on sales/valuations of assets, net	412		313		99			32
(Gain)/loss on sales/valuations of assets, net										300		270		30			11
Other noninterest expenses	8,448		9,237		(789		)	(9	)	17,656		18,540		(884		)	(5	)
Total noninterest expenses	$	71,740	$	70,309	$	1,431		2	%	$	141,038	$	141,329	$	(291	)	—	%

For the ~~first~~second quarter of 2017, noninterest expenses totaled ~~$71.7~~$69.3 million compared to ~~$70.3~~$71.0 million during the second quarter of 2016, a decrease of $1.7 million or 2%. For the first six months of 2017, noninterest expenses totaled $141.0 million compared to $141.3 million during the first ~~quarter~~six months of 2016, ~~an increase~~a decrease of ~~$1.4 million~~$291,000 or 2%less than 1%. ~~The categories with the most significant increases were professional fees and advertising.~~

The largest component of noninterest expenses, salaries and employee benefits, ~~increased $53,000~~decreased $859,000 or ~~less than 1%~~2% during the ~~first~~second quarter of 2017 as compared to the same quarter in 2016. When comparing the first six months of 2017 to the first six months of 2016, salaries and employee benefits decreased $806,000 or 1%. Heartland had total full-time equivalent employees of ~~1,896~~1,862 on ~~March 31,~~June 30, 2017, compared to ~~1,907~~1,888 on ~~March 31,~~June 30, 2016.

Professional fees increased ~~$1.3 million~~$97,000 or ~~19%~~1% during the ~~first~~second quarter of 2017 compared to the second quarter of 2016 and $1.4 million or 10% during the first ~~quarter~~six months of 2017 compared to the first six months of 2016, primarily as a result of a higher level of services provided to Heartland by third-party advisors, including services performed in connection with mergers and acquisitions and cloud-based applications.

FDIC insurance assessments decreased $211,000 or 19% to $909,000 during the second quarter of 2017 from $1.1 million during the same quarter in 2016. For the six-month periods ended June 30, 2017, and 2016, the FDIC insurance assessments were $1.7 million and $2.3 million respectively, which is a decrease of $572,000 or 25%. Changes made to the assessment rate calculation

by the FDIC went into effect on December 30, 2016, and those changes have resulted in decreased assessments for Heartland's subsidiary banks.

Advertising expenses were ~~$2.4~~$1.4 million during the ~~first~~second quarter of 2017 compared to ~~$1.3~~$1.6 million during the ~~first~~second quarter of 2016, ~~an increase~~a decrease of ~~$1.1 million~~$192,000 or ~~89%~~12%. Advertising expenses increased $948,000 or 33% during the first ~~quarter~~six months of 2017 compared to the first six months of 2016. The increase is primarily due to the costs of a deposit campaign promotion in the first quarter of ~~2016. This increase was primarily a result of costs associated with a deposit promotion campaign.~~2017.

Core deposit intangibles and customer relationship intangibles amortization ~~was $1.2 million~~decreased $79,000 or 6% during the ~~first~~second quarter of 2017 compared ~~to $1.9 million~~the second quarter of 2016 and $803,000 or 25% during the first ~~quarter~~six months of ~~2016, a decrease~~2017 compared to the first six months of ~~$724,000 or 38%.~~2016. During the first quarter of 2016, a $700,000 adjustment to the core deposit intangibles was recorded at Premier Valley Bank due to the loss of a significant deposit account relationship at Premier Valley Bank.

For the ~~first~~second quarter of 2017, other noninterest expenses decreased ~~$789,000~~$95,000 or ~~9% over~~1% to $9.2 million during the ~~first~~second quarter of ~~2016, as~~2017 from $9.3 million recorded during the second quarter of 2016. For the six-month period ended June 30, 2017, other noninterest expenses decreased $884,000 or 5% to $17.7 million from $18.6 million recorded in the same period in 2016. Heartland has replaced certain existing software applications and ~~their~~ associated maintenance costs with cloud-based applications.

One of Heartland's top priorities is to improve its efficiency ratio, on a fully tax-equivalent basis, by reducing it to 65% or less. During the ~~first~~second quarter of 2017, Heartland's efficiency ratio, on a fully tax-equivalent basis, ~~increased~~decreased to ~~69.95%~~65.61% in comparison with ~~66.90%~~67.95% during the ~~first~~second quarter of 2016. ~~Contributing~~For the six-month period ended June 30, 2017, the efficiency ratio on a fully tax-equivalent basis increased by 32 basis points to ~~this increase were reduced operating revenue, primarily as a result of a reduction~~67.75% when compared to the same six-month period in ~~mortgage loan originations and increased expenses associated with merger and acquisition activity and promotional costs incurred for a deposit marketing campaign.~~2016. Heartland's efficiency ratio will show variability from quarter to quarter as a result of acquisition activities and also from the seasonality and related revenue and expense timing differences that are inherent in the residential mortgage business.

Income Taxes

Heartland's effective tax rate was ~~23.49%~~26.85% for the ~~first~~second quarter of 2017 compared to ~~33.10%~~32.37% for the ~~first~~second quarter of 2016. Federal low-income housing tax credits totaling $310,000 and solar energy tax credits totaling $270,000 reduced Heartland's income taxes ~~by $304,000~~ during the ~~first~~second quarter of ~~both~~2017. For the second quarter of 2016, Heartland's income taxes were reduced by federal low-income housing tax credits totaling $304,000. Also included in the second quarter of 2017 ~~and 2016.~~tax computation was a state tax credit of $830,000 related to a partnership investment in a historic rehabilitation tax credit project. Heartland's effective tax rate was also affected by the level of tax-exempt interest income which, as a percentage of pre-tax income,

was ~~30.46%~~23.49% during the ~~first~~second quarter of 2017 compared to ~~18.88%~~18.86% during the second quarter of 2016.

Heartland's effective tax rate was 25.37% for the first six months of 2017 compared to 32.73% for the first six months of 2016. Federal low-income housing tax credits totaling $614,000 and solar energy tax credits totaling $270,000 were included in the determination of Heartland's income taxes during the first ~~quarter~~six months of 2017 compared to federal low-income housing tax credits of $608,000 during the first six months of 2016. Heartland's effective tax rate for the six months ended June 30, 2017, was impacted by the state tax credit referenced above. The level of tax-exempt interest income, as a percentage of pre-tax income, was 26.55% during the first six months of 2017 compared to 18.86% during the first six months of 2016.

As a result of the adoption of ASU 2016-09, "Compensation-Stock Compensation (Topic 718)" on January 1, 2017, Heartland's income taxes ~~during~~for the first ~~quarter~~six months of 2017 included a tax benefit of ~~$888,000 upon~~$989,000 resulting from the vesting of outstanding restricted stock unit awards. The majority of ~~Heartland's restricted stock unit awards vest annually~~this tax benefit was recorded in the first ~~quarter.~~quarter of 2017. Exclusive of this tax benefit, Heartland's effective tax rate for the first ~~quarter~~six months of 2017 was ~~27.26%~~27.22%.

Segment Reporting

Heartland has two reportable segments: community and other banking and retail mortgage banking. Revenues from community and other banking operations consist primarily of interest earned on loans and investment securities, fees from deposit and ancillary services and net security gains. Retail mortgage banking operating revenues consist of interest earned on mortgage loans held for sale, gains on sale of mortgage loans into the secondary market, the servicing of mortgage loans for others and loan origination fee income. See Note 9 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for further information regarding Heartland's segment reporting.

Income before taxes for the community and other banking segment for the ~~first~~second quarter of 2017 was ~~$24.4~~$30.2 million compared to ~~$28.3~~$30.0 million for the second quarter of 2016, a $260,000 or 1% increase. For the first six months of 2017, income before taxes

for the community and other banking segment was $54.6 million compared to $58.3 million for the first ~~quarter~~six months of 2016, a ~~$4.0~~$3.7 million or ~~14%~~6% decrease. ~~This decrease resulted primarily from increased noninterest expenses.~~

Net interest income from the community and other banking segment was ~~$72.2~~$73.4 million during the ~~first~~second quarter of 2017 compared to ~~$71.6~~$71.9 million during the ~~first~~second quarter of 2016, an increase of ~~$600,000~~$1.6 million or 2%. For the six-month period ended June 30, 2017, net interest income from the community and other banking segment increased $2.2 million or 1%. compared to the first six months of 2016. This increase was primarily athe result of additional earning ~~assets from the CIC Bancshares, Inc. acquisition completed on February 5, 2016, and the Founders Bancorp acquisition completed on February 28, 2017.~~assets.

Provision for loan losses allocable to the community and other banking segment was ~~$3.6 million~~$889,000 for the ~~first~~second quarter of 2017 compared to $2.1 million during the second quarter of 2016. For the first ~~quarter~~six months of 2017, the provision for loan losses was $4.5 million compared to $4.2 million for the first six months of 2016. Given the size of Heartland's loan portfolio, the movement of acquired loans out of the purchase accounting pool and the variability that can occur in the factors considered when determining the appropriateness of the allowance for loan losses, Heartland's quarterly provision for loan losses will vary from quarter to quarter. During the ~~first~~second quarter of 2017, Heartland’s credit quality was stable as nonperforming and delinquent loan levels were largely ~~unchanged.~~unchanged, and the charge-offs in the quarter were primarily attributable to loans with a specific reserve that had been provided for in previous quarters. As a result, the ~~higher~~ provision inexpense recorded for both the ~~first quarter of~~three- and six-month periods ended June 30, 2017, ~~in comparison with the first quarter of 2016~~ was primarily due to the movement of acquired loans out of the purchase accounting pool and minor fluctuations in the variables that management uses to determine the allowance.

Noninterest income allocable to the community and other banking segment totaled ~~$19.0~~$18.3 million during the ~~first~~second quarter of 2017 compared to ~~$18.5~~$19.9 million during the ~~first~~second quarter of 2016, ~~an increase~~a decrease of ~~$497,000~~$1.6 million or 8%. For the first six months of 2017, noninterest income allocable to the community and other banking segment totaled $37.3 million compared to $38.4 million during 2016, a decrease of $1.2 million or 3%. ~~The increase was primarily a result of higher~~Increased service charges and fees ~~which were~~income, offset by ~~a $1.0 million decrease~~decreases in ~~security~~securities gains, ~~net.~~net, contributed to the majority of the change in noninterest income for both the three and six-month periods ended June 30, 2017, compared to the same periods in 2016.

Noninterest expenses allocable to the community and other banking segment totaled ~~$63.2~~$60.6 million during the ~~first~~second quarter of 2017 compared to $59.7 million during the ~~first~~second quarter of 2016, an increase of ~~$3.5~~$870,000 or 1%. For the six-month period ended June 30, 2017, noninterest expenses allocable to the community and other banking segment increased by $4.3 million or ~~6%.~~4% to $123.8 million compared to $119.4 million recorded during the first six months of 2016. The categories of noninterest expenses with the most significant increases were salaries and employee benefits and professional fees. Professional fees ~~and advertising. These increases were~~increased primarily as a result of additional services provided to Heartland by third-party advisors, including services performed in connection with mergers and acquisitions and the replacement of software applications with cloud-based ~~applications, and advertising costs associated with a deposit promotion campaign.~~applications.

The retail mortgage banking segment recorded a loss before taxes of ~~$824,000~~$225,000 for the ~~first~~second quarter of 2017 compared to income before taxes of ~~$1.6~~$1.0 million for the ~~first~~second quarter of 2016, a decrease of ~~$2.4~~$1.2 million or ~~152%~~122%. For the first six months of 2017, the retail mortgage banking segment recorded a loss before income taxes of $1.0 million compared to income before taxes of $2.6 million during the first six months of 2016, a decrease of $3.7 million or 140%.

Noninterest income from the retail mortgage banking segment totaled ~~$6.9~~$7.4 million during the ~~first~~second quarter of 2017 compared to ~~$11.0~~$11.1 million during the ~~first~~second quarter of 2016, a ~~$4.2~~$3.8 million or ~~38%~~34% decrease. Noninterest income from the retail mortgage banking segment totaled $14.2 million for the first six months of 2017 compared to $22.2 million for the first six months of 2016, which is a decrease of $7.9 million or 36%. Retail mortgage banking income results primarily from net gains on sale of mortgage loans into the secondary market, related fees and fair value marks on the associated derivatives. Mortgage loan applications were ~~$248.6~~$308.1 million in the ~~first~~second quarter of 2017 compared to ~~$407.0~~$440.9 million in the ~~first~~second quarter of 2016, a decrease of ~~$158.4~~$132.8 million or ~~39%~~30%. ~~The~~For the first six months of 2017, mortgage loan applications were $556.7 million compared to $847.9 million during the first six months of 2016, a decrease of $291.2 million or 34%.The volume of mortgage loans sold totaled ~~$172.5~~$180.3 million during the ~~first~~second quarter of 2017, a ~~$47.9~~$122.2 million or ~~22%~~40% decrease from the ~~$220.4~~$302.4 million of mortgage loans sold during the ~~first~~second quarter of 2016. ~~This decrease~~For the first six months of 2017, the volume of mortgage loans sold totaled $352.8 million compared to $522.8 million during the first six months of 2016, a $170.0 million or 31% decrease. Decreases in the volume of mortgage loans sold was attributable to the higher mortgage interest rates during the first ~~quarter~~six months of 2017, which significantly reduced mortgage loan refinancing activity.

Noninterest expenses allocable to the retail mortgage banking segment were ~~$8.5~~$8.7 million during the ~~first~~second quarter of 2017 compared to ~~$10.6~~$11.3 million during the ~~first~~second quarter of 2016, a decrease of ~~$2.0~~$2.6 million or ~~19%~~23%. For the first six months of 2017, noninterest expenses allocable to the retail mortgage banking segment were $17.3 million compared to $21.9 million during the first six months of 2016, a decrease of $4.6 million or 21%. Lower expenses during the second quarter and first ~~quarter~~six months of 2017 in comparison with the second quarter and first ~~quarter~~six months of 2016 were partially attributable to reduced transaction-based compensation paid to mortgage banking personnel as a result of the lower volume of residential mortgage loans underwritten

during ~~the first quarter of~~ 2017. Additionally, in reaction to the lower volume of mortgage loan originations, a series of workforce reductions were

implemented during the first ~~quarter~~six months of 2017. ~~The impact of the workforce reductions are expected to continue into the second quarter.~~

FINANCIAL CONDITION

Total assets of Heartland were ~~$8.36~~$8.20 billion at ~~March 31,~~June 30, 2017, ~~an increase~~a decrease of ~~$114.8~~$42.4 million or 1% since year-end 2016. ~~Included in this increase, at fair value, was~~Exclusive of the $213.9 million of assets acquired at fair value in the Founders Bancorp ~~transaction.~~transaction, total assets decreased $256.3 million or 3% since December 31, 2016. Securities represented 25% of total assets at June 30, 2017, and 26% of total assets at December 31, 2016.

Lending Activities

Total net loans held to maturity were ~~$5.36~~$5.33 billion at ~~March 31,~~June 30, 2017, compared to $5.35 billion at year-end 2016, ~~an increase~~a decrease of ~~$9.9~~$26.6 million or less than 1%. This ~~increase~~change includes $96.4 million of total loans held to maturity, at fair value, acquired in the Founders Bancorp transaction. Exclusive of this transaction, total loans held to maturity decreased ~~$86.6~~$123.1 million or 2%. ~~Historically, Heartland has not experienced significant organic loan growth in the first quarter of the year. Three~~Five of the Heartland bank subsidiaries experienced a ~~decline~~net increase in loan balances during the second quarter ~~primarily as a result~~ of ~~scheduled construction loan payoffs.~~2017. Price competition for quality loans remains intense, and Heartland remains committed to its pricing strategy, disciplined credit approach and emphasis on the client relationship.

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


LOAN PORTFOLIO	March 31, 2017					December 31, 2016					June 30, 2017					December 31, 2016
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
Loans receivable held to maturity:
Commercial	$	1,314,393		24.50	%	$	1,287,265		24.04	%	$	1,344,323		25.24	%	$	1,287,265		24.04	%
Commercial real estate	2,535,355			47.27		2,538,582			47.42	%	2,458,688			46.17		2,538,582			47.42	%
Agricultural and agricultural real estate	481,125			8.97		489,318			9.14		495,243			9.30		489,318			9.14
Residential mortgage	604,902			11.28		617,924			11.54		596,385			11.20		617,924			11.54
Consumer	427,962			7.98		420,613			7.86		431,052			8.09		420,613			7.86
Gross loans receivable held to maturity	5,363,737			100.00	%	5,353,702			100.00	%	5,325,691			100.00	%	5,353,702			100.00	%
Unearned discount	(668		)			(699		)			(639		)			(699		)
Deferred loan fees	(1,465		)			(1,284		)			30					(1,284		)
Total net loans receivable held to maturity	5,361,604					5,351,719					5,325,082					5,351,719
Allowance for loan losses	(54,999		)			(54,324		)			(54,051		)			(54,324		)
Loans receivable, net	$	5,306,605				$	5,297,395				$	5,271,031				$	5,297,395

Loans secured by real estate, either fully or partially, totaled ~~$3.55~~$3.48 billion or ~~66%~~65% of gross loans at ~~March 31,~~June 30, 2017. Excluding purchase accounting valuations, ~~51%~~52% of the properties securing non-farm, nonresidential real estate loans are owner occupied. The largest categories of Heartland's real estate secured loans at ~~March 31,~~June 30, 2017, and December 31, 2016, are listed below, in thousands:

													LOANS SECURED BY REAL ESTATE
	March 31, 2017			December 31, 2016			June 30, 2017			December 31, 2016
Residential real estate, excluding residential construction and residential lot loans	$	995,797		$	1,030,190		$	1,010,455		$	1,030,190
Industrial, manufacturing, business and commercial	475,339			474,632			467,975			474,632
Agriculture	247,585			255,046			249,018			255,046
Retail	336,866			332,009			341,063			332,009
Office	351,700			347,334			333,950			347,334
Land development and lots	130,999			127,700			126,494			127,700
Hotel, resort and hospitality	167,914			151,571			164,948			151,571
Multi-family	188,219			185,559			180,443			185,559
Food and beverage	100,989			102,225			101,928			102,225
Warehousing	123,766			120,471			119,762			120,471
Health services	143,793			147,412			131,851			147,412
Residential construction	132,659			143,962			105,679			143,962
All other	173,387			172,617			162,402			172,617
Purchase accounting valuations	(17,901		)	(17,559		)	(16,306		)	(17,559		)
Total loans secured by real estate	$	3,551,112		$	3,573,169		$	3,479,662		$	3,573,169

Allowance For Loan Losses

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

Nonperforming loans were ~~$63.7~~$66.1 million or ~~1.19%~~1.24% of total loans at ~~March 31,~~June 30, 2017, compared to $64.4 million or 1.20% of total loans at December 31, 2016. At ~~March 31,~~June 30, 2017, approximately ~~$27.1~~$30.1 million or ~~42%~~46% of Heartland's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to ~~four~~six borrowers. The portion of Heartland's nonperforming loans covered by government guarantees was ~~$16.6~~$21.9 million at ~~March 31,~~June 30, 2017, and $17.3 million at December 31, 2016, which includes ~~$14.2~~$16.3 million and $14.3 million, respectively, of repurchased residential real estate loans. Effective July 1, 2017, Heartland has elected to sell GNMA originated government guaranteed residential real estate loans on a servicing released basis to mitigate the future repurchase obligation associated with these loans.

The allowance for loan losses ~~at March 31, 2017,~~ was ~~1.03%~~1.02% of loans at both June 30, 2017, and ~~86.29% of nonperforming loans compared to 1.02% of loans~~December 31, 2016, and 81.78% and 84.37% of nonperforming loans at June 30, 2017 and December 31, ~~2016.~~2016, respectively. Excluding those loans covered by the purchase accounting adjustments, the ratio of the allowance for loan losses to outstanding loans was 1.20% at June 30, 2017, and 1.22% at ~~both March 31, 2017, and~~ December 31, 2016. At ~~March 31,~~June 30, 2017, valuation reserves totaled ~~$25.2~~$22.8 million and covered ~~$938.9~~$853.0 million of acquired loans. At December 31, 2016, valuation reserves totaled $25.3 million and covered $956.0 million of acquired loans.

Loans delinquent 30 to 89 days as a percent of total loans was ~~0.44%~~0.38% at ~~March 31,~~June 30, 2017, in comparison with 0.37% at December 31, 2016.

The table below presents the changes in the allowance for loan losses during the ~~three-month~~three- and six-month periods ended ~~March 31,~~June 30, 2017 and 2016, in thousands:


ANALYSIS OF ALLOWANCE FOR LOAN LOSSES	Three Months Ended March 31,						Three Months Ended June 30,
	2017			2016			2017			2016
Balance at beginning of period	$	54,324		$	48,685		$	54,999		$	49,738
Provision for loan losses	3,641			2,067			889			2,118
Recoveries on loans previously charged off	752			591			929			2,851
Charge-offs on loans not covered by loss share agreements							(2,766		)	(2,951		)
Balance at end of period							$	54,051		$	51,756
Annualized ratio of net charge offs to average loans							0.14		%	0.01		%

							Six Months Ended June 30,
							2017			2016
Balance at beginning of period							$	54,324		$	48,685
Provision for loan losses							4,530			4,185
Recoveries on loans previously charged off							1,681			3,442
Charge-offs on loans	(3,718		)	(1,605		)	(6,484		)	(4,556		)
Balance at end of period	$	54,999		$	49,738		$	54,051		$	51,756
Annualized ratio of net charge offs to average loans	0.22		%	0.08		%	0.18		%	0.04		%

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


NONPERFORMING ASSETS	March 31,						December 31,						June 30,						December 31,
	2017			2016			2016			2015			2017			2016			2016			2015
Nonaccrual loans	$	62,868		$	47,750		$	64,299		$	39,655		$	65,393		$	57,053		$	64,299		$	39,655
Loans contractually past due 90 days or more	872			639			86			—			698			—			86			—
Total nonperforming loans	63,740			48,389			64,385			39,655			66,091			57,053			64,385			39,655
Other real estate	11,188			11,338			9,744			11,524			9,269			11,003			9,744			11,524
Other repossessed assets	739			426			663			485			675			564			663			485
Total nonperforming assets	$	75,667		$	60,153		$	74,792		$	51,664		$	76,035		$	68,620		$	74,792		$	51,664
Performing troubled debt restructured loans⁽¹⁾	$	11,010		$	10,711		$	10,380		$	11,075		$	11,157		$	9,923		$	10,380		$	11,075
Nonperforming loans to total loans	1.19		%	0.88		%	1.20		%	0.79		%	1.24		%	1.04		%	1.20		%	0.79		%
Nonperforming assets to total loans plus repossessed property	1.41		%	1.09		%	1.39		%	1.03		%	1.43		%	1.25		%	1.39		%	1.03		%
Nonperforming assets to total assets	0.90		%	0.73		%	0.91		%	0.67		%	0.93		%	0.84		%	0.91		%	0.67		%

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

The schedules below summarize the changes in Heartland's nonperforming assets during the second quarter of 2017 and the first ~~three~~six months of 2017, in thousands:



	Nonperforming Loans			Other Real Estate Owned			Other Repossessed Assets			Total Nonperforming Assets
March 31, 2017	$	63,740		$	11,188		$	739		$	75,667
Loan foreclosures	(2,069		)	2,039			30			—
Net loan charge-offs	(1,837		)	—			—			(1,837		)
Acquired nonperforming assets	—			—			—			—
New nonperforming loans	13,700			—			—			13,700
Reduction of nonperforming loans⁽¹⁾	(7,443		)	—			—			(7,443		)
OREO/Repossessed assets sales proceeds	—			(3,700		)	(34		)	(3,734		)
OREO/Repossessed assets writedowns, net	—			(258		)	(1		)	(259		)
Net activity at Citizens Finance Co.	—			—			(59		)	(59		)
June 30, 2017	$	66,091		$	9,269		$	675		$	76,035

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


	Nonperforming Loans			Other Real Estate Owned			Other Repossessed Assets			Total Nonperforming Assets			Nonperforming Loans			Other Real Estate Owned			Other Repossessed Assets			Total Nonperforming Assets
December 31, 2016	$	64,385		$	9,744		$	663		$	74,792		$	64,385		$	9,744		$	663		$	74,792
Loan foreclosures	(2,461		)	2,263			198			—			(4,530		)	4,302			228			—
Net loan charge-offs	(2,966		)	—			—			(2,966		)	(4,803		)	—			—			(4,803		)
Acquired nonperforming assets	—			—			—			—			—			—			—			—
New nonperforming loans	14,819			—			—			14,819			28,519			—			—			28,519
Reduction of nonperforming loans⁽¹⁾	(10,037		)	—			—			(10,037		)	(17,480		)	—			—			(17,480		)
OREO/Repossessed assets sales proceeds	—			(545		)	(170		)	(715		)	—			(4,245		)	(204		)	(4,449		)
OREO/Repossessed assets writedowns, net	—			(274		)	(5		)	(279		)	—			(532		)	(6		)	(538		)
Net activity at Citizens Finance Co.	—			—			53			53			—			—			(6		)	(6		)
March 31, 2017	$	63,740		$	11,188		$	739		$	75,667
June 30, 2017													$	66,091		$	9,269		$	675		$	76,035

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

Securities

The composition of Heartland's securities portfolio is managed to maximize the return on the portfolio while considering the impact it has on Heartland's asset/liability position and liquidity needs. Securities represented 25% and 26% of total assets at ~~both March 31,~~

June 30, 2017, and December 31, ~~2016.~~2016, respectively. Total available for sale securities as of ~~March 31,~~June 30, 2017, were ~~$1.89~~$1.79 billion, ~~an increase~~a decrease of ~~$47.7~~$56.4 million or 3% from $1.85 billion at December 31, 2016.

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


SECURITIES PORTFOLIO COMPOSITION	March 31, 2017				December 31, 2016				June 30, 2017				December 31, 2016
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
U.S. government corporations and agencies	$	15,067	0.69	%	$	4,700	0.22	%	$	5,471	0.26	%	$	4,700	0.22	%
Mortgage-backed securities	1,288,527		59.22		1,290,500		60.56		1,262,528		60.99		1,290,500		60.56
Obligation of states and political subdivisions	835,209		38.39		799,806		37.53		758,328		36.63		799,806		37.53
Corporate debt securities									7,186		0.35		—		—
Equity securities	15,341		0.71		14,520		0.68		15,514		0.75		14,520		0.68
Other securities	21,557		0.99		21,560		1.01		21,094		1.02		21,560		1.01
Total securities	$	2,175,701	100.00	%	$	2,131,086	100.00	%	$	2,070,121	100.00	%	$	2,131,086	100.00	%

The percentage of Heartland's securities portfolio comprised of mortgage-backed securities was ~~59%~~61% at ~~March 31,~~both June 30, 2017, and ~~61% at~~ December 31, 2016. Approximately ~~77%~~80% of Heartland's mortgage-backed securities were issued by government-sponsored enterprises at ~~March 31,~~June 30, 2017. Heartland's securities portfolio had an expected modified duration of ~~4.15~~4.60 years as of ~~March 31,~~June 30, 2017, compared to 4.34 years at year-end 2016.

The Volcker Rule, which ~~is scheduled to be effective~~went into effect July 21, 2017, prohibits insured depository institutions and their holding companies from engaging in proprietary trading of securities, derivatives and certain other financial instruments for the entity's own account, and prohibits certain interests in, or relationships with, a hedge fund or private equity fund. Heartland ~~does~~did not ~~believe that it engages~~engage in any significant amount of proprietary trading, as defined in the Volcker Rule, and ~~believes that any~~the impact of the Volcker Rule on Heartland's business activities and investment portfolio ~~would be~~was minimal. Heartland has reviewed its investment portfolio to determine if any investments meet the Volcker Rule's definition of covered funds. Based on the review, Heartland ~~believes~~determined that ~~any~~the impact related to investments considered to be covered funds ~~would~~did not have a significant effect on its financial condition or results of operations.

At ~~March 31,~~June 30, 2017, Heartland had ~~$21.6~~$21.1 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 ~~$7.09~~$6.93 billion as of ~~March 31,~~June 30, 2017, compared to $6.85 billion at year-end 2016, an increase of ~~$242.5~~$82.8 million or 4%1%. This increase included $181.5 million of deposits, at fair value, acquired in the Founders Bancorp transaction. Exclusive of this transaction, total deposits ~~increased $61.0~~decreased $98.7 million or 1% ~~during the first quarter of~~since December 31, 2017.

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


DEPOSITS	March 31, 2017				December 31, 2016				June 30, 2017				December 31, 2016
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Demand	$	2,319,256	32.71	%	$	2,202,036	32.16	%	$	2,355,410	33.99	%	$	2,202,036	32.16	%
Savings	3,940,146		55.58		3,788,089		55.32		3,704,579		53.45		3,788,089		55.32
Time	830,459		11.71		857,286		12.52		870,180		12.56		857,286		12.52
Total	$	7,089,861	100.00	%	$	6,847,411	100.00	%	$	6,930,169	100.00	%	$	6,847,411	100.00	%

Demand deposits totaled ~~$2.32~~$2.36 billion at ~~March 31,~~June 30, 2017, an increase of ~~$117.2~~$153.4 million or 5%7% since year-end 2016, with $94.4 million of the increase attributable to the Founders Bancorp transaction. Excluding demand deposits acquired in this transaction, demand deposits increased ~~$22.8~~$59.0 million or 1%3%. Deposit composition continued to reflect a favorable mix with demand deposits at ~~33% of total deposits,~~34%, savings deposits at ~~55%~~53% and time deposits at ~~12%~~13% of total deposits at ~~March 31,~~June 30, 2017, compared to demand deposits at 32% ~~of total deposits,~~, savings deposits at 55% and time deposits at 13% of total deposits at December 31, 2016. ~~Contributing to the improvement in deposit mix were decreases in the level~~Savings deposits totaled $3.70 billion at June 30, 2017, a decrease of ~~time deposits, which decreased $50.6~~$83.5 million ~~during the first quarter of 2017 when excluding the $23.8~~or 2% since year-end 2016, with $63.3 million of ~~time~~the change attributable to savings deposits acquired in the Founders Bancorp transaction. Excluding savings deposits acquired in this transaction, savings deposits decreased $146.8 million or 4%. The primary reason for the decrease in the savings deposits balance is due to significant reductions in the balances of two deposit customers at two of Heartland's subsidiary banks, which represent $136.0 million of the decrease since December 31, 2016. Time deposits increased $12.9 million or 2% since year end. Time deposits include brokered CDs, which increased $20.2 million since year-end 2016. Time deposits acquired with the Founders Bancorp transaction totaled $23.8 million. Excluding the effect of these items, time deposits decreased $31.2 million since December 31, 2016. This trend of reduced time deposits is partially a result of management's focus on building its demand and savings deposit customer base. Heartland

does not plan to offer highly competitive interest rates on time deposits, except to customers with which it has other banking relationships. ~~Savings~~The increase in brokered deposits ~~totaled $3.94 billion~~during the second quarter of 2017 was to provide liquidity at ~~March 31, 2017, an increase of $152.1 million or 4% since year-end 2016, with $63.3 million of the increase attributable to the Founders Bancorp transaction. Excluding~~one subsidiary bank that experienced a decline in savings deposits ~~acquired in this transaction, savings deposits increased $88.8 million or 2%.~~as mentioned previously.

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


	March 31, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Securities sold under agreement to repurchase	$	135,748	$	229,555	$	105,568	$	229,555
Federal funds purchased	3,680		40,200		2,700		40,200
Advances from the FHLB	10,000		30,367		25,000		30,367
Other short-term borrowings	5,597		6,337		5,862		6,337
Total	$	155,025	$	306,459	$	139,130	$	306,459

Short-term borrowings generally include federal funds purchased, securities sold under agreements to repurchase, short-term FHLB advances and discount window borrowings from the Federal Reserve Bank. These funding alternatives are utilized in varying degrees depending on their pricing and availability. All of Heartland's 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- or long-term purposes under a variety of programs. The amount of short-term borrowings of Heartland was ~~$155.0~~$139.1 million at ~~March 31,~~June 30, 2017, compared to $306.5 million at year-end 2016, a decrease of ~~$151.4~~$167.3 million or ~~49%~~55%.

All of the Heartland bank subsidiaries provide retail repurchase agreements to their customers as a cash management tool, which sweep excess funds from demand deposit accounts into these agreements. This source of funding does not increase the bank's reserve requirements. Although the aggregate balance of these retail repurchase agreements is subject to variation, the account relationships represented by these balances are principally local. The balances of retail repurchase agreements were ~~$135.7~~$105.6 million at ~~March 31,~~June 30, 2017, compared to $229.6 million at December 31, 2016, a decrease of ~~$93.8~~$124.0 million or ~~41%~~54%. In addition to seasonal fluctuations, these balances declined as a result of Heartland's focus on reducing the volume of retail repurchase agreement activity so that the securities pledged under these repurchase agreements would be unencumbered. The treasury management teams at the Heartland bank subsidiaries introduced other value-added cash management tools and loss prevention services to these customers to further enhance their cash management alternatives.

Short-term FHLB advances of ~~$10.0~~$25.0 million were included in short-term borrowings at ~~March 31,~~June 30, 2017, in comparison with $30.4 million at December 31, 2016.

Also included in short-term borrowings is a ~~$20.0~~$25.0 million revolving credit line Heartland has with an unaffiliated bank, primarily to provide liquidity to Heartland. The borrowing capacity on this revolving credit line was increased from $20.0 million to $25.0 million on June 14, 2017. No balance was outstanding on this line at both ~~March 31,~~June 30, 2017, and December 31, 2016.

Other Borrowings

The outstanding balances of other borrowings, which Heartland defines as borrowings with an original maturity date of more than one year, are shown in the table below, net of discount and issuance costs amortization, in thousands, as of ~~March 31,~~June 30, 2017, and December 31, 2016:


	March 31, 2017		December 31, 2016		June 30, 2017		December 31, 2016
Advances from the FHLB	$	6,907	$	6,975	$	6,840	$	6,975
Wholesale repurchase agreements	30,000		30,000		30,000		30,000
Trust preferred securities	115,321		115,232		115,410		115,232
Senior notes	11,000		16,000		11,000		16,000
Note payable to unaffiliated bank	36,667		37,667		35,667		37,667
Contracts payable for purchase of real estate and other assets	1,973		2,339		1,969		2,339
Subordinated notes	73,893		73,857		73,929		73,857
Other borrowings	6,290		6,464		6,281		6,464
Total	$	282,051	$	288,534	$	281,096	$	288,534

Other borrowings include all debt arrangements Heartland and its subsidiaries have entered into with original maturities that extend beyond one year, including long-term FHLB borrowings, borrowings under term notes, subordinated notes and senior notes, convertible debt, and obligations under trust preferred capital securities. As of ~~March 31,~~June 30, 2017, the amount of other borrowings was ~~$282.1~~$281.1 million, a decrease of ~~$6.5~~$7.4 million or 2%3% since year-end 2016.

Long-term FHLB borrowings with an original term of more than one year totaled ~~$6.9~~$6.8 million at ~~March 31,~~June 30, 2017, compared to $7.0 million at December 31, 2016. Total long-term FHLB borrowings at ~~March 31,~~June 30, 2017, had an average rate of 3.27% and an average maturity of 4643 months.

Heartland's structured wholesale repurchase agreements totaled $30.0 million at both ~~March 31,~~June 30, 2017, and December 31, 2016. These wholesale repurchase agreements mature in 2018.

Heartland had senior notes totaling $11.0 million outstanding at June 30, 2017, and $16.0 million outstanding at December 31, 2016.

Heartland has a non-revolving credit facility with an unaffiliated bank, which provides a borrowing capacity of up to $75.0 million. At ~~March 31,~~June 30, 2017, ~~$36.7~~$35.7 million was outstanding on this non-revolving credit line compared to $37.7 million outstanding at December 31, 2016. ~~Any outstanding~~The balance ~~on this non-revolving credit line~~of the $35.7 million note is due in April 2021. At ~~March 31,~~June 30, 2017, Heartland had ~~$27.1~~$39.3 million available on this non-revolving credit ~~facility.~~facility, of which no balance was drawn. Any balance on this non-revolving credit facility is due in June 2018.

~~Heartland also had senior notes totaling $11.0 million outstanding at March 31, 2017, and $16.0 million outstanding at December 31, 2016, and subordinated~~Subordinated notes totaling $73.9 million were outstanding at both ~~March 31,~~June 30, 2017, and December 31, 2016. During the first quarter of 2017, $167,000 of the subordinated convertible notes were converted into 6,128 shares of Heartland common stock.

A schedule of Heartland's trust preferred securities outstanding as of ~~March 31,~~June 30, 2017, is as follows, in thousands:

Amount

Issued

Issuance

Date

Interest

Rate

Interest

Rate as of

3/31/17⁽¹⁾

Maturity

Date

Callable

Date

Amount

Issued

Issuance

Date

Interest

Rate

Interest

Rate as of

6/30/17⁽¹⁾

Maturity

Date

Callable

Date

Heartland Financial Statutory Trust IV

25,774

03/17/2004

2.75% over LIBOR

3.90%⁽²⁾

03/17/2034

06/17/2017

25,774

03/17/2004

2.75% over LIBOR

4.02%⁽²⁾

03/17/2034

09/17/2017

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

2.35%⁽³⁾

04/07/2036

07/07/2017

20,619

01/27/2006

1.33% over LIBOR

2.49%⁽³⁾

04/07/2036

10/07/2017

Heartland Financial Statutory Trust VI

20,619

06/21/2007

6.75%

6.75%⁽⁴⁾

09/15/2037

06/15/2017

20,619

06/21/2007

1.48% over LIBOR

2.73%⁽⁴⁾

09/15/2037

09/15/2017

Heartland Financial Statutory Trust VII

20,619

06/26/2007

1.48% over LIBOR

2.53%⁽⁵⁾

09/01/2037

06/01/2017

20,619

06/26/2007

1.48% over LIBOR

2.68%⁽⁵⁾

09/01/2037

09/01/2017

Morrill Statutory Trust I

8,829

12/19/2002

3.25% over LIBOR

4.40%⁽⁶⁾

12/26/2032

06/26/2017

8,853

12/19/2002

3.25% over LIBOR

4.55%⁽⁶⁾

12/26/2032

09/26/2017

Morrill Statutory Trust II

8,448

12/17/2003

2.85% over LIBOR

4.00%⁽⁷⁾

12/17/2033

06/17/2017

8,475

12/17/2003

2.85% over LIBOR

4.12%⁽⁷⁾

12/17/2033

09/17/2017

Sheboygan Statutory Trust I

6,287

9/17/2003

2.95% over LIBOR

4.10%

09/17/2033

06/17/2017

6,309

9/17/2003

2.95% over LIBOR

4.22%

09/17/2033

09/17/2017

CBNM Capital Trust I

4,272

9/10/2004

3.25% over LIBOR

4.38%

12/15/2034

06/15/2017

4,284

9/10/2004

3.25% over LIBOR

4.50%

12/15/2034

09/15/2017

115,467

115,552

(1) Effective weighted average interest rate as of March 31, 2017, was 4.83% 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, 2017, was 5.01% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(3) Effective interest rate as of March 31, 2017, was 4.69% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(4) Interest rate is fixed at 6.75% through June 15, 2017, then resets to 1.48% over LIBOR for the remainder of the term.

(5) Effective interest rate as of March 31, 2017, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(6) Effective interest rate as of March 31, 2017, was 4.92% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(7) Effective interest rate as of March 31, 2017, was 4.51% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(1) Effective weighted average interest rate as of June 30, 2017, was 4.34% due to interest rate swap transactions on the variable rate securities as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(2) Effective interest rate as of June 30, 2017, was 5.01% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(3) Effective interest rate as of June 30, 2017, was 4.69% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(4) Effective interest rate as of June 30, 2017, was 3.87% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(5) Effective interest rate as of June 30, 2017, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(6) Effective interest rate as of June 30, 2017, was 4.92% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(7) Effective interest rate as of June 30, 2017, was 4.51% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

During 2015, Heartland entered into two additional forward starting interest rate swaps. The first forward starting interest rate swap transaction relates to Heartland's $20.0 million Statutory Trust VI, which ~~will convert~~converted from a fixed interest rate subordinated debenture to a variable interest rate subordinated ~~debenture. The effective date of the interest rate swap transaction is~~debenture on June 15, ~~2017, and~~2017. Heartland Statutory Trust VI will effectively remain at a fixed interest ~~rate. The forward-starting~~rate until the swap ~~transaction~~ expires on June 15, 2024. The second forward starting interest rate swap was effective on March 1, 2017, and replaced the current interest rate swap related to Heartland Statutory Trust VII that expired on March 1, 2017.

CAPITAL REQUIREMENTS

~~Bank regulatory agencies have~~The Federal Reserve has adopted capital ~~standards by which all~~adequacy guidelines that are used to assess the adequacy of capital in supervising a bank holding ~~companies are evaluated, including requirements~~company. The federal banking agencies implemented final rules to ~~maintain certain core~~establish a new comprehensive regulatory capital ~~amounts included as Tier~~framework with a phase-in period beginning on January 1, 2015 and ending on January 1, 2019. The Final Rules implemented the third installment of the Basel Accords ("Basel III") regulatory capital ~~at minimum levels relative to total assets (the "Tier 1 Leverage Capital Ratio"~~reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") and ~~at minimum levels relative~~substantially amended the regulatory risk-based capital rules applicable to "risk-weighted assets," which are calculated by assigning value to assets, and off balance sheet commitments, based on their risk characteristics (the "Tier 1 Risk-Based Capital Ratio"). Bank holding companies also are required to maintain total capital at minimum levels relative to risk-weighted assets (the "Total Risk-Based Capital Ratio"). Starting in 2015, bank holding companies became subject to a new Common Equity Tier 1 Capital Ratio, an increased Tier 1 Leverage Capital Ratio and an increased Tier 1 Risk-Based Capital Ratio under theHeartland. Under Basel III, ~~rules. They are required to include in Common Equity Tier 1~~Heartland must hold a conservation buffer above the adequately capitalized risk-based capital the effects of other comprehensive income adjustments, such as gains and losses on securities held to maturity, that were previously excluded from the definition of Tier 1 capital. However, bank holding companies were allowed to make a one-time election not to include those effects. Heartland and its bank subsidiaries have been, and will continue to be, managed so they meet the well-capitalized requirements under the regulatory frameworkratios. The capital conservation buffer for ~~prompt corrective action. Heartland and its bank subsidiaries made the one-time election to exclude the effects of other comprehensive income adjustments on their Tier 1 capital.~~2017 is 1.25%.

Under the Basel III rules, the requirements to be categorized as well-capitalized was established at 6.5% for the Common Equity Tier 1 Capital Ratio, changed from 4% to 5% for the Tier 1 Leverage Capital Ratio, changed from 6% to 8% for the Tier 1 Risk-Based Capital Ratio and remained at 10% for the Total Risk-Based Capital Ratio. 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 ~~were as follows~~and the Federal Reserve's current capital adequacy guidelines for the dates indicated, in thousands:


CAPITAL RATIOS	March 31, 2017				December 31, 2016				June 30, 2017				December 31, 2016
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Risk-Based Capital Ratio
Tier 1 capital	$	777,802	12.40	%	$	756,056	11.93	%	$	797,920	12.73	%	$	756,056	11.93	%
Tier 1 capital minimum requirement	376,277		6.00	%	380,148		6.00	%	376,068		6.00	%	380,148		6.00	%
Excess	$	401,525	6.40	%	$	375,908	5.93	%	$	421,852	6.73	%	$	375,908	5.93	%

Common Equity Tier 1 capital	$	661,543	10.55	%	$	639,467	10.09	%	$	681,571	10.87	%	$	639,467	10.09	%
Common Equity Tier 1 minimum requirement	282,208		4.50	%	285,111		4.50	%	282,051		4.50	%	285,111		4.50	%
Excess	$	379,335	6.05	%	$	354,356	5.59	%	$	399,520	6.37	%	$	354,356	5.59	%

Total capital	$	907,922	14.48	%	$	887,607	14.01	%	$	927,355	14.80	%	$	887,607	14.01	%
Total capital minimum requirement	501,703		8.00	%	506,865		8.00	%	501,424		8.00	%	506,865		8.00	%
Excess	$	406,219	6.48	%	$	380,742	6.01	%	$	425,931	6.80	%	$	380,742	6.01	%
Total risk-weighted assets	$	6,271,289			$	6,335,807			$	6,267,795			$	6,335,807

Leverage Ratio
Tier 1 capital	$	777,802	9.62	%	$	756,056	9.28	%	$	797,920	9.75	%	$	756,056	9.28	%
Tier 1 capital minimum requirement	323,357		4.00	%	325,894		4.00	%	327,336		4.00	%	325,894		4.00	%
Excess	$	454,445	5.62	%	$	430,162	5.28	%	$	470,584	5.75	%	$	430,162	5.28	%
Average adjusted assets (less goodwill and other intangible assets)	$	8,083,932			$	8,147,357			$	8,183,396			$	8,147,357

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

During the first quarter of 2017, 333 shares of the Heartland Series D convertible preferred stock issued in the CIC Bancshares, Inc. acquisition were converted into 13,283 shares of Heartland common stock, and $167,000 of the convertible notes assumed in the acquisition were converted into 6,128 shares of Heartland common stock.

On July 7, 2017, Heartland completed the acquisition of Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado. Simultaneous with the close, Citywide Banks merged into Heartland's Centennial Bank and Trust subsidiary. The aggregate consideration was approximately $211.2 million, of which $58.6 million was cash, and the remainder was settled by delivery of 3,216,161 shares of Heartland common stock.

Common stockholders' equity was ~~$780.4~~$805.0 million at ~~March 31,~~June 30, 2017, compared to $739.6 million at December 31, 2016. Book value per common share was ~~$29.26~~$30.15 at ~~March 31,~~June 30, 2017, compared to $28.31 at year-end 2016. Changes in common stockholders' equity and book value per common share are the result of earnings, dividends paid, stock transactions and mark-to-market adjustment for unrealized gains and losses on securities available for sale and derivative instruments. Heartland had unrealized losses on securities available for sale, net of applicable taxes, of ~~$28.4~~$23.3 million at ~~March 31,~~June 30, 2017, compared to unrealized losses of $30.2 million at December 31, 2016.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

Commitments and Contractual Obligations

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Heartland's bank subsidiaries 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,~~June 30, 2017, and December 31, 2016, commitments to extend credit aggregated ~~$1.58~~$1.64 billion and $1.57 billion, respectively. Standby letters of credit aggregated ~~$45.9~~$46.2 million at ~~March 31,~~June 30, 2017 and $46.1 million at December 31, 2016.

Contractual obligations and other commitments were disclosed in Heartland's Annual Report on Form 10-K for the year ended December 31, 2016. Except for the commitments with respect to the Citywide Banks of Colorado, Inc. acquisition described below, there have been no material changes in Heartland's contractual obligations and other commitments since that report was filed.

On ~~February 13,~~July 7, 2017, Heartland ~~entered into a definitive merger agreement with~~acquired Citywide Banks of Colorado, Inc., parent company of Citywide Banks, headquartered in Aurora, Colorado. ~~Under~~Simultaneous with the ~~terms of the definitive merger agreement, Heartland will acquire~~close, Citywide Banks of Colorado Inc., in a transaction valued at approximately $203.0 million as of the announcement date, subject to certain adjustments. Citywide Banks of Colorado, Inc. common shareholders will receive a combination of Heartland common stock and cash. The transaction is subject to customary closing conditions, including approval by shareholders of Citywide Banks of Colorado, Inc., and bank regulatory authorities. The transaction is also subject to Heartland stockholders approving an increase in the number of authorized shares of Heartland common stock at the 2017 annual meeting of stockholders. The transaction is expected to close in the third quarter of 2017, and simultaneous with the closing, Citywide Banks will mergemerged into Heartland's Centennial Bank and Trust subsidiary. The combined entity ~~will operate~~operates as Citywide Banks. The aggregate consideration was approximately $211.2 million, of which $58.6 million was cash, and the remainder was settled by delivery of 3,216,161 shares of Heartland common stock. The combined entity operates as Citywide Banks. As of June 30, 2017, Citywide Banks had total assets of $1.38 billion, including $1.00 billion in net loans outstanding, and $1.20 billion of deposits. The systems conversion for this transaction is scheduled to be completed in the fourth quarter of 2017.

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. ~~At March 31,~~On June 14, 2017, ~~Heartland’s~~Heartland's revolving credit agreement with an unaffiliated bank ~~provided a maximum borrowing capacity of~~was increased to $25.0 million from $20.0 million of ~~which~~maximum borrowing capacity. At June 30, 2017, no balance was outstanding. Heartland also has a non-revolving credit line with the same unaffiliated bank. At ~~March 31,~~June 30, 2017, ~~$27.1~~$39.3 million was available on this non-revolving credit line. These credit agreements contain specific financial covenants, all of which Heartland was in compliance with as of ~~March 31,~~June 30, 2017.

The ability of Heartland to pay dividends to its stockholders is dependent upon dividends paid by its subsidiaries. The bank subsidiaries are subject to statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable

capital ratios in Heartland's bank subsidiaries, certain portions of their retained earnings are not available for the payment of dividends.

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

Derivative Financial Instruments

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

LIQUIDITY

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

Operating activities provided cash of ~~$33.8~~$71.9 million during the first ~~three~~six months of 2017 compared to ~~providing~~ cash provided of ~~$24.4~~$51.5 million ~~of cash~~ during the first ~~three~~six months of 2016. The largest factor in this change was the activity in loans originated for sale and the proceeds on sales of loans held for sale, which provided cash of ~~$12.3~~$12.4 million during the first ~~three~~six months of 2017 compared to the use of ~~$1.8~~$7.8 million in cash during the first ~~three~~six months of 2016.

Investing activities provided cash of ~~$80.4~~$230.4 million during the first ~~three~~six months of 2017 compared to providing cash of ~~$74.1~~$223.9 million during the first ~~three~~six months of 2016. The proceeds from ~~securities~~ sales, paydowns and maturities of securities available for sale and held to maturity were ~~$273.5~~$730.2 million during the first ~~three~~six months of 2017 compared to ~~$349.0~~$712.9 million during the first ~~three~~six months of 2016. Cash used for the purchase of securities totaled ~~$313.7~~$666.6 million during the first ~~three~~six months of 2017 compared to ~~$363.0~~$594.1 million during the first ~~three~~six months of 2016. A net change in loans provided cash of ~~$80.9~~$113.4 million during the first ~~three~~six months of 2017 compared to providing cash of ~~$78.5~~$98.2 million during the first ~~three~~six months of 2016. Also contributing to cash provided by investing activities was net cash and cash equivalents received in acquisitions, which totaled $33.7 million during the first ~~three~~six months of 2017 compared to $8.1 million during the first ~~three~~six months of 2016.

Financing activities used cash of ~~$99.8~~$279.2 million during the first ~~three~~six months of 2017 compared to using cash of ~~$224.0~~$304.2 million during the first ~~three~~six months of 2016. A net increase in demand ~~and savings~~ deposits provided cash of ~~$111.6~~$59.0 million during the first~~three~~ six months of 2017 compared to providing cash of ~~$1.8~~$71.5 million during the first ~~three~~six months of 2016. The net decrease in savings deposits used cash of $146.8 million and $10.0 million for the six months ended June 30, 2017, and 2016, respectively. A net decrease in time deposits used cash of ~~$50.6~~$10.9 million during the first ~~three~~six months of 2017 compared to using cash of ~~$131.4~~$277.9 million during the first ~~three~~six months of 2016. Short-term borrowings activity, including short-term FHLB activity, used cash of ~~$151.4~~$167.3 million during the first ~~three~~six months of 2017 compared to using cash of ~~$3.9~~$26.0 million during the first ~~three~~six months of 2016. Other borrowing activity used cash of ~~$6.4~~$7.5 million during the first ~~three~~six months of 2017 compared to ~~using~~providing cash of ~~$5.5~~$25.5 million during the first ~~three~~six months of 2016. Included in the use of cash during the first ~~three~~six months of 2016 was cash of $81.7 million used for the redemption of Heartland's Series C Preferred Stock issued to the U.S. Treasury under the Small Business Lending Fund program.

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

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

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

Heartland's revolving credit agreement with an unaffiliated bank provides a maximum borrowing capacity of ~~$20.0~~$25.0 million, of which no balance had been drawn at ~~March 31,~~June 30, 2017. Heartland also has a non-revolving credit line with the same unaffiliated bank, which had ~~$27.1~~$39.3 million of borrowing capacity at ~~March 31, 2017.~~

June 30, 2017, of which no balance had been drawn.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a regular basis by the asset/liability committees of Heartland's bank subsidiaries and, on a consolidated basis, by Heartland's executive management and board of directors. Darling Consulting Group, Inc. has been engaged to provide asset/liability management position assessment and strategy formulation services to Heartland and its bank subsidiaries. At least quarterly, a detailed review of the balance sheet risk profile is performed for Heartland and each of its bank subsidiaries. Included in these reviews are interest rate sensitivity analyses, which simulate changes in net interest income in response to various interest rate scenarios. These analyses consider current portfolio rates, existing maturities, repricing opportunities and market interest rates, in addition to prepayments and growth under different interest rate assumptions. Selected strategies are modeled prior to implementation to determine their effect on Heartland's interest rate risk profile and net interest income. Heartland believes its primary market risk exposures did not change significantly in the first ~~three~~six months of 2017.

The core interest rate risk analysis utilized by Heartland examines the balance sheet under increasing and decreasing interest rate scenarios that are neither too modest nor too extreme. All rate changes are ramped over a 12-month horizon based upon a parallel shift in the yield curve and then maintained at those levels over the remainder of the simulation horizon. Using this approach, management is able to see the effect that both a gradual change of rates (year 1) and a rate shock (year 2 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,~~June 30, 2017, and ~~March 31,~~June 30, 2016, provided the following results, in thousands:


	2017				2016				2017				2016
	Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base
Year 1
Down 100 Basis Points	$	288,697	(2.40	)%	$	277,416	(2.76	)%	$	289,377	(3.28	)%	$	281,651	(2.76	)%
Base	$	295,788			$	285,293			$	299,196			$	289,650
Up 200 Basis Points	$	299,112	1.12	%	$	281,351	(1.38	)%	$	300,077	0.29	%	$	286,207	(1.19	)%
Year 2
Down 100 Basis Points	$	270,796	(8.45	)%	$	266,563	(6.57	)%	$	274,065	(8.40	)%	$	268,616	(7.26	)%
Base	$	293,625	(0.73	)%	$	287,656	0.83	%	$	300,821	0.54	%	$	290,353	0.24	%
Up 200 Basis Points	$	310,771	5.07	%	$	289,691	1.54	%	$	318,483	6.45	%	$	296,350	2.31	%

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 balance sheet until the loan is made or the letter or credit is issued.

Heartland periodically holds a securities trading portfolio that would also be subject to elements of market risk. These securities are carried on the balance sheet at fair value. At both ~~March 31,~~June 30, 2017, and December 31, 2016, Heartland held no securities in its securities trading portfolio.

ITEM 4. CONTROLS AND PROCEDURES

Based on an evaluation, as of the end of the period covered by this quarterly report 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,~~June 30, 2017, there have been no changes in Heartland's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, Heartland's internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors applicable to Heartland from those disclosed in Part I, Item 1A. “Risk Factors” in Heartland's 2016 Annual Report on Form 10-K. Please refer to that section of Heartland's Form 10-K report for disclosures regarding the risks and uncertainties related to Heartland's business.

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

Heartland's board of directors has authorized management to acquire and hold up to 500,000 shares of common stock as treasury shares at any one time. Heartland and its affiliated purchasers made no purchases of its common stock during the ~~three~~six months ended ~~March 31,~~June 30, 2017.

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	⁽¹⁾⁽²⁾	Form of ~~Time-Based~~Director Restricted Stock Unit Award Agreement under the Heartland Financial USA, Inc. 2012 Long-Term Incentive Plan
10.2	⁽¹⁾⁽²⁾	~~Form of Performance-Based Restricted Stock Unit Award Agreement One-Year Performance Period under the~~Revolving Credit Line Promissory Note dated June 14, 2017, between Heartland Financial USA, Inc. ~~2012 Long-Term Incentive Plan~~and Bankers Trust Company
10.3	⁽¹⁾⁽²⁾	~~Form of Performance-Based Restricted Stock Unit Award Agreement Three-Year Performance Period under the~~Promissory Note dated June 14, 2017 between Heartland Financial USA, Inc. ~~2012 Long-Term Incentive Plan~~and Bankers Trust Company
31.1	⁽²⁾	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
31.2	⁽²⁾	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
32.1	⁽²⁾	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	⁽²⁾	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		Financial statement formatted in Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, and (vi) the Notes to Consolidated Financial Statements.

______________

(1) Management contracts or compensatory plans or arrangements.

(2) Filed herewith.

SIGNATURES

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

HEARTLAND FINANCIAL USA, INC.

(Registrant)

/s/ Lynn B. Fuller

By: Lynn B. Fuller

Chairman 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 5,~~August 4, 2017



HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
	March 31, 2017 (Unaudited)			December 31, 2016
ASSETS
Cash and due from banks	$	129,386		$	151,290
Interest bearing deposits with the Federal Reserve Bank and other banks and other short-term investments	43,765			7,434
Cash and cash equivalents	173,151			158,724
Time deposits in other financial institutions	41,539			2,105
Securities:
Available for sale, at fair value (cost of $1,938,457 at March 31, 2017, and $1,893,947 at December 31, 2016)	1,893,528			1,845,864
Held to maturity, at cost (fair value of $272,797 at March 31, 2017, and $274,799 at December 31, 2016)	260,616			263,662
Other investments, at cost	21,557			21,560
Loans held for sale	49,009			61,261
Loans receivable:
Held to maturity	5,361,604			5,351,719
Allowance for loan losses	(54,999		)	(54,324		)
Loans receivable, net	5,306,605			5,297,395
Premises, furniture and equipment, net	164,183			163,614
Premises, furniture and equipment held for sale	1,242			414
Other real estate, net	11,188			9,744
Goodwill	141,461			127,699
Core deposit intangibles and customer relationship intangibles, net	24,068			22,775
Servicing rights, net	35,441			35,778
Cash surrender value on life insurance	117,613			112,615
Other assets	120,644			123,869
TOTAL ASSETS	$	8,361,845		$	8,247,079
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	2,319,256		$	2,202,036
Savings	3,940,146			3,788,089
Time	830,459			857,286
Total deposits	7,089,861			6,847,411
Short-term borrowings	155,025			306,459
Other borrowings	282,051			288,534
Accrued expenses and other liabilities	53,596			63,759
TOTAL LIABILITIES	7,580,533			7,506,163
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share; authorize 17,604 shares; none issued or outstanding at both March 31, 2017, and December 31, 2016)	—			—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both March 31, 2017, and December 31, 2016)	—			—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both March 31, 2017, and December 31, 2016, none issued or outstanding at both March 31, 2017, and December 31, 2016)	—			—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both March 31, 2017, and December 31, 2016; 745 shares issued and outstanding at March 31, 2017, and 1,078 shares issued and outstanding at December 31, 2016)	938			1,357
Common stock (par value $1 per share; 30,000,000 shares authorized at both March 31, 2017, and December 31, 2016; issued 26,674,121 shares at March 31, 2017, and 26,119,929 shares at December 31, 2016)	26,674			26,120
Capital surplus	351,423			328,376
Retained earnings	431,219			416,109
Accumulated other comprehensive income (loss)	(28,942		)	(31,046		)
Treasury stock at cost (0 shares at both March 31, 2017, and December 31, 2016)	—			—
TOTAL STOCKHOLDERS' EQUITY	781,312			740,916
TOTAL LIABILITIES AND EQUITY	$	8,361,845		$	8,247,079

See accompanying notes to consolidated financial statements.