UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For quarterly period ended ~~September~~June 30, ~~2019~~2020


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

For transition period from __________ to __________

Commission File Number: 001-15393

HEARTLAND FINANCIAL USA, INC.

(Exact name of Registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

42-1405748

(I.R.S. employer identification number)

1398 Central Avenue, Dubuque, Iowa 52001

(Address of principal executive offices)(Zip Code)

(563) 589-2100

(Registrant's telephone number, including area code)

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


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

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 ☒ No ☐

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

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

Large accelerated filer

☒

Accelerated Filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

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


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

Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date: As of ~~November 4, 2019,~~August 5, 2020, the Registrant had outstanding ~~36,698,445~~36,880,021 shares of common stock, $1.00 par value per share.

HEARTLAND FINANCIAL USA, INC.

Form 10-Q Quarterly Report

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)	HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)					HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
		September 30, 2019 (Unaudited)		December 31, 2018			June 30, 2020 (Unaudited)		December 31, 2019
ASSETS	ASSETS					ASSETS
Cash and due from banks	Cash and due from banks	$	243,395	$	223,135	Cash and due from banks	$	211,429	$	206,607
Interest bearing deposits with other banks and other short-term investments	Interest bearing deposits with other banks and other short-term investments	204,372		50,495		Interest bearing deposits with other banks and other short-term investments	242,149		172,127
Cash and cash equivalents	Cash and cash equivalents	447,767		273,630		Cash and cash equivalents	453,578		378,734
Time deposits in other financial institutions	Time deposits in other financial institutions	3,711		4,672		Time deposits in other financial institutions	3,128		3,564
Securities:	Securities:					Securities:

Carried at fair value (cost of $2,993,045 at September 30, 2019, and $2,492,620 at December 31, 2018)		3,020,568		2,450,709
Held to maturity, at cost (fair value of $97,905 at September 30, 2019, and $245,341 at December 31, 2018)		87,965		236,283
Carried at fair value (cost of $4,075,406 at June 30, 2020, and $3,311,433 at December 31, 2019)						Carried at fair value (cost of $4,075,406 at June 30, 2020, and $3,311,433 at December 31, 2019)	4,126,351		3,312,796
Held to maturity, net of allowance for credit losses of $62 at June 30, 2020 (fair value of $101,557 at June 30, 2020, and $100,484 at December 31, 2019)						Held to maturity, net of allowance for credit losses of $62 at June 30, 2020 (fair value of $101,557 at June 30, 2020, and $100,484 at December 31, 2019)	90,579		91,324
Other investments, at cost	Other investments, at cost	29,042		28,396		Other investments, at cost	35,902		31,321
Loans held for sale	Loans held for sale	35,427		119,801		Loans held for sale	54,382		26,748
Loans receivable:	Loans receivable:					Loans receivable:
Held to maturity	Held to maturity	7,971,608		7,407,697		Held to maturity	9,246,830		8,367,917

Allowance for loan and lease losses		(66,222)		(61,963)
Allowance for credit losses						Allowance for credit losses	(119,937)		(70,395)
Loans receivable, net	Loans receivable, net	7,905,386		7,345,734		Loans receivable, net	9,126,893		8,297,522
Premises, furniture and equipment, net	Premises, furniture and equipment, net	195,984		187,418		Premises, furniture and equipment, net	197,914		197,558
Premises, furniture and equipment held for sale	Premises, furniture and equipment held for sale	3,251		7,258		Premises, furniture and equipment held for sale	567		2,967
Other real estate, net	Other real estate, net	6,425		6,153		Other real estate, net	5,539		6,914
Goodwill	Goodwill	427,097		391,668		Goodwill	446,345		446,345
Core deposit intangibles and customer relationship intangibles, net	Core deposit intangibles and customer relationship intangibles, net	49,819		47,479		Core deposit intangibles and customer relationship intangibles, net	43,011		48,688
Servicing rights, net	Servicing rights, net	6,271		31,072		Servicing rights, net	5,469		6,736
Cash surrender value on life insurance	Cash surrender value on life insurance	171,471		162,892		Cash surrender value on life insurance	172,813		171,625

Other assets	Other assets	179,078		114,841		Other assets	263,682		186,755
TOTAL ASSETS	TOTAL ASSETS	$	12,569,262	$	11,408,006	TOTAL ASSETS	$	15,026,153	$	13,209,597
LIABILITIES AND EQUITY	LIABILITIES AND EQUITY					LIABILITIES AND EQUITY
LIABILITIES:	LIABILITIES:					LIABILITIES:
Deposits:	Deposits:					Deposits:
Demand	Demand	$	3,581,127	$	3,264,737	Demand	$	4,831,151	$	3,543,863
Savings	Savings	5,770,754		5,107,962		Savings	6,810,296		6,307,425
Time	Time	1,117,975		1,023,730		Time	1,067,252		1,193,043
Total deposits	Total deposits	10,469,856		9,396,429		Total deposits	12,708,699		11,044,331
Deposits held for sale		—		106,409

Short-term borrowings	Short-term borrowings	107,853		227,010		Short-term borrowings	88,631		182,626
Other borrowings	Other borrowings	278,417		274,905		Other borrowings	306,459		275,773
Accrued expenses and other liabilities	Accrued expenses and other liabilities	149,293		78,078		Accrued expenses and other liabilities	174,987		128,730
TOTAL LIABILITIES	TOTAL LIABILITIES	11,005,419		10,082,831		TOTAL LIABILITIES	13,278,776		11,631,460
STOCKHOLDERS' EQUITY:	STOCKHOLDERS' EQUITY:					STOCKHOLDERS' EQUITY:

Preferred stock (par value $1 per share; authorized 17,604 shares; 0ne issued or outstanding at both September 30, 2019, and December 31, 2018)		—		—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; 0ne issued or outstanding at both September 30, 2019, and December 31, 2018)		—		—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2019, and December 31, 2018, 0ne issued or outstanding at both September 30, 2019, and December 31, 2018)		—		—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both September 30, 2019, and December 31, 2018; 0ne issued or outstanding at both September 30, 2019, and December 31, 2018)		—		—
Common stock (par value $1 per share; 60,000,000 shares authorized at September 30, 2019, and 40,000,000 shares authorized at December 31, 2018; issued 36,696,190 shares at September 30, 2019, and 34,477,499 shares at December 31, 2018)		36,696		34,477
Preferred stock (par value $1 per share; authorized 6,104 shares; NaN issued or outstanding at both June 30, 2020, and December 31, 2019)						Preferred stock (par value $1 per share; authorized 6,104 shares; NaN issued or outstanding at both June 30, 2020, and December 31, 2019)	—		—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; NaN issued or outstanding at both June 30, 2020, and December 31, 2019)						Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; NaN issued or outstanding at both June 30, 2020, and December 31, 2019)	—		—
Series B Fixed Rate Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both June 30, 2020 and December 31, 2019; NaN issued or outstanding at both June 30, 2020 and December 31, 2019)						Series B Fixed Rate Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both June 30, 2020 and December 31, 2019; NaN issued or outstanding at both June 30, 2020 and December 31, 2019)	—		—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both June 30, 2020, and December 31, 2019; NaN issued or outstanding at both June 30, 2020, and December 31, 2019)						Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both June 30, 2020, and December 31, 2019; NaN issued or outstanding at both June 30, 2020, and December 31, 2019)	—		—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both June 30, 2020, and December 31, 2019; NaN issued or outstanding at both June 30, 2020, and December 31, 2019)						Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both June 30, 2020, and December 31, 2019; NaN issued or outstanding at both June 30, 2020, and December 31, 2019)	—		—
Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 authorized at June 30, 2020 and NaN authorized at December 31, 2019; issued and outstanding 11,500 shares at June 30, 2020, and NaN issued or outstanding at December 31, 2019.						Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 authorized at June 30, 2020 and NaN authorized at December 31, 2019; issued and outstanding 11,500 shares at June 30, 2020, and NaN issued or outstanding at December 31, 2019.	110,705		—
Common stock (par value $1 per share; 60,000,000 shares authorized at both June 30, 2020, and December 31, 2019; issued 36,844,744 shares at June 30, 2020, and 36,704,278 shares at December 31, 2019)						Common stock (par value $1 per share; 60,000,000 shares authorized at both June 30, 2020, and December 31, 2019; issued 36,844,744 shares at June 30, 2020, and 36,704,278 shares at December 31, 2019)	36,845		36,704
Capital surplus	Capital surplus	838,543		743,095		Capital surplus	844,202		839,857
Retained earnings	Retained earnings	670,816		579,252		Retained earnings	723,067		702,502
Accumulated other comprehensive income/(loss)	Accumulated other comprehensive income/(loss)	17,788		(31,649)		Accumulated other comprehensive income/(loss)	32,558		(926)

TOTAL STOCKHOLDERS' EQUITY	TOTAL STOCKHOLDERS' EQUITY	1,563,843		1,325,175		TOTAL STOCKHOLDERS' EQUITY	1,747,377		1,578,137
TOTAL LIABILITIES AND EQUITY	TOTAL LIABILITIES AND EQUITY	$	12,569,262	$	11,408,006	TOTAL LIABILITIES AND EQUITY	$	15,026,153	$	13,209,597

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. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data)
	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
INTEREST INCOME:
Interest and fees on loans	$	107,005	$	106,027	$	213,419	$	206,483
Interest on securities:
Taxable	23,362		16,123		45,093		31,999
Nontaxable	3,344		2,554		5,527		5,647
Interest on federal funds sold	—		—		—		4
Interest on interest bearing deposits in other financial institutions	54		2,299		775		3,591
TOTAL INTEREST INCOME	133,765		127,003		264,814		247,724
INTEREST EXPENSE:
Interest on deposits	6,134		16,138		20,716		29,351
Interest on short-term borrowings	61		338		357		1,227
Interest on other borrowings (includes $(417) and $100 of interest expense/(benefit) related to derivatives reclassified from accumulated other comprehensive income/(loss) for the three months ended June 30, 2020 and 2019, respectively, and $(600) and $265 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the six months ended June 30, 2020 and 2019, respectively)	3,424		3,819		7,084		7,483
TOTAL INTEREST EXPENSE	9,619		20,295		28,157		38,061
NET INTEREST INCOME	124,146		106,708		236,657		209,663
Provision for credit losses	26,796		4,918		48,316		6,553
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	97,350		101,790		188,341		203,110
NONINTEREST INCOME:
Service charges and fees	10,972		14,629		22,993		27,423
Loan servicing income	379		1,338		1,342		3,067
Trust fees	4,977		4,825		9,999		9,299
Brokerage and insurance commissions	595		1,028		1,328		1,762
Securities gains, net includes $2,006 and $3,580 of net security gains reclassified from accumulated other comprehensive income/(loss) for the three months ended June 30, 2020 and 2019, respectively and $3,664 and $5,155 of net security gains reclassified from accumulated other comprehensive income for the six months ended June 30, 2020 and 2019, respectively)	2,006		3,580		3,664		5,155


Unrealized gain on equity securities, net	680		112		449		370
Net gains on sale of loans held for sale	7,857		4,343		12,517		7,519
Valuation allowance on servicing rights	9		(364)		(1,556)		(953)
Income on bank owned life insurance	1,167		888		1,665		1,787
Other noninterest income	1,995		1,682		4,053		3,349
TOTAL NONINTEREST INCOME	30,637		32,061		56,454		58,778
NONINTEREST EXPENSES:
Salaries and employee benefits	50,118		49,895		100,075		100,180
Occupancy	6,502		6,426		12,973		13,033
Furniture and equipment	2,993		3,136		6,101		5,828
Professional fees	13,676		14,344		26,149		25,366

Advertising	995		2,609		3,200		4,929
Core deposit intangibles and customer relationship intangibles amortization	2,696		3,313		5,677		6,155
Other real estate and loan collection expenses	203		162		537		863
(Gain)/loss on sales/valuations of assets, net	701		(18,286)		717		(21,290)
Acquisition, integration and restructuring costs	673		929		2,049		4,543
Partnership investment in tax credit projects	791		1,465		975		1,940
Other noninterest expenses	11,091		11,105		22,845		21,781
TOTAL NONINTEREST EXPENSES	90,439		75,098		181,298		163,328
INCOME BEFORE INCOME TAXES	37,548		58,753		63,497		98,560
Income taxes (includes $614 and $880 of income tax expense reclassified from accumulated other comprehensive income/(loss) for the three months ended June 30, 2020 and 2019, respectively and $1,080 and $1,238 of income tax expense reclassified from accumulated other comprehensive income for the six months ended June 30, 2020 and 2019, respectively)	7,417		13,584		13,326		21,894





NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	30,131	$	45,169	$	50,171	$	76,666
EARNINGS PER COMMON SHARE - BASIC	$	0.82	$	1.26	$	1.36	$	2.18
EARNINGS PER COMMON SHARE - DILUTED	$	0.82	$	1.26	$	1.36	$	2.17
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.20	$	0.16	$	0.40	$	0.32

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands)
	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
NET INCOME	$	30,131	$	45,169	$	50,171	$	76,666
OTHER COMPREHENSIVE INCOME
Securities:
Net change in unrealized gain on securities	81,552		28,422		53,224		58,387

Reclassification adjustment for net gains realized in net income	(2,006)		(3,580)		(3,664)		(5,155)

Income taxes	(20,729)		(6,383)		(12,932)		(13,664)
Other comprehensive income on securities	58,817		18,459		36,628		39,568
Derivatives used in cash flow hedging relationships:
Net change in unrealized gain/(loss) on derivatives	317		(2,263)		(3,363)		(3,768)
Reclassification adjustment for net gains/(losses) on derivatives realized in net income	(423)		94		(613)		252
Income taxes	18		453		832		736
Other comprehensive loss on cash flow hedges	(88)		(1,716)		(3,144)		(2,780)
Other comprehensive income	58,729		16,743		33,484		36,788
TOTAL COMPREHENSIVE INCOME	$	88,860	$	61,912	$	83,655	$	113,454

See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
	Six Months Ended June 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	50,171	$	76,666
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	14,071		16,315
Provision for credit losses	48,316		6,553
Net amortization of premium on securities	6,251		10,927
Securities gains, net	(3,664)		(5,155)

Unrealized gain on equity securities, net	(449)		(370)
Stock based compensation	3,558		3,602

Loans originated for sale	(271,167)		(165,249)
Proceeds on sales of loans held for sale	254,523		161,625
Net gains on sale of loans held for sale	(10,990)		(7,177)
(Increase) decrease in accrued interest receivable	(4,298)		2,421
(Increase) decrease in prepaid expenses	(910)		229
Increase (decrease) in accrued interest payable	(1,699)		1,021

Capitalization of servicing rights	(1,527)		(415)
Valuation allowance on servicing rights	1,556		953
(Gain) loss on sales/valuations of assets, net	717		(10,735)
Net excess tax (expense) benefit from stock based compensation	(91)		272
Other, net	(53,313)		(29,184)
NET CASH PROVIDED BY OPERATING ACTIVITIES	31,055		62,299
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits in other financial institutions	(7)		(248)
Proceeds from the sale of securities available for sale	511,639		1,194,897



Proceeds from the maturity of and principal paydowns on securities available for sale	212,538		178,930
Proceeds from the maturity of and principal paydowns on securities held to maturity	1,832		2,406
Proceeds from the maturity of time deposits in other financial institutions	150		490
Proceeds from the sale, maturity of and principal paydowns on other investments	6,135		7,992
Purchase of securities available for sale	(1,491,459)		(1,148,238)

Purchase of other investments	(10,273)		(4,899)
Net (increase) decrease in loans	(881,419)		77,147
Purchase of bank owned life insurance policies	(201)		(16)
Proceeds from bank owned life insurance policies	—		421
Proceeds from sale of mortgage servicing rights	—		33,823
Capital expenditures	(7,679)		(3,909)
Net cash and cash equivalents received in acquisitions	—		38,650
Proceeds from the sale of equipment	3,331		829
Net cash expended in divestitures	—		(49,264)
Proceeds on sale of OREO and other repossessed assets	1,783		3,825
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES	$	(1,653,630)	$	332,836


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands)
	Six Months Ended June 30,
	2020		2019
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits	$	1,287,288	$	4,675
Net increase in savings deposits	502,871		110,498
Net increase (decrease) in time deposit accounts	(125,791)		29,924


Net decrease in short-term borrowings	(12,799)		(44,326)
Proceeds from short term FHLB advances	516,545		430,888
Repayments of short term FHLB advances	(597,741)		(531,725)
Proceeds from other borrowings	33,750		50
Repayments of other borrowings	(3,622)		(15,621)



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

Proceeds from issuance of common stock	928		408
Dividends paid	(14,715)		(11,397)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES	1,697,419		(26,626)
Net increase in cash and cash equivalents	74,844		368,509
Cash and cash equivalents at beginning of year	378,734		273,630
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	453,578	$	642,139
Supplemental disclosures:
Cash paid for income/franchise taxes	$	12,798	$	19,495
Cash paid for interest	$	29,856	$	37,099
Loans transferred to OREO	$	1,055	$	4,655
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale	$	—	$	2,568

Deposits transferred to held for sale	$	—	$	76,968
Loans transferred to held for sale	$	—	$	32,111
Securities transferred from held to maturity to available for sale	$	—	$	148,030
Purchases of securities available for sale, accrued, not settled	$	—	$	37,373


Transfer of available for sale securities to held to maturity securities	$	462	$	—

Stock consideration granted for acquisitions	$	—	$	92,258

See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
INTEREST INCOME:
Interest and fees on loans $ 110,566 $ 105,733 $ 317,049 $ 288,171
Interest on securities:
Taxable 18,567 14,433 50,566 38,280
Nontaxable 2,119 3,490 7,766 10,653
Interest on federal funds sold — — 4 —
Interest on interest bearing deposits in other financial institutions 2,151 1,238 5,742 2,413
TOTAL INTEREST INCOME 133,403 124,894 381,127 339,517
INTEREST EXPENSE:
Interest on deposits 17,982 10,092 47,333 23,841
Interest on short-term borrowings 250 464 1,477 1,279
Interest on other borrowings (includes $24 and $242 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended September 30, 2019 and 2018, respectively, and $276 and $469 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the nine months ended September 30, 2019 and 2018, respectively) 3,850 3,660 11,333 10,726
TOTAL INTEREST EXPENSE 22,082 14,216 60,143 35,846
NET INTEREST INCOME 111,321 110,678 320,984 303,671
Provision for loan losses 5,201 5,238 11,754 14,332
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 106,120 105,440 309,230 289,339
NONINTEREST INCOME:
Service charges and fees 12,366 12,895 39,789 35,046
Loan servicing income 821 1,670 3,888 5,231
Trust fees 4,959 4,499 14,258 13,794
Brokerage and insurance commissions 962 1,111 2,724 2,895
Securities gains/(losses), net (includes $2,013 of net security gains and $(145) of net security losses reclassified from accumulated other comprehensive income for the three months ended September 30, 2019 and 2018, respectively and $7,168 and $1,037 of net security gains reclassified from accumulated other comprehensive income for the nine months ended September 30, 2019 and 2018, respectively) 2,013 (145) 7,168 1,037
Unrealized gain on equity securities, net 144 54 514 97
Net gains on sale of loans held for sale 4,673 7,410 12,192 18,261
Valuation allowance on servicing rights (626) 230 (1,579) 12
Income on bank owned life insurance 881 892 2,668 2,206
Other noninterest income 3,207 1,149 6,556 3,536
TOTAL NONINTEREST INCOME 29,400 29,765 88,178 82,115
NONINTEREST EXPENSES:
Salaries and employee benefits 50,027 49,921 150,307 149,389
Occupancy 6,594 6,348 19,637 18,706
Furniture and equipment 2,858 3,470 8,770 9,403
Professional fees 12,131 12,800 38,478 32,880
Advertising 2,737 2,754 7,723 6,839
Core deposit intangibles and customer relationship intangibles amortization 2,899 2,626 9,054 6,763
Other real estate and loan collection expenses (89) 784 774 2,464
(Gain)/loss on sales/valuations of assets, net 356 912 (20,934) 2,243
Restructuring expenses — — 3,227 2,564
Other noninterest expenses 15,454 12,924 39,259 33,816
TOTAL NONINTEREST EXPENSES 92,967 92,539 256,295 265,067
INCOME BEFORE INCOME TAXES 42,553 42,666 141,113 106,387
Income taxes (includes $502 and $(26) of income tax expense/(benefit) reclassified from accumulated other comprehensive income for the three months ended September 30, 2019 and 2018, respectively and $1,740 and $174 of income tax expense reclassified from accumulated other comprehensive income for the nine months ended September 30, 2019 and 2018, respectively) 7,941 8,956 29,835 21,530
NET INCOME 34,612 33,710 111,278 84,857
Preferred dividends — (13) — (39)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 34,612 $ 33,697 $ 111,278 $ 84,818
EARNINGS PER COMMON SHARE - BASIC $ 0.94 $ 0.98 $ 3.12 $ 2.61
EARNINGS PER COMMON SHARE - DILUTED $ 0.94 $ 0.97 $ 3.11 $ 2.59
CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.18 $ 0.14 $ 0.50 $ 0.40
See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Dollars in thousands, except per share data)
	Heartland Financial USA, Inc. Stockholders' Equity
	Preferred Stock		Common Stock		Capital Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Equity
Balance at March 31, 2019	$	—	$	34,604	$	745,596	$	603,506	$	(11,604)	$	1,372,102
Comprehensive income							45,169		16,743		61,912

Cash dividends declared:

Common, $0.16 per share							(5,867)				(5,867)


Issuance of 2,086,450 shares of common stock			2,086		90,327						92,413
Stock based compensation					1,227						1,227
Balance at June 30, 2019	$	—	$	36,690	$	837,150	$	642,808	$	5,139	$	1,521,787
Balance at January 1, 2019	$	—	$	34,477	$	743,095	$	579,252	$	(31,649)	$	1,325,175
Comprehensive income							76,666		36,788		113,454

Cumulative effect adjustment from the adoption of ASU 2016-02							(1,713)				(1,713)


Cash dividends declared:


Common, $0.32 per share							(11,397)				(11,397)




Issuance of 2,212,562 shares of common stock			2,213		90,453						92,666
Stock based compensation					3,602						3,602
Balance at June 30, 2019	$	—	$	36,690	$	837,150	$	642,808	$	5,139	$	1,521,787
Balance at March 31, 2020	$	—	$	36,807	$	842,780	$	700,298	$	(26,171)	$	1,553,714
Comprehensive income							$	30,131	$	58,729	88,860

Cash dividends declared:
Common, $0.20 per share							(7,362)				(7,362)
Issuance of 11,500 shares of Series E preferred stock	110,705										110,705
Issuance of 37,527 shares of common stock			38		86						124
Stock based compensation					1,336						1,336
Balance at June 30, 2020	$	110,705	$	36,845	$	844,202	$	723,067	$	32,558	$	1,747,377
Balance at January 1, 2020	$	—	$	36,704	$	839,857	$	702,502	$	(926)	$	1,578,137
Comprehensive income							50,171		33,484		83,655

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


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

Issuance of 11,500 shares of Series E preferred stock	110,705										110,705


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

See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
NET INCOME $ 34,612 $ 33,710 $ 111,278 $ 84,857
OTHER COMPREHENSIVE INCOME/(LOSS)
Securities:
Net change in unrealized gain/(loss) on securities 19,851 (8,060) 78,238 (36,395)
Reclassification adjustment for net (gains)/losses realized in net income (2,013) 145 (7,168) (1,037)
Income taxes (4,577) 2,078 (18,241) 9,586
Other comprehensive income/(loss) on securities 13,261 (5,837) 52,829 (27,846)
Derivatives used in cash flow hedging relationships:
Net change in unrealized gain/(loss) on derivatives (800) 395 (4,568) 2,991
Reclassification adjustment for net losses on derivatives realized in net income 27 242 279 469
Income taxes 161 (79) 897 (682)
Other comprehensive income/(loss) on cash flow hedges (612) 558 (3,392) 2,778
Other comprehensive income/(loss) 12,649 (5,279) 49,437 (25,068)
TOTAL COMPREHENSIVE INCOME $ 47,261 $ 28,431 $ 160,715 $ 59,789
See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 111,278 $ 84,857
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 23,561 22,647
Provision for loan losses 11,754 14,332
Net amortization of premium on securities 15,959 18,958
Securities gains, net (7,168) (1,037)
Unrealized gain on equity securities, net (514) (97)
Stock based compensation 4,833 3,689
Loans originated for sale (289,877) (551,328)
Proceeds on sales of loans held for sale 289,769 594,529
Net gains on sale of loans held for sale (11,545) (13,939)
(Increase) decrease in accrued interest receivable 932 (5,422)
(Increase) decrease in prepaid expenses (3,611) 2,243
Increase in accrued interest payable 1,905 1,121
Gain on extinguishment of debt (375) —
Capitalization of servicing rights (756) (4,404)
Valuation allowance on servicing rights 1,579 (12)
(Gain)/loss on sales/valuations of assets, net (10,378) 2,243
Net excess tax benefit from stock based compensation 270 672
Other, net (40,706) (1,979)
NET CASH PROVIDED BY OPERATING ACTIVITIES 96,910 167,073
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits in other financial institutions (254) (1,000)
Proceeds from the sale of securities available for sale 1,485,773 694,872
Proceeds from the redemption of time deposits in other financial institutions — 8,767
Proceeds from the maturity of and principal paydowns on securities available for sale 265,500 172,702
Proceeds from the maturity of and principal paydowns on securities held to maturity 2,938 13,169
Proceeds from the maturity of and principal paydowns on time deposits in other financial institutions 1,215 5,829
Proceeds from the sale, maturity of and principal paydowns on other investments 10,297 2,038
Purchase of securities available for sale (1,984,228) (940,607)
Purchase of other investments (4,957) (2,411)
Net increase in loans (47,023) (13,737)
Purchase of bank owned life insurance policies (16) (2,000)
Proceeds from bank owned life insurance policies 421 —
Proceeds from sale of mortgage servicing rights 33,823 —
Capital expenditures (8,389) (11,793)
Net cash and cash equivalents received in acquisitions 38,650 212,197
Proceeds from the sale of equipment 1,277 998
Net cash expended in divestitures (49,264) —
Proceeds on sale of OREO and other repossessed assets 6,907 3,128
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ (247,330) $ 142,152

HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
2019 2018
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits $ 159,044 $ 156,497
Net increase in savings deposits 347,749 130,704
Net decrease in time deposit accounts (397) (122,795)
Proceeds on short-term revolving credit line — 25,000
Repayments on short-term revolving credit line — (25,000)
Net decrease in short-term borrowings (43,733) (183,552)
Proceeds from short term FHLB advances 430,888 355,602
Repayments of short term FHLB advances (531,725) (365,602)
Proceeds from other borrowings 50 30,131
Repayments of other borrowings (17,769) (56,221)
Payment for the redemption of debt (2,125) —
Purchase of treasury stock — (97)
Proceeds from issuance of common stock 576 286
Dividends paid (18,001) (12,806)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 324,557 (67,853)
Net increase in cash and cash equivalents 174,137 241,372
Cash and cash equivalents at beginning of year 273,630 196,003
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 447,767 $ 437,375
Supplemental disclosures:
Cash paid for income/franchise taxes $ 30,523 $ 14,754
Cash paid for interest $ 58,297 $ 34,725
Loans transferred to OREO $ 7,421 $ 5,016
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale $ 2,568 $ 3,415
Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net, $ 1,564 $ —
Deposits transferred to held for sale $ 76,968 $ 50,312
Loans transferred to held for sale $ 32,111 $ 31,379
Securities transferred from held to maturity to available for sale $ 148,030 $ —
Purchases of securities available for sale, accrued, not settled $ 22,879 $ 3,481
Conversion of Series D preferred stock to common stock $ — $ 938
Stock consideration granted for acquisitions $ 92,258 $ 238,075
See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
(Dollars in thousands, except per share data)
Heartland Financial USA, Inc. Stockholders' Equity
Preferred
Stock Common
Stock Capital
Surplus Retained
Earnings Accumulated Other Comprehensive Income (Loss) Treasury
Stock Total
Equity
Balance at June 30, 2018 $ 938 $ 34,438 $ 740,128 $ 524,786 $ (44,543) $ — $ 1,255,747
Comprehensive income 33,710 (5,279) 28,431
Cash dividends declared:
Series D Preferred, $17.50 per share (13) (13)
Common, $0.14 per share (4,821) (4,821)
Conversion of Series D Preferred Stock (938) (938)
Issuance of 34,584 shares of common stock 35 1,033 1,068
Stock based compensation 919 919
Balance at September 30, 2018 $ — $ 34,473 $ 742,080 $ 553,662 $ (49,822) $ — $ 1,280,393
Balance at January 1, 2018 $ 938 $ 29,953 $ 503,709 $ 481,331 $ (24,474) $ — $ 991,457
Comprehensive income 84,857 (25,068) 59,789
Reclassification of unrealized net gain on equity securities 280 (280) —
Cash dividends declared:
Series D Preferred, $52.50 per share (39) (39)
Common, $0.40 per share (12,767) (12,767)
Conversion of Series D Preferred Stock (938) (938)
Purchase of 1,761 shares of common stock (97) (97)
Issuance of 4,521,434 shares of common stock 4,520 234,682 97 239,299
Stock based compensation 3,689 3,689
Balance at September 30, 2018 $ — $ 34,473 $ 742,080 $ 553,662 $ (49,822) $ — $ 1,280,393
Balance at June 30, 2019 $ — $ 36,690 $ 837,150 $ 642,808 $ 5,139 $ — $ 1,521,787
Comprehensive income $ 34,612 $ 12,649 47,261
Cash dividends declared:
Common, $0.18 per share (6,604) (6,604)
Issuance of 6,129 shares of common stock 6 162 168
Stock based compensation 1,231 1,231
Balance at September 30, 2019 $ — $ 36,696 $ 838,543 $ 670,816 $ 17,788 $ — $ 1,563,843
Balance at January 1, 2019 $ — $ 34,477 $ 743,095 $ 579,252 $ (31,649) $ — $ 1,325,175
Comprehensive income 111,278 49,437 160,715
Retained earnings adjustment for adoption of leasing standard (1,713) (1,713)
Cash dividends declared:
Common, $0.50 per share (18,001) (18,001)
Issuance of 2,218,691 shares of common stock 2,219 90,615 92,834
Stock based compensation 4,833 4,833
Balance at September 30, 2019 $ — $ 36,696 $ 838,543 $ 670,816 $ 17,788 $ — $ 1,563,843
See accompanying notes to consolidated financial statements.

HEARTLAND FINANCIAL USA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended December 31, ~~2018,~~2019, included in the Form 10-K of Heartland Financial USA, Inc. ("Heartland") filed with the Securities and Exchange Commission ("SEC") on February ~~27, 2019~~26, 2020. Footnote disclosures to the interim unaudited consolidated financial statements which would substantially duplicate the disclosure contained in the footnotes to the audited consolidated financial statements have been omitted.

The financial information of Heartland included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended ~~September~~June 30, ~~2019,~~2020, are not necessarily indicative of the results expected for the year ending December 31, ~~2019.~~2020.

Earnings Per Share

Basic earnings per share is determined using net income available to common stockholders and weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average common shares and assumed incremental common shares issued. Amounts used in the determination of basic and diluted earnings per share for the three- and ~~nine-month~~six--month periods ended ~~September~~June 30, ~~2019,~~2020, and ~~2018,~~2019, are shown in the table below:


		Three Months Ended September 30,							Three Months Ended June 30,
(Dollars and number of shares in thousands, except per share data)	(Dollars and number of shares in thousands, except per share data)	2019		2018		(Dollars and number of shares in thousands, except per share data)	2020		2019
Net income		$	34,612	$	33,710
Preferred dividends		—		(13)
Net income available to stockholders						Net income available to stockholders	$	30,131	$	45,169

Net income available to common stockholders		$	34,612	$	33,697

Weighted average common shares outstanding for basic earnings per share	Weighted average common shares outstanding for basic earnings per share	36,692		34,452		Weighted average common shares outstanding for basic earnings per share	36,881		35,744
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	Assumed incremental common shares issued upon vesting of outstanding restricted stock units	143		192		Assumed incremental common shares issued upon vesting of outstanding restricted stock units	35		135
Weighted average common shares for diluted earnings per share	Weighted average common shares for diluted earnings per share	36,835		34,644		Weighted average common shares for diluted earnings per share	36,916		35,879
Earnings per common share — basic	Earnings per common share — basic	$	0.94	$	0.98	Earnings per common share — basic	$	0.82	$	1.26
Earnings per common share — diluted	Earnings per common share — diluted	$	0.94	$	0.97	Earnings per common share — diluted	$	0.82	$	1.26
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	8		—		Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	54		7

		Nine Months Ended September 30,							Six Months Ended June 30,
(Dollars and number of shares in thousands, except per share data)	(Dollars and number of shares in thousands, except per share data)	2019		2018		(Dollars and number of shares in thousands, except per share data)	2020		2019
Net income		$	111,278	$	84,857
Preferred dividends		—		(39)

Net income available to common stockholders		$	111,278	$	84,818

Net income available to stockholders						Net income available to stockholders	$	50,171	$	76,666

Weighted average common shares outstanding for basic earnings per share	Weighted average common shares outstanding for basic earnings per share	35,675		32,520		Weighted average common shares outstanding for basic earnings per share	36,851		35,157
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	Assumed incremental common shares issued upon vesting of outstanding restricted stock units	143		187		Assumed incremental common shares issued upon vesting of outstanding restricted stock units	69		138
Weighted average common shares for diluted earnings per share	Weighted average common shares for diluted earnings per share	35,818		32,707		Weighted average common shares for diluted earnings per share	36,920		35,295
Earnings per common share — basic	Earnings per common share — basic	$	3.12	$	2.61	Earnings per common share — basic	$	1.36	$	2.18
Earnings per common share — diluted	Earnings per common share — diluted	$	3.11	$	2.59	Earnings per common share — diluted	$	1.36	$	2.17
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	8		—		Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	1		7

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.

Effect of New Financial Accounting Standards

~~In February 2016, the FASB issued~~ ASU ~~2016-02, "~~2016-13

~~Leases (Topic 842).~~" Topic 842 requires a lessee to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as financing or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is applied on a modified retrospective basis. Heartland leases certain properties and equipment under operating leases that resulted in recognition of lease assets and lease liabilities on the consolidated balance sheets under the ASU; however the majority of Heartland's properties and equipment are owned, not leased. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. Early adoption is permitted. InOn January 2018, the FASB issued an amendment to provide entities with the optional practical expedient to not evaluate existing or expired land easements that were previously not accounted for as leases under Topic 840. In July 2018, the FASB issued ASU 2018-11, "~~Leases - Targeted Improvements~~" to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, Specifically, under the amendments in ASU 2018-11, entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02.1, 2020, Heartland adopted the accounting standard on January 1, 2019, on a modified retrospective basis, as required, and has not restated comparative periods. Heartland adopted the practical expedients, which allow for existing leases to be accounted for under previous guidance with the exception of balance sheet recognition for lessees. The adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $25.9 million and $27.6 million, respectively, on January 1, 2019. The difference between the lease assets and lease liabilities, which was $1.7 million, was recorded as an adjustment to retained earnings. The adoption of the standard did not impact Heartland's results of operations or liquidity. See Note 11, "Leases", for more information on Heartland's leases.

~~In June 2016, the FASB issued ASU~~Accounting Standards Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326),", ~~." The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at~~which replaces the ~~net amount~~incurred loss methodology with an expected ~~to be collected. The allowance for credit losses is a valuation account~~loss methodology that is ~~deducted from~~referred to as the ~~amortized cost basis of the financial asset(s) to present the net carrying value at the amount~~current expected to be collected on the financial asset. The amendments in this ASU indicate that an entity should not use the length of time a security has been in an unrealized loss position to avoid recording a credit loss. In addition, in determining whether a credit loss exists, the amendments in this ASU also remove the requirements to consider the historical and implied volatility of the fair value of a security and recoveries or declines in fair value after the balance sheet date. The amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity may adopt the amendments earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.("CECL") methodology. Also on January 1, 2020, Heartland ~~intends to adopt the accounting standard in 2020, as required. In April 2019, the FASB also issued~~adopted ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial ~~Instruments.~~Instruments," ~~As it relates to current expected credit losses, this guidance amends~~which amended certain provisions contained in ASU 2016-13, particularly ~~with regards to the inclusion of~~by including accrued interest in the definition of amortized cost, as well as by clarifying ~~the~~that loan extension and renewal options in the original or modified contract that are not unconditionally cancelable by the entity ~~that are included in the original or modified contract~~ should be considered in the entity's determination of expected credit losses. ~~Upon~~Also on January 1, 2020, Heartland adopted ASU 2019-11, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses," which amended certain aspects of ASU 2016-13.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, which includes loans held to maturity and held to maturity debt securities. It also applies to available for sale debt securities and off-balance sheet unfunded loan commitments. Heartland adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost basis and off-balance sheet unfunded loan commitments. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

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

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

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

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

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

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

Heartland ~~formed an internal committee~~elected not to ~~assess and implement~~utilize the standard. During 2018, Heartland entered into an agreement with a third party vendor for consulting services and a technology solution. The technology solution implementation has been completed, and Heartland has produced two parallel runs forregulatory transition relief issued by federal regulatory authorities in the first ~~two quarters~~quarter of ~~2019 excluding economic forecasting~~2020, which allowed banking institutions to ~~estimate~~delay the impact of ~~this new guidance.~~CECL on regulatory capital because the impact on the capital ratios of Heartland and its subsidiary banks was not significant.

Loans Held to Maturity

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost, which is the principal amount outstanding, net of cumulative charge-offs, unamortized net deferred loan origination fees and costs and unamortized premiums or discounts on purchased loans. Heartland has a loan policy which establishes the credit risk appetite, lending standards and underwriting criteria designed so that Heartland may extend credit in a prudent and sound manner. The Heartland board of directors reviews and approves the loan policy on a regular basis. A reporting system supplements the review process by providing management and the board with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.

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

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

Allowance for Credit Losses on Loans

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

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

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

Quantitative Factors

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

If a loan no longer shares similar risk characteristics with other loans in the pool and does not share similar risk characteristics with another pool, it is evaluated on an individual basis and is not included in the collective evaluation. Heartland will individually assess loans that are collateral dependent. A loan is collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For those loans that are deemed collateral dependent and in foreclosure the impairment will be recognized by creating a specific reserve against

the loan with a corresponding charge to provision expense. In most cases, the specific reserve will be charged off in the same quarter as the loss is probable. Individually assessed loans will be considered non-accrual since it is probable that the collection of all principal and interest will not occur. In some cases when foreclosure is not probable, but Heartland believes certain loans do not share the same risk characteristics with the like loans in the pool, the standard allows for these loans to be individually assessed. All individually assessed calculations are completed at least annually.

Qualitative Factors

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

Heartland utilizes the following qualitative factors:

•changes in lending policies and procedures

•changes in the nature and volume of loans

•experience and ability of management

•changes in the credit quality of the loan portfolio

•risk in acquired portfolios

•concentrations of credit

•other external factors

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

Economic Forecasting

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

It is expected that actual economic conditions will, in many circumstances, turn out differently than forecasted because the ultimate outcomes during the forecast period may be affected by events that were unforeseen, such as economic disruption and fiscal or monetary policy actions, which are exacerbated by longer forecasting periods. This uncertainty would be relevant to the entity’s confidence level as to the outcomes being forecasted. That is, an entity is likely less confident in the ultimate outcome of events that will occur at the end of ~~2019, management will continue~~the forecast period as compared to ~~prepare parallel calculations to compare~~ the ~~existing allowance for loan losses to this new guidance. Additionally, management expects to complete data validation and documentation~~beginning. As a result, actual future economic conditions may not be an effective indicator of the ~~accounting policies and internal controls related~~quality of management’s forecasting process, including the length of the forecast period.

Heartland has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in Heartland's methodology. Because Heartland is applying the economic forecast adjustment qualitatively, the concept of "reversion to the ~~standard. Heartland has also entered into an agreement to have its new model validated by a third party prior to~~historical mean" does not apply. For Heartland's January 1, ~~2020. Further review~~2020 calculation, a two-year reasonable and ~~refinement~~supportable forecast period was used. Because of the economic ~~forecasting, as well as the model~~uncertainty associated with COVID-19, Heartland utilized a one-year reasonable and ~~methodologies, will continue in preparation~~supportable forecast period for the ~~adoption~~calculation of both the March 31, 2020, and June 30, 2020, allowance for credit losses.

Allowance for Credit Losses on Unfunded Loan Commitments

Heartland estimates expected credit losses over the contractual term of the ~~standard on January 1, 2020.~~

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

Allowance for Credit Losses on Held to Maturity Debt Securities

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

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

ASU 2016-13 modifies the impairment model for AFS debt securities. AFS debt securities in unrealized loss positions are evaluated for credit related loss at least quarterly. The decline in fair value of an AFS debt security due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes. Although these evaluations involve significant judgment, an unrealized loss in the fair value of a debt security is generally considered to not be related to credit when the fair value of the security is below the carrying value primarily due to changes in risk-free interest rates, there has not been significant deterioration in the financial condition of the issuer, and Heartland does not intend to sell nor does it believe it will be required to sell the security before the recovery of its cost basis.

Heartland did not record an allowance for credit losses on AFS debt securities upon adoption of ASU 2016-13 or at June 30, 2020.

ASU 2017-04

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

~~In March 2017,~~Heartland used this approach to evaluate its goodwill during the ~~FASB issued ASU 2017-08,~~ ~~"Receivables - Nonrefundable Fee and Other Costs (Subtopic 310-20)."~~ ~~These amendments shorten~~second quarter of 2020, as an unprecedented deterioration in economic conditions triggered by the ~~amortization period for certain callable debt securities held at~~COVID-19 pandemic caused a ~~premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do~~significant decline in stock market valuations, including Heartland's common stock price. Based on this goodwill impairment assessment, Heartland concluded that its goodwill was not require an accounting change for securities held at a discount. Discounts continue to be amortized to maturity. These amendments are effective for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If any entity early adopts the amendments in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. The amendments must be applied and Heartland intends to apply these amendments on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Heartland adopted this ASU on January 1, 2019, as required, and the adoption did not have a material impact on its results of operations, financial position and liquidity.impaired.

~~In August 2017, the FASB issued~~ ASU ~~2017-12, "Derivatives and Hedging:Targeted Improvements to Accounting for Hedging Activities~~." The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. For a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, this ASU permits an entity to designate an amount that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows (the "last-of-layer" method). Under this designation, prepayment risk is not incorporated into the measurement of the hedged item. ASU 2017-12 requires a modified retrospective transition method in which Heartland will recognize the cumulative effect of the change on the opening balance of each affected component of equity on the balance sheet as of the date of adoption. Heartland adopted this ASU on January 1, 2019, as required, and as a result of the adoption, $148.0 million of held to maturity securities were reclassified to available for sale debt securities carried at fair value. See Note 3, "Securities," for further details. There was no impact to Heartland's results of operations, or liquidity as a result of the adoption of this amendment.

2018-13

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

~~In August 2018, the FASB issued ASU 2018-15,~~ ~~"Intangible-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract."~~ The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update require an entity in a hosting arrangement that is a service contract to follow the guidance in Subtopic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. The amendments also require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendment is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and the amendment can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption was permitted. Heartland early adopted this ASU using the prospective approach in the second quarter of 2019, and the adoption did not have a material impact on its results of operations, financial position and liquidity.

ASU 2018-16

In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting." In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government, ~~("UST"),~~ the London Interbank Offered Rate ("LIBOR") swap rate, and the Overnight Index Swap ("OIS") Rate based on the Fed Funds Effective Rate. When the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017, it introduced the Securities Industry and Financial Markets Association ("SIFMA") Municipal Swap Rate as the fourth permissible U.S. benchmark rate. ~~The new~~ ASU 2018-16 adds the OIS rate based on the Secured Overnight Financing Rate ("SOFR") as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR

transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. ~~The amendments in this update~~ASU 2018-16 became effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and the financial statement impact immediately upon adoption was immaterial. The future financial statement impact will depend on any new contracts entered into using new benchmark rates, as well as any existing contracts that ~~get~~are migrated from LIBOR to new benchmark interest rates. Heartland is currently evaluating the impact of the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates, including but not limited to the SOFR. Currently, Heartland has adjustable rate loans, several debt obligations and derivative instruments in place that reference LIBOR-based rates. The transition from LIBOR is ~~estimated~~expected to take place at the end of 2021, and management will continue to actively assess the related opportunities and risks involved in this transition.

ASU 2019-12

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

ASU 2020-02

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

ASU 2020-03

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

ASU 2020-04

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

NOTE 2: ACQUISITIONS

Pending Acquisition

Johnson Bank branches

On June 9, 2020, Arizona Bank & Trust ("AB&T"), which is a wholly-owned subsidiary of Heartland headquartered in Phoenix, Arizona, entered into a purchase and assumption agreement, pursuant to which AB&T will acquire certain assets and will assume substantially all of the deposits and certain other liabilities of Johnson Bank's Arizona operations, which includes four banking centers. Johnson Bank is a wholly-owned subsidiary of Johnson Financial Group, Inc., headquartered in Racine, Wisconsin. Johnson Insurance Services is not a part of this transaction.

Under the terms of the purchase and assumption agreement, AB&T will acquire Johnson Bank's Arizona banking centers, which had deposits of approximately $415.3 million and loans of approximately $168.1 million as of June 30, 2020. The actual amount of deposits assumed and loans acquired will be determined at closing. Because the purchase and assumption agreement was signed on June 9, 2020, and the transaction is expected to close in the fourth quarter of 2020, the transaction had no impact on Heartland's consolidated financial statements for the six months ended June 30, 2020.

Pending Acquisition

AIM Bancshares, Inc.

On February 11, 2020, Heartland entered into a definitive merger agreement to acquire AIM Bancshares, Inc., and its wholly-owned subsidiary, AimBank, headquartered in Levelland, Texas. Shareholders of AIM Bancshares will receive 207.0 shares of Heartland common stock and $685.00 of cash for each share of AIM Bancshares. The transaction value will change due to fluctuations in the price of Heartland common stock and is subject to certain potential adjustments as set forth in the merger agreement. Simultaneous with the closing of the transaction, AimBank will merge into Heartland's Texas-based subsidiary, First Bank & Trust, and the combined entity will operate as First Bank & Trust. As of June 30, 2020, AimBank had total assets of $1.95 billion, $1.19 billion of gross loans outstanding, and $1.69 billion of deposits. Heartland and AIM Bancshares, Inc. are currently reviewing the corporate structure and terms of the transaction. Because the merger agreement was signed on February 11, 2020 and the transaction did not close prior to June 30, 2020, the transaction had no impact on Heartland's consolidated financial statements for the six months ended June 30, 2020.

Rockford Bank and Trust Company

On ~~August 13,~~November 30, 2019, Heartland's Illinois Bank & Trust subsidiary ~~entered into a purchase and assumption agreement to acquire~~completed its acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company, ~~("RB&T"),~~ headquartered in Rockford, Illinois. ~~RB&T is~~Rockford Bank and Trust Company was a wholly-owned subsidiary of Moline, Illinois-based QCR Holdings, Inc. As of ~~September 30, 2019, RB&T~~the closing date, Rockford Bank and Trust Company had, at fair value, total assets of ~~$519.5~~$495.7 million, which included ~~$417.3~~$354.0 million of gross loans held to maturity, and ~~$451.5~~$430.3 million of deposits. ~~RB&T serves the Rockford market from 2 full-service banking locations.~~ The all-cash transaction is subject to regulatory approval and to customary closing conditions and is expected to close in the fourth quarter of 2019. The systems conversion is expected to occur in the first quarter of 2020.payment was approximately $46.6 million.

Blue Valley Ban Corp.

On May 10, 2019, Heartland completed the acquisition of Blue Valley Ban Corp. ("BVBC") and its wholly-owned subsidiary, Bank of Blue Valley, headquartered in Overland Park, Kansas. Based on Heartland's closing common stock price of $44.78 per share on May 10, 2019, the aggregate consideration paid to BVBC common shareholders was $92.3 million, which was paid by delivery of 2,060,258 shares of Heartland common stock. On the closing date, in addition to this merger consideration, Heartland provided BVBC the funds necessary to repay outstanding debt of $6.9 million, and Heartland assumed $16.1 million of trust preferred securities at fair value. Immediately following the closing of the transaction, Bank of Blue Valley was merged with and into Heartland's wholly-owned Kansas subsidiary, Morrill & Janes Bank and Trust Company, and the combined entity operates under the Bank of Blue Valley brand. As of the closing date, BVBC had, at fair value, total assets of $766.2 million, total loans held to maturity of $542.0 million, and total deposits of $617.1 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of BVBC.

~~First Bank Lubbock Bancshares, Inc.~~

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

~~Signature Bancshares, Inc.~~

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

NOTE 3: SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of debt securities available for sale and equity securities with a readily determinable fair value that are carried at fair value as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, are summarized in the table below, in thousands:

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Estimated
Fair
Value
September 30, 2019
U.S. government corporations and agencies $ 8,900 $ 50 $ — $ 8,950
Mortgage and asset-backed securities 2,465,561 28,381 (13,265) 2,480,677
Obligations of states and political subdivisions 500,222 13,915 (1,558) 512,579
Total debt securities 2,974,683 42,346 (14,823) 3,002,206
Equity securities with a readily determinable fair value 18,362 — — 18,362
Total $ 2,993,045 $ 42,346 $ (14,823) $ 3,020,568
December 31, 2018
U.S. government corporations and agencies $ 32,075 $ 3 $ (127) $ 31,951
Mortgage and asset-backed securities 2,061,358 3,740 (38,400) 2,026,698
Obligations of states and political subdivisions 382,101 919 (8,046) 374,974
Total debt securities 2,475,534 4,662 (46,573) 2,433,623
Equity securities with a readily determinable fair value 17,086 — — 17,086
Total $ 2,492,620 $ 4,662 $ (46,573) $ 2,450,709

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


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2020
U.S. government corporations and agencies	$	5,745	$	97	$	—	$	5,842
Mortgage and asset-backed securities	3,130,605		45,792		(41,958)		3,134,439
Obligations of states and political subdivisions	919,665		49,828		(2,814)		966,679

Total debt securities	4,056,015		95,717		(44,772)		4,106,960
Equity securities with a readily determinable fair value	19,391		—		—		19,391
Total	$	4,075,406	$	95,717	$	(44,772)	$	4,126,351
December 31, 2019
U.S. government corporations and agencies	$	9,844	$	49	$	—	$	9,893
Mortgage and asset-backed securities	2,579,081		17,200		(19,003)		2,577,278
Obligations of states and political subdivisions	704,073		12,516		(9,399)		707,190

Total debt securities	3,292,998		29,765		(28,402)		3,294,361
Equity securities with a readily determinable fair value	18,435		—		—		18,435
Total	$	3,311,433	$	29,765	$	(28,402)	$	3,312,796

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, are summarized in the table below, in thousands:


		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Allowance for Credit Losses
September 30, 2019
June 30, 2020										June 30, 2020

Obligations of states and political subdivisions	Obligations of states and political subdivisions	$	87,965	$	9,940	$	—	$	97,905	Obligations of states and political subdivisions	$	90,641	$	10,916	$	—	$	101,557	$	(62)
Total	Total	$	87,965	$	9,940	$	—	$	97,905	Total	$	90,641	$	10,916	$	—	$	101,557	$	(62)
December 31, 2018
December 31, 2019										December 31, 2019

Obligations of states and political subdivisions	Obligations of states and political subdivisions	$	236,283	$	9,554	$	(496)	$	245,341	Obligations of states and political subdivisions	$	91,324	$	9,160	$	—	$	100,484	$	—
Total	Total	$	236,283	$	9,554	$	(496)	$	245,341	Total	$	91,324	$	9,160	$	—	$	100,484	$	—

As of June 30, 2020, Heartland had $14.5 million of accrued interest receivable, which is included in other assets on the consolidated balance sheet. Heartland does not consider accrued interest receivable in the carrying amount of financial assets held at amortized cost basis or in the allowance for credit losses calculation.

The amortized cost and estimated fair value of investment securities carried at fair value at ~~September~~June 30, ~~2019,~~2020, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.


		September 30, 2019							June 30, 2020
		Amortized Cost		Estimated Fair Value			Amortized Cost		Estimated Fair Value
Due in 1 year or less	Due in 1 year or less	$	22,717	$	22,750	Due in 1 year or less	$	9,026	$	9,079
Due in 1 to 5 years	Due in 1 to 5 years	23,369		23,725		Due in 1 to 5 years	22,916		23,333
Due in 5 to 10 years	Due in 5 to 10 years	76,723		79,411		Due in 5 to 10 years	77,716		81,897
Due after 10 years	Due after 10 years	386,313		395,643		Due after 10 years	815,752		858,212
Total debt securities	Total debt securities	509,122		521,529		Total debt securities	925,410		972,521
Mortgage and asset-backed securities	Mortgage and asset-backed securities	2,465,561		2,480,677		Mortgage and asset-backed securities	3,130,605		3,134,439
Equity securities with a readily determinable fair value	Equity securities with a readily determinable fair value	18,362		18,362		Equity securities with a readily determinable fair value	19,391		19,391
Total investment securities	Total investment securities	$	2,993,045	$	3,020,568	Total investment securities	$	4,075,406	$	4,126,351

The amortized cost and estimated fair value of debt securities held to maturity at ~~September~~June 30, ~~2019,~~2020, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.


		September 30, 2019							June 30, 2020
		Amortized Cost		Estimated Fair Value			Amortized Cost		Estimated Fair Value
Due in 1 year or less	Due in 1 year or less	$	2,403	$	2,443	Due in 1 year or less	$	1,814	$	1,840
Due in 1 to 5 years	Due in 1 to 5 years	15,153		15,690		Due in 1 to 5 years	17,582		18,389
Due in 5 to 10 years	Due in 5 to 10 years	58,936		64,695		Due in 5 to 10 years	59,986		65,872
Due after 10 years	Due after 10 years	11,473		15,077		Due after 10 years	11,259		15,456

Total debt securities						Total debt securities	90,641		101,557
Allowance for credit losses						Allowance for credit losses	(62)		—
Total investment securities	Total investment securities	$	87,965	$	97,905	Total investment securities	$	90,579	$	101,557

As of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, securities with a ~~fair~~carrying value of ~~$431.5 million~~$2.07 billion and ~~$524.8~~$509.6 million, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.

Gross gains and losses realized related to the sales of securities carried at fair value for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, are summarized as follows, in thousands:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2019		2018		2019		2018			2020		2019		2020		2019
Proceeds from sales	Proceeds from sales	$	290,877	$	59,137	$	1,485,773	$	694,872	Proceeds from sales	$	182,749	$	760,743	$	511,639	$	1,194,897
Gross security gains	Gross security gains	2,371		67		10,301		3,537		Gross security gains	3,958		5,522		6,862		7,930
Gross security losses	Gross security losses	358		212		3,133		2,500		Gross security losses	1,952		1,942		3,198		2,775

The following ~~tables summarize,~~table summarizes, in thousands, the amount of unrealized losses, defined as the amount by which cost or amortized cost exceeds fair value, and the related fair value of investments with unrealized losses in Heartland's securities portfolio as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018.~~2019. The investments were segregated into two categories: those that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss

position for 12 months or more. The reference point for determining how long an investment was in an unrealized loss position was ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, respectively. ~~Securities for~~


Debt securities available for sale	Less than 12 months									12 months or longer						Total
	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count
June 30, 2020

Mortgage and asset-backed securities	$	1,070,001	$	(23,591)	81	$	392,756	$	(18,367)	19	$	1,462,757	$	(41,958)	100
Obligations of states and political subdivisions	104,108		(2,814)		97	—		—		—	104,108		(2,814)		97



Total temporarily impaired securities	$	1,174,109	$	(26,405)	178	$	392,756	$	(18,367)	19	$	1,566,865	$	(44,772)	197
December 31, 2019

Mortgage and asset-backed securities	$	1,231,732	$	(14,189)	150	$	241,232	$	(4,814)	58	$	1,472,964	$	(19,003)	208
Obligations of states and political subdivisions	387,534		(9,399)		50	—		—		—	387,534		(9,399)		50



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

Heartland had 0 securities held to maturity with unrealized losses at June 30, 2020, or December 31, 2019.

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

Debt securities available for sale Less than 12 months 12 months or longer Total
Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
September 30, 2019
U.S. government corporations and agencies $ — $ — $ — $ — $ — $ —
Mortgage and asset-backed securities 976,443 (7,689) 255,827 (5,576) 1,232,270 (13,265)
Obligations of states and political subdivisions 118,741 (1,525) 2,139 (33) 120,880 (1,558)
Total temporarily impaired securities $ 1,095,184 $ (9,214) $ 257,966 $ (5,609) $ 1,353,150 $ (14,823)
December 31, 2018
U.S. government corporations and agencies $ 24,902 $ (83) $ 4,577 $ (44) $ 29,479 $ (127)
Mortgage and asset-backed securities 733,826 (9,060) 805,089 (29,340) 1,538,915 (38,400)
Obligations of states and political subdivisions 34,990 (390) 258,143 (7,656) 293,133 (8,046)
Total temporarily impaired securities $ 793,718 $ (9,533) $ 1,067,809 $ (37,040) $ 1,861,527 $ (46,573)

Securities held to maturity Less than 12 months 12 months or longer Total
Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses Fair
Value Unrealized
Losses
September 30, 2019
Obligations of states and political subdivisions $ — $ — $ — $ — $ — $ —
Total temporarily impaired securities $ — $ — $ — $ — $ — $ —
December 31, 2018
Obligations of states and political subdivisions $ 10,802 $ (17) $ 19,508 $ (479) $ 30,310 $ (496)
Total temporarily impaired securities $ 10,802 $ (17) $ 19,508 $ (479) $ 30,310 $ (496)

ASU 2016-13. Heartland reviews the investment securities portfolio at the security level on a quarterly basis ~~to monitor its exposure to OTTI. A determination as to whether a security's decline in fair value is other-than-temporary~~for potential credit losses, which takes into consideration numerous factors, and the relative significance of any single factor can vary by security. Some factors Heartland may consider ~~in the OTTI analysis~~ include ~~the length of time the security has been in an unrealized loss position,~~ changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, with regard to debt securities, Heartland may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain debt securities in unrealized loss positions, Heartland prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

The remaining unrealized losses on Heartland's mortgage and asset-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. The losses are not related to concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that the securities will not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these ~~investments are not considered other-than-temporarily impaired.~~securities during the three and six months ended June 30, 2020.

The remaining unrealized losses on Heartland's obligations of states and political subdivisions are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors the published credit ratings of these securities and the stability of the underlying municipalities. Because the decline in fair value is attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these ~~investments are not considered other-than-temporarily impaired.~~securities during the three and six months ended June 30, 2020.

The credit loss model under ASC 326-30, applicable to held to maturity debt securities, requires the recognition of lifetime expected credit losses through an allowance account at the time when the security is purchased. The following table presents, in

~~There were 0 gross realized gains or~~thousands, the activity in the allowance for credit losses ~~on the sale of~~for securities ~~carried at fair value or~~ held to maturity ~~securities with OTTI write-downs~~by major security type for the ~~nine-month periods~~three- and six months ended ~~September~~June 30, ~~2019, and September 30, 2018, respectively.~~2020:


	Obligations of states and political subdivisions
Balance at March 31, 2020	$	197
Provision for credit losses	(135)
Balance at June 30, 2020	$	62

	Obligations of states and political subdivisions
Balance at December 31, 2019	$	—
Impact of ASU 2016-13 adoption	158
Provision for credit losses	(96)
Balance at June 30, 2020	$	62

~~Other investments, at cost, include equity~~The following table summarizes, in thousands, the carrying amount of Heartland's held to maturity debt securities ~~without a readily determinable fair value,~~by investment rating as of June 30, 2020, which ~~totaled $29.0 million~~are updated quarterly and ~~$28.4 million at September 30, 2019, and December 31, 2018, respectively. At September 30, 2019, and December 31, 2018,~~used to monitor the credit quality of the securities:


Rating	Obligations of states and political subdivisions
AAA	$	3,086
AA, AA+, AA-	16,947
A+, A, A-	13,750
BBB	6,102
Not Rated	50,756
Total	$	90,641

Included in other ~~investments at cost included~~securities were shares of stock in ~~the~~each Federal Home Loan ~~Banks~~Bank (the ~~"FHLBs"~~"FHLB") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of ~~$14.9~~$20.9 million at June 30, 2020 and ~~$16.6~~$16.8 million ~~respectively.~~at December 31, 2019.

The Heartland banks are required by federal law to maintain FHLB stock as members of the various FHLBs. These equity securities are "restricted" in that they can only be sold back to the respective institutions from which they were acquired or another member institution at par. Therefore, the FHLB stock is less liquid than other marketable equity securities, and the fair value approximates amortized cost. Heartland considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. Heartland evaluates impairment in these investments based on the ultimate recoverability of the par value and, at ~~September~~June 30, ~~2019,~~2020, did not consider the investments to be other than temporarily impaired.

NOTE 4: LOANS

Loans as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, were as follows, in thousands:

September 30, 2019 December 31, 2018
Loans receivable held to maturity:
Commercial $ 2,276,916 $ 2,020,231
Commercial real estate 4,116,680 3,711,481
Agricultural and agricultural real estate 545,006 565,408
Residential real estate 589,793 673,603
Consumer 447,718 440,158
Gross loans receivable held to maturity 7,976,113 7,410,881
Unearned discount (833) (1,624)
Deferred loan fees (3,672) (1,560)
Total net loans receivable held to maturity 7,971,608 7,407,697
Allowance for loan losses (66,222) (61,963)
Loans receivable, net $ 7,905,386 $ 7,345,734


	June 30, 2020		December 31, 2019
Loans receivable held to maturity:
Commercial and industrial	$	2,364,400	$	2,530,809
Paycheck Protection Program ("PPP")	1,124,430		—
Owner occupied commercial real estate	1,433,271		1,472,704
Non-owner occupied commercial real estate	1,543,623		1,495,877
Real estate construction	1,115,843		1,027,081
Agricultural and agricultural real estate	520,773		565,837
Residential real estate	735,762		832,277
Consumer	408,728		443,332
Total loans receivable held to maturity	9,246,830		8,367,917






Allowance for credit losses	(119,937)		(70,395)
Loans receivable, net	$	9,126,893	$	8,297,522

On January 1, 2020, Heartland ~~has certain lending policies~~ adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," and ~~procedures~~results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in ~~place that are designed~~accordance with previously applicable GAAP. Additionally, Heartland reclassified its loan categories to ~~provide~~align more closely with Federal Deposit Insurance Corporation ("FDIC") reporting requirements and classification codes, and all prior periods have been adjusted. As of June 30, 2020, Heartland had $34.5 million of accrued interest receivable, which is included in other assets on the consolidated balance sheet. Heartland does not consider accrued interest receivable in the allowance for ~~an acceptable level of~~ credit risk. The board of directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the board with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.losses calculation.

Heartland originates commercial and commercial real estate loans for a wide variety of business purposes, including lines of credit for capital and operating purposes and term loans for real estate and equipment purchases. Agricultural loans provide financing for capital improvements and farm operations, as well as livestock and machinery purchases. Residential mortgage loans are originated for the construction, purchase or refinancing of single family residential properties. Consumer loans include loans for motor vehicles, home improvement, home equity and personal lines of credit.

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

The following table shows the balance in the allowance for ~~loan~~credit losses at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, and the related loan balances, disaggregated on the basis of ~~impairment~~measurement methodology, in thousands. ~~Loans evaluated under ASC 310-10-35 include~~As of June 30, 2020, loans ~~on nonaccrual status~~individually assessed are collateral dependent and ~~troubled debt restructurings, which are individually evaluated for impairment, and~~in the process of foreclosure or no longer share the same risk characteristics of the other ~~impaired~~ loans ~~deemed to have similar risk characteristics.~~in the pool. All other loans are collectively evaluated for ~~impairment under ASC 450-20. Heartland has made no significant changes to the accounting for the allowance for loan losses during the quarter ended September 30,~~losses. Loans individually evaluated were considered impaired at December 31, 2019.

Allowance For
Loan Losses Gross Loans Receivable
Held to Maturity
Ending Balance
Under ASC
310-10-35 Ending Balance
Under ASC
450-20 Total Ending Balance Evaluated for Impairment
Under ASC
310-10-35 Ending Balance Evaluated for Impairment
Under ASC
450-20 Total
September 30, 2019
Commercial $ 6,124 $ 19,161 $ 25,285 $ 23,355 $ 2,253,561 $ 2,276,916
Commercial real estate 308 29,073 29,381 19,913 4,096,767 4,116,680
Agricultural and agricultural real estate 1,084 4,267 5,351 20,073 524,933 545,006
Residential real estate 123 1,319 1,442 17,552 572,241 589,793
Consumer 475 4,288 4,763 5,100 442,618 447,718
Total $ 8,114 $ 58,108 $ 66,222 $ 85,993 $ 7,890,120 $ 7,976,113
December 31, 2018
Commercial $ 5,733 $ 18,772 $ 24,505 $ 24,202 $ 1,996,029 $ 2,020,231
Commercial real estate 218 25,320 25,538 14,388 3,697,093 3,711,481
Agricultural and agricultural real estate 686 4,267 4,953 15,951 549,457 565,408
Residential real estate 168 1,617 1,785 20,251 653,352 673,603
Consumer 749 4,433 5,182 7,004 433,154 440,158
Total $ 7,554 $ 54,409 $ 61,963 $ 81,796 $ 7,329,085 $ 7,410,881


	Allowance For Credit Losses										Gross Loans Receivable Held to Maturity
	Individually Evaluated for Credit Losses		Collectively Evaluated for Credit Losses		Total		Loans Individually Evaluated for Credit Losses		Loans Collectively Evaluated for Credit Losses		Total
June 30, 2020
Commercial and industrial	$	2,068	$	30,463	$	32,531	$	14,731	$	2,349,669	$	2,364,400
PPP	—		—		—		—		1,124,430		1,124,430
Owner occupied commercial real estate	13,446		9,956		23,402		21,588		1,411,683		1,433,271
Non-owner occupied commercial real estate	29		10,133		10,162		3,550		1,540,073		1,543,623
Real estate construction	51		28,616		28,667		258		1,115,585		1,115,843
Agricultural and agricultural real estate	2,086		3,615		5,701		17,065		503,708		520,773
Residential real estate	240		9,064		9,304		4,783		730,979		735,762
Consumer	317		9,853		10,170		688		408,040		408,728

Total	$	18,237	$	101,700	$	119,937	$	62,663	$	9,184,167	$	9,246,830
December 31, 2019
Commercial and industrial	$	6,276	$	24,511	$	30,787	$	31,814	$	2,498,995	$	2,530,809
Owner occupied commercial real estate	351		7,863		8,214		9,468		1,463,236		1,472,704
Non-owner occupied commercial real estate	33		7,769		7,802		1,730		1,494,147		1,495,877
Real estate construction	—		11,599		11,599		685		1,026,396		1,027,081
Agricultural and agricultural real estate	916		4,757		5,673		18,554		547,283		565,837
Residential real estate	176		1,328		1,504		20,678		811,599		832,277
Consumer	419		4,397		4,816		4,123		439,209		443,332

Total	$	8,171	$	62,224	$	70,395	$	87,052	$	8,280,865	$	8,367,917

The following ~~table presents~~tables present the amortized cost basis for loans on nonaccrual ~~loans,~~status and accruing loans past due 90 days or more at June 30, 2020, in thousands:


	Nonaccrual Loans with an Allowance for Credit Losses		Nonaccrual Loans with No Allowance for Credit Losses		Total Nonaccrual Loans		Accruing Loans Past Due 90+ Days
June 30, 2020
Commercial and industrial	$	11,630	$	9,812	$	21,442	$	—
Owner occupied commercial real estate	20,860		4,725		25,585		—
Non-owner occupied commercial real estate	349		3,412		3,761		—
Real estate construction	1,298		75		1,373		—
Agricultural and agricultural real estate	11,864		7,476		19,340		83
Residential mortgage	9,468		6,116		15,584		1,207
Consumer	4,167		357		4,524		70
Total	$	59,636	$	31,973	$	91,609	$	1,360

Heartland recognized $0 of interest income on nonaccrual loans during the three- and ~~performing~~six months ended June 30, 2020.

Heartland had $6.6 million of troubled debt restructured loans at ~~September~~June 30, ~~2019,~~2020, of which $4.0 million were classified as nonaccrual and ~~December 31, 2018, in thousands:~~

September 30, 2019 December 31, 2018
Nonaccrual loans $ 67,924 $ 67,833
Nonaccrual troubled debt restructured loans 4,284 4,110
Total nonaccrual loans $ 72,208 $ 71,943
Accruing loans past due 90 days or more $ 40 $ 726
Performing troubled debt restructured loans $ 3,199 $ 4,026

$2.6 million were accruing according to the restructured terms. Heartland had $7.6 million of troubled debt

restructured loans at December 31, 2019, of which $3.8 million were classified as nonaccrual and $3.8 million were accruing according to the restructured terms.

The following tables provide information on troubled debt restructured loans that were modified during the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019,~~2020, and ~~September~~June 30, ~~2018,~~2019, dollars in thousands:


		Three Months Ended September 30,																			Three Months Ended June 30,
		2019								2018									2020				2019
		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment			Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial	Commercial	—	$	—	$	—	—	$	—	$	—	Commercial	—	$	—	$	—	—	$	—	$	—
Commercial real estate		—	—		—		—	—		—
Total commercial and commercial real estate		—	—		—		—	—		—
PPP												PPP	—	—		—		—	—		—
Owner occupied commercial real estate												Owner occupied commercial real estate	—	—		—		—	—		—
Non-owner occupied commercial real estate												Non-owner occupied commercial real estate	—	—		—		—	—		—
Real estate construction												Real estate construction	—	—		—		—	—		—
Agricultural and agricultural real estate	Agricultural and agricultural real estate	—	—		—		—	—		—		Agricultural and agricultural real estate	—	—		—		—	—		—
Residential real estate	Residential real estate	—	—		—		1	92		94		Residential real estate	1	60		66		3	240		246
Consumer	Consumer	—	—		—		—	—		—		Consumer	—	—		—		—	—		—
Total	Total	—	$	—	$	—	1	$	92	$	94	Total	1	$	60	$	66	3	$	240	$	246


		Nine Months Ended September 30,																			Six Months Ended June 30,
		2019								2018									2020				2019
		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment			Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial		—	$	—	$	—	—	$	—	$	—
Commercial real estate		—	—		—		—	—		—
Total commercial and commercial real estate		—	—		—		—	—		—
Commercial and industrial												Commercial and industrial	—	$	—	$	—	—	$	—	$	—
PPP												PPP	—	—		—		—	—		—
Owner occupied commercial real estate												Owner occupied commercial real estate	—	—		—		—	—		—
Non-owner occupied commercial real estate												Non-owner occupied commercial real estate	—	—		—		—	—		—
Real estate construction												Real estate construction	—	—		—		—	—		—
Agricultural and agricultural real estate	Agricultural and agricultural real estate	—	—		—		—	—		—		Agricultural and agricultural real estate	—	—		—		—	—		—
Residential real estate	Residential real estate	4	276		288		11	2,098		1,808		Residential real estate	2	92		98		4	276		288
Consumer	Consumer	—	—		—		—	—		—		Consumer	—	—		—		—	—		—
Total	Total	4	$	276	$	288	11	$	2,098	$	1,808	Total	2	$	92	$	98	4	$	276	$	288

The pre-modification and post-modification recorded investment represents amounts as of the date of loan modification. The difference between the pre-modification investment and post-modification investment amounts on Heartland's residential real estate troubled debt restructured loans for the three- and ~~nine-months~~six months ended ~~September~~June 30, ~~2019,~~2020, is due to principal deferment collected from government guarantees and capitalized interest and escrow. At ~~September~~June 30, ~~2019,~~2020, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructured loan. The tables above do not include any loan modifications made under COVID-19 modification programs. Refer to the "Overview" section of Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for further information on these modifications.

The following table shows troubled debt restructured loans for which there was a payment default during the three- and ~~nine-month~~six--month periods ended ~~September~~June 30, ~~2019,~~2020, and ~~September~~June 30, ~~2018,~~2019, that had been modified during the twelve-month period prior to default, in thousands:


		With Payment Defaults During the Three Months Ended September 30,											With Payment Defaults During the Three Months Ended June 30,
		2019				2018						2020			2019
		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment			Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Commercial		—	$	—	—	$	—
Commercial real estate		—	—		—	—
Total commercial and commercial real estate		—	—		—	—
Commercial and industrial								Commercial and industrial	—	$	—	—	$	—
PPP								PPP	—	—		—	—
Owner occupied commercial real estate								Owner occupied commercial real estate	—	—		—	—
Non-owner occupied commercial real estate								Non-owner occupied commercial real estate	—	—		—	—
Real estate construction								Real estate construction	—	—		—	—
Agricultural and agricultural real estate	Agricultural and agricultural real estate	—	—		—	—		Agricultural and agricultural real estate	—	—		—	—
Residential real estate	Residential real estate	—			4	418		Residential real estate	—	—		1	61
Consumer	Consumer	—	—		—	—		Consumer	—	—		—	—
Total	Total	—	$	—	4	$	418	Total	—	$	—	1	$	61


		With Payment Defaults During the Nine Months Ended September 30,											With Payment Defaults During the Six Months Ended June 30,
		2019				2018						2020			2019
		Number of Loans	Recorded Investment		Number of Loans	Recorded Investment			Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Commercial		—	$	—	—	$	—
Commercial real estate		—	—		—	—
Total commercial and commercial real estate		—	—		—	—
Commercial and industrial								Commercial and industrial	—	$	—	—	$	—
PPP								PPP	—	—		—	—
Owner occupied commercial real estate								Owner occupied commercial real estate	—	—		—	—
Non-owner occupied commercial real estate								Non-owner occupied commercial real estate	—	—		—	—
Real estate construction								Real estate construction	—	—		—	—
Agricultural and agricultural real estate	Agricultural and agricultural real estate	—	—		—	—		Agricultural and agricultural real estate	—	—		—	—
Residential real estate	Residential real estate	3	253		10	1,598		Residential real estate	1	238		3	253
Consumer	Consumer	—	—		—	—		Consumer	—	—		—	—
Total	Total	3	$	253	10	$	1,598	Total	1	$	238	3	$	253

Heartland's internal rating system is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category and categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration.

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

The "substandard" rating is assigned to loans that are inadequately protected by the current net worth and ~~paying~~repaying capacity of the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that Heartland will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following weaknesses: deteriorating financial trends, lack of earnings, inadequate debt service capacity, excessive debt and/or lack of liquidity.

The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring the rating of the loan as "loss" until the exact status of the loan can be determined. The loss rating is assigned to loans considered uncollectible. Heartland had 0 loans classified as loss or doubtful as of ~~September~~June 30, ~~2019. Loans are placed on "nonaccrual" when management does not expect to collect payments of principal~~2020 and ~~interest in full or when principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured and in the process of collection.~~December 31, 2019.

The following table shows the risk category of loans by loan category and year of origination as of June 30, 2020, in thousands:


	Amortized Cost Basis of Term Loans by Year of Origination
	2020		2019		2018		2017		2016		2015 and Prior		Revolving		Total
Commercial and industrial
Pass	$	270,156	$	395,142	$	210,947	$	255,555	$	130,483	$	356,052	$	523,532	$	2,141,867
Watch	7,506		39,383		13,278		18,592		8,429		184		45,250		132,622
Substandard	3,672		8,052		21,695		14,822		11,150		12,701		17,819		89,911
Commercial and industrial total	$	281,334	$	442,577	$	245,920	$	288,969	$	150,062	$	368,937	$	586,601	$	2,364,400
PPP
Pass	$	1,071,796	$	—	$	—	$	—	$	—	$	—	$	—	$	1,071,796
Watch	30,693		—		—		—		—		—		—		30,693
Substandard	21,941		—		—		—		—		—		—		21,941
PPP total	$	1,124,430	$	—	$	—	$	—	$	—	$	—	$	—	$	1,124,430
Owner occupied commercial real estate
Pass	$	139,436	$	307,221	$	277,311	$	175,702	$	122,807	$	252,559	$	31,445	$	1,306,481
Watch	5,865		6,529		5,467		29,782		4,585		8,422		100		60,750
Substandard	6,768		7,784		23,012		9,889		6,163		12,211		213		66,040
Owner occupied commercial real estate total	$	152,069	$	321,534	$	305,790	$	215,373	$	133,555	$	273,192	$	31,758	$	1,433,271
Non-owner occupied commercial real estate
Pass	$	174,914	$	403,907	$	249,906	$	176,422	$	113,130	$	285,323	$	29,731	$	1,433,333
Watch	254		2,520		26,360		17,152		8,868		16,265		475		71,894
Substandard	19,460		2,933		1,615		5,891		1,377		7,120		—		38,396
Non-owner occupied commercial real estate total	$	194,628	$	409,360	$	277,881	$	199,465	$	123,375	$	308,708	$	30,206	$	1,543,623
Real estate construction
Pass	$	136,140	$	423,116	$	314,934	$	82,944	$	31,864	$	32,028	$	15,820	$	1,036,846
Watch	329		17,548		20,447		10,418		16,931		1,189		824		67,686
Substandard	5,762		2,021		863		1,462		522		681		—		11,311
Real estate construction total	$	142,231	$	442,685	$	336,244	$	94,824	$	49,317	$	33,898	$	16,644	$	1,115,843
Agricultural and agricultural real estate
Pass	$	60,973	$	91,129	$	52,319	$	34,156	$	17,330	$	40,204	$	120,864	$	416,975
Watch	3,117		7,501		5,293		1,153		2,027		3,914		9,307		32,312
Substandard	8,207		7,489		18,599		6,446		3,966		14,591		12,188		71,486
Agricultural and agricultural real estate total	$	72,297	$	106,119	$	76,211	$	41,755	$	23,323	$	58,709	$	142,359	$	520,773
Residential real estate
Pass	$	47,582	$	82,571	$	119,637	$	89,920	$	56,886	$	275,367	$	27,211	$	699,174
Watch	82		3,050		880		1,619		349		7,291		346		13,617
Substandard	147		312		1,047		408		1,217		18,739		1,101		22,971
Residential real estate total	$	47,811	$	85,933��	$	121,564	$	91,947	$	58,452	$	301,397	$	28,658	$	735,762


	Amortized Cost Basis of Term Loans by Year of Origination
	2020		2019		2018		2017		2016		2015 and Prior		Revolving		Total
Consumer
Pass	$	18,844	$	32,474	$	21,239	$	15,111	$	4,718	$	22,982	$	280,592	$	395,960
Watch	—		335		385		193		247		744		1,874		3,778
Substandard	377		767		2,583		919		907		2,608		829		8,990
Consumer total	$	19,221	$	33,576	$	24,207	$	16,223	$	5,872	$	26,334	$	283,295	$	408,728

Total Pass	$	1,919,841	$	1,735,560	$	1,246,293	$	829,810	$	477,218	$	1,264,515	$	1,029,195	$	8,502,432
Total Watch	47,846		76,866		72,110		78,909		41,436		38,009		58,176		413,352
Total Substandard	66,334		29,358		69,414		39,837		25,302		68,651		32,150		331,046
Total Loans	$	2,034,021	$	1,841,784	$	1,387,817	$	948,556	$	543,956	$	1,371,175	$	1,119,521	$	9,246,830

The following table ~~presents loans~~shows Heartland's loan portfolio by credit quality indicator ~~at September 30, 2019, and~~as of December 31, ~~2018,~~2019, in thousands:

Pass Nonpass Total
September 30, 2019
Commercial $ 2,125,500 $ 151,416 $ 2,276,916
Commercial real estate 3,864,191 252,489 4,116,680
  Total commercial and commercial real estate 5,989,691 403,905 6,393,596
Agricultural and agricultural real estate 426,383 118,623 545,006
Residential real estate 563,603 26,190 589,793
Consumer 435,407 12,311 447,718
  Total gross loans receivable held to maturity $ 7,415,084 $ 561,029 $ 7,976,113
December 31, 2018
Commercial $ 1,880,579 $ 139,652 $ 2,020,231
Commercial real estate 3,524,344 187,137 3,711,481
  Total commercial and commercial real estate 5,404,923 326,789 5,731,712
Agricultural and agricultural real estate 471,642 93,766 565,408
Residential real estate 645,478 28,125 673,603
Consumer 425,451 14,707 440,158
  Total gross loans receivable held to maturity $ 6,947,494 $ 463,387 $ 7,410,881












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

The nonpass category in the table above is comprised of approximately ~~62% special mention~~60% watch loans and ~~38%~~40% substandard loans as of ~~September 30, 2019. The percent of nonpass loans on nonaccrual status as of September 30, 2019, was 13%. As of~~ December 31, ~~2018, the nonpass category in the table above was comprised of approximately 52% special mention loans and 48% substandard loans.~~2019. The percent of nonpass loans on nonaccrual status as of December 31, ~~2018,~~2019, was ~~16%~~14%. ~~Loans delinquent 30 to 89 days as a percent of total loans were 0.28% at September 30, 2019, compared to 0.21% at December 31, 2018.~~ Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified. ~~All impaired loans are reviewed at least annually.~~

As of ~~September~~June 30, ~~2019,~~2020, Heartland had ~~$3.3~~$1.8 million of loans secured by residential real estate property that were in the process of foreclosure.

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

The following table sets forth information regarding Heartland's accruing and nonaccrual loans at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


		Accruing Loans																							Accruing Loans
		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual		Total Loans			30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual		Total Loans
September 30, 2019
Commercial		$	5,727	$	3,376	$	34	$	9,137	$	2,244,365	$	23,414	$	2,276,916
Commercial real estate		4,824		1,257		—		6,081		4,097,311		13,288		4,116,680
Total commercial and commercial real estate		10,551		4,633		34		15,218		6,341,676		36,702		6,393,596
June 30, 2020																June 30, 2020
Commercial and industrial																Commercial and industrial	$	4,587	$	228	$	—	$	4,815	$	2,338,143	$	21,442	$	2,364,400
PPP																PPP	—		—		—		—		1,124,430		—		1,124,430
Owner occupied commercial real estate																Owner occupied commercial real estate	90		1,159		—		1,249		1,406,437		25,585		1,433,271
Non-owner occupied commercial real estate																Non-owner occupied commercial real estate	2,776		158		—		2,934		1,536,928		3,761		1,543,623
Real estate construction																Real estate construction	2,298		—		—		2,298		1,112,172		1,373		1,115,843
Agricultural and agricultural real estate	Agricultural and agricultural real estate	3,144		24		—		3,168		521,910		19,928		545,006		Agricultural and agricultural real estate	4,209		600		83		4,892		496,541		19,340		520,773
Residential real estate	Residential real estate	1,993		185		—		2,178		576,365		11,250		589,793		Residential real estate	483		1,242		1,207		2,932		717,246		15,584		735,762
Consumer	Consumer	1,411		537		6		1,954		441,436		4,328		447,718		Consumer	2,594		348		70		3,012		401,192		4,524		408,728
Total gross loans receivable held to maturity	Total gross loans receivable held to maturity	$	17,099	$	5,379	$	40	$	22,518	$	7,881,387	$	72,208	$	7,976,113	Total gross loans receivable held to maturity	$	17,037	$	3,735	$	1,360	$	22,132	$	9,133,089	$	91,609	$	9,246,830
December 31, 2018
Commercial		$	2,574	$	205	$	—	$	2,779	$	1,991,525	$	25,927	$	2,020,231
Commercial real estate		4,819		—		726		5,545		3,694,259		11,677		3,711,481
Total commercial and commercial real estate		7,393		205		726		8,324		5,685,784		37,604		5,731,712
December 31, 2019																December 31, 2019
Commercial and industrial																Commercial and industrial	$	5,121	$	904	$	3,899	$	9,924	$	2,491,110	$	29,775	$	2,530,809
Owner occupied commercial real estate																Owner occupied commercial real estate	3,487		690		—		4,177		1,461,589		6,938		1,472,704
Non-owner occupied commercial real estate																Non-owner occupied commercial real estate	614		81		—		695		1,493,619		1,563		1,495,877
Real estate construction																Real estate construction	5,689		72		—		5,761		1,020,153		1,167		1,027,081
Agricultural and agricultural real estate	Agricultural and agricultural real estate	99		—		—		99		549,376		15,933		565,408		Agricultural and agricultural real estate	3,734		79		26		3,839		541,455		20,543		565,837
Residential real estate	Residential real estate	5,147		49		—		5,196		655,329		13,078		673,603		Residential real estate	4,166		24		180		4,370		814,840		13,067		832,277
Consumer	Consumer	2,724		307		—		3,031		431,799		5,328		440,158		Consumer	2,511		651		—		3,162		436,675		3,495		443,332
Total gross loans receivable held to maturity	Total gross loans receivable held to maturity	$	15,363	$	561	$	726	$	16,650	$	7,322,288	$	71,943	$	7,410,881	Total gross loans receivable held to maturity	$	25,322	$	2,501	$	4,105	$	31,928	$	8,259,441	$	76,548	$	8,367,917

~~The~~Loans delinquent 30 to 89 days as a percent of total loans were 0.22% at June 30, 2020, compared to 0.33% at December 31, 2019. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified. All individually assessed loans are reviewed at least annually.

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

average outstanding loan balances recorded on the consolidated balance sheet during the year ended December 31, 2019, and the interest income recognized on the impaired loans during the ~~three- and nine-month period ended September 30, 2019, and~~ year ended December 31, ~~2018,~~2019, in thousands:


		Unpaid Principal Balance		Loan Balance		Related Allowance Recorded		Quarter- to- Date Avg. Loan Balance		Quarter- to- Date Interest Income Recognized		Year- to- Date Avg. Loan Balance		Year- to- Date Interest Income Recognized			Unpaid Principal Balance		Loan Balance		Related Allowance Recorded		Year-to- Date Avg. Loan Balance		Year-to- Date Interest Income Recognized
September 30, 2019
December 31, 2019																December 31, 2019
Impaired loans with a related allowance:	Impaired loans with a related allowance:															Impaired loans with a related allowance:
Commercial	Commercial	$	11,025	$	11,015	$	6,124	$	11,399	$	—	$	11,630	$	9	Commercial	$	11,727	$	11,710	$	6,276	$	11,757	$	6
Commercial real estate		1,751		1,751		308		1,596		6		1,386		17
Total commercial and commercial real estate		12,776		12,766		6,432		12,995		6		13,016		26
Owner occupied commercial real estate																Owner occupied commercial real estate	712		712		352		1,435		22
Non-owner occupied commercial real estate																Non-owner occupied commercial real estate	138		138		33		—		—
Real estate construction																Real estate construction	17		17		—		—		—
Agricultural and agricultural real estate	Agricultural and agricultural real estate	2,979		2,979		1,084		3,100		17		2,881		17		Agricultural and agricultural real estate	2,751		2,237		916		2,739		—
Residential real estate	Residential real estate	999		999		123		1,086		3		1,157		3		Residential real estate	1,378		1,378		176		1,116		—
Consumer	Consumer	1,122		1,120		475		1,116		1		1,197		8		Consumer	998		997		419		1,170		11
Total loans held to maturity	Total loans held to maturity	$	17,876	$	17,864	$	8,114	$	18,297	$	27	$	18,251	$	54	Total loans held to maturity	$	17,721	$	17,189	$	8,172	$	18,217	$	39
Impaired loans without a related allowance:	Impaired loans without a related allowance:															Impaired loans without a related allowance:
Commercial	Commercial	$	14,752	$	12,340	$	—	$	13,529	$	186	$	12,989	$	627	Commercial	$	22,525	$	20,104	$	—	$	19,141	$	782
Commercial real estate		18,243		18,162		—		18,897		88		16,897		215
Total commercial and commercial real estate		32,995		30,502		—		32,426		274		29,886		842
Owner occupied commercial real estate																Owner occupied commercial real estate	8,756		8,756		—		8,337		341
Non-owner occupied commercial real estate																Non-owner occupied commercial real estate	1,592		1,592		—		1,515		62
Real estate construction																Real estate construction	668		668		—		636		26
Agricultural and agricultural real estate	Agricultural and agricultural real estate	20,137		17,094		—		16,958		12		16,243		45		Agricultural and agricultural real estate	19,113		16,317		—		16,837		60
Residential real estate	Residential real estate	16,578		16,553		—		16,612		69		17,362		220		Residential real estate	19,382		19,300		—		17,073		280
Consumer	Consumer	3,979		3,980		—		3,897		3		4,314		46		Consumer	3,135		3,126		—		4,182		45
Total loans held to maturity	Total loans held to maturity	$	73,689	$	68,129	$	—	$	69,893	$	358	$	67,805	$	1,153	Total loans held to maturity	$	75,171	$	69,863	$	—	$	67,721	$	1,596
Total impaired loans held to maturity:	Total impaired loans held to maturity:															Total impaired loans held to maturity:
Commercial	Commercial	$	25,777	$	23,355	$	6,124	$	24,928	$	186	$	24,619	$	636	Commercial	$	34,252	$	31,814	$	6,276	$	30,898	$	788
Commercial real estate		19,994		19,913		308		20,493		94		18,283		232
Total commercial and commercial real estate		45,771		43,268		6,432		45,421		280		42,902		868
Owner occupied commercial real estate																Owner occupied commercial real estate	9,468		9,468		352		9,772		363
Non-owner occupied commercial real estate																Non-owner occupied commercial real estate	1,730		1,730		33		1,515		62
Real estate construction																Real estate construction	685		685		—		636		26
Agricultural and agricultural real estate	Agricultural and agricultural real estate	23,116		20,073		1,084		20,058		29		19,124		62		Agricultural and agricultural real estate	21,864		18,554		916		19,576		60
Residential real estate	Residential real estate	17,577		17,552		123		17,698		72		18,519		223		Residential real estate	20,760		20,678		176		18,189		280
Consumer	Consumer	5,101		5,100		475		5,013		4		5,511		54		Consumer	4,133		4,123		419		5,352		56
Total impaired loans held to maturity	Total impaired loans held to maturity	$	91,565	$	85,993	$	8,114	$	88,190	$	385	$	86,056	$	1,207	Total impaired loans held to maturity	$	92,892	$	87,052	$	8,172	$	85,938	$	1,635

Unpaid
Principal
Balance Loan
Balance Related
Allowance
Recorded Year-to-
Date
Avg.
Loan
Balance Year-to-
Date
Interest
Income
Recognized
December 31, 2018
Impaired loans with a related allowance:
Commercial $ 12,376 $ 12,366 $ 5,733 $ 4,741 $ 33
Commercial real estate 891 891 218 4,421 25
Total commercial and commercial real estate 13,267 13,257 5,951 9,162 58
Agricultural and agricultural real estate 1,718 1,718 686 2,165 2
Residential real estate 647 647 168 1,138 12
Consumer 1,373 1,373 749 2,934 29
Total loans held to maturity $ 17,005 $ 16,995 $ 7,554 $ 15,399 $ 101
Impaired loans without a related allowance:
Commercial $ 13,616 $ 11,836 $ — $ 10,052 $ 299
Commercial real estate 13,578 13,497 — 13,000 249
Total commercial and commercial real estate 27,194 25,333 — 23,052 548
Agricultural and agricultural real estate 16,836 14,233 — 14,781 5
Residential real estate 19,604 19,604 — 23,950 308
Consumer 5,631 5,631 — 5,117 97
Total loans held to maturity $ 69,265 $ 64,801 $ — $ 66,900 $ 958
Total impaired loans held to maturity:
Commercial $ 25,992 $ 24,202 $ 5,733 $ 14,793 $ 332
Commercial real estate 14,469 14,388 218 17,421 274
Total commercial and commercial real estate 40,461 38,590 5,951 32,214 606
Agricultural and agricultural real estate 18,554 15,951 686 16,946 7
Residential real estate 20,251 20,251 168 25,088 320
Consumer 7,004 7,004 749 8,051 126
Total impaired loans held to maturity $ 86,270 $ 81,796 $ 7,554 $ 82,299 $ 1,059
On November 30, 2019, Heartland's Illinois Bank & Trust subsidiary completed the acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank & Trust Company, headquartered in Rockford, Illinois. As of November 30, 2019, Rockford Bank & Trust had gross loans of $366.6 million, and the estimated fair value of the loans acquired was $354.0 million.

On May 10, 2019, Heartland completed the acquisition of Blue Valley Ban Corp., parent company of Bank of Blue Valley, headquartered in Overland Park, Kansas. As of May 10, 2019, Blue Valley Ban Corp. had gross loans of ~~$558.4~~$558.2 million, and the estimated fair value of the loans acquired was ~~$542.3~~$542.0 million.

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

NOTE 5: ALLOWANCE FOR CREDIT LOSSES

~~On February 23, 2018, Heartland acquired Signature Bancshares, Inc., parent company of Signature Bank, based~~Changes in ~~Minnetonka, Minnesota. As of February 23, 2018, Signature Bancshares, Inc. had gross~~the allowance for credit losses on loans ~~of $335.1 million~~for the three- and ~~the estimated fair value of the loans acquired was $324.5 million.~~six- month periods ended June 30, 2020, and June 30, 2019, were as follows, in thousands:


	Commercial and Industrial		PPP		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at March 31, 2020	$	32,463	$	—	$	10,336	$	8,321	$	22,951	$	4,797	$	8,725	$	9,757	$	97,350
Charge-offs	(2,767)		—		(213)		(19)		(84)		(1)		(235)		(245)		(3,564)
Recoveries	432		—		191		8		210		—		92		211		1,144
Provision	2,403		—		13,088		1,852		5,590		905		722		447		25,007
Balance at June 30, 2020	$	32,531	$	—	$	23,402	$	10,162	$	28,667	$	5,701	$	9,304	$	10,170	$	119,937

	Commercial and Industrial		PPP		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at December 31, 2019	$	30,787	$	—	$	8,214	$	7,802	$	11,599	$	5,673	$	1,504	$	4,816	$	70,395
Impact of ASU 2016-13 adoption	3,147		—		(407)		(2,834)		3,413		(380)		4,817		4,315		12,071
Charge-offs	(8,363)		—		(213)		(19)		(105)		(254)		(314)		(597)		(9,865)
Recoveries	784		—		192		8		215		826		95		344		2,464
Provision	6,176		—		15,616		5,205		13,545		(164)		3,202		1,292		44,872
Balance at June 30, 2020	$	32,531	$	—	$	23,402	$	10,162	$	28,667	$	5,701	$	9,304	$	10,170	$	119,937


	Commercial and Industrial		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at March 31, 2019	$	27,250	6,330		7,126		9,994		$	5,518	$	1,623	$	4,798	$	62,639
Charge-offs	(3,971)		(13)		—		(101)		(48)		(201)		(446)		(4,780)
Recoveries	276		4		60		124		1		34		574		1,073
Provision	4,125		(139)		296		(7)		515		136		(8)		4,918
Balance at June 30, 2019	$	27,680	$	6,182	$	7,482	$	10,010	$	5,986	$	1,592	$	4,918	$	63,850

	Commercial and Industrial		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at December 31, 2018	$	26,306	$	6,525	$	7,430	$	9,679	$	4,914	$	1,813	$	5,296	$	61,963
Charge-offs	(4,951)		(36)		—		(155)		(427)		(341)		(820)		(6,730)
Recoveries	584		93		100		128		329		86		744		2,064
Provision	5,741		(400)		(48)		358		1,170		34		(302)		6,553
Balance at June 30, 2019	$	27,680	$	6,182	$	7,482	$	10,010	$	5,986	$	1,592	$	4,918	$	63,850

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

from nonaccretable to accretable with a positive impact on future interest income. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

At September 30, 2019, and December 31, 2018, the carrying amount of loans acquired since 2015 consist of purchased impaired and nonimpaired purchased loans as summarized in the following table, in thousands:

September 30, 2019 December 31, 2018
Impaired
Purchased
Loans Non
Impaired
Purchased
Loans Total
Purchased
Loans Impaired
Purchased
Loans Non
Impaired
Purchased
Loans Total
Purchased
Loans
Commercial $ 6,744 $ 260,192 $ 266,936 $ 3,801 $ 243,693 $ 247,494
Commercial real estate 3,260 1,086,336 1,089,596 158 1,098,171 1,098,329
Agricultural and agricultural real estate — 9,827 9,827 — 27,115 27,115
Residential real estate — 157,575 157,575 231 184,389 184,620
Consumer loans — 85,918 85,918 — 75,773 75,773
Total covered loans $ 10,004 $ 1,599,848 $ 1,609,852 $ 4,190 $ 1,629,141 $ 1,633,331

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

Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Balance at beginning of period $ (184) $ 463 $ 227 $ 57
Original yield discount, net, at date of acquisition — — 27 508
Accretion (1,438) (93) (2,546) (943)
Reclassification from nonaccretable difference⁽¹⁾
1,687 186 2,357 934
Balance at period end $ 65 $ 556 $ 65 $ 556
(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 $44.6 million, and the estimated fair value of these loans was $28.2 million. At September 30, 2019, a majority of these loans were valued based upon the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of such collateral, and the timing and amount of the cash flows could not be reasonably estimated. At September 30, 2019, there was $103,000 of allowance recorded and $57,000 of allowance recorded at December 31, 2018, related to these ASC 310-30 loans. Provision expense of $39,000 and $675,000 was recorded for the nine-month periods ended September 30, 2019, and 2018, respectively.

For loans acquired since January 2015, the preliminary estimate on the acquisition dates of the contractually required payments receivable for all nonimpaired loans acquired was $4.22 billion, and the estimated fair value of the loans was $4.12 billion.

~~NOTE 5: ALLOWANCE FOR LOAN LOSSES~~

Changes in the allowance for ~~loan~~credit losses on unfunded commitments for the three- and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2019, and September 30, 2018,~~2020, were as ~~follows, in thousands:~~follows:


Balance at March 31, 2020	$	15,468
Provision	1,924
Balance at June 30, 2020	$	17,392

Balance at December 31, 2019	$	248
Impact of ASU 2016-13 adoption	13,604
Provision	3,540
Balance at June 30, 2020	$	17,392

Commercial Commercial
Real Estate Agricultural and Agricultural Real Estate Residential
Real Estate Consumer Total
Balance at June 30, 2019 $ 24,082 $ 27,300 $ 6,049 $ 1,572 $ 4,847 $ 63,850
Charge-offs (2,175) (135) (1,670) (3) (859) (4,842)
Recoveries 1,273 204 198 25 313 2,013
Provision 2,105 2,012 774 (152) 462 5,201
Balance at September 30, 2019 $ 25,285 $ 29,381 $ 5,351 $ 1,442 $ 4,763 $ 66,222
Commercial Commercial
Real Estate Agricultural and Agricultural
Real Estate Residential
Real Estate Consumer Total
Balance at December 31, 2018 $ 24,505 $ 25,538 $ 4,953 $ 1,785 $ 5,182 $ 61,963
Charge-offs (6,506) (295) (2,098) (316) (2,357) (11,572)
Recoveries 1,642 381 533 72 1,449 4,077
Provision 5,644 3,757 1,963 (99) 489 11,754
Balance at September 30, 2019 $ 25,285 $ 29,381 $ 5,351 $ 1,442 $ 4,763 $ 66,222

Commercial Commercial
Real Estate Agricultural and Agricultural Real Estate Residential
Real Estate Consumer Total
Balance at June 30, 2018 $ 20,709 $ 23,727 $ 5,709 $ 1,857 $ 9,322 $ 61,324
Charge-offs (2,945) (199) (1,145) — (1,831) (6,120)
Recoveries 158 242 — 1 378 779
Provision 4,147 (80) 2 (8) 1,177 5,238
Balance at September 30, 2018 $ 22,069 $ 23,690 $ 4,566 $ 1,850 $ 9,046 $ 61,221
Commercial Commercial
Real Estate Agricultural and Agricultural
Real Estate Residential
Real Estate Consumer Total
Balance at December 31, 2017 $ 18,098 $ 21,950 $ 4,258 $ 2,224 $ 9,156 $ 55,686
Charge-offs (4,717) (761) (1,357) (211) (4,462) (11,508)
Recoveries 562 1,013 14 77 1,045 2,711
Provision 8,126 1,488 1,651 (240) 3,307 14,332
Balance at September 30, 2018 $ 22,069 $ 23,690 $ 4,566 $ 1,850 $ 9,046 $ 61,221
Prior to the adoption of ASU 2016-13, the allowance for credit losses on unfunded commitments was considered immaterial.

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

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

Heartland had goodwill of ~~$427.1~~$446.3 million at ~~September~~both June 30, ~~2019,~~2020, and ~~$391.7 million at~~ December 31, ~~2018.~~2019. Heartland conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. There was 0 goodwill impairment as of the most recent annual assessment. Due to the COVID-19 pandemic and economic conditions, an interim quantitative assessment of goodwill was performed during the second quarter of 2020, and no goodwill impairment was identified.

Heartland recorded $19.2 million of goodwill and $1.8 million of core deposit intangibles in connection with the acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company, headquartered in Rockford, Illinois on November 30, 2019.

Heartland recorded $35.4 million of goodwill and $11.4 million of core deposit intangibles in connection with the acquisition of Blue Valley Ban Corp., parent company of Bank of Blue Valley, headquartered in Overland Park, Kansas on May 10, 2019.

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

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

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

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

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

Heartland's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangibles, and commercial servicing rights. The gross carrying amount of these intangible assets and the associated accumulated amortization at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, are presented in the table below, in thousands:


		September 30, 2019										December 31, 2018											June 30, 2020				December 31, 2019
		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount			Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:	Amortizing intangible assets:													Amortizing intangible assets:
Core deposit intangibles	Core deposit intangibles	$	95,033	$	45,428	$	49,605	$	83,640	$	36,403	$	47,237	Core deposit intangibles	$	96,821	$	53,996	$	42,825	$	96,821	$	48,338	$	48,483
Customer relationship intangibles	Customer relationship intangibles	1,177		963		214		1,177		935		242		Customer relationship intangibles	1,177		991		186		1,177		972		205
Mortgage servicing rights	Mortgage servicing rights	7,584		2,562		5,022		42,228		12,865		29,363		Mortgage servicing rights	9,375		4,890		4,485		7,886		2,265		5,621
Commercial servicing rights	Commercial servicing rights	6,936		5,687		1,249		6,834		5,125		1,709		Commercial servicing rights	6,990		6,006		984		6,952		5,837		1,115
Total	Total	$	110,730	$	54,640	$	56,090	$	133,879	$	55,328	$	78,551	Total	$	114,363	$	65,883	$	48,480	$	112,836	$	57,412	$	55,424

On April 30, 2019, Dubuque Bank and Trust Company closed on the sale of substantially all its servicing rights portfolio, which contained loans with an unpaid principal balance of $3.31 billion to PNC Bank, N.A. The transaction qualified as a sale, and $20.6 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of June 30, 2019. Cash of approximately ~~$34.8~~$36.6 million was received during ~~the second quarter,~~2019, and Heartland recorded ~~an estimated~~a gain on the sale of this portfolio of approximately ~~$13.3~~$14.5 million. ~~A payable of approximately $293,000 was recorded as of September 30, 2019, due to the timing of the servicing transfer per the terms of the sale agreement.~~ In the agreement, which ~~includes~~included customary terms and conditions, Dubuque Bank and Trust Company provided interim servicing of the loans until the transfer date, which was August 1, 2019.

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


		Core Deposit Intangibles		Customer Relationship Intangibles		Mortgage Servicing Rights		Commercial Servicing Rights		Total			Core Deposit Intangibles		Customer Relationship Intangibles		Mortgage Servicing Rights		Commercial Servicing Rights		Total
Three months ending December 31, 2019		$	2,908	$	9	$	472	$	89	$	3,478
Six months ending December 31, 2020												Six months ending December 31, 2020	$	4,918	$	18	$	1,524	$	141	$	6,601
Year ending December 31,	Year ending December 31,											Year ending December 31,
2020		10,159		36		1,137		311		11,643
2021	2021	8,462		35		975		275		9,747		2021	8,691		35		740		261		9,727
2022	2022	6,898		35		813		240		7,986		2022	7,102		34		635		232		8,003
2023	2023	6,019		34		649		158		6,860		2023	6,202		34		529		157		6,922
2024	2024	4,945		33		488		86		5,552		2024	5,108		33		423		98		5,662
2025												2025	4,265		32		317		95		4,709
Thereafter	Thereafter	10,214		32		488		90		10,824		Thereafter	6,539		—		317		—		6,856
Total	Total	$	49,605	$	214	$	5,022	$	1,249	$	56,090	Total	$	42,825	$	186	$	4,485	$	984	$	48,480

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of ~~September~~June 30, ~~2019.~~2020. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others ~~at First Bank & Trust~~ were approximately ~~$621.5~~$661.7 million at ~~September~~June 30, ~~2019~~2020 compared to ~~$648.9~~$616.7 million at December 31, 2018. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio at First Bank & Trust were approximately $16.3 million at September 30, 2019 and $5.9 million at December 31, 2018.

~~Heartland transferred custodial escrow balances totaling $22.9 million to PNC Bank, N.A. in conjunction with the transfer of the mortgage servicing rights portfolio on August 1,~~ 2019. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $12.7 million at ~~Dubuque Bank~~June 30, 2020 and ~~Trust Company totaled $17.7~~$5.0 million at December 31, ~~2018.~~2019.

At ~~September~~June 30, ~~2019,~~2020, the fair value of the mortgage servicing rights ~~at First Bank & Trust~~ was estimated at ~~$5.0~~$4.5 million compared to ~~$7.1~~$5.6 million at December 31, ~~2018.~~

2019. The fair value of mortgage servicing rights is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings of ~~First Bank & Trust's~~the mortgage servicing rights are considered in the calculation. The average constant prepayment rate was ~~16.40%~~17.10% for the ~~September~~June 30, ~~2019~~2020 valuation compared to ~~10.30%~~14.20% for the December 31, ~~2018~~2019 valuation. The discount rate was 9.02% for June 30, 2020 compared to 9.03% ~~for both September 30, 2019 and~~at December 31, ~~2018~~2019 valuations. The average capitalization rate for the first ~~nine months~~six months of ~~2019~~2020 ranged from 80 76 to ~~98 basis~~116 basis points compared to a range of 9381 to ~~117~~98 basis points for ~~2018 since acquisition on May 18, 2018.~~ the first six months of 2019. Fees collected for the servicing of mortgage loans for others were ~~$422,000~~$410,000 and ~~$2.6 million~~$427,000 for the ~~quarters~~quarter ended ~~September~~June 30, 2020 and June 30, 2019, ~~and September 30, 2018,~~ respectively, and ~~$1.3 million~~$819,000 and ~~$7.3 million~~$854,000 for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018.~~2019.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, and ~~September~~June 30, ~~2018:~~2019:


		2019			2018				2020			2019
Balance at January 1,	Balance at January 1,	$	29,363		$	23,248		Balance at January 1,	$	5,621		$	29,363
Originations	Originations	654			4,322			Originations	1,490			342
Amortization	Amortization	(2,867)			(4,394)			Amortization	(1,070)			(2,395)

Sale of mortgage servicing rights	Sale of mortgage servicing rights	(20,556)			—			Sale of mortgage servicing rights	—			(20,556)
Acquired mortgage servicing rights		—			6,995

Valuation allowance	Valuation allowance	(1,572)			—			Valuation allowance	(1,556)			(953)
Balance at period end	Balance at period end	$	5,022		$	30,171		Balance at period end	$	4,485		$	5,801

Mortgage servicing rights, net to servicing portfolio	Mortgage servicing rights, net to servicing portfolio	0.81		%	0.73		%	Mortgage servicing rights, net to servicing portfolio	0.68		%	0.92		%

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 ~~$87.0~~$74.2 million at

~~September~~ June 30, ~~2019~~2020 and ~~$107.4~~$82.1 million at December 31, ~~2018.~~2019. The commercial servicing rights portfolio is separated into two tranches at the respective Heartland subsidiary, loans with a term of less than 20 years and loans with a term of more than 20 years. Fees collected for the servicing of commercial loans for others were ~~$216,000~~$54,000 and ~~$401,000~~$230,000 for the quarter ended ~~September~~June 30, 2020 and June 30, 2019, ~~and September 30, 2018,~~ respectively, and ~~$826,000~~$172,000 and ~~$1.2 million~~$610,000 for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2019,~~2020 and ~~September~~June 30, ~~2018, respectively.~~2019.

The fair value of each commercial servicing rights portfolio is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds and servicing costs, are considered in the calculation. The range of average constant prepayment rates for the valuations was ~~13.11%~~15.22% to ~~16.60%~~19.56% as of ~~September~~June 30, ~~2019,~~2020, compared to ~~11.01%~~14.25% to ~~13.50%~~18.08% as of December 31, ~~2018.~~2019. The discount rate range was ~~9.77%~~8.04% to ~~14.41%~~14.40% for the ~~September~~June 30, ~~2019,~~2020, valuations compared to ~~13.44%~~10.65% to ~~16.96%~~13.94% for the December 31, ~~2018,~~2019, valuations. The capitalization rate for both ~~2019~~2020 and ~~2018~~2019 ranged from 310 to 445 basis points. The total fair value of Heartland's commercial servicing rights was estimated at ~~$1.8~~$1.4 million as of ~~September~~June 30, ~~2019,~~2020, and ~~$2.1~~$1.6 million as of December 31, ~~2018.~~2019.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the ~~nine-months~~six-months ended ~~September~~June 30, ~~2019,~~2020, and ~~September~~June 30, ~~2018:~~2019:


		2019			2018				2020			2019
Balance at January 1,	Balance at January 1,	$	1,709		$	2,609		Balance at January 1,	$	1,115		$	1,709

Originations	Originations	102			82			Originations	38			73
Amortization	Amortization	(555)			(835)			Amortization	(169)			(403)
Valuation allowance on commercial servicing rights		(7)			12

Balance at period end	Balance at period end	$	1,249		$	1,868		Balance at period end	$	984		$	1,379
Fair value of commercial servicing rights	Fair value of commercial servicing rights	$	1,827		$	2,529		Fair value of commercial servicing rights	$	1,417		$	1,851
Commercial servicing rights, net to servicing portfolio	Commercial servicing rights, net to servicing portfolio	1.44		%	1.63		%	Commercial servicing rights, net to servicing portfolio	1.32		%	1.52		%

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

Mortgage and commercial servicing rights are subsequently measured using the amortization method, which requires the asset to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment at each Heartland subsidiary based upon the fair value of the assets as compared to the carrying amount. Impairment is recognized through a valuation allowance for specific tranches to the extent that fair value is less than carrying amount at each Heartland subsidiary. At ~~September~~June 30, ~~2019,~~2020, a ~~$1.6~~$516,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $2.0 million valuation allowance was required on the mortgage servicing rights ~~and at~~30-year tranche. At December 31, ~~2018,~~2019, a ~~$58,000~~$114,000 valuation allowance was required on the mortgage servicing ~~rights. At September 30, 2019,~~rights 15-year tranche and a ~~$7,000~~$797,000 valuation allowance was required on ~~commercial~~the mortgage servicing rights ~~with a term less than 20 years~~30-year tranche. At both June 30, 2020 and ~~0 valuation allowance was required on commercial servicing rights with a term greater than 20 years. At~~ December 31, ~~2018,~~2019, 0 valuation allowance was required on commercial servicing rights with a term less than 20 years and 0 valuation allowance was required on commercial servicing rights with a term greater than 20 years.

The following table summarizes, in thousands, the book value, the fair value of each tranche of the mortgage servicing rights and any recorded valuation allowance at each respective subsidiary at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018:~~2019:


September 30, 2019		Book Value 15-Year Tranche		Fair Value 15-Year Tranche		Impairment 15-Year Tranche		Book Value 30-Year Tranche		Fair Value 30-Year Tranche		Impairment 30-Year Tranche
Dubuque Bank and Trust Company		$	—	$	—	$	—	$	—	$	—	$	—
June 30, 2020														June 30, 2020	Book Value 15-Year Tranche		Fair Value 15-Year Tranche		Impairment 15-Year Tranche		Book Value 30-Year Tranche		Fair Value 30-Year Tranche		Impairment 30-Year Tranche

First Bank & Trust	First Bank & Trust	1,511		1,267		244		5,140		3,755		1,385		First Bank & Trust	1,533		1,017		516		5,478		3,469		2,009
Total	Total	$	1,511	$	1,267	$	244	$	5,140	$	3,755	$	1,385	Total	$	1,533	$	1,017	$	516	$	5,478	$	3,469	$	2,009
December 31, 2018
Dubuque Bank and Trust Company		$	2,195	$	4,636	$	—	$	20,025	$	36,901	$	—
December 31, 2019														December 31, 2019

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

The following table summarizes, in thousands, the book value, the fair value of each tranche of the commercial servicing rights and any recorded valuation allowance at each respective subsidiary at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018:~~2019:


September 30, 2019		Book Value Less than 20 Years		Fair Value Less than 20 Years		Impairment Less than 20 Years		Book Value More than 20 Years		Fair Value More than 20 Years		Impairment More than 20 Years
Citywide Banks		$	—	$	—	$	—	$	—	$	—	$	—
June 30, 2020														June 30, 2020	Book Value Less than 20 Years		Fair Value Less than 20 Years		Impairment Less than 20 Years		Book Value More than 20 Years		Fair Value More than 20 Years		Impairment More than 20 Years

Premier Valley Bank	Premier Valley Bank	24		17		7		149		167		—		Premier Valley Bank	1		11		—		111		140		—
Wisconsin Bank & Trust	Wisconsin Bank & Trust	155		331		—		928		1,311		—		Wisconsin Bank & Trust	99		236		—		773		1,030		—
Total	Total	$	179	$	348	$	7	$	1,077	$	1,478	$	—	Total	$	100	$	247	$	—	$	884	$	1,170	$	—
December 31, 2018
Citywide Banks		$	1	$	6	$	—	$	18	$	20	$	—
December 31, 2019														December 31, 2019

Premier Valley Bank	Premier Valley Bank	45		74		—		178		184		—		Premier Valley Bank	1		13		—		135		161		—
Wisconsin Bank & Trust	Wisconsin Bank & Trust	249		411		—		1,218		1,439		—		Wisconsin Bank & Trust	128		272		—		851		1,148		—
Total	Total	$	295	$	491	$	—	$	1,414	$	1,643	$	—	Total	$	129	$	285	$	—	$	986	$	1,309	$	—

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 ~~$2.2~~$4.6 million of cash as collateral at ~~September~~June 30, ~~2019~~2020 compared to ~~0 collateral~~$1.9 million at December 31, ~~2018.~~2019. At ~~September~~both June 30, 2020 and December 31, 2019, 0 collateral was required to be pledged by Heartland's ~~counterparties, compared to $770,000 collateral at December 31, 2018.~~counterparties.

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

Cash Flow Hedges

Heartland has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates. To manage the interest rate risk related to the variability of interest payments, Heartland has entered into various interest rate swap agreements. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received or made on Heartland's variable-rate liabilities. For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, the change in net unrealized losses on cash flow hedges reflects changes in the fair value of the swaps and

reclassification from accumulated other comprehensive income to interest expense totaling ~~$299,000.~~$600,000. For the next twelve months, Heartland estimates that cash ~~receipts~~payments and reclassification from accumulated other comprehensive income to ~~reduce~~ interest expense will total ~~$134,000.~~$1.7 million.

Heartland entered into 6 forward starting interest rate swap transactions to effectively convert Heartland Financial Statutory Trust IV, V, VI, and VII, which total $85.0 million, as well as Morrill Statutory Trust I and II, which total $20.0 million, from variable rate subordinated debentures to fixed rate debt. For accounting purposes, these 6 swap transactions are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $105.0 million of Heartland's subordinated debentures that reset quarterly on a specified reset date. At inception, Heartland asserted that the underlying principal balance would remain outstanding throughout the hedge transaction, making it probable that sufficient LIBOR-based interest payments would exist through the maturity date of the swaps. During the first quarter of ~~2019,~~2020, the interest rate swap ~~transactions~~transaction associated with ~~Morrill~~Heartland Financial Statutory Trust ~~I and II,~~VI, totaling $20.0 million, matured and the fixed rate debt has been converted to a variable rate subordinated ~~debentures.~~debenture.

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

The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as cash flow hedges at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


		Notional Amount		Fair Value		Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity		Notional Amount		Fair Value		Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity
September 30, 2019
June 30, 2020												June 30, 2020

Interest rate swap	Interest rate swap	$	25,000	$	(202)	Other liabilities	2.139	%	2.255	%	03/17/2021	Interest rate swap	$	25,000	$	(373)	Other liabilities	0.299	%	2.255	%	03/17/2021

Interest rate swap		20,000		(119)		Other liabilities	2.303		3.355		01/07/2020

Interest rate swap	Interest rate swap	26,667		154		Other assets	4.549		3.674		05/10/2021	Interest rate swap	23,667		(207)		Other liabilities	2.677		3.674		05/10/2021
Interest rate swap	Interest rate swap	26,500		(1,726)		Other liabilities	4.537		5.425		07/24/2028	Interest rate swap	24,250		(2,621)		Other liabilities	2.685		5.425		07/24/2028
Interest rate swap	Interest rate swap	20,000		(828)		Other liabilities	2.119		2.390		06/15/2024	Interest rate swap	20,000		(1,702)		Other liabilities	0.313		2.390		06/15/2024
Interest rate swap	Interest rate swap	20,000		(754)		Other liabilities	2.138		2.352		03/01/2024	Interest rate swap	20,000		(1,596)		Other liabilities	0.350		2.352		03/01/2024
Interest rate swap	Interest rate swap	6,000		(21)		Other liabilities	2.119		1.866		06/15/2021	Interest rate swap	6,000		(97)		Other liabilities	0.313		1.866		06/15/2021
Interest rate swap	Interest rate swap	3,000		(13)		Other liabilities	2.303		1.878		06/30/2021	Interest rate swap	3,000		(49)		Other liabilities	1.219		1.878		06/30/2021
December 31, 2018
December 31, 2019												December 31, 2019
Interest rate swap	Interest rate swap	$	25,000	$	191	Other assets	2.788	%	2.255	%	03/17/2021	Interest rate swap	$	25,000	$	(167)	Other liabilities	1.900	%	2.255	%	03/17/2021
Interest rate swap	Interest rate swap	20,000		(177)		Other liabilities	2.408		3.355		01/07/2020	Interest rate swap	20,000		(67)		Other liabilities	2.043		3.355		01/07/2020
Interest rate swap	Interest rate swap	10,000		29		Other assets	2.822		1.674		03/26/2019	Interest rate swap	25,667		135		Other assets	4.215		3.674		05/10/2021
Interest rate swap	Interest rate swap	10,000		28		Other assets	2.788		1.658		03/18/2019	Interest rate swap	25,750		(1,384)		Other liabilities	4.280		5.425		07/24/2028
Interest rate swap	Interest rate swap	29,667		763		Other assets	4.887		3.674		05/10/2021	Interest rate swap	20,000		(614)		Other liabilities	1.894		2.390		06/15/2024
Interest rate swap	Interest rate swap	28,750		(572)		Other liabilities	5.004		5.425		07/24/2028	Interest rate swap	20,000		(561)		Other liabilities	1.907		2.352		03/01/2024
Interest rate swap	Interest rate swap	20,000		157		Other assets	2.788		2.390		06/15/2024	Interest rate swap	6,000		(15)		Other liabilities	1.894		1.866		06/15/2021
Interest rate swap	Interest rate swap	20,000		185		Other assets	2.738		2.352		03/01/2024	Interest rate swap	3,000		(9)		Other liabilities	1.831		1.878		06/30/2021
Interest rate swap		6,000		105		Other Assets	2.788		1.866		06/15/2021
Interest rate swap		3,000		51		Other assets	2.787		1.878		06/30/2021

The table below identifies the gains and losses recognized on Heartland's derivative instruments designated as cash flow hedges for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019,~~2020, and ~~September~~June 30, ~~2018,~~2019, 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 September 30, 2019
Three Months Ended June 30, 2020										Three Months Ended June 30, 2020

Interest rate swaps	Interest rate swaps	$	(766)	Interest expense	$	(31)	Other income	$	—	Interest rate swaps	$	(100)	Interest expense	$	417	Other income	$	—
Nine Months Ended September 30, 2019
Six Months Ended June 30, 2020										Six Months Ended June 30, 2020

Interest rate swaps	Interest rate swaps	$	(4,269)	Interest expense	$	(296)	Other income	$	—	Interest rate swaps	$	(3,963)	Interest expense	$	600	Other income	$	—
Three Months Ended September 30, 2018
Three Months Ended June 30, 2019										Three Months Ended June 30, 2019

Interest rate swaps	Interest rate swaps	$	375	Interest expense	$	21	Other income	$	—	Interest rate swaps	$	(2,163)	Interest expense	$	(100)	Other income	$	—
Nine Months Ended September 30, 2018
Six Months Ended June 30, 2019										Six Months Ended June 30, 2019

Interest rate swaps	Interest rate swaps	$	3,198	Interest expense	$	(207)	Other income	$	—	Interest rate swaps	$	(3,503)	Interest expense	$	(265)	Other income	$	—

Fair Value Hedges

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

periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.

Heartland was required to pledge ~~$3.4~~$4.2 million and ~~$2.5~~$3.4 million of cash as collateral for these fair value hedges at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, respectively.

The table below identifies the notional amount, fair value and balance sheet category of Heartland's fair value hedges at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


		Notional Amount		Fair Value		Balance Sheet Category		Notional Amount		Fair Value		Balance Sheet Category
September 30, 2019
June 30, 2020							June 30, 2020

Fair value hedges	Fair value hedges	$	—	$	—	Other assets	Fair value hedges	$	21,048	$	(2,926)	Other liabilities
December 31, 2019							December 31, 2019

Fair value hedges	Fair value hedges	21,349		(1,818)		Other liabilities	Fair value hedges	21,250		(1,253)		Other liabilities
December 31, 2018
Fair value hedges		$	19,820	$	74	Other assets
Fair value hedges		15,064		$	(339)	Other liabilities

The table below identifies the gains and losses recognized on Heartland's fair value hedges for the three- and ~~nine-month~~six- month periods ended ~~September~~June 30, ~~2019,~~2020, and ~~September~~June 30, ~~2018,~~2019, in thousands:

Amount of Gain (Loss)

Income Statement Category

Three Months Ended ~~September~~June 30, 2020

Fair value hedges

Interest income

Six Months Ended June 30, 2020

Fair value hedges

(1,673)

Interest income

Three Months Ended June 30, 2019

Fair value hedges

~~(263)~~(660)

Interest income

~~Nine~~Six Months Ended ~~September~~June 30, 2019

Fair value hedges

~~(1,553)~~

~~Interest income~~

~~Three Months Ended September 30, 2018~~

~~Fair value hedges~~

~~179~~

~~Interest income~~

~~Nine Months Ended September 30, 2018~~

~~Fair value hedges~~

~~1,423~~ (1,290)

Interest income

Embedded Derivatives

Heartland has fixed rate loans with embedded derivatives. The loans contain terms that affect the cash flows or value of the loan similar to a derivative instrument, and therefore are considered to contain an embedded derivative. The embedded derivatives are bifurcated from the loans because the terms of the derivative instrument are not clearly and closely related to the loans. The embedded derivatives are recorded at fair value on the consolidated balance sheets as a part of other assets, and changes in the fair value are a component of noninterest income. The table below identifies the notional amount, fair value and balance sheet category of Heartland's embedded derivatives at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


		Notional Amount		Fair Value		Balance Sheet Category		Notional Amount		Fair Value		Balance Sheet Category
September 30, 2019
June 30, 2020							June 30, 2020
Embedded derivatives	Embedded derivatives	$	11,742	$	717	Other assets	Embedded derivatives	$	9,416	$	827	Other assets

December 31, 2019							December 31, 2019
Embedded derivatives	Embedded derivatives	—		—		Other liabilities	Embedded derivatives	$	9,627	$	465	Other assets
December 31, 2018
Embedded derivatives		$	11,266	$	453	Other assets
Embedded derivatives		2,231		(54)		Other liabilities

The table below identifies the gains and losses recognized on Heartland's embedded derivatives for the three- and ~~nine-month~~six--month periods ended ~~September~~June 30, ~~2019,~~2020, and ~~September~~June 30, ~~2018,~~2019, in thousands:

Amount of Gain (Loss)

Income Statement Category

Three Months Ended ~~September~~June 30, 2020

Embedded derivatives

Other noninterest income

Six Months Ended June 30, 2020

Embedded derivatives

362

Other noninterest income

Three Months Ended June 30, 2019

Embedded derivatives

~~1,389~~182

Other noninterest income

~~Nine~~Six Months Ended ~~September~~June 30, 2019

Embedded derivatives

~~318~~

~~Other noninterest income~~

~~Three Months Ended September 30, 2018~~

~~Embedded derivatives~~

~~108~~

~~Other noninterest income~~

~~Nine Months Ended September 30, 2018~~

~~Embedded derivatives~~

~~523~~1,071

Other noninterest income

Back-to-Back Loan Swaps

Heartland has interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan swaps, Heartland enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the consolidated balance sheets. Heartland was required to post ~~$25.2~~$51.6 million and ~~$2.0~~$20.2 million as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to pledge $0 at ~~September~~June 30, ~~2019,~~2020, and ~~$680,000~~$0 at December 31, ~~2018.~~2019. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the ~~nine~~three- and six months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018,~~2019, 0 gain or loss was recognized. The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as loan swaps at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


		Notional Amount		Fair Value		Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate			Notional Amount		Fair Value		Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
September 30, 2019
June 30, 2020											June 30, 2020
Customer interest rate swaps	Customer interest rate swaps	$	320,994	$	21,281	Other assets	4.72	%	4.32	%	Customer interest rate swaps	$	447,820	$	51,791	Other assets	4.47	%	2.53	%
Customer interest rate swaps	Customer interest rate swaps	320,994		(21,281)		Other liabilities	4.32		4.72		Customer interest rate swaps	447,820		(51,791)		Other liabilities	2.53		4.47
December 31, 2018
December 31, 2019											December 31, 2019
Customer interest rate swaps	Customer interest rate swaps	$	211,246	$	4,449	Other assets	5.10	%	4.96	%	Customer interest rate swaps	$	374,191	$	16,927	Other assets	4.68	%	4.05	%
Customer interest rate swaps	Customer interest rate swaps	211,246		(4,449)		Other liabilities	4.96		5.10		Customer interest rate swaps	374,191		(16,927)		Other liabilities	4.05		4.68

Other Free Standing Derivatives

Heartland has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments. Heartland enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on the commitments to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on the consolidated balance sheets, with the changes in fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting treatment. Heartland was required to pledge 0 collateral ~~of $0~~ at ~~September~~both June 30, ~~2019,~~2020, and ~~$35,000 at~~ December 31, ~~2018.~~2019. Heartland's counterparties were required to pledge 0 collateral at both ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, as collateral for these forward commitments.

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

The table below identifies the balance sheet category and fair values of Heartland's other free standing derivative instruments not designated as hedging instruments at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


		Balance Sheet Category	Notional Amount		Fair Value			Balance Sheet Category	Notional Amount		Fair Value
September 30, 2019
June 30, 2020							June 30, 2020
Interest rate lock commitments (mortgage)	Interest rate lock commitments (mortgage)	Other assets	$	29,816	$	970	Interest rate lock commitments (mortgage)	Other assets	$	64,501	$	2,653

Forward commitments	Forward commitments	Other assets	18,000		64		Forward commitments	Other assets	3,000		—
Forward commitments	Forward commitments	Other liabilities	48,500		(209)		Forward commitments	Other liabilities	51,500		(281)
Undesignated interest rate swaps	Undesignated interest rate swaps	Other liabilities	11,742		(717)		Undesignated interest rate swaps	Other liabilities	9,416		(827)
Undesignated interest rate swaps		Other assets	—		—
December 31, 2018

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

Forward commitments	Forward commitments	Other assets	—		—		Forward commitments	Other assets	16,000		15
Forward commitments	Forward commitments	Other liabilities	51,500		(399)		Forward commitments	Other liabilities	36,500		(113)
Undesignated interest rate swaps	Undesignated interest rate swaps	Other liabilities	11,266		(453)		Undesignated interest rate swaps	Other liabilities	9,627		(465)
Undesignated interest rate swaps		Other assets	2,231		54

The table below identifies the income statement category of the gains and losses recognized in income on Heartland's other free standing derivative instruments not designated as hedging instruments for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019,~~2020, and ~~September~~June 30, ~~2018,~~2019, in thousands:


	Income Statement Category	Gain (Loss) Recognized
Three Months Ended ~~September~~June 30, 2020
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	1,296
Forward commitments	Net gains on sale of loans held for sale	962
Undesignated interest rate swaps	Other noninterest income	(1)
Six Months Ended June 30, 2020
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	2,994
Forward commitments	Net gains on sale of loans held for sale	(184)
Undesignated interest rate swaps	Other noninterest income	(362)
Three Months Ended June 30, 2019
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	~~(255)~~552
Forward commitments	Net gains on sale of loans held for sale	~~283~~ (145)
Undesignated interest rate swaps	Other noninterest income	~~(1,389)~~182
~~Nine~~Six Months Ended ~~September~~June 30, 2019
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	~~561~~
~~Forward commitments~~	~~Net gains on sale of loans held for sale~~	~~255~~
~~Undesignated interest rate swaps~~	~~Other noninterest income~~	~~(318)~~
~~Three Months Ended September 30, 2018~~
~~Interest rate lock commitments (mortgage)~~	~~Net gains on sale of loans held for sale~~	$	~~(4,470)~~
~~Forward commitments~~	~~Net gains on sale of loans held for sale~~	~~644~~
~~Undesignated interest rate swaps~~	~~Other noninterest income~~	~~108~~
~~Nine Months Ended September 30, 2018~~
~~Interest rate lock commitments (mortgage)~~	~~Net gains on sale of loans held for sale~~	$	~~(1,849)~~816

Forward commitments	Net gains on sale of loans held for sale	~~352~~ (28)
Undesignated interest rate swaps	Other noninterest income	~~523~~1,071

NOTE 8: FAIR VALUE

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

Fair Value Hierarchy

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

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

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

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

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

Assets

Securities Available for Sale and Held to Maturity

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

Equity Securities with a Readily Determinable Fair Value

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

Loans Held for Sale

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

Loans Held to Maturity

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

Premises, Furniture and Equipment Held for Sale

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

Mortgage Servicing Rights

Mortgage servicing rights assets represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of the assumptions in the discounted cash flow analysis require a significant degree of management estimation and judgment. Mortgage servicing rights are subject to impairment testing. The carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third party. For purposes of measuring impairment, the rights are stratified into certain risk characteristics including note type and note term. If the valuation model reflects a fair value less than the carrying value, mortgage servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies mortgage servicing rights as nonrecurring with Level 3 measurement inputs.

Commercial Servicing Rights

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

Derivative Financial Instruments

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

Although Heartland has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, Heartland has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Heartland has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Interest rate lock commitments

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

Forward commitments

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

Other Real Estate Owned

Other real estate owned ("OREO") represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the fair value of the property at the time of acquisition (representing the property's cost basis), plus any acquisition costs, or the estimated fair value of the property, less disposal costs. Heartland considers third party appraisals, as well as independent fair value assessments from realtors or persons involved in selling OREO, in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. Heartland

periodically reviews OREO to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. OREO is classified as nonrecurring Level 3 of the fair value hierarchy.

The table below presents Heartland's assets and liabilities that are measured at fair value on a recurring basis as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands, aggregated by the level in the fair value hierarchy within which those measurements fall:


		Total Fair Value		Level 1		Level 2		Level 3			Total Fair Value		Level 1		Level 2		Level 3
September 30, 2019
June 30, 2020										June 30, 2020
Assets	Assets									Assets

Securities available for sale	Securities available for sale									Securities available for sale
U.S. government corporations and agencies	U.S. government corporations and agencies	$	8,950	$	7,497	$	1,453	$	—	U.S. government corporations and agencies	$	5,842	$	4,547	$	1,295	$	—
Mortgage and asset-backed securities	Mortgage and asset-backed securities	2,480,677		—		2,480,677		—		Mortgage and asset-backed securities	3,134,439		—		3,134,439		—
Obligations of states and political subdivisions	Obligations of states and political subdivisions	512,579		—		512,579		—		Obligations of states and political subdivisions	966,679		—		966,679		—

Equity securities with a readily determinable fair value	Equity securities with a readily determinable fair value	18,362		—		18,362		—		Equity securities with a readily determinable fair value	19,391		—		19,391		—
Derivative financial instruments⁽¹⁾	Derivative financial instruments⁽¹⁾	22,152		—		22,152		—		Derivative financial instruments⁽¹⁾	52,618		—		52,618		—
Interest rate lock commitments	Interest rate lock commitments	970		—		—		970		Interest rate lock commitments	2,653		—		—		2,653
Forward commitments		64		—		64		—

Total assets at fair value	Total assets at fair value	$	3,043,754	$	7,497	$	3,035,287	$	970	Total assets at fair value	$	4,181,622	$	4,547	$	4,174,422	$	2,653
Liabilities	Liabilities									Liabilities
Derivative financial instruments⁽²⁾	Derivative financial instruments⁽²⁾	$	27,479	$	—	$	27,479	$	—	Derivative financial instruments⁽²⁾	$	62,189	$	—	$	62,189	$	—
Forward commitments	Forward commitments	209		��		209		—		Forward commitments	281		—		281		—

Total liabilities at fair value	Total liabilities at fair value	$	27,688	$	—	$	27,688	$	—	Total liabilities at fair value	$	62,470	$	—	$	62,470	$	—
December 31, 2018
December 31, 2019										December 31, 2019
Assets	Assets									Assets

Securities available for sale	Securities available for sale									Securities available for sale
U.S. government corporations and agencies	U.S. government corporations and agencies	$	31,951	$	25,414	$	6,537	$	—	U.S. government corporations and agencies	$	9,893	$	8,503	$	1,390	$	—
Mortgage and asset-backed securities	Mortgage and asset-backed securities	2,026,698		—		2,026,698		—		Mortgage and asset-backed securities	2,577,278		—		2,577,278		—
Obligations of states and political subdivisions	Obligations of states and political subdivisions	374,974		—		374,974		—		Obligations of states and political subdivisions	707,190		—		707,190		—

Equity securities	Equity securities	17,086		—		17,086		—		Equity securities	18,435		—		18,435		—
Derivative financial instruments⁽¹⁾	Derivative financial instruments⁽¹⁾	6,539		—		6,539		—		Derivative financial instruments⁽¹⁾	17,527		—		17,527		—
Interest rate lock commitments	Interest rate lock commitments	725		—		—		725		Interest rate lock commitments	681		—		—		681

Total assets at fair value	Total assets at fair value	$	2,457,973	$	25,414	$	2,431,834	$	725	Total assets at fair value	$	3,331,019	$	8,503	$	3,321,835	$	681
Liabilities	Liabilities									Liabilities
Derivative financial instruments⁽²⁾	Derivative financial instruments⁽²⁾	$	6,044	$	—	$	6,044	$	—	Derivative financial instruments⁽²⁾	$	21,462	$	—	$	21,462	$	—
Forward commitments	Forward commitments	399		—		399		—		Forward commitments	113		—		113		—

Total liabilities at fair value	Total liabilities at fair value	$	6,443	$	—	$	6,443	$	—	Total liabilities at fair value	$	21,575	$	—	$	21,575	$	—

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

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


		Fair Value Measurements at September 30, 2019																			Fair Value Measurements at June 30, 2020
		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses			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		$	10,767	$	—	$	—	$	10,767	$	1,098
Commercial real estate		1,088		—		—		1,088		72
Collateral dependent loans:												Collateral dependent loans:
Commercial and industrial												Commercial and industrial	$	7,672	$	—	$	—	$	7,672	$	322
Owner occupied commercial real estate												Owner occupied commercial real estate	3,982		—		—		3,982		—
Non-owner occupied commercial real estate												Non-owner occupied commercial real estate	1,144		—		—		1,144		—
Real estate construction												Real estate construction	132		—		—		132		—
Agricultural and agricultural real estate	Agricultural and agricultural real estate	11,536		—		—		11,536		1,015		Agricultural and agricultural real estate	11,358		—		—		11,358		—
Residential real estate	Residential real estate	1,042		—		—		1,042		24		Residential real estate	563		—		—		563		52
Consumer	Consumer	645		—		—		645		—		Consumer	162		—		—		162		—
Total collateral dependent impaired loans		$	25,078	$	—	$	—	$	25,078	$	2,209
Total collateral dependent loans												Total collateral dependent loans	$	25,013	$	—	$	—	$	25,013	$	374
Loans held for sale	Loans held for sale	$	35,427	$	—	$	35,427	$	—	$	(1,234)	Loans held for sale	$	54,382	$	—	$	54,382	$	—	$	(2,001)
Other real estate owned	Other real estate owned	$	6,425	$	—	$	—	$	6,425	$	880	Other real estate owned	5,539		—		—		5,539		651
Premises, furniture and equipment held for sale	Premises, furniture and equipment held for sale	$	3,251	$	—	$	—	$	3,251	$	954	Premises, furniture and equipment held for sale	567		—		—		567		—
Servicing rights	Servicing rights	$	5,039	$	—	$	—	$	5,039	$	1,579	Servicing rights	4,485		—		—		4,485		1,556


		Fair Value Measurements at December 31, 2018																			Fair Value Measurements at December 31, 2019
		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses			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:	Collateral dependent impaired loans:											Collateral dependent impaired loans:
Commercial		$	12,932	$	—	$	—	$	12,932	$	660
Commercial real estate		405		—		—		405		72
Commercial and industrial												Commercial and industrial	$	15,173	$	—	$	—	$	15,173	$	1,114
Owner occupied commercial real estate												Owner occupied commercial real estate	1,352		—		—		1,352		—
Non-owner occupied commercial real estate												Non-owner occupied commercial real estate	1,305		—		—		1,305		—
Real estate construction												Real estate construction	—		—		—		—		—
Agricultural and agricultural real estate	Agricultural and agricultural real estate	11,070		—		—		11,070		575		Agricultural and agricultural real estate	12,623		—		—		12,623		1,254
Residential real estate	Residential real estate	478		—		—		478		—		Residential real estate	4,978		—		—		4,978		82
Consumer	Consumer	624		—		—		624		—		Consumer	1,033		—		—		1,033		—
Total collateral dependent impaired loans	Total collateral dependent impaired loans	$	25,509	$	—	$	—	$	25,509	$	1,307	Total collateral dependent impaired loans	$	36,464	$	—	$	—	$	36,464	$	2,450
Loans held for sale	Loans held for sale	$	119,801	$	—	$	52,577	$	67,224	$	(1,870)	Loans held for sale	$	26,748	$	—	$	26,748	$	—	$	(980)

Other real estate owned	Other real estate owned	$	6,153	$	—	$	—	$	6,153	$	2,647	Other real estate owned	6,914		—		—		6,914		947
Premises, furniture and equipment held for sale	Premises, furniture and equipment held for sale	$	7,258	$	—	$	—	$	7,258	$	59	Premises, furniture and equipment held for sale	2,967		—		—		2,967		735
Servicing rights	Servicing rights	$	7,143	$	—	$	—	$	7,143	$	58	Servicing rights	5,621		—		—		5,621		911

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

Fair Value at
9/30/2019

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Fair Value at
6/30/2020

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Interest rate lock commitments

970

Discounted cash flows

Closing ratio

0-99% (90%)⁽¹⁾

Interest rate lock commitments

2,653

Discounted cash flows

Closing ratio

0-99% (88%)⁽¹⁾

Other real estate owned

6,425

Modified appraised value

Third party appraisal

(2)

Other real estate owned

5,539

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Other real estate owned

Appraisal discount

0-10%⁽³⁾

Servicing rights

5,039

Discounted cash flows

Third party valuation

(4)

Servicing rights

4,485

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

3,251

Modified appraised value

Third party appraisal

Premises, furniture and equipment held for sale

567

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Premises, furniture and equipment held for sale

Appraisal discount

0-10%⁽³⁾

Collateral dependent impaired loans:

Commercial

10,767

Modified appraised value

Third party appraisal

(2)

Commercial

7,672

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%⁽³⁾

Commercial

Appraisal discount

0-10%⁽³⁾

Commercial real estate

1,088

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Owner occupied commercial real estate

3,982

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%⁽³⁾

Non-owner occupied commercial real estate

1,144

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-7%⁽³⁾

Real estate construction

132

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Agricultural and agricultural real estate

11,536

Modified appraised value

Third party appraisal

(2)

Agricultural and agricultural real estate

11,358

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%⁽³⁾

Agricultural and agricultural real estate

Appraisal discount

0-8%⁽³⁾

Residential real estate

1,042

Modified appraised value

Third party appraisal

(2)

Residential real estate

563

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-12%⁽³⁾

Residential real estate

Appraisal discount

0-6%⁽³⁾

Consumer

645

Modified appraised value

Third party valuation

(2)

Consumer

162

Modified appraised value

Third party valuation

(2)

Valuation discount

0-10%⁽³⁾

Consumer

Valuation discount

0-7%⁽³⁾

(1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. The weighted average closing ratio for PrimeWest Mortgage Corporation is 90%.

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

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

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

Fair Value at
12/31/2018

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Fair Value at
12/31/2019

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Loans held for sale

67,224

Discounted cash flows

Sales contract

⁽¹⁾

Interest rate lock commitments

725

Discounted cash flows

Closing ratio

0-99% (91%)⁽²⁾

Interest rate lock commitments

681

Discounted cash flows

Closing ratio

0-99% (90%)⁽¹⁾

Other real estate owned

6,153

Modified appraised value

Third party appraisal

(3)

Other real estate owned

6,914

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽⁴⁾

Other real estate owned

Appraisal discount

0-10%⁽³⁾

Servicing rights

7,143

Discounted cash flows

Third party valuation

⁽⁵⁾

Servicing rights

5,621

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

7,258

Modified appraised value

Third party appraisal

(3)

Premises, furniture and equipment held for sale

2,967

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽⁴⁾

Premises, furniture and equipment held for sale

Appraisal discount

0-10%⁽³⁾

Collateral dependent impaired loans:

Commercial

12,932

Modified appraised value

Third party appraisal

(3)

Commercial

15,173

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%⁽⁴⁾

Appraisal discount

0-25%⁽³⁾

Commercial real estate

405

Modified appraised value

Third party appraisal

(3)

Owner occupied commercial real estate

1,352

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-14%⁽³⁾

Non-owner occupied commercial real estate

1,305

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-14%⁽³⁾

Real estate construction

—

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-19%⁽⁴⁾

Appraisal discount

0-14%⁽³⁾

Agricultural and agricultural real estate

11,070

Modified appraised value

Third party appraisal

(3)

Agricultural and agricultural real estate

12,623

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-24%⁽⁴⁾

Agricultural and agricultural real estate

Appraisal discount

0-15%⁽³⁾

Residential real estate

478

Modified appraised value

Third party appraisal

(3)

Residential real estate

3,088

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-24%⁽⁴⁾

Residential real estate

Appraisal discount

0-25%⁽³⁾

Consumer

624

Modified appraised value

Third party valuation

(3)

Consumer

988

Modified appraised value

Third party valuation

(2)

Valuation discount

0-14%⁽⁴⁾

Consumer

Valuation discount

0-10%⁽³⁾

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

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

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

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

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

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

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


		For the Nine Months Ended September 30, 2019		For the Year Ended December 31, 2018			For the Six Months Ended June 30, 2020		For the Year Ended December 31, 2019
Balance at January 1,	Balance at January 1,	$	725	$	1,738	Balance at January 1,	$	681	$	725
Acquired interest rate lock commitments		—		1,383

Total gains (losses) included in earnings	Total gains (losses) included in earnings	561		(3,269)		Total gains (losses) included in earnings	2,994		18
Issuances	Issuances	8,077		2,962		Issuances	5,734		10,702
Settlements	Settlements	(8,393)		(2,089)		Settlements	(6,756)		(10,764)
Balance at period end	Balance at period end	$	970	$	725	Balance at period end	$	2,653	$	681

Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, were ~~$970,000~~$2.7 million and ~~$725,000,~~$681,000, respectively.

The table below is a summary of the estimated fair value of Heartland's financial instruments (as defined by ASC 825) as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands. The carrying amounts in the following tables are recorded in the consolidated balance sheets under the indicated captions. In accordance with ASC 825, the assets and liabilities that are not financial instruments are not included in the disclosure, including the value of the commercial and mortgage servicing rights,

premises, furniture and equipment, premises, furniture and equipment held for sale, OREO, goodwill, and other intangibles and other liabilities.

Heartland does not believe that the estimated information presented herein is representative of the earnings power or value of Heartland. The following analysis, which is inherently limited in depicting fair value, also does not consider any value associated with either existing customer relationships or the ability of Heartland to create value through loan origination, deposit gathering or fee generating activities. Many of the estimates presented herein are based upon the use of highly subjective information and assumptions and, accordingly, the results may not be precise. Management believes that fair value estimates may not be comparable between financial institutions due to the wide range of permitted valuation techniques and numerous estimates which must be made. Furthermore, because the disclosed fair value amounts were estimated as of the balance sheet date, the amounts actually realized or paid upon maturity or settlement of the various financial instruments could be significantly different.


						Fair Value Measurements at September 30, 2019															Fair Value Measurements at June 30, 2020
		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	447,767	$	447,767	$	447,767	$	—	$	—	Cash and cash equivalents	$	453,578	$	453,578	$	453,578	$	—	$	—
Time deposits in other financial institutions	Time deposits in other financial institutions	3,711		3,711		3,711		—		—		Time deposits in other financial institutions	3,128		3,128		3,128		—		—
Securities:	Securities:											Securities:

Carried at fair value	Carried at fair value	3,020,568		3,020,568		7,497		3,013,071		—		Carried at fair value	4,126,351		4,126,351		4,547		4,121,804		—
Held to maturity	Held to maturity	87,965		97,905		—		97,905		—		Held to maturity	90,579		101,557		—		101,557		—
Other investments	Other investments	29,042		29,042		—		29,042		—		Other investments	35,902		35,902		—		35,902		—
Loans held for sale	Loans held for sale	35,427		35,427		—		35,427		—		Loans held for sale	54,382		54,382		—		54,382		—
Loans, net:	Loans, net:											Loans, net:
Commercial		2,250,134		2,187,799		—		2,177,032		10,767
Commercial real estate		4,084,592		4,057,687		—		4,056,599		1,088
Commercial and industrial												Commercial and industrial	2,331,869		2,307,865		—		2,300,193		7,672
PPP												PPP	1,124,430		1,124,430		—		1,124,430		—
Owner occupied commercial real estate												Owner occupied commercial real estate	1,409,869		1,400,849		—		1,396,867		3,982
Non-owner occupied commercial real estate												Non-owner occupied commercial real estate	1,533,461		1,524,064		—		1,522,920		1,144
Real estate construction												Real estate construction	1,087,176		1,101,835		—		1,101,703		132
Agricultural and agricultural real estate	Agricultural and agricultural real estate	540,406		532,650		—		521,114		11,536		Agricultural and agricultural real estate	515,072		496,297		—		484,939		11,358
Residential real estate	Residential real estate	587,288		561,187		—		560,145		1,042		Residential real estate	726,458		726,139		—		725,576		563
Consumer	Consumer	442,966		440,984		—		440,339		645		Consumer	398,558		397,445		—		397,283		162
Total Loans, net	Total Loans, net	7,905,386		7,780,307		—		7,755,229		25,078		Total Loans, net	9,126,893		9,078,924		—		9,053,911		25,013
Cash surrender value on life insurance	Cash surrender value on life insurance	171,471		171,471		—		171,471		—		Cash surrender value on life insurance	172,813		172,813		—		172,813		—
Derivative financial instruments⁽¹⁾	Derivative financial instruments⁽¹⁾	22,152		22,152		—		22,152		—		Derivative financial instruments⁽¹⁾	52,618		52,618		—		52,618		—
Interest rate lock commitments	Interest rate lock commitments	970		970		—		—		970		Interest rate lock commitments	2,653		2,653		—		—		2,653
Forward commitments	Forward commitments	64		64		—		64		—		Forward commitments	30		30		—		30		—
Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits	Deposits											Deposits
Demand deposits	Demand deposits	3,581,127		3,581,127		—		3,581,127		—		Demand deposits	4,831,151		4,831,151		—		4,831,151		—
Savings deposits	Savings deposits	5,770,754		5,770,754		—		5,770,754		—		Savings deposits	6,810,296		6,810,296		—		6,810,296		—
Time deposits	Time deposits	1,117,975		1,117,975		—		1,117,975		—		Time deposits	1,067,252		1,067,453		—		1,067,453		—
Deposits held for sale		—		—		—		—		—

Short term borrowings	Short term borrowings	107,853		107,853		—		107,853		—		Short term borrowings	88,631		88,631		—		88,631		—
Other borrowings	Other borrowings	278,417		278,707		—		278,707		—		Other borrowings	306,459		308,561		—		308,561		—
Derivative financial instruments⁽¹⁾		27,479		27,479		—		27,479		—
Derivative financial instruments⁽²⁾												Derivative financial instruments⁽²⁾	62,189		62,189		—		62,189		—
Forward commitments	Forward commitments	209		209		—		209		—		Forward commitments	281		281		—		281		—

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


						Fair Value Measurements at December 31, 2018															Fair Value Measurements at December 31, 2019
		Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	273,630	$	273,630	$	273,630	$	—	$	—	Cash and cash equivalents	$	378,734	$	378,734	$	378,734	$	—	$	—
Time deposits in other financial institutions	Time deposits in other financial institutions	4,672		4,672		4,672		—		—		Time deposits in other financial institutions	3,564		3,564		3,564		—		—
Securities:	Securities:											Securities:

Carried at fair value	Carried at fair value	2,450,709		2,450,709		25,414		2,425,295		—		Carried at fair value	3,312,796		3,312,796		8,503		3,304,293		—
Held to maturity	Held to maturity	236,283		245,341		—		245,341		—		Held to maturity	91,324		100,484		—		100,484		—
Other investments	Other investments	28,396		28,396		—		28,396		—		Other investments	31,321		31,321		—		31,321		—
Loans held for sale	Loans held for sale	119,801		119,801		—		52,577		67,224		Loans held for sale	26,748		26,748		—		26,748		—
Loans, net:	Loans, net:											Loans, net:
Commercial		1,994,785		1,955,607		—		1,942,675		12,932
Commercial real estate		3,684,213		3,667,138		—		3,666,733		405
Commercial and industrial												Commercial and industrial	2,530,809		2,621,253		—		2,606,080		15,173
Owner occupied commercial real estate												Owner occupied commercial real estate	1,472,704		1,409,388		—		1,408,036		1,352
Non-owner occupied commercial real estate												Non-owner occupied commercial real estate	1,495,877		1,397,527		—		1,396,222		1,305
Real estate construction												Real estate construction	1,027,081		924,041		—		924,041		—
Agricultural and agricultural real estate	Agricultural and agricultural real estate	561,265		553,112		—		542,042		11,070		Agricultural and agricultural real estate	565,837		576,821		—		564,198		12,623
Residential real estate	Residential real estate	670,473		654,596		—		654,118		478		Residential real estate	832,277		841,453		—		838,365		3,088
Consumer	Consumer	434,998		432,016		—		431,392		624		Consumer	443,332		470,927		—		469,939		988
Total Loans, net	Total Loans, net	7,345,734		7,262,469		—		7,236,960		25,509		Total Loans, net	8,297,522		8,243,343		—		8,206,879		36,464
Cash surrender value on life insurance	Cash surrender value on life insurance	162,892		162,892		—		162,892		—		Cash surrender value on life insurance	171,625		171,625		—		171,625		—
Derivative financial instruments⁽¹⁾	Derivative financial instruments⁽¹⁾	6,539		6,539		—		6,539		—		Derivative financial instruments⁽¹⁾	17,527		17,527		—		17,527		—
Interest rate lock commitments	Interest rate lock commitments	725		725		—		—		725		Interest rate lock commitments	681		681		—		—		681

Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits	Deposits											Deposits
Demand deposits	Demand deposits	3,264,737		3,264,737		—		3,264,737		—		Demand deposits	3,543,863		3,543,863		—		3,543,863		—
Savings deposits	Savings deposits	5,107,962		5,107,962		—		5,107,962		—		Savings deposits	6,307,425		6,307,425		—		6,307,425		—
Time deposits	Time deposits	1,023,730		1,023,730		—		1,023,730		—		Time deposits	1,193,043		1,193,043		—		1,193,043		—
Deposits held for sale		106,409		100,241		—		—		100,241

Short term borrowings	Short term borrowings	227,010		227,010		—		227,010		—		Short term borrowings	182,626		182,626		—		182,626		—
Other borrowings	Other borrowings	274,905		276,966		—		276,966		—		Other borrowings	275,773		278,169		—		278,169		—
Derivative financial instruments⁽¹⁾	Derivative financial instruments⁽¹⁾	6,044		6,044		—		6,044		—		Derivative financial instruments⁽¹⁾	21,462		21,462		—		21,462		—
Forward commitments	Forward commitments	399		399		—		399		—		Forward commitments	113		113		—		113		—

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

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

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

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

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

Loans — The fair value of loans is determined using an exit price ~~methodology as prescribed by ASU 2016-01, which was effective on January 1, 2018.~~methodology. The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and a discount rate based on the relative risk of the cash flows. Other considerations include the loan type, remaining life of the loan and credit risk.

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

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

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

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

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

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

Deposits Held for Sale — As of September 30, 2019, Heartland had $0 of deposits held for sale. Prior to December 31, 2018, Heartland entered into agreements with third parties to sell the deposits of 5 branch locations, which totaled $106.4 million as of December 31, 2018. The estimated fair value in the table above was based on the carrying value of the deposits less the premium Heartland expected to receive in accordance with the sales contract when the transactions were completed in the first six months of 2019.

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

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

NOTE 9: REVENUE

~~On January 1, 2018, Heartland adopted ASU 2014-09, "Revenue~~Accounting Standards Codification ("ASC") 606, Revenue from Contracts with ~~Customers" (Topic 606), and~~Customers, requires revenue to be recognized at an amount that reflects the consideration to which Heartland expects to be entitled in exchange for transferring goods or services to a customer. ASC 606 applies to all ~~subsequent ASUs~~contracts with customers to provide goods or services in the ordinary course of business, except for contracts that ~~modified Topic 606.~~

~~Topic 606 does not apply to~~are specifically excluded from its scope. The majority of Heartland's revenue ~~associated with financial instruments,~~streams including ~~revenue from loans and securities. In addition, certain noninterest~~interest income, ~~streams such as fees associated with~~ loan servicing income, net securities gain, net unrealized gains and losses on equity securities, net gains on sale of loans held for sale, valuation adjustment on servicing rights, income from bank owned life insurance ~~derivatives~~ and ~~certain credit card fees~~other noninterest income are ~~also not in~~outside the scope of ~~the new guidance. Topic 606 is applicable to noninterest revenue~~ASC 606. Revenue streams ~~such as~~including service charges and fees, interchange fees on credit and debit cards, trust fees and brokerage and insurance ~~commissions. However,~~commissions are within the ~~recognition~~scope of ~~these revenue streams did not change significantly upon adoption of Topic~~ASC 606. ~~Substantially all of Heartland's revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.~~

Service Charges and Fees

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

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

Customer service fees and other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. Heartland's performance obligation for fees, exchange, and other service charges are largely

satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

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

Trust Fees

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

Brokerage and Insurance Commissions

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

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the ~~three-~~three and ~~nine-months~~six months ended ~~September~~June 30, ~~2019,~~2020, and ~~2018,~~2019, in thousands:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended June 30,				Six Months Ended June 30,
		2019		2018		2019		2018			2020		2019		2020		2019
In-scope of Topic 606	In-scope of Topic 606									In-scope of Topic 606
Service charges and fees	Service charges and fees									Service charges and fees
Service charges and fees on deposit accounts	Service charges and fees on deposit accounts	$	3,221	$	2,858	$	9,383	$	8,270	Service charges and fees on deposit accounts	$	3,476	$	3,186	$	6,913	$	6,163
Overdraft fees	Overdraft fees	2,917		2,990		8,537		7,716		Overdraft fees	1,634		2,876		4,443		5,619
Customer service and other service fees	Customer service and other service fees	104		102		270		268		Customer service and other service fees	35		84		94		166
Credit card fee income	Credit card fee income	3,936		3,062		11,555		8,443		Credit card fee income	4,067		4,270		7,967		7,619
Debit card income	Debit card income	2,188		3,883		10,044		10,349		Debit card income	1,760		4,213		3,576		7,856

Total service charges and fees	Total service charges and fees	$	12,366	$	12,895	$	39,789	$	35,046	Total service charges and fees	10,972		14,629		22,993		27,423
Trust fees	Trust fees	4,959		4,499		14,258		13,794		Trust fees	4,977		4,825		9,999		9,299
Brokerage and insurance commissions	Brokerage and insurance commissions	962		1,111		2,724		2,895		Brokerage and insurance commissions	595		1,028		1,328		1,762
Total noninterest income in-scope of Topic 606	Total noninterest income in-scope of Topic 606	$	18,287	$	18,505	$	56,771	$	51,735	Total noninterest income in-scope of Topic 606	16,544		20,482		34,320		38,484

Out-of-scope of Topic 606	Out-of-scope of Topic 606									Out-of-scope of Topic 606
Loan servicing income	Loan servicing income	$	821	$	1,670	$	3,888	$	5,231	Loan servicing income	$	379	$	1,338	$	1,342	$	3,067
Securities gains/(losses), net		2,013		(145)		7,168		1,037
Securities gains, net										Securities gains, net	2,006		3,580		3,664		5,155
Unrealized gain on equity securities, net	Unrealized gain on equity securities, net	144		54		514		97		Unrealized gain on equity securities, net	680		112		449		370
Net gains on sale of loans held for sale	Net gains on sale of loans held for sale	4,673		7,410		12,192		18,261		Net gains on sale of loans held for sale	7,857		4,343		12,517		7,519
Valuation adjustment on servicing rights	Valuation adjustment on servicing rights	(626)		230		(1,579)		12		Valuation adjustment on servicing rights	9		(364)		(1,556)		(953)
Income on bank owned life insurance	Income on bank owned life insurance	881		892		2,668		2,206		Income on bank owned life insurance	1,167		888		1,665		1,787
Other noninterest income	Other noninterest income	3,207		1,149		6,556		3,536		Other noninterest income	1,995		1,682		4,053		3,349
Total noninterest income out-of-scope of Topic 606	Total noninterest income out-of-scope of Topic 606	11,113		11,260		31,407		30,380		Total noninterest income out-of-scope of Topic 606	14,093		11,579		22,134		20,294
Total noninterest income	Total noninterest income	$	29,400	$	29,765	$	88,178	$	82,115	Total noninterest income	$	30,637	$	32,061	$	56,454	$	58,778

Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. Heartland's noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after Heartland satisfies its performance obligation and revenue is recognized. Heartland does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, Heartland did not have any significant contract balances.

Contract Acquisition Costs

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

NOTE 10: STOCK COMPENSATION

Heartland may grant, through its Nominating and Compensation Committee (the "Compensation Committee"), non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and cash incentive

awards, under its ~~2012~~2020 Long-Term Incentive Plan (the "Plan"). The Plan was ~~originally~~ approved by stockholders in May 2020 and replaces the 2012 ~~and was amended effective March 8, 2016, to increase~~Long-Term Incentive Plan. The Plan increases the number of shares of common stock authorized for issuance to 1,460,000 and ~~make~~makes certain other changes to the Plan. As of ~~September~~June 30, ~~2019, 350,412~~2020, 1,429,562 shares of common stock were available for issuance under future awards that may be granted under the Plan to employees and directors of, and service providers to, Heartland or its subsidiaries.

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

~~The amount~~Heartland's income tax expense included $91,000 of tax expense during the six months ended June 30, 2020 and a tax benefit of $272,000 during the six months ended June 30, 2019, related to the exercise, vesting and forfeiture of equity-based ~~awards reflected as a tax benefit in Heartland's income tax expense was $270,000 and $672,000 during the nine months ended September 30, 2019 and 2018, respectively.~~awards.

Restricted Stock Units

The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). In the first quarter of 2020, the Compensation Committee granted time-based RSUs with respect to 114,944 shares of common stock, and in the first quarter of 2019, the Compensation Committee granted time-based RSUs with respect to 90,073 ~~shares of common stock, and in the first quarter of 2018, the Compensation Committee granted time-based RSUs with respect to 52,153~~ shares of common stock to selected officers and employees. The time-based RSUs represent the right, without payment, to receive shares of Heartland common stock on a specified date in the future. The time-based RSUs granted in ~~2019~~2020 and ~~2018~~2019 vest over three years in equal installments on March 6 of each of the three years following the year of the grant. The time-based RSUs may also vest upon death or disability, upon a change in control or upon a "qualified retirement" (as defined in the RSU agreement). The retiree is required to sign a non-solicitation agreement as a condition to vesting.

The Compensation Committee also granted three-year performance-based RSUs with respect to ~~34,848~~50,787 shares and ~~16,108~~34,848 shares of common stock in the first quarter of ~~2019~~2020 and ~~2018,~~2019 respectively. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance period ended December 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, respectively. These performance-based RSUs or a portion thereof may vest in 2022 and 2021, respectively, after measurement of performance in relation to the performance targets.

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

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

The Compensation Committee may grant RSUs under the Plan to directors as part of their compensation, to new management level employees at commencement of employment, and to other employees and service providers as incentives. During the ~~nine~~six months ended ~~September~~June 30, 2020, and June 30, 2019, 46,613 and ~~September 30, 2018,~~ 32,662 ~~and 29,048~~ time-based RSUs, respectively, were granted to directors and new employees.

A summary of the RSUs outstanding as of June 30, 2020, and 2019, and changes during the six months ended June 30, 2020 and 2019, follows:


	2020				2019
	Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value
Outstanding at January 1,	254,383	$	46.76	266,995	$	43.89
Granted	212,344	32.00		157,583	45.00
Vested	(118,686)	44.52		(139,623)	38.82
Forfeited	(14,648)	47.00		(18,015)	49.31
Outstanding at June 30,	333,393	$	38.55	266,940	$	46.97

~~A summary of the RSUs outstanding as of September 30, 2019, and 2018, and changes during the nine months ended September 30, 2019 and 2018, follows:~~

2019 2018
Shares Weighted-Average Grant Date
Fair Value Shares Weighted-Average Grant Date
Fair Value
Outstanding at January 1, 266,995 $ 43.89 301,578 $ 34.74
Granted 157,583 45.00 116,297 55.26
Vested (142,023) 38.93 (127,429) 32.70
Forfeited (26,136) 48.95 (27,678) 45.58
Outstanding at September 30, 256,419 $ 46.96 262,768 $ 43.65

Total compensation costs recorded for RSUs were ~~$4.8~~$3.4 million and ~~$3.7~~$3.6 million for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. As of ~~September~~June 30, ~~2019,~~2020, there were ~~$6.0~~$7.9 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2022.

NOTE 11: LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, Heartland adopted ASU 2016-02 "Leases" (Topic 842) and all subsequent ASUs that modified Topic 842. For Heartland, Topic 842 primarily affected the accounting treatment for operating lease agreements in which Heartland is the lessee.

Lessee Accounting

Substantially all of the leases in which Heartland is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2031. All of Heartland's leases are classified as operating leases, and therefore, were previously not recognized on the consolidated balance sheet. With the adoption of ~~Topic 842,~~ASU 2016-02 "Leases" (Topic 842), operating lease agreements are required to be recognized on the consolidated balance sheet as a right-of-use ("ROU") asset and a corresponding lease liability.

Heartland elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet. The table below presents Heartland's ROU assets and lease liabilities as of ~~September~~June 30, 2020 and December 31, 2019, in thousands:

~~Assets~~

~~Classification~~

~~September 30, 2019~~

~~Operating lease assets~~

~~Other assets~~

~~24,677~~

~~Total lease right-of-use assets~~

~~24,677~~

~~Liabilities~~

~~Operating lease liabilities~~

~~Accrued expenses and other liabilities~~

~~26,403~~

~~Total lease liabilities~~

~~26,403~~


	Classification	June 30, 2020		December 31, 2019
Operating lease right-of-use assets	Other assets	$	21,474	$	23,200
Operating lease liabilities	Accrued expenses and other liabilities	$	22,740	$	24,617

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. Heartland’s lease agreements often include one or more options to renew at Heartland’s discretion. If at lease inception, Heartland considers the exercising of a renewal option to be reasonably certain, Heartland will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, Heartland utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. ~~For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used.~~ The variable lease cost primarily represents variable payments such as common area maintenance and utilities. The table below presents the lease costs and supplemental information as of ~~September~~June 30, 2020 and 2019, in thousands:


											Three Months Ended June 30,						Six Months Ended June 30,
		Income Statement Category	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019				Income Statement Category		2020		2019		2020		2019
Lease Cost	Lease Cost							Lease Cost
Operating lease cost	Operating lease cost	Occupancy expense	$	1,681	$	4,548		Operating lease cost	Occupancy expense		$	1,311	$	1,462	$	2,639	$	2,867
Variable lease cost	Variable lease cost	Occupancy expense	42		109			Variable lease cost	Occupancy expense		16		32		32		67

Total lease cost	Total lease cost		$	1,723	$	4,657		Total lease cost			$	1,327	$	1,494	$	2,671	$	2,934
Supplemental Information	Supplemental Information							Supplemental Information
Noncash reduction of ROU assets arising from lease modifications		Occupancy expense	$	495	$	2,959
Noncash reduction lease liabilities arising from lease modifications		Occupancy expense	284		2,771
Noncash reduction of ROU assets arising from lease modifications and terminations								Noncash reduction of ROU assets arising from lease modifications and terminations	Occupancy expense		$	17	$	2,464	$	375	$	2,464
Noncash reduction of lease liabilities arising from lease modifications and terminations								Noncash reduction of lease liabilities arising from lease modifications and terminations	Occupancy expense		—		2,487		386		2,487

Supplemental balance sheet information	Supplemental balance sheet information		As of September 30, 2019							Supplemental balance sheet information							As of June 30, 2020
Weighted-average remaining operating lease term (in years)	Weighted-average remaining operating lease term (in years)		6.5							Weighted-average remaining operating lease term (in years)							6.53

Weighted-average discount rate for operating leases	Weighted-average discount rate for operating leases		3.00				%			Weighted-average discount rate for operating leases							3.00		%

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of ~~September~~June 30, ~~2019 is~~2020 are as follows, in thousands:


Three months ending December 31, 2019		$	1,503
Six months ending December 31, 2020				Six months ending December 31, 2020	$	2,829
Year ending December 31,	Year ending December 31,			Year ending December 31,
2020		5,931
2021	2021	5,678		2021	5,384
2022	2022	4,346		2022	4,157
2023	2023	2,900		2023	2,819
2024				2024	2,106
Thereafter	Thereafter	8,751		Thereafter	7,793
Total lease payments	Total lease payments	$	29,109	Total lease payments	25,088
Less interest	Less interest	(2,706)		Less interest	(2,348)
Present value of lease liabilities	Present value of lease liabilities	$	26,403	Present value of lease liabilities	$	22,740

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

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

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

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (including any information incorporated herein by reference) contains, and future oral and written statements of Heartland Financial USA, Inc. ("Heartland") and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the business, financial condition, results of operations, plans, objectives and future performance of Heartland. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of Heartland's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Although Heartland has made these statements based on management's experience and best estimate of future events, there may be events or factors that management has not anticipated, and the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, including those identified in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~ 2019, as updated and supplemented in this Quarterly Report on Form 10-Q, and factors including but not limited to: the impact of the COVID-19 pandemic on Heartland and U.S. and global financial markets; containment measures enacted by the U.S. federal and state governments and by private businesses in response to the COVID-19 pandemic; the deterioration of the U.S. economy in general and in the local economies in which Heartland conducts its operations; increasing credit losses due to deterioration in the financial condition of its borrowers, based on declining oil prices and asset and collateral values, which may continue to increase Heartland’s provision for credit losses and net charge-offs; civil unrest in the communities that Heartland serves; levels of unemployment in the subsidiary banks’ lending areas; real estate market values in the subsidiary banks’ lending areas; future natural disasters and increases to flood insurance premiums; the effects of past and any future terrorist threats and attacks, acts of war or threats thereof; the level of prepayments on loans and mortgage-backed securities; legislative/regulatory changes affecting banking, taxes, securities, insurance and monetary and financial matters; monetary and fiscal policies of the U.S. Government including policies of the United States Department of the Treasury and the Federal Reserve; the quality or composition of Heartland’s loan or investment portfolios; demand for loan products and financial services, deposit flows and competition in Heartland’s market areas; changes in accounting principles and guidelines; the timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet; Heartland’s ability to implement technological changes as anticipated and to develop and maintain secure and reliable electronic delivery systems; Heartland’s ability to retain key executives and employees and the ability of Heartland and its subsidiaries to successfully consummate acquisitions and integrate acquired operations.

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

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

OVERVIEW

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

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

~~Net~~Heartland reported the following results for the three months ended June 30, 2020:

•net income available to common stockholders for the quarter ended ~~September~~June 30, ~~2019,~~2020, was ~~$34.6~~$30.1 million, or ~~$0.94~~$0.82 per diluted common share, compared to ~~$33.7~~$45.2 million, or ~~$0.97~~$1.26 per diluted common share, for the quarter ended ~~September~~June 30, ~~2018. Return~~2019.

•excluding tax-effected provision for credit losses of $21.2 million and tax-effected acquisition, integration and restructuring costs of $532,000, adjusted net income available to common stockholders (non-GAAP) was $51.8 million, or $1.40 of adjusted earnings per diluted common share (non-GAAP) for the second quarter of 2020, compared to $49.8 million (non-GAAP), or $1.39 of adjusted earnings per diluted common share (non-GAAP), for the second quarter of 2019, which excluded tax-effected provision for credit losses of $3.9 million and tax-effected acquisition, integration and restructuring costs of $734,000.

•return on average common equity was ~~8.91%~~7.69% and return on average assets was ~~1.12%~~0.84% for the ~~third~~second quarter of ~~2019,~~2020, compared to ~~10.58%~~12.56% and ~~1.18%~~1.55%, respectively, for the same quarter in ~~2018.~~2019.

•return on average tangible common equity (non-GAAP) of 11.97% and adjusted return on average tangible common equity (non-GAAP) of 20.02% for the second quarter of 2020 compared to 19.52% and 21.41%, respectively, for the second quarter of 2019.

~~Net~~Heartland reported the following results for the six months ended June 30, 2020:

•net income available to common stockholders ~~for the nine months ended September 30, 2019, was $111.3~~of $50.2 million or ~~$3.11 per diluted common share, compared to $84.8 million or $2.59~~$1.36 per diluted common share, for the ~~nine~~six months ended ~~September~~June 30, ~~2018. Return~~2020, compared to $76.7 million or $2.17 per diluted common share for the six months ended June 30, 2019.

•excluding tax-effected provision for credit losses of $38.2 million and tax-effected acquisition, integration and restructuring costs of $1.6 million, adjusted net income available to common stockholders (non-GAAP) was $90.0 million, or $2.44 of adjusted earnings per diluted common share (non-GAAP) for the six months ended June 30, 2020, compared to $85.4 million (non-GAAP), or $2.42 of adjusted earnings per diluted common share (non-GAAP), for the six months ended June 30, 2019, which excluded $5.2 million of tax-effected provision for credit losses and $3.6 million of tax-effected acquisition, integration and restructuring costs.

•return on average common equity was ~~10.33%~~6.32% and return on average assets was ~~1.27%~~0.73% for the first ~~nine~~six months of ~~2019,~~2020, compared to ~~9.95%~~11.13% and ~~1.07%~~1.35%, respectively, for the same period in ~~2018.~~2019.

•return on average tangible common equity (non-GAAP) of 9.95% and adjusted return on average tangible common equity (non-GAAP) of 17.19% for the six months ended June 30, 2020, compared to 17.49% and 19.37%, respectively, for the six months ended June 30, 2019.

For the ~~third~~second quarter and first six months of ~~2019,~~2020, Heartland's net interest margin was ~~3.98% (4.02%~~3.81% (3.85% on a fully tax-equivalent ~~basis) compared~~basis, non-GAAP), which compares to ~~4.32% (4.38%~~4.06% (4.10% on a fully tax-equivalent ~~basis)~~basis, non-GAAP) and 4.09% (4.14% on a fully-tax equivalent basis, non-GAAP) for the second quarter and first six months of 2019, respectively.

The efficiency ratio was 55.75% for the second quarter of 2020 compared to 64.13% for the same quarter ~~in 2018, and the~~of 2019. The efficiency ratio was ~~61.92% and 62.51%~~58.64% for the ~~third quarter~~first six months of ~~2019~~2020 compared to 64.52% for the first six months of 2019.

Total assets of Heartland were $15.03 billion at June 30, 2020, an increase of $1.82 billion or 14% since year-end 2019. Securities represented 28% of total assets at June 30, 2020, and ~~2018, respectively. For the nine-month period ended September 30, 2019, Heartland's net interest~~26% of total assets at December 31, 2019. Total loans held to

~~margin was 4.05% (4.10% on a fully tax-equivalent basis)~~maturity were $9.25 billion at June 30, 2020 compared to ~~4.25% (4.32% on a fully tax-equivalent basis) for the same period in 2018. The efficiency ratio for the first nine months of 2019 was 63.95% compared to 65.03% for the same period in 2018.~~

~~Total assets of Heartland were $12.57~~$8.37 billion at ~~September 30,~~December 31, 2019, which was an increase of ~~$1.16 billion or 10% since year-end 2018. Securities represented 25% of total assets at September 30, 2019, and 24% of total assets at December 31, 2018.~~

~~Total loans held to maturity were $7.97 billion at September 30, 2019, compared to $7.41 billion at year-end 2018, an increase of $563.9~~$878.9 million or 8%11%. This change includes $542.0 million of total loans held to maturity acquired at fair value in the Blue Valley Ban Corp. ("BVBC") transaction. During the first quarter of 2019, Heartland classified $32.1 million of loans as held for sale in conjunction with the branch sales described below in "Recent Developments". Excluding the reclassification of loans to held for sale and the BVBC transaction, total loans held to maturity increased $54.0 million or 1% since December 31, 2018.

Total deposits were ~~$10.47~~$12.71 billion as of ~~September~~June 30, ~~2019,~~2020, compared to ~~$9.40~~$11.04 billion at year-end ~~2018,~~2019, an increase of ~~$1.07~~$1.66 billion or ~~11%~~15%. This increase includes $617.1 million of deposits acquired at fair value in the BVBC transaction. During the first quarter of 2019, Heartland classified $77.0 million of deposits as held for sale in conjunction with the branch sales. Exclusive of the reclassification of deposits to held for sale and the deposits acquired at fair value in the BVBC transaction, total deposits increased $533.3 million or 6% since December 31, 2018.

Total equity was ~~$1.56~~$1.75 billion at ~~September~~June 30, ~~2019,~~2020, compared to ~~$1.33~~$1.58 billion at year-end ~~2018.~~2019. Book value per common share was ~~$42.62~~$44.42 at ~~September~~June 30, ~~2019,~~2020, compared to ~~$38.44~~$43.00 at year-end ~~2018.~~2019. Heartland's unrealized gain on securities available for sale, net of applicable taxes, was ~~$20.3~~$37.6 million at ~~September~~June 30, ~~2019,~~2020, compared to an unrealized ~~loss~~gain of ~~$32.5 million,~~$969,000, net of applicable taxes, at December 31, ~~2018.~~2019.

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

COVID-19

In ~~keeping~~March 2020, the outbreak of the novel Coronavirus Disease 2019 ("COVID-19") was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States, as well as globally. Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with ~~its focus on core~~responses to the pandemic by businesses and ~~execution~~individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of ~~strategic priorities, Heartland has completed~~many businesses, which have led to a loss of revenues and a rapid increase in unemployment, material decreases in commodity prices and business valuations, disruptions in global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, emergency response legislation and an expectation that the ~~following transactions since January 1, 2019:~~Federal Reserve will maintain a low interest rate environment for the foreseeable future.

~~Blue Valley Ban Corp. Acquisition~~

On May 10, 2019, Heartland completed the acquisition of BVBC and its wholly-owned subsidiary, Bank of Blue Valley, headquartered in Overland Park, Kansas. Based on Heartland's closing common stock price of $44.78 per share on May 10, 2019, the aggregate consideration paid to BVBC common shareholders was $92.3 million, which was paid by delivery of 2,060,258 shares of Heartland common stock. On the closing date, in addition to this merger consideration, Heartland provided BVBC the funds necessary to repay outstanding debt of $6.9 million, and Heartland assumed $16.1 million of trust preferred securities at fair value. Immediately following the closing of the transaction, Bank of Blue Valley was merged with and into Heartland's wholly-owned Kansas subsidiary, Morrill & Janes Bank and Trust Company, and the combined entity operates under the Bank of Blue Valley brand. As of the closing date, BVBC had, at fair value, total assets of $766.2 million, total loans held to maturity of $542.0 million, and total deposits of $617.1 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of BVBC.

The financial impact of the BVBC acquisition is included in the results of operations for the period ended September 30, 2019, but not in the results of operations for the same period ended September 30, 2018.

~~Branch Sales and Other Divestitures~~

•On January 11, 2019, Heartland completed the sale of the loan portfolios of its consumer finance subsidiaries, Citizens Finance Co. and Citizens Finance of Illinois Co. (collectively, "Citizens"). The loan portfolios had a fair value of $67.2 million.

•On February 22, 2019, Heartland completed the sale of two branch locations of Wisconsin Bank & Trust. The sale included loans of $11.7 million and deposits of $48.6 million. Heartland recorded a net gain of $3.2 million inIn the first quarter of ~~2019, which consisted~~2020, Heartland implemented and continues to operate under its pandemic management plan to assure workplace and employee safety and business resiliency. Relief and support provided to customers and communities facing challenges from the impacts of COVID-19 included the following measures:

•employees who can work from home continue to do so, while those who come into bank locations are on rotating teams to limit potential exposure;

•all in-person events and large meetings are canceled and have transitioned to virtual meetings;

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

•implemented and extended a ~~gain~~20% wage premium for certain customer-facing and call center employees.

•provided direct Small Business Administration ("SBA") guaranteed loans to customers via its participation in the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") Paycheck Protection Program ("PPP") by originating $1.2 billion of ~~$3.5~~PPP loans;

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

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

The continued economic disruption resulting from the COVID-19 pandemic will make it difficult for some customers to repay the principal and interest on their loans, and Heartland's subsidiary banks have been working with customers to modify the terms of ~~$329,000~~certain existing loans. The following table shows the total loans exposure as of ~~core deposit intangibles.~~June 30, 2020, and March 31, 2020, to customer segment profiles that Heartland believes will be more heavily impact by COVID-19, dollars in thousands:


	As of June 30, 2020						As of March 31, 2020
Industry	Total Exposure⁽¹⁾		% of Gross Exposure⁽¹⁾		Total Exposure⁽¹⁾		% of Gross Exposure⁽¹⁾
Lodging	$	490,475	4.38	%	$	498,596	4.47	%
Multi-family properties	474,610		4.24		436,931		3.92
Retail trade	407,030		3.64		367,727		3.30
Retail properties	369,782		3.31		408,506		3.66
Restaurants and bars	255,701		2.29		247,239		2.22
Nursing homes/assisted living	130,103		1.16		126,267		1.13
Oil and gas	63,973		0.57		56,302		0.50
Childcare facilities	44,968		0.40		48,455		0.43
Gaming	34,618		0.31		34,790		0.31
Total	$	2,271,260	20.30	%	$	2,224,813	19.94	%

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

•
On April 30, 2019, Dubuque Bank and Trust Company closed on the sale of substantially all its mortgage servicing rights portfolio, which contained loans with an unpaid principal balance of approximately $3.31 billion to PNC Bank, N.A. The transaction qualified as a sale, and $20.6 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as

As of June 30, ~~2019. Cash~~2020, loan modifications have been made on approximately $1.10 billion of loans in Heartland's portfolio. In accordance with interagency guidance issued in March 2020, these modifications are not considered troubled debt restructurings. Approximately 58% of these modifications are interest only for 90 days, and the remainder are primarily principal and interest deferments for 90 days. The original loan modifications will be expiring throughout the third quarter, and Heartland expects that the majority will be returning to full payment status. However, it is likely that some of the modifications will be extended for an additional 90 days in order to provide the necessary support for certain COVID-19 impacted customers.

Through June 30, 2020, Heartland's subsidiary banks funded approximately ~~$34.8~~4,800 PPP loans, totaling $1.20 billion. As of June 30, 2020, deferred fees totaling $35.3 million were recorded associated with the PPP loans, of which $3.7 million was ~~received~~recognized in income during the second quarter ~~and Heartland recorded an estimated gain on the sale~~ of this portfolio of approximately $13.3 million. A payable of approximately $293,000 was recorded as of September 30, 2019, due to the timing of the servicing transfer per the terms of the sale agreement. In the agreement, which includes customary terms and conditions, Dubuque Bank and Trust Company provided interim servicing of the loans until the transfer date, which was August 1, 2019.

•On May 3, 2019, Heartland completed the sale of two branches of Illinois Bank & Trust. The sale included loans of $1.2 million and deposits of $11.4 million. Heartland recorded a net gain of $340,000 in the second quarter of 2019, which consisted of a gain of $519,000 and write-off of $179,000 of core deposit intangibles.

•On May 17, 2019, Heartland completed the sale of one branch of Citywide Banks. The sale included loans of $8.4 million and deposits of $24.4 million. Heartland recorded a net gain of $1.6 million in the second quarter of 2019, which consisted of a gain of $1.8 million and write-off of $174,000 of core deposit intangibles.

•On May 31, 2019, Heartland completed the sale of two branch locations of Dubuque Bank and Trust Company, which operated as First Community Bank, in Keokuk, Iowa. The sale included loans of $17.5 million and deposits of $72.0 million. Heartland recorded a gain of $4.2 million in the second quarter of 2019.2020.

At June 30, 2020, Heartland ~~has been working on company-wide strategic initiatives since the end~~had $1.12 billion of ~~2018. Management expects approximately $8 million to $10~~PPP loans outstanding, which was net of $31.6 million of deferred fees. Under the ~~net gains on~~CARES Act, PPP loans are 100% SBA guaranteed and borrowers may be eligible to have an amount up to the ~~sale~~entire principal balance forgiven and paid by the SBA. PPP loans also carry a zero risk rating for regulatory capital purposes and the Federal Reserve has made available a liquidity facility to facilitate funding of the branches and mortgage servicing rights previously discussed will be invested in talent, process improvement, and technology upgrades that management believes are necessary to support future organic and acquired growth, improve efficiency and ultimately provide a superior customer experience and enhance profitability.PPP loans held by banks.

~~Three~~As of June 30, 2020, approximately $211.8 million in principal amount of existing SBA loans were eligible to participate in the ~~most significant investments in technology~~SBA loan payment and ~~process improvement are:~~deferral program, pursuant to which the SBA will pay the borrower’s principal, interest and fees for a period of six months.

•
~~a project called Operation Customer Compass, which is focused on streamlining~~

COVID-19 Risks and automating processes. This project is intended to create back-office capacity for growth and enhance the customer experience. Expense reductions of over $10 million annually are expected to be realized once the project is completed, which is anticipated to be the end of 2019;

•~~an upgrade to the existing customer relationship management system to the Salesforce Platform, which is an industry leader for relationship management, and,~~

•~~the implementation of nCino, a premiere commercial loan origination system.~~Uncertainties

The ~~upgrade to Salesforce and the implementation of nCino is expected to significantly improve the sales management process and improve the effectiveness~~spread of the ~~commercial sales teams. The integration between nCino~~pandemic has caused significant disruptions in the U.S. economy, including disruption of banking and ~~Salesforce is expected~~other financial activity in the areas in which Heartland operates. While there has been no material impact to ~~improve back office efficiencies and shorten the sales cycle. These two projects are currently underway and will be ongoing into mid-2020.~~Heartland to date, COVID-19 could also potentially create widespread business continuity issues.

~~Pending Acquisition-Rockford Bank~~Government authorities, including the United States Congress, the President, and ~~Trust Company~~the Federal Reserve, have taken several actions designed to cushion the economic fallout from COVID-19.

~~On August 13, 2019, Heartland's Illinois Bank & Trust subsidiary entered~~•In early March 2020, the Federal Reserve reduced the target range of its overnight funds rate to near zero, and in June 2020, stated its intention to maintain this target rate through 2022, which will continue to negatively impact Heartland’s net interest margin.

•The CARES Act was signed into law at the end of March 2020. The CARES Act provides funding to prevent a ~~purchase~~severe economic downturn through various measures, including direct financial aid to American families and ~~assumption agreement~~economic stimulus to ~~acquire substantially all of~~significantly impacted industry sectors through the ~~assets~~PPP and ~~substantially all of~~other programs.

•In April 2020, the ~~deposits~~Federal Reserve provided additional funding sources for small and ~~certain other liabilities of Rockford Bank~~mid-sized businesses as well as for state and Trust Company ("RB&T"), headquartered in Rockford, Illinois. RB&T is a wholly-owned subsidiary of Moline, Illinois-based QCR Holdings, Inc. As of September 30, 2019, RB&T had total assets of $519.5 million, which included $417.3 million of gross loans held to maturity, and $451.5 million of deposits. RB&T serveslocal governments as they work through cash flow stresses caused by the Rockford market from two full-service banking locations. The all-cash transaction is subject to regulatory approval and to customary closing conditions and is expected to close in the fourth quarter of 2019. The systems conversion is expected to occur in the first quarter of 2020.COVID-19 pandemic.

FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data) Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
STATEMENT OF INCOME DATA
Interest income $ 133,403 $ 124,894 $ 381,127 $ 339,517
Interest expense 22,082 14,216 60,143 35,846
Net interest income 111,321 110,678 320,984 303,671
Provision for loan losses 5,201 5,238 11,754 14,332
Net interest income after provision for loan losses 106,120 105,440 309,230 289,339
Noninterest income 29,400 29,765 88,178 82,115
Noninterest expenses 92,967 92,539 256,295 265,067
Income taxes 7,941 8,956 29,835 21,530
Net income 34,612 33,710 111,278 84,857
Preferred dividends — (13) — (39)
Net income available to common stockholders $ 34,612 $ 33,697 $ 111,278 $ 84,818
Key Performance Ratios
Annualized return on average assets 1.12 % 1.18 % 1.27 % 1.07 %
Annualized return on average common equity (GAAP) 8.91 % 10.58 % 10.33 % 9.95 %
Annualized return on average tangible common equity (non-GAAP)⁽¹⁾
13.78 % 17.31 % 16.13 % 15.64 %
Annualized ratio of net charge-offs to average loans 0.14 % 0.28 % 0.13 % 0.17 %
Annualized net interest margin (GAAP) 3.98 % 4.32 % 4.05 % 4.25 %
Annualized net interest margin, fully tax-equivalent (non-GAAP)⁽¹⁾
4.02 % 4.38 % 4.10 % 4.32 %
Efficiency ratio, fully tax-equivalent (non-GAAP)⁽¹⁾
61.92 % 62.51 % 63.95 % 65.03 %
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common shareholders (GAAP) $ 34,612 $ 33,697 $ 111,278 $ 84,818
Plus core deposit and customer relationship intangibles amortization, net of tax⁽²⁾
2,291 2,075 7,153 5,343
Adjusted net income available to common shareholders (non-GAAP) $ 36,903 $ 35,772 $ 118,431 $ 90,161
Average common stockholders' equity (GAAP) $ 1,541,369 $ 1,263,226 $ 1,440,754 $ 1,139,149
    Less average goodwill 427,097 391,668 409,932 323,058
    Less average other intangibles, net 51,704 51,592 49,373 45,207
Average tangible common equity (non-GAAP) $ 1,062,568 $ 819,966 $ 981,449 $ 770,884
Annualized return on average common equity (GAAP) 8.91 % 10.58 % 10.33 % 9.95 %
Annualized return on average tangible common equity (non-GAAP) 13.78 % 17.31 % 16.13 % 15.64 %
Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net Interest Income (GAAP) $ 111,321 $ 110,678 $ 320,984 $ 303,671
    Plus tax-equivalent adjustment⁽²⁾
1,140 1,544 3,820 4,663
Net interest income - tax-equivalent (non-GAAP)
$ 112,461 $ 112,222 $ 324,804 $ 308,334
Average earning assets $ 11,102,581 $ 10,154,591 $ 10,598,465 $ 9,547,147
Net interest margin (GAAP) 3.98 % 4.32 % 4.05 % 4.25 %
Net interest margin, fully tax-equivalent (non-GAAP) 4.02 % 4.38 % 4.10 % 4.32 %
Heartland's business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-19 escalates further or is unsuccessful, Heartland could experience a material adverse effect on its business, financial condition, results of operations and cash flows. The full extent of the impact of the COVID-19 pandemic, and resulting measures to curtail its spread, will depend on future developments which are highly uncertain, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among other future developments. Potentially material effects on Heartland’s business are discussed below.

Interest Income, Net Interest Margin and Fee Income

Heartland's interest income may be reduced due to lower interest rates, more loan modifications, delinquent interest payments, and related credit losses, resulting from the economic impact of COVID-19. During the six months ended June 30, 2020, Heartland significantly increased its allowance for credit losses. The allowance for credit losses is increased through provisions for credit losses which are deducted from net interest income on Heartland’s consolidated statements of income. In keeping with guidance from regulators, Heartland is actively working with COVID-19 affected borrowers to defer their payments, interest, and fees. While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments occur, interest income and fees accrued would need to be reversed. In such a scenario, interest income and net interest margin could be negatively impacted in future periods. However, any reduction in interest income could be offset by additional interest and fee income earned on PPP loans. At this time, Heartland is unable to project the impact of interest deferrals and interest earned on PPP loans on Heartland's net interest margin in future periods.

Capital and Liquidity

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

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

Asset Valuation

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

The sustained decline in Heartland's stock price, which management deemed to be a triggering event, caused management to perform impairment testing on its goodwill in the second quarter of 2020. Management concluded that none of the goodwill at any of Heartland's reporting units was impaired.

Processes, Controls and Business Continuity Plan

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

Credit

As a result of the current economic environment caused by the COVID-19 pandemic, Heartland is engaging in more frequent communication with borrowers to better understand their creditworthiness and the challenges faced. These communications should allow Heartland to respond proactively as borrower needs and issues arise. The fiscal stimulus and relief programs have been an effective mitigant to credit losses in the near term; however, once these programs have run their course, the Heartland

FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data) Three Months Ended
September 30, Nine Months Ended
September 30,
2019 2018 2019 2018
Reconciliation of Efficiency Ratio (non-GAAP)
Net interest income (GAAP) $ 111,321 $ 110,678 $ 320,984 $ 303,671
Plus tax-equivalent adjustment⁽²⁾
1,140 1,544 3,820 4,663
Fully tax-equivalent net interest income 112,461 112,222 324,804 308,334
Noninterest income 29,400 29,765 88,178 82,115
Securities (gains)/losses, net (2,013) 145 (7,168) (1,037)
Unrealized gain on equity securities, net (144) (54) (514) (97)
Gain on extinguishment of debt (375) — (375) —
Valuation adjustment on servicing rights 626 (230) 1,579 (12)
Adjusted income (non-GAAP) $ 139,955 $ 141,848 $ 406,504 $ 389,303
Total noninterest expenses (GAAP) $ 92,967 $ 92,539 $ 256,295 $ 265,067
Less:
Core deposit and customer relationship intangibles amortization 2,899 2,626 9,054 6,763
Partnership investment in tax credit projects 3,052 338 4,992 338
(Gain)/loss on sales/valuations of assets, net
356 912 (20,934) 2,243
Restructuring expenses — — 3,227 2,564
Adjusted noninterest expenses (non-GAAP) $ 86,660 $ 88,663 $ 259,956 $ 253,159
Efficiency ratio, fully tax-equivalent (non-GAAP) 61.92 % 62.51 % 63.95 % 65.03 %
(1) Refer to the "Non-GAAP Financial Measures" section after these financial tables for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.
(2) Computed on a tax-equivalent basis using an effective tax rate of 21%.
may experience changes in the value of collateral securing outstanding loans, deterioration in the credit quality of borrowers, and the inability of borrowers to repay loans in accordance with their loan terms causing credit losses. Should economic conditions worsen, Heartland could be required to further increase its allowance for credit losses and record additional credit loss expense. It is likely that Heartland's asset quality measures could worsen during future measurement periods if the effects of the COVID-19 pandemic are prolonged.

FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data) As Of and For the Quarter Ended
9/30/2019 6/30/2019 3/31/2019 12/31/2018 9/30/2018
BALANCE SHEET DATA
Investments $ 3,137,575 $ 2,681,419 $ 2,516,055 $ 2,715,388 $ 2,540,779
Loans held for sale 35,427 34,575 69,716 119,801 77,727
Total loans receivable(1) 7,971,608 7,853,051 7,331,544 7,407,697 7,365,493
Allowance for loan losses 66,222 63,850 62,639 61,963 61,221
Total assets 12,569,262 12,160,290 11,312,495 11,408,006 11,335,132
Total deposits⁽²⁾
10,469,856 10,108,557 9,352,942 9,396,429 9,512,163
Long-term obligations 278,417 282,863 268,312 274,905 277,563
Common stockholders’ equity 1,563,843 1,521,787 1,372,102 1,325,175 1,280,393
Common Share Data
Book value per common share (GAAP) $ 42.62 $ 41.48 $ 39.65 $ 38.44 $ 37.14
Tangible book value per common share (non-GAAP)⁽³⁾
$ 29.62 $ 28.40 $ 27.04 $ 25.70 $ 24.33
Common shares outstanding, net of treasury stock 36,696,190 36,690,061 34,603,611 34,477,499 34,473,029
Tangible common equity ratio (non-GAAP)⁽³⁾
8.99 % 8.92 % 8.60 % 8.08 % 7.70 %
Stock Price Volatility

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

RECENT DEVELOPMENTS

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

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

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

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

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

The allowance calculation under CECL is an expected loss model, which encompasses expected losses over the life of the loan and held to maturity securities portfolios, including expected losses due to changes in economic conditions and forecasts, such as those caused by the COVID-19 pandemic. Heartland recorded $21.5 million and $26.8 million of provision for credit losses in the first quarter and second quarter of 2020, respectively, primarily due to a deteriorating economic outlook resulting in an increase in expected credit losses. For more information, see "Provision for Credit Losses" and "Allowance for Credit Losses" below.

Entered into a Definitive Merger Agreement with AIM Bancshares, Inc.

On February 11, 2020, Heartland entered into a definitive merger agreement to acquire AIM Bancshares, Inc. and its wholly-owned subsidiary, AimBank, headquartered in Levelland, Texas. In the transaction, all issued and outstanding shares of AIM Bancshares stock will be exchanged for shares of Heartland common stock and cash. Shareholders of AIM Bancshares will receive 207.0 shares of Heartland common stock and $685.00 of cash for each share of AIM Bancshares. The transaction value will change due to fluctuations in the price of Heartland common stock and is subject to certain potential adjustments as set forth in the merger agreement. Simultaneous with the closing of the transaction, AimBank will merge with and into Heartland's Lubbock, Texas-based subsidiary, First Bank and Trust. Heartland and AIM Bancshares, Inc. are currently reviewing the corporate structure and terms of the transaction. As of June 30, 2020, AimBank had total assets of approximately $1.95 billion, which included $1.19 billion of gross loans outstanding, and approximately $1.69 billion of deposits.

Entered into a Purchase and Assumption Agreement with Johnson Financial Group, Inc.

On June 9, 2020, Arizona Bank & Trust (“AB&T”), a wholly-owned subsidiary of Heartland headquartered in Phoenix, Arizona, entered into a purchase and assumption agreement, pursuant to which AB&T will acquire certain assets and will assume substantially all of the deposits and certain other liabilities of Johnson Bank’s Arizona operations, which includes four banking centers. Johnson Bank is a wholly-owned subsidiary of Johnson Financial Group, Inc. headquartered in Racine, Wisconsin. Johnson Insurance Services is not a part of this transaction.

Issued $115.0 Million of Preferred Equity

FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data) As Of and For the Quarter Ended
9/30/2019 6/30/2019 3/31/2019 12/31/2018 9/30/2018
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)
Common stockholders' equity (GAAP) $ 1,563,843 $ 1,521,787 $ 1,372,102 $ 1,325,175 $ 1,280,393
  Less goodwill 427,097 427,097 391,668 391,668 391,668
  Less core deposit and customer relationship intangibles, net 49,819 52,718 44,637 47,479 50,071
Tangible common stockholders' equity (non-GAAP) $ 1,086,927 $ 1,041,972 $ 935,797 $ 886,028 $ 838,654
Common shares outstanding, net of treasury stock 36,696,190 36,690,061 34,603,611 34,477,499 34,473,029
Common stockholders' equity (book value) per share (GAAP) $ 42.62 $ 41.48 $ 39.65 $ 38.44 $ 37.14
Tangible book value per common share (non-GAAP) $ 29.62 $ 28.40 $ 27.04 $ 25.70 $ 24.33
Reconciliation of Tangible Common Equity Ratio (non-GAAP)
Tangible common stockholders' equity (non-GAAP) $ 1,086,927 $ 1,041,972 $ 935,797 $ 886,028 $ 838,654
Total assets (GAAP) $ 12,569,262 $ 12,160,290 $ 11,312,495 $ 11,408,006 $ 11,335,132
    Less goodwill 427,097 427,097 391,668 391,668 391,668
    Less core deposit and customer relationship intangibles, net 49,819 52,718 44,637 47,479 50,071
Total tangible assets (non-GAAP) $ 12,092,346 $ 11,680,475 $ 10,876,190 $ 10,968,859 $ 10,893,393
Tangible common equity ratio (non-GAAP) 8.99 % 8.92 % 8.60 % 8.08 % 7.70 %
(1) Excludes loans held for sale.
(2) Excludes deposits held for sale.
(3) Refer to the "Non-GAAP Financial Measures" section after these financial tables for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.
corporate purposes, which may include organic and acquired growth, financing investments, capital expenditures, investments in wholly-owned subsidiaries as regulatory capital and repayment of debt.


FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)	Three Months Ended June 30,									Six Months Ended June 30,
	2020			2019			2020			2019
STATEMENT OF INCOME DATA
Interest income	$	133,765		$	127,003		$	264,814		$	247,724
Interest expense	9,619			20,295			28,157			38,061
Net interest income	124,146			106,708			236,657			209,663
Provision for credit losses	26,796			4,918			48,316			6,553
Net interest income after provision for credit losses	97,350			101,790			188,341			203,110
Noninterest income	30,637			32,061			56,454			58,778
Noninterest expenses	90,439			75,098			181,298			163,328
Income taxes	7,417			13,584			13,326			21,894



Net income available to common stockholders	$	30,131		$	45,169		$	50,171		$	76,666

Key Performance Ratios
Annualized return on average assets	0.84		%	1.55		%	0.73		%	1.35		%
Annualized return on average common equity (GAAP)	7.69			12.56			6.32			11.13
Annualized return on average tangible common equity (non-GAAP)⁽¹⁾	11.97			19.52			9.95			17.49
Annualized adjusted return on average tangible common equity (non-GAAP)⁽¹⁾	20.02			21.41			17.19			19.37
Annualized ratio of net charge-offs to average loans	0.11			0.19			0.17			0.12
Annualized net interest margin (GAAP)	3.81			4.06			3.81			4.09
Annualized net interest margin, fully tax-equivalent (non-GAAP)⁽¹⁾	3.85			4.10			3.85			4.14
Efficiency ratio, fully tax-equivalent (non-GAAP)⁽¹⁾	55.75			64.13			58.64		��	64.52


Dollars in thousands, expect per share data	As Of and For the Quarter Ended
	6/30/2020			3/31/2020			12/31/2019			9/30/2019			6/30/2019
BALANCE SHEET DATA
Investments	$	4,252,832		$	3,615,866		$	3,435,441		$	3,137,575		$	2,681,419
Loans held for sale	54,382			22,957			26,748			35,427			34,575
Loans receivable held to maturity	9,246,830			8,374,236			8,367,917			7,971,608			7,853,051
Allowance for credit losses	119,937			97,350			70,395			66,222			63,850
Total assets	15,026,153			13,294,509			13,209,597			12,569,262			12,160,290
Total deposits	12,708,699			11,174,025			11,044,331			10,469,856			10,108,557
Long-term obligations	306,459			276,150			275,773			278,417			282,863

Common equity	1,636,672			1,553,714			1,578,137			1,563,843			1,521,787

Common Share Data
Book value per common share (GAAP)	$	44.42		$	42.21		$	43.00		$	42.62		$	41.48
Tangible book value per common share (non-GAAP)⁽¹⁾	$	31.14		$	28.84		$	29.51		$	29.62		$	28.40

Common shares outstanding, net of treasury stock	36,844,744			36,807,217			36,704,278			36,696,190			36,690,061
Tangible common equity ratio (non-GAAP)⁽¹⁾	7.89		%	8.29		%	8.52		%	8.99		%	8.92		%

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

NON-GAAP RECONCILIATIONS

(Dollars in thousands, except per share data)


	As Of and For the Quarter Ended
	6/30/2020			3/31/2020			12/31/2019			9/30/2019			6/30/2019
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common stockholders (GAAP)	$	30,131		$	20,040		$	37,851		$	34,612		$	45,169
Plus core deposit and customer relationship intangibles amortization, net of tax⁽¹⁾	2,130			2,355			2,305			2,291			2,617
Net income excluding intangible amortization (non-GAAP)	$	32,261		$	22,395		$	40,156		$	36,903		$	47,786

Average common equity (GAAP)	$	1,574,902		$	1,619,682		$	1,570,258		$	1,541,369		$	1,442,388
Less average goodwill	446,345			446,345			433,374			427,097			410,642		��
Less average core deposit and customer relationship intangibles, net	44,723			47,632			49,389			51,704			49,868
Average tangible common equity (non-GAAP)	$	1,083,834		$	1,125,705		$	1,087,495		$	1,062,568		$	981,878
Annualized return on average common equity (GAAP)	7.69		%	4.98		%	9.56		%	8.91		%	12.56		%
Annualized return on average tangible common equity (non-GAAP)	11.97		%	8.00		%	14.65		%	13.78		%	19.52		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net Interest Income (GAAP)	$	124,146		$	112,511		$	112,745		$	111,321		$	106,708
Plus tax-equivalent adjustment⁽¹⁾	1,416			1,131			1,109			1,140			1,268
Net interest income, fully tax-equivalent (non-GAAP)	$	125,562		$	113,642		$	113,854		$	112,461		$	107,976

Average earning assets	$	13,103,159		$	11,891,455		$	11,580,295		$	11,102,581		$	10,552,166

Annualized net interest margin (GAAP)	3.81		%	3.81		%	3.86		%	3.98		%	4.06		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)	3.85			3.84			3.90			4.02			4.10
Purchase accounting discount	0.16			0.09			0.17			0.23			0.18


	As Of and For the Quarter Ended
	6/30/2020			3/31/2020			12/31/2019			9/30/2019			6/30/2019
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)
Common equity (GAAP)	$	1,636,672		$	1,553,714		$	1,578,137		$	1,563,843		$	1,521,787
Less goodwill	446,345			446,345			446,345			427,097			427,097
Less core deposit and customer relationship intangibles, net	43,011			45,707			48,688			49,819			52,718
Tangible common equity (non-GAAP)	$	1,147,316		$	1,061,662		$	1,083,104		$	1,086,927		$	1,041,972

Common shares outstanding, net of treasury stock	36,844,744			36,807,217			36,704,278			36,696,190			36,690,061
Common equity (book value) per share (GAAP)	$	44.42		$	42.21		$	43.00		$	42.62		$	41.48
Tangible book value per common share (non-GAAP)	$	31.14		$	28.84		$	29.51		$	29.62		$	28.40

Reconciliation of Tangible Common Equity Ratio (non-GAAP)
Tangible common equity (non-GAAP)	$	1,147,316		$	1,061,662		$	1,083,104		$	1,086,927		$	1,041,972

Total assets (GAAP)	$	15,026,153		$	13,294,509		$	13,209,597		$	12,569,262		$	12,160,290
Less goodwill	446,345			446,345			446,345			427,097			427,097
Less core deposit and customer relationship intangibles, net	43,011			45,707			48,688			49,819			52,718
Total tangible assets (non-GAAP)	$	14,536,797		$	12,802,457		$	12,714,564		$	12,092,346		$	11,680,475
Tangible common equity ratio (non-GAAP)	7.89		%	8.29		%	8.52		%	8.99		%	8.92		%

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


Reconciliation of Efficiency Ratio (non-GAAP)	For the Quarter Ended
				6/30/2020				3/31/2020				12/31/2019				9/30/2019				6/30/2019
Net interest income (GAAP)	$	124,146			$	112,511			$	112,745			$	111,321			$	106,708
Tax-equivalent adjustment⁽¹⁾	1,416				1,131				1,109				1,140				1,268
Fully tax-equivalent net interest income	125,562				113,642				113,854				112,461				107,976
Noninterest income	30,637				25,817				28,030				29,400				32,061
Securities gains, net	(2,006)				(1,658)				(491)				(2,013)				(3,580)
Unrealized (gain)/loss on equity securities, net	(680)				231				(11)				(144)				(112)
Gain on extinguishment of debt	—				—				—				(375)				—
Valuation adjustment on servicing rights	(9)				1,565				(668)				626				364
Adjusted revenue (non-GAAP)	$	153,504			$	139,597			$	140,714			$	139,955			$	136,709

Total noninterest expenses (GAAP)	$	90,439			$	90,859			$	92,866			$	92,967			$	75,098
Less:
Core deposit and customer relationship intangibles amortization	2,696				2,981				2,918				2,899				3,313
Partnership investment in tax credit projects	791				184				3,038				3,052				1,465
(Gain)/loss on sales/valuation of assets, net	701				16				1,512				356				(18,286)
Acquisition, integration and restructuring costs	673				1,376				537				1,500				929
Adjusted noninterest expenses (non-GAAP)	$	85,578			$	86,302			$	84,861			$	85,160			$	87,677
Efficiency ratio, fully tax-equivalent (non-GAAP)	55.75		%		61.82		%		60.31		%		60.85		%		64.13		%

Acquisition, integration and restructuring costs
Salaries and employee benefits	$	122			$	44			$	—			$	100			$	100
Occupancy	—				—				11				—				10
Furniture and equipment	15				24				7				(4)				84
Professional fees	505				996				462				855				624
Advertising	4				89				31				115				52
(Gain)/loss on sales/valuations of assets, net	—				—				—				—				—
Other noninterest expenses	27				223				26				434				59
Total acquisition, integration and restructuring costs	$	673			$	1,376			$	537			$	1,500			$	929
After tax impact on diluted earnings per share⁽¹⁾	$	0.01			$	0.03			$	0.01			$	0.03			$	0.02

Reconciliation of Adjusted Net Income and Adjusted Diluted EPS (non-GAAP)
Net income (GAAP)	$	30,131			$	20,040			$	37,851			$	34,612			$	45,169
Provision for credit losses⁽¹⁾	21,169				17,001				3,873				4,109				3,885
Acquisition, integration and restructuring costs⁽¹⁾	532				1,087				424				1,185				734
Adjusted net income (non-GAAP)	$	51,832			$	38,128			$	42,148			$	39,906			$	49,788
Diluted earnings per share (GAAP)	$	0.82			$	0.54			$	1.03			$	0.94			$	1.26
Adjusted diluted earnings per share (non-GAAP)	$	1.40			$	1.03			$	1.14			$	1.08			$	1.39

Reconciliation of Annualized Adjusted Return on Average Tangible Common Equity (non-GAAP)
Adjusted net income (non-GAAP)	$	51,832			$	38,128			$	42,148			$	39,906			$	49,788
Plus core deposit and customer relationship intangibles amortization, net of tax⁽¹⁾	2,130				2,355				2,305				2,291				2,617
Adjusted net income excluding intangible amortization (non-GAAP)	$	53,962			$	40,483			$	44,453			$	42,197			$	52,405
Average tangible common equity (non-GAAP)	$	1,083,834			$	1,125,705			$	1,087,495			$	1,062,568			$	981,878
Annualized adjusted return on average tangible common equity (non-GAAP)	20.02		%		14.46		%		16.22		%		15.76		%		21.41		%

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


HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
	For the Quarter Ended June 30,									For the Six Months Ended June 30,
	2020			2019			2020			2019
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income (GAAP)	$	30,131		$	45,169		$	50,171		$	76,666
Plus core deposit and customer relationship intangibles amortization, net of tax⁽¹⁾	2,130			2,617			4,485			4,862
Net income excluding intangible amortization (non-GAAP)	$	32,261		$	47,786		$	54,656		$	81,528

Average common equity (GAAP)	$	1,574,902		$	1,442,388		$	1,597,292		$	1,389,612
Less average goodwill	446,345			410,642			446,345			401,207
Less average core deposit and customer relationship intangibles, net	44,723			49,868			46,177			48,188
Average tangible common equity (non-GAAP)	$	1,083,834		$	981,878		$	1,104,770		$	940,217
Annualized return on average common equity (GAAP)	7.69		%	12.56		%	6.32		%	11.13		%
Annualized return on average tangible common equity (non-GAAP)	11.97		%	19.52		%	9.95		%	17.49		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net Interest Income (GAAP)	$	124,146		$	106,708		$	236,657		$	209,663
Plus tax-equivalent adjustment⁽¹⁾	1,416			1,268			2,547			2,680
Net interest income, fully tax-equivalent (non-GAAP)	$	125,562		$	107,976		$	239,204		$	212,343

Average earning assets	$	13,103,159		$	10,552,166		$	12,497,307		$	10,342,229

Annualized net interest margin (GAAP)	3.81		%	4.06		%	3.81		%	4.09		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)	3.85			4.10			3.85			4.14
Purchase accounting discount amortization on loans included in annualized net interest margin	0.16			0.18			0.10			0.17

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


HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED FINANCIAL HIGHLIGHTS (Unaudited)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
Reconciliation of Efficiency Ratio (non-GAAP)	For the Quarter Ended June 30,												For the Six Months Ended June 30,
				2020				2019				2020				2019
Net interest income (GAAP)	$	124,146			$	106,708			$	236,657			$	209,663
Tax-equivalent adjustment⁽¹⁾	1,416				1,268				2,547				2,680
Fully tax-equivalent net interest income	125,562				107,976				239,204				212,343
Noninterest income	30,637				32,061				56,454				58,778
Securities gains, net	(2,006)				(3,580)				(3,664)				(5,155)
Unrealized (gain)/loss on equity securities, net	(680)				(112)				(449)				(370)

Valuation adjustment on servicing rights	(9)				364				1,556				953
Adjusted revenue (non-GAAP)	$	153,504			$	136,709			$	293,101			$	266,549

Total noninterest expenses (GAAP)	$	90,439			$	75,098			$	181,298			$	163,328
Less:
Core deposit and customer relationship intangibles amortization	2,696				3,313				5,677				6,155
Partnership investment in tax credit projects	791				1,465				975				1,940
(Gain)/loss on sales/valuation of assets, net	701				(18,286)				717				(21,290)
Acquisition, integration and restructuring costs	673				929				2,049				4,543
Adjusted noninterest expenses (non-GAAP)	$	85,578			$	87,677			$	171,880			$	171,980
Efficiency ratio, fully tax-equivalent (non-GAAP)	55.75		%		64.13		%		58.64		%		64.52		%

Acquisition, integration and restructuring costs
Salaries and employee benefits	$	122			$	100			$	166			$	716
Occupancy	—				10				—				1,204
Furniture and equipment	15				84				39				84
Professional fees	505				624				1,501				1,048
Advertising	4				52				93				57
(Gain)/loss on sales/valuations of assets, net	—				—				—				1,003
Other noninterest expenses	27				59				250				431
Total acquisition, integration and restructuring costs	$	673			$	929			$	2,049			$	4,543
After tax impact on diluted earnings per share⁽¹⁾	$	0.01			$	0.02			$	0.04			$	0.10

Reconciliation of Adjusted Net Income and Adjusted Diluted EPS (non-GAAP)
Net income (GAAP)	$	30,131			$	45,169			$	50,171			$	76,666
Provision for credit losses⁽¹⁾	21,169				3,885				38,170				5,177
Acquisition, integration and restructuring costs⁽¹⁾	532				734				1,619				3,589
Adjusted net income (non-GAAP)	$	51,832			$	49,788			$	89,960			$	85,432
Diluted earnings per share (GAAP)	$	0.82			$	1.26			$	1.36			$	2.17
Adjusted diluted earnings per share (non-GAAP)	$	1.40			$	1.39			$	2.44			$	2.42

Reconciliation of Annualized Adjusted Return on Average Tangible Common Equity (non-GAAP)
Adjusted net income (non-GAAP)	$	51,832			$	49,788			$	89,960			$	85,432
Plus core deposit and customer relationship intangibles amortization, net of tax⁽¹⁾	2,130				2,617				4,485				4,862
Adjusted net income excluding intangible amortization (non-GAAP)	$	53,962			$	52,405			$	94,445			$	90,294
Average tangible common equity (non-GAAP)	$	1,083,834			$	981,878			$	1,104,770			$	940,217
Annualized adjusted return on average tangible common equity (non-GAAP)	20.02		%		21.41		%		17.19		%		19.37		%

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

Non-GAAP Financial Measures

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

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

Net Interest Margin and Net Interest Income

Heartland's success in maintaining competitive net interest margin has been the result of an increase in average earning assets and a favorable deposit mix for the quarters ended ~~September~~June 30, 2020 and 2019 and ~~2018 and~~ the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019. Also contributing to Heartland's ability to maintain its net interest margin has been the amortization of purchase accounting discounts associated with acquisitions completed by Heartland. Growth in interest income on a tax-equivalent basis was largely due to the increase in average earning assets primarily from recent ~~acquisitions. Increases~~acquisitions and loan growth, including PPP loans. Decreases in total interest expense were primarily ~~due to recent increases in market~~the result of declining interest ~~rates and deposit growth from recent acquisitions.~~rates. See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for information relating to Heartland's net interest income on a fully tax-equivalent basis, which is not defined by GAAP. Refer to the ~~financial highlights~~"Financial Highlights" above for a reconciliation of annualized net interest margin on a fully tax-equivalent basis to GAAP.

For the Quarters ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

Net interest margin, expressed as a percentage of average earning assets, was ~~3.98% (4.02%~~3.81% (3.85% on a fully tax-equivalent ~~basis)~~basis, non-GAAP) during the ~~third~~second quarter of ~~2019,~~2020, compared to ~~4.32% (4.38%~~4.06% (4.10% on a fully tax-equivalent ~~basis)~~basis, non-GAAP) during the ~~third~~second quarter of ~~2018.~~2019. Excluding the impact of the PPP loans, Heartland's net interest margin on a fully tax-equivalent basis (non-GAAP) for the second quarter of 2020 was 3.95%. For the ~~third~~second quarter of ~~2019,~~2020, Heartland's net interest margin included 2316 basis points of purchase accounting discount amortization on loans compared to 2518 basis points in the same quarter of ~~2018.~~2019.

Total interest income for the ~~third~~second quarter of ~~2019~~2020 was ~~$133.4~~$133.8 million, an increase of ~~$8.5~~$6.8 million or 7%5%, compared to ~~$124.9~~$127.0 million recorded in the ~~third~~second quarter of ~~2018.~~2019. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were ~~$1.1~~$1.4 million for the ~~third~~second quarter of ~~2019~~2020 and ~~$1.5~~$1.3 million for the ~~third~~second quarter of ~~2018.~~2019. With these adjustments, total interest income on a tax-equivalent basis was ~~$134.5~~$135.2 million for the ~~third~~second quarter of ~~2019,~~2020, an increase of ~~$8.1~~$6.9 million or 6%5%, compared to ~~$126.4~~$128.3 million for the ~~third~~second quarter of ~~2018.~~2019.

Average earning assets increased ~~$948.0 million~~$2.55 billion or 9%24% to ~~$11.10~~$13.10 billion from ~~$10.15~~$10.55 billion in the ~~third~~second quarter of ~~2018,~~2019, which was primarily attributable to recent ~~acquisitions.~~acquisitions and loan growth, including PPP loans. The average interest rate on earning assets decreased 1373 basis points to ~~4.81%~~4.15% for the ~~third~~second quarter of ~~2019~~2020 compared to ~~4.94%~~4.88% for the same quarter in ~~2018. In~~2019, which was primarily due to recent decreases in market interest rates and the ~~first~~lower yield on PPP loans, which was 2.64% for the second quarter of 2019, Heartland sold its higher yielding consumer loan portfolios, which decreased the average rate on earning assets by approximately 13 basis points for the third quarter of 2019 compared to the same quarter in 2018.2020.

Total interest expense for the ~~third~~second quarter of 2020 was $9.6 million, a decrease of $10.7 million or 53% from $20.3 million in the second quarter of 2019, which was ~~$22.1 million,~~the result of an increase ~~of $7.9 million or 55% from $14.2 million~~ in ~~the third quarter of 2018.~~average interest bearing liabilities partially offset by declining interest rates. The average interest rate paid on Heartland's interest bearing ~~liabilities increased~~deposits decreased 67 basis points to ~~1.22%~~0.32% for the ~~third~~second quarter of ~~2019~~2020 compared to ~~0.86%~~0.99% for the ~~third~~second quarter of ~~2018, which was primarily due to recent increases in market interest rates.~~2019. The average interest rate paid on savings deposits was ~~0.94%~~0.14% during the ~~third~~second quarter of ~~2019~~2020 compared to ~~0.56%~~0.89% for the ~~third~~second quarter of ~~2018,~~2019, and the average interest rate paid on time deposits was ~~1.62%~~1.38% for the ~~third~~second quarter of ~~2019~~2020 compared to ~~1.03%~~1.49% for the ~~third~~second quarter of ~~2018.~~2019. The average interest rate paid on Heartland's borrowings was ~~4.26%~~3.80% for the ~~third~~second quarter of ~~2019~~2020 compared to ~~3.91%~~4.52% in the ~~third~~second quarter of ~~2018.~~2019.

For the quarter ended ~~September~~June 30, ~~2019,~~2020, average interest bearing liabilities were ~~$7.17~~$8.16 billion, an increase of ~~$630.0 million~~$1.28 billion or ~~10%~~19%, from ~~$6.54~~$6.87 billion for the quarter ended ~~September~~June 30, ~~2018.~~2019. Average interest bearing deposits increased ~~$666.8 million~~$1.28 billion or ~~11%~~20% to ~~$6.79~~$7.79 billion for the quarter ended ~~September~~June 30, ~~2019,~~2020, from ~~$6.13~~$6.50 billion in the same quarter in ~~2018.~~2019, which was primarily attributable to recent acquisitions and deposit growth. Average borrowings decreased ~~$36.8 million~~$389,000 or 9%less than 1% to ~~$382.2~~$368.9 million during the ~~third~~second quarter of ~~2019~~2020 from ~~$419.0~~$369.3 million during the same quarter in ~~2018. The increase in Heartland's average interest bearing liabilities is primarily attributable to recent acquisitions.~~2019.

Net interest income increased ~~$643,000~~$17.4 million or 1%16% to ~~$111.3~~$124.1 million in the ~~third~~second quarter of ~~2019~~2020 from ~~$110.7~~$106.7 million in the ~~third~~second quarter of ~~2018.~~2019. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled ~~$112.5~~$125.6 million during the ~~third~~second quarter of ~~2019,~~2020, an increase of ~~$239,000~~$17.6 million or ~~less than 1%~~16% from ~~$112.2~~$108.0 million during the ~~third~~second quarter of ~~2018.~~2019.

For the Six Months ended June 30, 2020 and 2019

~~For the Nine Months Ended September 30, 2019 and 2018~~

Net interest margin, expressed as a percentage of average earning assets, was ~~4.05% (4.10%~~3.81% (3.85% on a fully tax-equivalent ~~basis)~~basis, non-GAAP) during the ~~nine-month period ended September 30, 2019,~~first six months of 2020, compared to ~~4.25% (4.32%~~4.09% (4.14% on a fully tax-equivalent ~~basis)~~basis, non-GAAP) during the ~~same period~~first six months of ~~2018.~~2019. Excluding the impact of the PPP loans, Heartland's net interest margin on a fully tax-equivalent basis (non-GAAP) for the first six months of 2020 was 3.90%. For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, Heartland's net interest margin included 1910 basis points of purchase accounting discount amortization on loans compared to 2117 basis points ~~for~~in the same period of ~~2018.~~2019.

Total interest income for the first ~~nine~~six months of ~~2019~~2020 was ~~$381.1~~$264.8 million, an increase of ~~$41.6~~$17.1 million or ~~12%~~7%, compared to ~~$339.5~~$247.7 million recorded in the ~~first nine months~~second quarter of ~~2018.~~2019. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were ~~$3.8~~$2.5 million for the first ~~nine~~six months of ~~2019~~2020 and ~~$4.7~~$2.7 million for the ~~same period~~first six months of ~~2018.~~2019. With these adjustments, total interest income on a tax-equivalent basis was ~~$384.9~~$267.4 million for the first ~~nine~~six months of ~~2019,~~2020, an increase of ~~$40.8~~$17.0 million or ~~12%~~7%, compared to ~~$344.2~~$250.4 million for the ~~first nine months~~same period of ~~2018.~~2019.

Average earning assets increased ~~$1.05~~$2.16 billion or ~~11%~~21% to ~~$10.60~~$12.50 billion from $10.34 billion for the first ~~nine~~six months of 2019, ~~from $9.55 billion for the first nine months of 2018,~~ which was primarily attributable to recent ~~acquisitions.~~acquisitions and loan growth, including PPP loans. The average interest rate on earning assets ~~increased 4~~decreased 58 basis points to ~~4.86%~~4.30% for the ~~first nine~~six months ~~of 2019~~ended June 30, 2020, compared to ~~4.82%~~4.88% for the same period in ~~2018. In~~2019, which was primarily due to recent decreases in market interest rates and the lower yield on PPP loans, which was 2.64% for the first ~~quarter~~six months of 2019, Heartland sold its higher yielding consumer loan portfolios, which decreased the average rate on earning assets by approximately 14 basis points for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.2020.

Total interest expense for the ~~nine-month period~~six months ended ~~September~~June 30, ~~2019~~2020, was ~~$60.1~~$28.2 million, ~~an increase~~a decrease of ~~$24.3~~$9.9 million or ~~68%~~26% from ~~$35.8~~$38.1 million in the nine-month period ended September 30, 2018. The average interest rate paid on Heartland's interest bearing liabilities increased to 1.17% for the nine months ended September 30, 2019 compared to 0.78% for the same period of ~~2018,~~2019, which was primarily ~~due to recent increases~~the result of decreases in market interest rates. The average interest rate paid on Heartland's interest bearing deposits decreased 38 basis points to 0.55% for the six months ended June 30, 2020, compared to 0.93% for the same period of 2019. The average interest rate paid on savings deposits was ~~0.88%,~~0.39% during the first six months of 2020 compared to 0.85% for the same period of 2019, and the average interest rate paid on time deposits was ~~1.45% during the first nine months of 2019 compared to 0.47% and 0.96%, respectively,~~1.48% for the first ~~nine~~six months of ~~2018.~~2020 compared to 1.37% for the first six months of 2019. The average interest rate paid on Heartland's borrowings was 3.80% and 4.21% for the ~~nine~~first six months ~~ended September 30,~~of 2020 and 2019, ~~and 2018, was 4.22% and 3.82%,~~ respectively.

~~For the first nine months of 2019, average~~Average interest bearing liabilities were ~~$6.89~~$8.00 billion for the first six months of 2020, an increase of ~~$740.6 million~~$1.25 billion or ~~12%~~19%, from ~~$6.15~~$6.75 billion for the same period of ~~2018.~~2019. Average interest bearing deposits increased ~~$755.7 million~~$1.27 billion or ~~13%~~20% to ~~$6.49~~$7.61 billion for the ~~nine~~first six months ~~ended September~~of June 30, ~~2019,~~2020, from ~~$5.73~~$6.33 billion in the ~~first nine months of 2018.~~period in 2019, which was primarily attributable to recent acquisitions and deposit growth. Average borrowings decreased ~~$15.1~~$24.1 million or 4%6% to ~~$405.6~~$393.3 million during the first ~~nine~~six months of ~~2019~~2020 from ~~$420.7~~$417.5 million during the same period in ~~2018.~~2019.

Net interest income increased ~~$17.3~~$27.0 million or 6%13% to ~~$321.0~~$236.7 million for the first six months of 2020 from $209.7 million in the ~~first nine months~~same period of ~~2019 from $303.7 million recorded in the first nine months of 2018.~~2019. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled ~~$324.8~~$239.2 million during the first ~~nine~~six months of ~~2019,~~2020, an increase of ~~$16.5~~$26.9 million or 5%13% from ~~$308.3~~$212.3 million during the same period of ~~2018.~~2019.

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

The following tables set forth certain information relating to Heartland's average consolidated balance sheets and reflect the yield on average earning assets and the cost of average interest bearing liabilities for the periods indicated, in thousands. Such yields and costs are calculated by dividing income or expense by the average balance of assets or liabilities. Average balances are derived from daily balances, and nonaccrual loans and loans held for sale are included in each respective loan category. Assets that receive favorable tax treatment are evaluated on a tax-equivalent basis assuming a federal income tax rate of 21%. Tax-favored assets generally have lower contractual pre-tax yields than fully taxable assets. A tax-equivalent yield is calculated by adding the tax savings to the interest earned on tax favored assets and dividing this amount by the average balance of the tax favorable assets.


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

		For the Quarter Ended																																			For the Quarter Ended
		September 30, 2019										June 30, 2019												September 30, 2018									June 30, 2020							March 31, 2020	June 30, 2019
		Average Balance		Interest		Rate		Average Balance		Interest		Rate		Average Balance		Interest		Rate			Average Balance		Interest		Rate		Average Balance		Interest		Rate		Average Balance		Interest		Rate
Earning Assets	Earning Assets																			Earning Assets
Securities:	Securities:																			Securities:
Taxable	Taxable	$	2,658,107	$	18,567	2.77	%	$	2,217,863	$	16,123	2.92	%	$	2,066,071	$	14,433	2.77	%	Taxable	$	3,375,245	$	23,362	2.78	%	$	3,132,103	$	21,731	2.79	%	$	2,217,863	$	16,123	2.92		%
Nontaxable⁽¹⁾	Nontaxable⁽¹⁾	266,933		2,682		3.99		324,164		3,233		4.00		435,045		4,418		4.03		Nontaxable⁽¹⁾	433,329		4,233		3.93		288,535		2,763		3.85		324,164		3,233		4.00
Total securities	Total securities	2,925,040		21,249		2.88		2,542,027		19,356		3.05		2,501,116		18,851		2.99		Total securities	3,808,574		27,595		2.91		3,420,638		24,494		2.88		2,542,027		19,356		3.05
Interest on deposits with other banks and other short-term investments		358,327		2,151		2.38		424,262		2,299		2.17		252,535		1,238		1.94
Interest on deposits with other banks and short-term investments																				Interest on deposits with other banks and short-term investments	210,347		54		0.10		181,320		721		1.60		424,262		2,299		2.17
Federal funds sold	Federal funds sold	—		—		—		—		—		—		—		—		—		Federal funds sold	—		—		—		—		—		—		—		—		—
Loans:⁽²⁾
Commercial and commercial real estate⁽¹⁾		6,216,133		86,864		5.54		5,968,424		82,328		5.53		5,637,360		77,443		5.45
Loans:⁽²⁾⁽³⁾																				Loans:⁽²⁾⁽³⁾
Commercial and industrial⁽¹⁾																				Commercial and industrial⁽¹⁾	2,453,066		30,759		5.04		2,607,513		32,454		5.01		2,436,443		31,991		5.27
PPP loans																				PPP loans	916,405		6,017		2.64		—		—		—		—		—		—
Owner occupied commercial real estate																				Owner occupied commercial real estate	1,426,019		17,670		4.98		1,433,160		18,581		5.21		1,312,149		18,659		5.70
Non-owner occupied commercial real estate																				Non-owner occupied commercial real estate	1,540,958		19,055		4.97		1,472,268		19,530		5.34		1,134,298		17,683		6.25
Real estate construction																				Real estate construction	1,100,514		12,589		4.60		1,045,836		12,845		4.94		900,733		13,195		5.88
Agricultural and agricultural real estate																				Agricultural and agricultural real estate	532,668		6,171		4.66		552,968		7,039		5.12		566,315		7,465		5.29
Residential mortgage	Residential mortgage	662,663		7,979		4.78		676,465		8,238		4.88		736,875		8,952		4.82		Residential mortgage	795,149		9,586		4.85		819,730		10,421		5.11		872,633		11,129		5.12
Agricultural and agricultural real estate⁽¹⁾		550,441		7,551		5.44		558,128		7,581		5.45		571,599		7,725		5.36
Consumer	Consumer	454,441		6,697		5.85		445,545		6,517		5.87		516,342		10,043		7.72		Consumer	422,134		5,685		5.42		432,745		6,095		5.66		425,991		6,494		6.11
Fees on loans				2,052		—				1,952		—				2,186		—
Less: allowance for loan losses	Less: allowance for loan losses	(64,464)		—		—		(62,685)		—		—		(61,236)		—		—		Less: allowance for loan losses	(102,675)		—		—		(74,723)		—		—		(62,685)		—		—
Net loans	Net loans	7,819,214		111,143		5.64		7,585,877		106,616		5.64		7,400,940		106,349		5.70		Net loans	9,084,238		107,532		4.76		8,289,497		106,965		5.19		7,585,877		106,616		5.64
Total earning assets	Total earning assets	11,102,581		134,543		4.81	%	10,552,166		128,271		4.88	%	10,154,591		126,438		4.94	%	Total earning assets	13,103,159		135,181		4.15	%	11,891,455		132,180		4.47	%	10,552,166		128,271		4.88		%
Nonearning Assets	Nonearning Assets	1,190,751						1,156,372						1,136,698						Nonearning Assets	1,288,697						1,256,718						1,156,372
Total Assets	Total Assets	$	12,293,332					$	11,708,538					$	11,291,289					Total Assets	$	14,391,856					$	13,148,173					$	11,708,538
Interest Bearing Liabilities⁽³⁾
Interest Bearing Liabilities																				Interest Bearing Liabilities
Savings	Savings	$	5,643,722	$	13,301	0.94	%	$	5,360,355	$	11,895	0.89	%	$	4,932,013	$	6,980	0.56	%	Savings	$	6,690,504	$	2,372	0.14	%	$	6,277,528	$	10,082	0.65	%	$	5,360,355	$	11,895	0.89		%
Time deposits	Time deposits	1,149,064		4,681		1.62		1,142,842		4,243		1.49		1,193,971		3,112		1.03		Time deposits	1,096,386		3,762		1.38		1,146,619		4,500		1.58		1,142,842		4,243		1.49
Short-term borrowings	Short-term borrowings	102,440		250		0.97		92,977		338		1.46		148,041		464		1.24		Short-term borrowings	82,200		61		0.30		141,807		296		0.84		92,977		338		1.46
Other borrowings	Other borrowings	279,718		3,850		5.46		276,275		3,819		5.54		270,924		3,660		5.36		Other borrowings	286,663		3,424		4.80		275,987		3,660		5.33		276,275		3,819		5.54
Total interest bearing liabilities	Total interest bearing liabilities	7,174,944		22,082		1.22	%	6,872,449		20,295		1.18	%	6,544,949		14,216		0.86	%	Total interest bearing liabilities	8,155,753		9,619		0.47	%	7,841,941		18,538		0.95	%	6,872,449		20,295		1.18
Noninterest Bearing Liabilities⁽³⁾
Noninterest Bearing Liabilities																				Noninterest Bearing Liabilities
Noninterest bearing deposits	Noninterest bearing deposits	3,460,857						3,287,559						3,404,759						Noninterest bearing deposits	4,501,488						3,547,046						3,287,559
Accrued interest and other liabilities	Accrued interest and other liabilities	116,162						106,142						77,786						Accrued interest and other liabilities	153,618						139,504						106,142
Total noninterest bearing liabilities	Total noninterest bearing liabilities	3,577,019						3,393,701						3,482,545						Total noninterest bearing liabilities	4,655,106						3,686,550						3,393,701
Stockholders' Equity		1,541,369						1,442,388						1,263,795
Total Liabilities and Stockholders' Equity		$	12,293,332					$	11,708,538					$	11,291,289
Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾				$	112,461					$	107,976					$	112,222
Equity																				Equity	1,580,997						1,619,682						1,442,388
Total Liabilities and Equity																				Total Liabilities and Equity	$	14,391,856					$	13,148,173					$	11,708,538
Net interest income, fully tax-equivalent (non-GAAP)⁽⁴⁾																				Net interest income, fully tax-equivalent (non-GAAP)⁽⁴⁾			$	125,562					$	113,642					$	107,976
Net interest spread⁽¹⁾	Net interest spread⁽¹⁾					3.59	%					3.70	%					4.08	%	Net interest spread⁽¹⁾					3.68	%					3.52	%					3.70		%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets						4.02	%					4.10	%					4.38	%
Net interest income, fully tax-equivalent to total earning assets (non-GAAP)⁽⁴⁾																				Net interest income, fully tax-equivalent to total earning assets (non-GAAP)⁽⁴⁾					3.85	%					3.84	%					4.10		%

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

(3) In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to align more closely with FDIC codes. All prior period balances have been adjusted.																				(3) In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to align more closely with FDIC codes. All prior period balances have been adjusted.
(4) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures.																				(4) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures.


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

		For the Nine Months Ended																									For the Six Months Ended
		September 30, 2019										September 30, 2018													June 30, 2020					June 30, 2019
		Average Balance		Interest		Rate		Average Balance		Interest		Rate			Average Balance			Interest		Rate		Average Balance			Interest		Rate
Earning Assets	Earning Assets													Earning Assets
Securities:	Securities:													Securities:
Taxable	Taxable	$	2,350,120	$	50,566	2.88	%	$	1,937,053	$	38,280	2.64	%	Taxable	$	3,253,675		$	45,093	2.79	%	$	2,193,576		$	31,999	2.94		%
Nontaxable⁽¹⁾	Nontaxable⁽¹⁾	327,150		9,830		4.02	%	444,127		13,485		4.06		Nontaxable⁽¹⁾	360,932			6,996		3.90		357,757			7,148		4.03
Total securities	Total securities	2,677,270		60,396		3.02		2,381,180		51,765		2.91		Total securities	3,614,607			52,089		2.90		2,551,333			39,147		3.09
Interest bearing deposits with other banks and other short-term investments	Interest bearing deposits with other banks and other short-term investments	334,191		5,742		2.30		183,905		2,413		1.75		Interest bearing deposits with other banks and other short-term investments	195,833			775		0.80		321,922			3,591		2.25
Federal funds sold	Federal funds sold	185		4		2.89		471		—		—		Federal funds sold	—			—		—		278			4		2.90
Loans:⁽²⁾⁽³⁾	Loans:⁽²⁾⁽³⁾													Loans:⁽²⁾⁽³⁾
Commercial and commercial real estate⁽¹⁾		5,978,304		247,275		5.53		5,319,862		211,557		5.32
Commercial and industrial⁽¹⁾														Commercial and industrial⁽¹⁾	2,530,349			63,213		5.02		2,381,953			62,380		5.28
PPP loans														PPP loans	458,202			6,017		2.64		—			—		—
Owner occupied commercial real estate														Owner occupied commercial real estate	1,429,560			36,251		5.10		1,285,930			36,190		5.68
Non-owner occupied commercial real estate														Non-owner occupied commercial real estate	1,506,583			38,585		5.15		1,130,756			35,106		6.26
Real estate construction														Real estate construction	1,073,175			25,434		4.77		866,548			25,066		5.83
Agricultural and agricultural real estate														Agricultural and agricultural real estate	542,818			13,210		4.89		567,330			14,668		5.21
Residential mortgage	Residential mortgage	670,896		23,396		4.66		688,367		23,365		4.54		Residential mortgage	807,440			20,007		4.98		878,691			21,415		4.91
Agricultural and agricultural real estate⁽¹⁾		554,344		22,433		5.41		542,755		20,579		5.07
Consumer	Consumer	446,546		19,693		5.90		489,417		27,895		7.62		Consumer	427,439			11,780		5.54		420,152			12,837		6.16
Fees on loans				6,008		—				6,606		—

Less: allowance for loan losses	Less: allowance for loan losses	(63,271)		—		—		(58,810)		—		—		Less: allowance for loan losses	(88,699)			—		—		(62,664)			—		—
Net loans	Net loans	7,586,819		318,805		5.62		6,981,591		290,002		5.55		Net loans	8,686,867			214,497		4.97		7,468,696			207,662		5.61
Total earning assets	Total earning assets	10,598,465		384,947		4.86	%	9,547,147		344,180		4.82	%	Total earning assets	12,497,307			267,361		4.30	%	10,342,229			250,404		4.88		%
Nonearning Assets	Nonearning Assets	1,161,655						1,023,306						Nonearning Assets	1,272,708							1,146,866
Total Assets	Total Assets	$	11,760,120					$	10,570,453					Total Assets	$	13,770,015						$	11,489,095
Interest Bearing Liabilities⁽³⁾
Interest Bearing Liabilities														Interest Bearing Liabilities
Savings	Savings	$	5,376,999	$	35,279	0.88	%	$	4,681,710	$	16,306	0.47	%	Savings	$	6,484,016		$	12,454	0.39	%	$	5,241,428		$	21,978	0.85		%
Time deposits	Time deposits	1,109,302		12,054		1.45		1,048,878		7,535		0.96		Time deposits	1,121,502			8,262		1.48		1,089,091			7,373		1.37
Short-term borrowings	Short-term borrowings	129,928		1,477		1.52		149,453		1,279		1.14		Short-term borrowings	112,004			357		0.64		143,901			1,227		1.72
Other borrowings	Other borrowings	275,642		11,333		5.50		271,234		10,726		5.29		Other borrowings	281,325			7,084		5.06		273,570			7,483		5.52
Total interest bearing liabilities	Total interest bearing liabilities	6,891,871		60,143		1.17	%	6,151,275		35,846		0.78	%	Total interest bearing liabilities	7,998,847			28,157		0.71	%	6,747,990			38,061		1.14		%
Noninterest Bearing Liabilities⁽³⁾
Noninterest Bearing Liabilities														Noninterest Bearing Liabilities
Noninterest bearing deposits	Noninterest bearing deposits	3,317,187						3,207,709						Noninterest bearing deposits	4,024,267							3,244,161
Accrued interest and other liabilities	Accrued interest and other liabilities	110,308						71,506						Accrued interest and other liabilities	146,561							107,332
Total noninterest bearing liabilities	Total noninterest bearing liabilities	3,427,495						3,279,215						Total noninterest bearing liabilities	4,170,828							3,351,493
Stockholders' Equity	Stockholders' Equity	1,440,754						1,139,963						Stockholders' Equity	1,600,340							1,389,612
Total Liabilities and Stockholders' Equity	Total Liabilities and Stockholders' Equity	$	11,760,120					$	10,570,453					Total Liabilities and Stockholders' Equity	$	13,770,015						$	11,489,095
Net interest income, fully tax-equivalent (non-GAAP)⁽¹⁾				$	324,804					$	308,334
Net interest income, fully tax-equivalent (non-GAAP)⁽⁴⁾														Net interest income, fully tax-equivalent (non-GAAP)⁽⁴⁾				$	239,204						$	212,343
Net interest spread⁽¹⁾	Net interest spread⁽¹⁾					3.69	%					4.04	%	Net interest spread⁽¹⁾						3.59	%						3.74		%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets						4.10	%					4.32	%

Net interest income, fully tax-equivalent (non-GAAP) to total earning assets⁽⁴⁾														Net interest income, fully tax-equivalent (non-GAAP) to total earning assets⁽⁴⁾						3.85	%						4.14		%
Interest bearing liabilities to earning assets														Interest bearing liabilities to earning assets	64.00		%					65.25		%

(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.	(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.																											(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.	(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.																											(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.
(3) Includes deposits held for sale.
(3) In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to more closely align with FDIC codes. All prior period balances have been adjusted.														(3) In conjunction with the adoption of ASU 2016-13, Heartland reclassified loan balances to more closely align with FDIC codes. All prior period balances have been adjusted.
(4) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures.														(4) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures.

Provision For ~~Loan~~Credit Losses

The allowance for ~~loan~~credit losses is established through provision expense to provide, in Heartland management's opinion, an appropriate allowance for ~~loan~~credit losses. The following table shows the components of Heartland's provision for ~~loan~~credit losses ~~was $5.2~~for the three and six months ended June 30, 2020 and 2019, in thousands:


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Provision for credit losses-loans	$	25,007	$	4,918	$	44,872	$	6,553
Provision for credit losses-unfunded commitments⁽¹⁾	1,924		—		3,540		—
Provision for credit losses-held to maturity securities⁽²⁾	(135)		—		(96)		—
Total provision expense	$	26,796	$	4,918	$	48,316	$	6,553

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

Provision for credit losses on loans totaled $25.0 million for the ~~third~~second quarter of ~~2019 and 2018. For the nine months ended September 30, 2019, provision expense totaled $11.8 million~~2020 compared to ~~$14.3 million for the same period of 2018.~~

The impact of the sale of the Citizen's Finance loan portfolios resulted in net recoveries of $1,800 for the third quarter and $629,000 for the first nine months of 2019, compared to net charge-offs of $805,000 in the third quarter of 2018 and $2.3$19.9 million for the first ~~nine~~quarter of 2020 and $4.9 million in the second quarter of 2019. Heartland recorded $11.6 million of provision expense for one owner-occupied commercial real estate sand fracking company relationship that was individually assessed for allowance for credit losses in the second quarter of 2020. For the first six months of ~~2018. As a result of~~2020, the ~~sale of the Citizen's Finance loan portfolios, Heartland recorded~~

~~negative~~ provision ~~expense of $1,800 and $629,000~~ for ~~the third quarter of 2019 and first nine months of 2019, respectively. Provision expense related~~credit losses on loans increased $38.3 million to ~~the Citizen's Finance loan portfolios of $769,000 and $2.3~~$44.9 million ~~respectively, was recorded for the same periods of 2018. This was a change~~compared to ~~provision expense of $771,000 and $2.9~~$6.6 million for the ~~three- and nine-months ended September 30, 2019, respectively,~~first six months of 2019. The continued deteriorating economic outlook negatively impacted the provision for credit losses on loans for the ~~Citizen's Finance loan portfolios.~~quarter and the six months ended June 30, 2020.

Given the size of Heartland's loan portfolio, the level of organic loan growth, ~~acquired loans that move out of the purchase accounting pool,~~ changes in credit quality and the variability that can occur in the factors, such as economic conditions, considered when determining the appropriateness of the allowance for ~~loan~~credit losses, Heartland's provision for ~~loan~~credit losses will vary from quarter to quarter. For additional details on the specific factors considered in establishing the allowance for ~~loan~~credit losses, refer to the discussion of critical accounting policies set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Heartland's Annual Report on Form 10-K for the year ended December 31, ~~2018, and~~2019, the information ~~under~~in Note 1, "Basis of Presentation," to the ~~caption~~consolidated financial statements included herein, "Allowance For ~~Loan~~Credit Losses" and "Provision for Credit Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 5, "Allowance for Credit Losses," to the consolidated financial statements included herein.

Heartland believes the allowance for ~~loan~~credit losses as of ~~September~~June 30, ~~2019,~~2020, was at a level commensurate with the overall risk exposure of the loan portfolio. However, if current economic conditions ~~should~~resulting from COVID-19 continue or further deteriorate, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for ~~loan~~credit losses. Due to the deteriorating economic conditions resulting from the COVID-19 pandemic, Heartland expects the provision for credit losses to remain elevated.

Noninterest Income

The tables below show Heartland's noninterest income for the three- and ~~nine-month~~six--month periods ended ~~September~~June 30, ~~2019,~~2020, and ~~2018,~~2019, in thousands:


	Three Months Ended June 30,
	2020		2019		Change		% Change
Service charges and fees	$	10,972	$	14,629	$	(3,657)	(25)	%
Loan servicing income	379		1,338		(959)		(72)
Trust fees	4,977		4,825		152		3
Brokerage and insurance commissions	595		1,028		(433)		(42)
Securities gains, net	2,006		3,580		(1,574)		44
Unrealized gain on equity securities, net	680		112		568		507

Net gains on sale of loans held for sale	7,857		4,343		3,514		81
Valuation adjustment on servicing rights	9		(364)		373		(102)
Income on bank owned life insurance	1,167		888		279		31
Other noninterest income	1,995		1,682		313		19
Total noninterest income	$	30,637	$	32,061	$	(1,424)	(4)	%


		Three Months Ended September 30,													Six Months Ended June 30,
		2019		2018		Change		% Change			2020		2019		Change		% Change
Service charges and fees	Service charges and fees	$	12,366	$	12,895	$	(529)	(4)	%	Service charges and fees	$	22,993	$	27,423	$	(4,430)	(16)	%
Loan servicing income	Loan servicing income	821		1,670		(849)		(51)		Loan servicing income	1,342		3,067		(1,725)		(56)
Trust fees	Trust fees	4,959		4,499		460		10		Trust fees	9,999		9,299		700		8
Brokerage and insurance commissions	Brokerage and insurance commissions	962		1,111		(149)		(13)		Brokerage and insurance commissions	1,328		1,762		(434)		(25)
Securities gains/(losses), net		2,013		(145)		2,158		1,488
Securities gains, net										Securities gains, net	3,664		5,155		(1,491)		(29)
Unrealized gain on equity securities, net	Unrealized gain on equity securities, net	144		54		90		167		Unrealized gain on equity securities, net	449		370		79		21

Net gains on sale of loans held for sale	Net gains on sale of loans held for sale	4,673		7,410		(2,737)		(37)		Net gains on sale of loans held for sale	12,517		7,519		4,998		66
Valuation adjustment on servicing rights	Valuation adjustment on servicing rights	(626)		230		(856)		(372)		Valuation adjustment on servicing rights	(1,556)		(953)		(603)		63
Income on bank owned life insurance	Income on bank owned life insurance	881		892		(11)		(1)		Income on bank owned life insurance	1,665		1,787		(122)		(7)
Other noninterest income	Other noninterest income	3,207		1,149		2,058		179		Other noninterest income	4,053		3,349		704		21
Total noninterest income	Total noninterest income	$	29,400	$	29,765	$	(365)	(1)	%	Total noninterest income	$	56,454	$	58,778	$	(2,324)	(4)	%

Nine Months Ended
September 30,
2019 2018 Change % Change
Service charges and fees $ 39,789 $ 35,046 $ 4,743 14 %
Loan servicing income 3,888 5,231 (1,343) (26)
Trust fees 14,258 13,794 464 3
Brokerage and insurance commissions 2,724 2,895 (171) (6)
Securities gains, net 7,168 1,037 6,131 591
Unrealized gain on equity securities, net 514 97 417 430
Net gains on sale of loans held for sale 12,192 18,261 (6,069) (33)
Valuation adjustment on servicing rights (1,579) 12 (1,591) (13,258)
Income on bank owned life insurance 2,668 2,206 462 21
Other noninterest income 6,556 3,536 3,020 85
Total noninterest income $ 88,178 $ 82,115 $ 6,063 7 %
Total noninterest income totaled $30.6 million during the second quarter of 2020 compared to $32.1 million during the second quarter of 2019, a decrease of $1.4 million or 4%. Total noninterest income totaled $56.5 million for the first six months of 2020 compared to $58.8 million for the first six months of 2019, which was a decrease of $2.3 million or 4%.

Notable changes in noninterest income categories for the three- and six months ended June 30, 2020 and 2019 are as follows:

Total noninterest income totaled $29.4 million during the third quarter of 2019 compared to $29.8 million during the third quarter of 2018, a decrease of $365,000 or 1%. For the nine months ended September 30, 2019, total noninterest income totaled $88.2 million compared to $82.1 million for the first nine months of 2018, which was an increase of $6.1 million or 7%. The changes for the quarterly and nine month comparison were primarily the result of higher securities gains, net, which were partially offset by lower loan servicing income, net gains on sale of loans held for sale and valuation adjustment on servicing rights. Also impacting the nine months ended September 30, 2019 compared to the same period in 2018 were higher service charges and fees.

Service Charges and Fees

The following tables summarize the changes in service charges and fees for the three- and ~~nine-month~~six--month periods ended ~~September~~June 30, ~~2019,~~2020, and ~~2018,~~2019, in thousands:


		Three Months Ended September 30,											Three Months Ended June 30,
		2019		2018		Change		% Change			2020		2019		Change		% Change
Service charges and fees on deposit accounts	Service charges and fees on deposit accounts	$	3,221	$	2,858	$	363	13	%	Service charges and fees on deposit accounts	$	3,476	$	3,186	$	290	9	%
Overdraft fees	Overdraft fees	2,917		2,990		(73)		(2)		Overdraft fees	1,634		2,876		(1,242)		(43)
Customer service and other service fees	Customer service and other service fees	104		102		2		2		Customer service and other service fees	35		84		(49)		(58)
Credit card fee income	Credit card fee income	3,936		3,062		874		29		Credit card fee income	4,067		4,270		(203)		(5)
Debit card income	Debit card income	2,188		3,883		(1,695)		(44)		Debit card income	1,760		4,213		(2,453)		(58)

Total service charges and fees	Total service charges and fees	$	12,366	$	12,895	$	(529)	(4)	%	Total service charges and fees	$	10,972	$	14,629	$	(3,657)	(25)	%

		Nine Months Ended September 30,											Six Months Ended June 30,
		2019		2018		Change		% Change			2020		2019		Change		% Change
Service charges and fees on deposit accounts	Service charges and fees on deposit accounts	$	9,383	$	8,270	$	1,113	13	%	Service charges and fees on deposit accounts	$	6,913	$	6,163	$	750	12	%
Overdraft fees	Overdraft fees	8,537		7,716		821		11		Overdraft fees	4,443		5,619		(1,176)		(21)
Customer service and other service fees	Customer service and other service fees	270		268		2		1		Customer service and other service fees	94		166		(72)		(43)
Credit card fee income	Credit card fee income	11,555		8,443		3,112		37		Credit card fee income	7,967		7,619		348		5
Debit card income	Debit card income	10,044		10,349		(305)		(3)		Debit card income	3,576		7,856		(4,280)		(54)

Total service charges and fees	Total service charges and fees	$	39,789	$	35,046	$	4,743	14	%	Total service charges and fees	$	22,993	$	27,423	$	(4,430)	(16)	%

Total service charges and fees decreased ~~$529,000~~$3.7 million or 4%25% to ~~$12.4~~$11.0 million during the ~~third~~second quarter of ~~2019~~2020 compared to ~~$12.9~~$14.6 million during the ~~third~~second quarter of ~~2018, as increases in credit card fee income and~~2019. Total service ~~charges~~charge and fees ~~on deposit accounts were offset by a decrease in debit card income. Total service charges and fees increased $4.7~~decreased $4.4 million or ~~14%~~16% to ~~$39.8 million during the first nine months of 2019 compared to $35.0~~$23.0 million for the ~~same period of 2018, which was~~six months ended June 30, 2020, compared to $27.4 million for the six months ended June 30, 2019. The decreases for the three- and six-month results were primarily attributable to ~~higher service charges~~decreases in overdraft fees and ~~fees on deposit accounts and higher credit~~debit card ~~fee income.~~income

~~Service charges and~~Overdraft fees ~~on deposit accounts increased $363,000 or 13% to $3.2~~totaled $1.6 million for the ~~third~~second quarter of ~~2019~~2020 compared to $2.9 million for the third quarter of 2018. For the first nine months of 2019, service charges and fees on deposit accounts totaled $9.4 million compared to $8.3 million for the first nine months of 2018, which was an increase of $1.1 million or 13%. Overdraft fees decreased $73,000 or 2% to $2.9 million for the thirdsecond quarter of 2019, ~~compared to $3.0~~which was a decrease of $1.2 million ~~for~~or 43%. For the ~~third quarter of 2018,~~six months ended June 30, 2020 and 2019, overdraft fees ~~increased $821,000~~totaled $4.4 million and $5.6 million, respectively, which was a decrease of $1.2 million or ~~11% during~~21%. The decreases for both the ~~first nine months of 2019 to $8.5 million compared to $7.7 million for the first nine months of 2018. The increases in service charges~~three- and ~~fees on deposit accounts and overdraft fees were~~six-month periods was primarily attributable to ~~a larger demand deposit~~reduced customer ~~base, a portion of which is attributable~~activity due to the ~~acquisitions completed in 2018 and the first half of 2019.~~

Fees associated with credit card services were $3.9 million during the third quarter of 2019 compared to $3.1 million during the third quarter of 2018, an increase of $874,000 or 29%. For the nine months ended September 30, 2019, credit card fee income totaled $11.6 million, which was an increase of $3.1 million or 37% from $8.4 million recorded in the same period of 2018. These increases resulted primarily from efforts to increase the level of commercial credit card services provided at Heartland's subsidiary banks, including at the recently acquired banks. Heartland has focused on expanding its card payment solutions for

~~businesses. In particular, Heartland has introduced an expense management service that provides business customers the ability to more efficiently manage their card-based spending.~~COVID-19 pandemic.

Debit card income decreased ~~$1.7~~$2.5 million or ~~44%~~58% to ~~$2.2~~$1.8 million for the ~~third~~second quarter of ~~2019~~2020 compared to ~~$3.9~~$4.2 million for the ~~third~~second quarter of ~~2018.~~2019. For the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, debit card income ~~decreased $305,000~~totaled $3.6 million and $7.9 million, respectively, which was a decrease of $4.3 million or ~~3% to $10.0 million from $10.3 million for the nine months ended September 30, 2018.~~54%. The decrease ~~for the quarterly period~~ was primarily attributable to reduced volume due to the COVID-19 pandemic and the impact of the Durbin Amendment, which restricts interchange fees to those which are "reasonable and proportionate" for certain debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing. The Durbin Amendment was effective for Heartland on July 1, 2019.

Loan Servicing Income

The following tables show the changes in loan servicing income for the three- and ~~nine-month~~six--month periods ended ~~September~~June 30, ~~2019,~~2020, and ~~2018,~~2019, in thousands:


		Three Months Ended September 30,											Three Months Ended June 30,
		2019		2018		Change		% Change			2020		2019		Change		% Change
Commercial and agricultural loan servicing fees⁽¹⁾	Commercial and agricultural loan servicing fees⁽¹⁾	$	774	$	702	$	72	10	%	Commercial and agricultural loan servicing fees⁽¹⁾	$	730	$	735	$	(5)	(1)		%
Residential mortgage servicing fees	Residential mortgage servicing fees	519		2,610		(2,091)		(80)		Residential mortgage servicing fees	410		1,355		(945)		(70)
Mortgage servicing rights amortization	Mortgage servicing rights amortization	(472)		(1,642)		1,170		71		Mortgage servicing rights amortization	(761)		(752)		(9)		(1)
Total loan servicing income	Total loan servicing income	$	821	$	1,670	$	(849)	(51)	%	Total loan servicing income	$	379	$	1,338	$	(959)	(72)		%

		Nine Months Ended September 30,											Six Months Ended June 30,
		2019		2018		Change		% Change			2020		2019		Change		% Change
Commercial and agricultural loan servicing fees⁽¹⁾	Commercial and agricultural loan servicing fees⁽¹⁾	$	2,270	$	2,375	$	(105)	(4)	%	Commercial and agricultural loan servicing fees⁽¹⁾	$	1,591	$	1,496	$	95	6		%
Residential mortgage servicing fees	Residential mortgage servicing fees	4,484		7,250		(2,766)		(38)		Residential mortgage servicing fees	819		3,965		(3,146)		(79)
Mortgage servicing rights amortization	Mortgage servicing rights amortization	(2,866)		(4,394)		1,528		35		Mortgage servicing rights amortization	(1,068)		(2,394)		1,326		55
Total loan servicing income	Total loan servicing income	$	3,888	$	5,231	$	(1,343)	(26)	%	Total loan servicing income	$	1,342	$	3,067	$	(1,725)	(56)		%

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

Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which are dependent upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. Loan servicing income totaled ~~$821,000~~$379,000 during the ~~third~~second quarter of 2020 compared to $1.3 million during the second quarter of 2019, ~~compared to $1.7 million during the third quarter of 2018,~~ a decrease of ~~$849,000~~$959,000 or ~~51%~~72%. For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, loan servicing income totaled ~~$3.9~~$1.3 million compared to $3.1 million for the six months ended June 30, 2019, which was a decrease of ~~$1.3~~$1.7 million or ~~26% from $5.2 million recorded in the same period of 2018.~~56%. The decrease ~~for both the quarterly and year-to-date comparisons~~ was ~~primarily~~ due to the sale of the mortgage servicing rights portfolio of Dubuque Bank and Trust Company and the increased mortgage servicing rights amortization due to increased mortgage loan refinancing activity in response to recent declines in mortgage interest rates. The sale of the mortgage servicing rights portfolio of Dubuque Bank and Trust Company, which occurred on April 30, ~~2019. This transaction does~~2019, did not impact the residential mortgage servicing portfolio of Heartland's ~~PrimeWest Mortgage Corporation~~First Bank & Trust subsidiary.

~~Securities Gains, Net~~

Securities gains, net, totaled $2.0 million for the third quarter of 2019 compared to net securities losses of $145,000 for the third quarter of 2018, which was an increase of $2.2 million. Securities gains, net, totaled $7.2 million and $1.0 million for the nine months ended September 30, 2019 and 2018, respectively, which was an increase of $6.1 million. Heartland's net unrealized gain on securities available for sale totaled $27.5 million at September 30, 2019, compared to net unrealized losses of $68.8 million at September 30, 2018.

Net Gains on Sale of Loans Held for Sale

During the ~~third~~second quarter of ~~2019,~~2020, net gains on sale of loans held for sale totaled ~~$4.7~~$7.9 million compared to ~~$7.4~~$4.3 million during the same period in ~~2018, a decrease~~2019, an increase of ~~$2.7~~$3.5 million or ~~37%~~81%. ~~For~~During the ~~nine~~first six months ~~ended September 30, 2019,~~of 2020, net gains on ~~sales~~sale of loans held for sale totaled ~~$12.2~~$12.5 million compared to ~~$18.3~~$7.5 million during the first six months of 2019, which was an increase of $5.0 million or 66%. The increase for both the three- and six-month comparisons was primarily due to an increase in residential mortgage loan refinancing activity in response to the recent declines in mortgage interest rates.

Valuation Adjustment on Servicing Rights

The valuation adjustment on servicing rights increased $603,000 or 63% to $1.6 million in the six months ended June 30, 2020 compared to $1.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018, which was a decrease of $6.1 million or 33%. These decreases were~~2019, primarily due to ~~the outsourcing of Heartland's legacy residential~~recent declines in mortgage ~~lending operations in the fourth quarter of 2018.~~interest rates.

~~Other Noninterest Income~~

Other noninterest income totaled $3.2 million and $1.1 million for the quarters ended September 30, 2019 and 2018, respectively, which was an increase of $2.1 million or 179%. Commercial swap fee income increased $1.3 million to $1.6 million for the third quarter of 2019 compared to $374,000 for the same quarter of 2018. Also included in other noninterest income for the third quarter of 2019 was a gain on the extinguishment of debt of $375,000. For the nine months ended September 30, 2019 and 2018, other noninterest income totaled $6.6 million and $3.5 million, respectively, which was an increase of $3.0 million or 85%. This increase was primarily attributable to a recovery of $266,000 on an acquired loan that was charged off prior to acquisition, $368,000 from a death benefit on bank owned life insurance, as well as the items impacting the third quarter of 2019.

Noninterest Expense

The tables below show Heartland's noninterest expenses for the three- and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019,~~2020, and ~~2018,~~2019, in thousands:


		Three Months Ended September 30,													Three Months Ended June 30,
		2019		2018		Change		% Change			2020		2019		Change		% Change
Salaries and employee benefits	Salaries and employee benefits	$	50,027	$	49,921	$	106	—	%	Salaries and employee benefits	$	50,118	$	49,895	$	223	—	%
Occupancy	Occupancy	6,594		6,348		246		4		Occupancy	6,502		6,426		76		1
Furniture and equipment	Furniture and equipment	2,858		3,470		(612)		(18)		Furniture and equipment	2,993		3,136		(143)		(5)
Professional fees	Professional fees	12,131		12,800		(669)		(5)		Professional fees	13,676		14,344		(668)		(5)

Advertising	Advertising	2,737		2,754		(17)		(1)		Advertising	995		2,609		(1,614)		(62)
Core deposit and customer relationship intangibles amortization	Core deposit and customer relationship intangibles amortization	2,899		2,626		273		10		Core deposit and customer relationship intangibles amortization	2,696		3,313		(617)		(19)
Other real estate and loan collection expenses, net	Other real estate and loan collection expenses, net	(89)		784		(873)		(111)		Other real estate and loan collection expenses, net	203		162		41		25
(Gain)/loss on sales/valuations of assets, net	(Gain)/loss on sales/valuations of assets, net	356		912		(556)		(61)		(Gain)/loss on sales/valuations of assets, net	701		(18,286)		18,987		(104)
Restructuring expenses		—		—		—		—
Acquisition, integration and restructuring costs										Acquisition, integration and restructuring costs	673		929		(256)		(28)
Partnership investment in tax credit projects										Partnership investment in tax credit projects	791		1,465		(674)		(46)
Other noninterest expenses	Other noninterest expenses	15,454		12,924		2,530		20		Other noninterest expenses	11,091		11,105		(14)		—
Total noninterest expenses	Total noninterest expenses	$	92,967	$	92,539	$	428	—	%	Total noninterest expenses	$	90,439	$	75,098	$	15,341	20	%


		Nine Months Ended September 30,													Six Months Ended June 30,
		2019		2018		Change		% Change			2020		2019		Change		% Change
Salaries and employee benefits	Salaries and employee benefits	$	150,307	$	149,389	$	918	1	%	Salaries and employee benefits	$	100,075	$	100,180	$	(105)	—	%
Occupancy	Occupancy	19,637		18,706		931		5		Occupancy	12,973		13,033		(60)		—
Furniture and equipment	Furniture and equipment	8,770		9,403		(633)		(7)		Furniture and equipment	6,101		5,828		273		5
Professional fees	Professional fees	38,478		32,880		5,598		17		Professional fees	26,149		25,366		783		3

Advertising	Advertising	7,723		6,839		884		13		Advertising	3,200		4,929		(1,729)		(35)
Core deposit and customer relationship intangibles amortization	Core deposit and customer relationship intangibles amortization	9,054		6,763		2,291		34		Core deposit and customer relationship intangibles amortization	5,677		6,155		(478)		(8)
Other real estate and loan collection expenses, net	Other real estate and loan collection expenses, net	774		2,464		(1,690)		(69)		Other real estate and loan collection expenses, net	537		863		(326)		(38)
(Gain)/loss on sales/valuations of assets, net	(Gain)/loss on sales/valuations of assets, net	(20,934)		2,243		(23,177)		(1,033)		(Gain)/loss on sales/valuations of assets, net	717		(21,290)		22,007		(103)
Restructuring expenses		3,227		2,564		663		26
Acquisition, integration and restructuring costs										Acquisition, integration and restructuring costs	2,049		4,543		(2,494)		(55)
Partnership investment in tax credit projects										Partnership investment in tax credit projects	975		1,940		(965)		(50)
Other noninterest expenses	Other noninterest expenses	39,259		33,816		5,443		16		Other noninterest expenses	22,845		21,781		1,064		5
Total noninterest expenses	Total noninterest expenses	$	256,295	$	265,067	$	(8,772)	(3)	%	Total noninterest expenses	$	181,298	$	163,328	$	17,970	11	%

For the ~~third~~second quarter of 2020, noninterest expenses totaled $90.4 million compared to $75.1 million during the second quarter of 2019, ~~noninterest expenses totaled $93.0 million compared to $92.5 million during the third quarter of 2018,~~ an increase of ~~$428,000~~$15.3 million or ~~less than 1%~~20%. For the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, total noninterest ~~expenses were $256.3~~expense was $181.3 million, ~~compared to $265.1~~an increase of $18.0 million or 11% from $163.3 million for the ~~same period of 2018, which was a decrease of $8.8 million or 3%.~~six months ended June 30, 2019.

Management has taken actions to streamline operations and reduce expenses, which included restructuring its mortgage lending operations, optimizing bank branch locations, and strategic initiative projects. Operation Customer Compass is anticipated to be complete by the end of 2019, and this project is focused on streamlining and automating processes. Expense reductions of over $10 million annually are expected to be realized once the Operation Customer Compass project is completed. Other process improvement projects will continue into mid-2020. Additionally, systems conversions of newly acquired entities are completed

~~as soon as possible after the closing of the transaction in order to optimize cost savings.~~ Notable changes in noninterest expense categories for the ~~quarterly~~three- and ~~nine-month periods~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 are as follows:

~~Professional Fees~~Advertising

~~Professional fees for the third quarter of 2019~~Advertising expense totaled ~~$12.1 million compared to $12.8~~$1.0 million for the ~~same~~ quarter ~~of 2018, which was a decrease of $669,000 or 5%. For the nine months~~ ended ~~September~~June 30, 2019, professional fees totaled $38.5 million compared to $32.9 million for the nine months ended September 30, 2018, which was an increase of $5.6 million or 17%. In the third quarter of 2019, Heartland's banks reversed the accrual for FDIC insurance assessments, which totaled $1.8 million, because the Deposit Insurance Fund ratio exceeded 1.38%, which is threshold required for assessment credits to be applied. This resulted in a benefit recorded in professional fees of $1.8 million for the third quarter of 2019 compared to expense of $1.1 million for the third quarter of 2018. Future FDIC insurance assessment expense may continue to be reduced by the assessment credits depending on the level of the Deposit Insurance Fund until the credits are fully utilized.

Professional fees related to Heartland's 2019 strategic initiative projects totaled $1.2 million for the third quarter and $4.3 million for the nine months ended September 30, 2019. The remainder of the increase for both the quarterly and year-to-date comparisons was primarily attributable to professional fees incurred at recently acquired entities, model validation expenses, and increased advisory services associated with the higher level of regulation resulting from Heartland having assets over $10 billion.

~~Core Deposit and Customer Relationship Intangibles Amortization~~

~~Core deposit and customer relationship intangibles amortization was $2.9 million for the third quarter of 2019~~2020 compared to $2.6 million for the same quarter ~~of 2018,~~in 2019, which was ~~an increase~~a decrease of ~~$273,000~~$1.6 million or ~~10%~~62%. For the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019, ~~core deposit~~advertising expense totaled $3.2 million and ~~customer relationship intangibles amortization was $9.1~~$4.9 million, ~~compared to $6.8 million for the same period of 2018,~~respectively, which was ~~an increase~~a decrease of ~~$2.3~~$1.7 million or ~~34%~~35%. ~~The increase for the quarterly comparison was~~Heartland has adjusted its advertising strategy in response to changes in business practices due to ~~recent acquisitions. The increase for~~ the ~~nine-month comparison was due to recent acquisitions and write-offs totaling $682,000 related to the branch sales at Illinois Bank & Trust, Citywide Banks and Wisconsin Bank & Trust.~~COVID-19 pandemic.

Gain/Loss on Sales/Valuations of Assets, Net

Net losses on sales/valuations of assets totaled ~~$356,000 during~~$701,000 for the ~~third~~second quarter of ~~2019~~2020 compared to ~~$912,000 for the third quarter of 2018, which was a decrease of $556,000 or 61%. For the nine months ended September 30, 2019,~~ net gains on sales/valuations of assets ~~totaled $20.9~~of $18.3 million ~~compared to~~for the second quarter of 2019. For the six months ended June 30, 2020, net losses on sales/valuations of assets totaled $717,000 compared to net gains on sales/valuation of ~~$2.2 million, which was a change~~assets of ~~$23.2~~$21.3 million. InDuring the

second quarter and first six months of 2019, Heartland completed several strategic initiatives that resulted in net gains, which included the sale of ~~$19.8 million were recorded in conjunction with~~ the ~~branch sales at Illinois Bank & Trust, Citywide Banks, and~~mortgage servicing rights portfolio of Dubuque Bank and Trust Company and several branch locations across Heartland's footprint.

Acquisition, integration and restructuring costs

Acquisition, integration and restructuring costs totaled $673,000 and $929,000 for the ~~sale~~second quarter of ~~Dubuque Bank~~2020 and ~~Trust Company's mortgage servicing rights portfolio. Additionally,~~2019, respectively, which was a ~~gain~~decrease of ~~$3.5~~$256,000 or 28%. For the six months ended June 30, 2020, acquisition, integration and restructuring costs totaled $2.0 million compared to $4.5 million for the same period of 2019, which was ~~recorded related to the sale~~a decrease of ~~two branches at Wisconsin Bank & Trust in~~$2.5 million or 55%. In the first quarter of ~~2019.~~2019, Heartland recorded $2.2 million of anticipated lease buyout expense, fixed asset disposals and software discontinuation fees related to the discontinuation of Heartland's legacy mortgage operations and consumer finance business.

~~Other noninterest expenses~~

Other noninterest expenses totaled $15.5 million for the third quarter of 2019 compared to $12.9 million for the third quarter of 2018, which was an increase of $2.5 million or 20%. For the nine months ended September 30, 2019 and 2018, other noninterest expenses totaled $39.3 million and $33.8 million, respectively, which was an increase of $5.4 million or 16%. Write-downs on partnership investments which qualified for tax credits totaled $3.1 million and $5.0 million for the quarter and the nine months ended September 30, 2019, respectively, compared to $338,000 for the same periods of 2018.

Efficiency Ratio

One of Heartland's top priorities ishas been to improve its efficiency ratio, on a fully tax-equivalent basis, bywith the goal of reducing it to the 55-60% range over the next twelve to eighteen months. During the ~~third~~second quarter of ~~2019,~~2020, Heartland's efficiency ratio on a fully tax-equivalent basis decreased by 59838 basis points to ~~61.92%~~55.75% in comparison with ~~62.51%~~64.13% for the quarter ended ~~September~~June 30, ~~2018.~~ 2019. The improvement of the efficiency ratio was primarily attributable to higher fully tax-equivalent net interest income, which increased $17.6 million or 16% to $125.6 million for the second quarter of 2020 from $108.0 million for the second quarter of 2019.

For the ~~nine~~first six months ~~ended September 30, 2019,~~of 2020, Heartland's efficiency ratio was ~~63.95%~~58.64%, which was ~~an improvement~~a decrease of ~~108~~588 basis points from ~~65.03%~~64.52% for the first six months of 2019. The improvement of the efficiency ratio was primarily attributable to higher fully-tax equivalent net interest income, which increased $26.9 million or 13% to $239.2 million for the first six months of 2020 from $212.3 million for the same period of ~~2018.~~2019.

Income Taxes

Heartland's effective tax rate was ~~18.66%~~19.75% for the ~~third~~second quarter of ~~2019~~2020 compared to ~~20.99%~~23.12% for the ~~third~~second quarter of ~~2018. Included in~~2019. The following items impacted Heartland's ~~third~~second quarter 2020 and 2019 ~~and 2018~~ tax ~~calculations were solar~~calculations:

•Solar energy tax credits of ~~$2.0 million~~$798,000 and ~~$223,000,~~$911,000 for the second quarter of 2020 and 2019, respectively.

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

•New markets tax credits of $75,000 during the second quarter of 2020 compared to ~~$307,000 for~~$0 in the ~~third~~second quarter of ~~2018.~~ 2019.

•Tax-exempt interest income as a percentage of pre-tax income ~~declined~~increased to ~~10.08%~~14.19% during the ~~third~~second quarter of 2020 compared to 8.09% for the second quarter of 2019.

•Tax expense of $66,000 in the second quarter of 2020 compared to $64,000 in the second quarter of 2019 resulting from ~~13.62% during~~ the ~~third quarter~~vesting of ~~2018.~~restricted stock unit awards.

Heartland's effective tax rate was ~~21.14% and 20.24%~~20.99% for the ~~nine~~first six months ~~ended September 30, 2019 and 2018, respectively. Included in~~of 2020 compared to 22.21% for the first six months of 2019. The following items impacted Heartland's tax calculation for the first ~~nine~~six months of ~~2019~~2020 and ~~2018 were solar~~2019:

•Solar energy tax credits of ~~$3.2~~$874,000 and $1.2 million for the first six months of 2020 and ~~$223,000,~~2019, respectively.

•Federal low-income housing tax credits ~~include~~of $390,000 and $562,000 for the first six months of 2020 and 2019, respectively.

•New markets tax credits of $150,000 during the first six months of 2020 compared to $0 in the ~~determination~~first six months of ~~Heartland's income taxes were $843,000 and $921,000 for the nine months ended September 30, 2019 and 2018, respectively. The tax-exempt~~2019.

•Tax-exempt interest income as a percentage of pre-tax income ~~declined~~increased to ~~10.19%~~15.09% during the first ~~nine~~six months of ~~2019 from 16.49% during~~2020 compared to 10.23% for the first ~~nine~~six months of ~~2018.~~2019.

•

~~Heartland's income taxes included~~Tax expense of $91,000 in the first six months of 2020 compared to a tax benefit of ~~$270,000 and $672,000 for~~$272,000 in the ~~nine-month periods ended September 30,~~first six months of 2019 ~~and 2018, respectively,~~ resulting from the vesting of ~~outstanding~~ restricted stock unit ~~awards and options.~~awards. The majority of Heartland's restricted stock unit awards vest in the first quarter of each year.

FINANCIAL CONDITION

Total assets of Heartland were ~~$12.57~~$15.03 billion at ~~September~~June 30, ~~2019,~~2020, an increase of ~~$1.16~~$1.82 billion or ~~10%~~14% since December 31, ~~2018. Excluding $766.2 million of assets acquired at fair value in the BVBC transaction, total assets increased $395.0 million or 3% since year-end 2018.~~2019. Securities represented ~~25%~~28% and ~~24%~~26% of total assets at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, respectively.

Lending Activities

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

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

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

Non-owner occupied commercial real estate loans provide financing for various non-owner occupied or income producing properties. Real estate construction loans are generally short-term or interim loans that provide financing for acquiring or developing commercial income properties, multi-family projects or single-family residential homes. The collateral that Heartland requires for most of these loans is based upon the discounted market value of the collateral. ~~The primary repayment risks of~~Non-owner occupied commercial real estate loans are ~~that~~typically dependent, in large part, on sufficient income from the ~~cash flow~~properties securing the loans to cover the operating expenses and debt service. Real estate construction loans involve additional risks because funds are advanced based upon estimates of costs and the estimated value of the ~~borrowers may be unpredictable, and the collateral securing these~~completed project. Additionally, real estate construction loans ~~may fluctuate in value. Heartland seeks to minimize these risks~~have a greater risk of default in a ~~variety~~weaker economy because the source of ~~ways. The underwriting analysis includes credit verification, analysis of global cash flows, appraisals~~repayment is reliant on the successful and ~~a review~~timely sale of the ~~financial condition of the borrower.~~project. Personal guarantees are frequently required as a tertiary form of repayment. In addition, when underwriting loans for commercial real estate, careful consideration is given to the property's operating history, future operating projections, current and projected occupancy, location and physical condition. Heartland also utilizes government guaranteed lending through the U.S. Small Business Administration 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 and agricultural real estate loans, many of which are secured by crops, machinery and real estate, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. Agricultural and agricultural real estate loans present unique credit risks relating to adverse weather conditions, loss of livestock due to disease or other reasons, declines in market prices for agricultural products and the impact of government regulations. The ultimate repayment of agricultural and agricultural real estate loans is dependent upon the profitable operation or management of the agricultural entity. Loans secured by farm equipment, livestock or crops may not provide an adequate source of repayment because of damage or depreciation. In underwriting agricultural and agricultural real estate loans, lending personnel work closely with their customers to review budgets and cash flow projections for crop production for the ensuing year. These budgets and cash flow projections are monitored closely during the year and reviewed with the customers at least annually. Lending personnel ~~also~~ work closely with governmental agencies, including the U.S. Small Business Administration and U.S. Department of Agriculture's Rural Development Business and Industry Program Farm Service Agency, to help agricultural customers obtain credit enhancement products, such as loan guarantees, longer-term funding or interest ~~assistance.~~assistance, to reduce risk.

Residential real estate loans are originated for the purchase or refinancing of single family residential properties. Residential real estate loans are dependent upon the borrower's ability to repay the loan and the underlying collateral value. During the fourth quarter of 2018, Heartland entered into arrangements with third parties to offer residential mortgage loans to customers in many of its markets. In addition, the acquisition in 2018 of First Bank & Trust in Lubbock, Texas, included its wholly owned mortgage subsidiary, PrimeWest Mortgage ~~Corporation. PrimeWest Mortgage~~ Corporation, which was merged into First Bank & Trust in April 2020. First Bank & Trust provides mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of customers in several of Heartland's southwestern markets. ~~PrimeWest Mortgage Corporation~~First Bank & Trust services the loans it sells into the secondary market.

Consumer lending includes motor vehicle, home improvement, home equity and small personal credit lines. Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than one-to-four-family residential mortgage loans. Consumer loan collections are dependent on the borrower's continuing financial stability and are therefore

more likely to be affected by adverse personal circumstances. Risk is reduced through underwriting criteria, which include

credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

Total loans held to maturity were ~~$7.97~~$9.25 billion at ~~September~~June 30, ~~2019, compared to $7.41~~2020, and $8.37 billion at December 31, ~~2018,~~2019, an increase of ~~$563.9~~$878.9 million or 8%11%. ~~This change includes $542.0 million of total loans held to maturity acquired~~The following table shows the changes in the BVBC transaction. During the first quarter of 2019, Heartland classified $32.1 million of loans as held for sale in conjunction with the branch sales. Excluding the reclassification of loans to held for sale and the BVBC transaction, total loans held to maturity increased $54.0 million or 1%loan balances by loan category since December 31, ~~2018. Loan changes by category were~~2019, in thousands:


	June 30, 2020		December 31, 2019		Change		% Change
Commercial and industrial	$	2,364,400	$	2,530,809	$	(166,409)	(7)	%
PPP	1,124,430		—		1,124,430		100
Owner occupied commercial real estate	1,433,271		1,472,704		(39,433)		(3)
Non-owner occupied commercial real estate	1,543,623		1,495,877		47,746		3
Real estate construction	1,115,843		1,027,081		88,762		9
Agricultural and agricultural real estate	520,773		565,837		(45,064)		(8)
Residential mortgage	735,762		832,277		(96,515)		(12)
Consumer	408,728		443,332		(34,604)		(8)
	$	9,246,830	$	8,367,917	$	878,913	11	%

•
~~Commercial and~~

Heartland originated $1.20 billion of PPP loans in the second quarter of 2020. Total commercial ~~real estate~~loans, excluding PPP loans, totaled ~~$6.39~~$6.46 billion at ~~September~~June 30, 2019, compared to $5.73 billion at December 31, 2018, which was an increase of $661.9 million or 12%. Excluding $14.9 million of commercial and commercial real estate loans classified as held for sale during the first quarter of 2019 and $480.1 million of loans acquired in the BVBC transaction, commercial and commercial real estate loans increased $196.6 million or 3% since year-end.

•~~Agricultural and agricultural real estate loans totaled $545.0 million at September 30, 2019, compared to $565.4 million at December 31, 2018,~~2020, which was a decrease of ~~$20.4~~$69.4 million or ~~4%. Excluding $6.6~~1% from $6.53 billion at year-end 2019. Utilization of revolving lines of credit decreased $162.6 million ~~of agricultural and agricultural real estate loans classified as held for sale~~ during the first six months of 2020. Excluding the decrease in revolving lines of credit utilization, which fluctuates from quarter ~~of 2019 and $1.8 million of loans acquired in the BVBC transaction, agricultural and agricultural real estate loans decreased $15.6~~to quarter, total commercial lending increased $93.2 million or ~~3% since year-end.~~

•Residential mortgage loans decreased $83.8 million or 12% to $589.8 million at September 30, 2019, from $673.6 million at December 31, 2018. Excluding $2.0 million of residential mortgage loans classified as held for saleless than 1% during the first ~~quarter~~six months of ~~2019 and $17.2 million of loans acquired~~2020.

The decreases in the ~~BVBC transaction,~~ residential ~~mortgage loans decreased $99.0 million or 15% since year-end,~~and consumer loan balances were primarily ~~as a result of customers refinancing loans~~ due to the recent ~~decreases~~declines in residential mortgage interest rates.

•Consumer loans increased $7.6 million or 2% to $447.7 million at September 30, 2019, compared to $440.2 million at December 31, 2018. Excluding $8.6 million of loans classified as held for sale during the first quarter of 2019 and $42.9 million of loans acquired in the BVBC transaction, consumer loans decreased $26.7 million or 6% since year-end, primarily as a result of customers refinancing loans due to the recent decreases in mortgage interest rates.

The table below presents the composition of the loan portfolio as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:

LOAN PORTFOLIO September 30, 2019 December 31, 2018
Amount Percent Amount Percent
Loans receivable held to maturity:
Commercial $ 2,276,916 28.56 % $ 2,020,231 27.26 %
Commercial real estate 4,116,680 51.61 3,711,481 50.08
Agricultural and agricultural real estate 545,006 6.83 565,408 7.63
Residential mortgage 589,793 7.39 673,603 9.09
Consumer 447,718 5.61 440,158 5.94
Gross loans receivable held to maturity 7,976,113 100.00 % 7,410,881 100.00 %
Unearned discount (833) (1,624)
Deferred loan fees (3,672) (1,560)
Total net loans receivable held to maturity 7,971,608 7,407,697
Allowance for loan losses (66,222) (61,963)
Loans receivable, net $ 7,905,386 $ 7,345,734


	June 30, 2020						December 31, 2019
	Amount		Percent		Amount		Percent
Loans receivable held to maturity:
Commercial and industrial	$	2,364,400	25.57	%	$	2,530,809	30.24	%
PPP	1,124,430		12.16		—		—
Owner occupied commercial real estate	1,433,271		15.50		1,472,704		17.60
Non-owner occupied commercial real estate	1,543,623		16.69		1,495,877		17.88
Real estate construction	1,115,843		12.07		1,027,081		12.27
Agricultural and agricultural real estate	520,773		5.63		565,837		6.76
Residential mortgage	735,762		7.96		832,277		9.95
Consumer	408,728		4.42		443,332		5.30
Gross loans receivable held to maturity	9,246,830		100.00	%	8,367,917		100.00	%






Allowance for credit losses	(119,937)				(70,395)
Loans receivable, net	$	9,126,893			$	8,297,522

Allowance for Credit Losses

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

Loans secured by real estate, either fully or partially, totaled $5.10 billion or 64% of gross loans at September 30, 2019. Exclusive of purchase accounting valuations at September 30, 2019, approximately 49% of the properties securing non-farm, nonresidential real estate loans are owner occupied. The largest categories of Heartland's loans secured by real estate at September 30, 2019, and December 31, 2018, are listed below, in thousands:

LOANS SECURED BY REAL ESTATE
September 30, 2019 December 31, 2018
Residential real estate, excluding residential construction and residential lot loans $ 1,051,362 $ 1,119,942
Industrial, manufacturing, business and commercial 630,781 805,265
Agriculture 281,143 270,023
Retail 465,184 435,680
Office 681,065 485,262
Land development and lots 228,997 216,665
Hotel, resort and hospitality 316,795 233,735
Multi-family 346,381 311,319
Food and beverage 134,721 130,981
Warehousing 203,697 186,436
Health services 262,696 182,882
Residential construction 188,639 171,116
All other 309,949 255,145
Total loans secured by real estate $ 5,101,410 $ 4,804,451

~~Allowance For Loan Losses~~

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

The table below presents the changes in the allowance for credit losses for loans during the three- and six--month periods ended June 30, 2020 and 2019, in thousands:


	Three Months Ended June 30,
	2020			2019
Balance at beginning of period	$	97,350		$	62,639

Provision for credit losses	25,007			4,918
Recoveries on loans previously charged off	1,144			(4,780)
Charge-offs on loans	(3,564)			1,073
Balance at end of period	$	119,937		$	63,850

Allowance for credit losses on loans as a percent of loans	1.30		%	0.81		%
Annualized ratio of net charge offs to average loans	0.11		%	0.19		%
	Six Months Ended June 30,
	2020			2019
Balance at beginning of period	$	70,395		$	61,963
Impact of ASU 2016-13 adoption	12,071			—
Provision for credit losses	44,872			6,553
Recoveries on loans previously charged off	2,464			2,064
Charge-offs on loans	(9,865)			(6,730)
Balance at end of period	$	119,937		$	63,850

Allowance for credit losses on loans as a percent of loans	1.30		%	0.81		%
Annualized ratio of net charge offs to average loans	0.17		%	0.12		%

Heartland's allowance for credit losses for loans totaled $82.5 million after adoption of CECL on January 1, 2020, which was an increase of $12.1 million since year-end 2019. Heartland recorded provision for credit losses for loans of $44.9 million in the first six months compared to $6.6 million in the first six months of 2019. The allowance for credit losses for loans totaled $119.9 million and $70.4 million at June 30, 2020, and December 31, 2019, respectively.

The allowance for credit losses for loans at June 30, 2020, was 1.30% of loans compared to 0.84% of loans at December 31, 2019. Net charge offs for the first six months of 2020 totaled $7.4 million compared to $4.7 million for the first six months of 2019, which was a $2.7 million increase. The increase was primarily attributable to a $3.2 million charge off in the first quarter of 2020 on a commercial and industrial loan for which a full reserve had been previously established. Heartland expects that net charge offs will increase in the second half of 2020 as customers’ ability to repay loans is adversely impacted by economic disruptions caused by the COVID-19 pandemic.

The following table shows, in thousands, the changes in Heartland's allowance for unfunded commitments for the three- and six-month periods ended June 30, 2020 and 2019:


	Three Months Ended June 30,
	2020		2019
Balance at beginning of period⁽¹⁾	15,468		—
Impact of ASU 2016-13 adoption	—		—
Provision for credit losses	1,924		—
Balance at end of period	$	17,392	$	—

	Six Months Ended June 30,
	2020		2019
Balance at beginning of period⁽¹⁾	$	248	$	—
Impact of ASU 2016-13 adoption	13,604		—
Provision for credit losses	3,540		—
Balance at end of period	$	17,392	$	—
(1) Prior to the adoption of ASU 2016-13, the allowance for unfunded commitments was immaterial, and therefore prior periods have not been shown in this table.

Heartland's allowance for unfunded commitments totaled $13.9 million after the adoption of CECL on January 1, 2020. Prior to January 1, 2020, the allowance for unfunded commitments was immaterial. Heartland recorded $3.5 million of provision for credit losses related to unfunded loan commitments in the first six months of 2020. At June 30, 2020, the allowance for unfunded commitments was $17.4 million, and Heartland had $3.07 billion of unfunded loan commitments.

The total allowance for lending related credit losses was $137.3 million at June 30, 2020, which was 1.49% of loans as of June 30, 2020. The following table shows, in thousands, the components of Heartland's allowance for lending related credit losses as of June 30, 2020, January 1, 2020, and December 31, 2019:


	June 30, 2020						January 1, 2020⁽¹⁾						December 31, 2019⁽²⁾
	Amount		Percentage of Allowance		Amount		Percentage of Allowance		Amount		Percentage of Allowance
Quantitative	$	94,398	68.73	%	$	82,829	85.99	%	$	41,694	59.23	%
Qualitative	27,473		20.01		11,468		11.91		28,701		40.77
Economic Forecast	15,458		11.26		2,021		2.10		—		—
Total	$	137,329	100.00	%	$	96,318	100.00	%	$	70,395	100.00	%

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

Heartland's quantitative allowance totaled $82.8 million or 86% of the total allowance for lending related credit losses on January 1, 2020, and $41.7 million or 59% of the allowance for loan losses at December 31, 2019. The increase in the quantitative component on January 1, 2020, was primarily attributable to the addition of $1.80 billion of previously acquired loans to the allowance calculation.

The quantitative allowance of Heartland's total allowance for lending related credit losses increased to $94.4 million at June 30, 2020 compared to $82.8 million at January 1, 2020. The increase in the quantitative portion was primarily due to the specific reserve recorded of $11.6 million for a sand fracking company relationship that was individually assessed for loan losses in the second quarter of 2020. The allowance for credit losses on individually assessed loans totaled $18.2 million at June 30, 2020 compared to $11.4 million at January 1, 2020, which was an increase of $6.8 million or 60%.

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

The qualitative allowance component of Heartland’s total allowance for lending related credit losses increased to $27.4 million or 20% of the total allowance at June 30, 2020, compared to $11.5 million or 12% on January 1, 2020. As described in Note 1, "Basis of Presentation," of the consolidated financial statements included in this Quarterly Report on Form 10-Q, in determining the appropriate level of this qualitative component, management assesses several risk factors including an overall assessment of "other external factors." At the end of the first quarter of 2020, in making its assessment, management increased the level of other external factors risk from the initial day 1 (January 1, 2020) assessment of moderate to high. This change reflected the uncertainty of both the economic forecasting and quantitative allowance component results given the high level of market and economic volatility that existed at the end of the quarter due to the COVID-19 pandemic. While several of the qualitative factors increased during the quarter, the change in the other external factors was the primary driver of the overall increase in the qualitative allowance for the six months ended June 30, 2020.

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

At June 30, 2020, Heartland utilized Moody's June 14, 2020, baseline forecast scenario, which was the most currently available forecast and included the potential impact of COVID-19. Because of the economic deterioration and uncertainty associated with COVID-19, the reasonable and supportable forecast period was reduced to one year, which resulted in an allowance of $15.5 million or 11% of the total allowance for lending related credit losses at June 30, 2020.

Credit Quality and Nonperforming Assets

Heartland's internal rating system for the credit quality of its loans is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category and categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration.For more information on this internal rating system, see Note 4 of Heartland’s consolidated financial statements in this Quarterly Report on Form 10-Q.

Heartland's nonpass loans totaled ~~7.03%~~8.1% of total loans as of ~~September~~June 30, ~~2019~~2020 compared to ~~6.26%~~6.7% of total loans as of December 31, ~~2018.~~2019. As of ~~September~~June 30, ~~2019,~~2020, Heartland's nonpass loans consisted of approximately ~~62% special mention~~56% watch loans and ~~38%~~44% substandard loans. The percent of nonpass loans on nonaccrual status as of ~~September~~June 30, ~~2019,~~2020, was ~~13%~~12%. Included in Heartland's nonpass loans at June 30, 2020 were $52.6 million of nonpass PPP loans. Heartland's risk rating methodology assigns a risk rating to the whole lending relationship. Heartland has no allowance recorded related to the PPP loans because of the 100% SBA guarantee.

As of December 31, ~~2018,~~2019, Heartland's nonpass loans were comprised of approximately ~~52% special mention~~60% watch loans and ~~48%~~40% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, ~~2018,~~2019, was ~~16%~~14%.

Nonperforming loans were $72.2 million or 0.91% of total loans at September 30, 2019, compared to $72.7 million or 0.98% of total loans at December 31, 2018. At September 30, 2019, approximately $38.2 million or 53% of Heartland's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to thirteen borrowers. At September 30, 2019, and December 31, 2018, Heartland had $6.5 million and $7.7 million, respectively, of nonperforming residential real estate loans that were repurchased under various Government National Mortgage Association ("GNMA") or other guaranteed loan programs. The portion of Heartland's nonperforming nonresidential real estate loans covered by government guarantees totaled $12.4 million at September 30, 2019, compared to $7.7 million at December 31, 2018.

The allowance for loan losses was 0.83% and 0.84% of loans at September 30, 2019 and December 31, 2018, respectively, and 91.66% and 85.27% of nonperforming loans at September 30, 2019, and December 31, 2018, respectively. Excluding the acquired loans covered by the valuation reserves, the ratio of the allowance for loan losses to outstanding loans was 1.00% and 1.03% at September 30, 2019, and December 31, 2018, respectively. At September 30, 2019, valuation reserves totaled $42.1 million and covered $1.65 billion of acquired loans. At December 31, 2018, valuation reserves totaled $40.9 million and covered $1.63 billion of acquired loans. Loans delinquent 30-89 days as a percent of total loans was ~~0.28%~~0.22% at ~~September~~June 30, ~~2019,~~2020, in comparison with ~~0.21%~~0.33% at December 31, ~~2018.~~

2019.

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

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES Three Months Ended
September 30,
2019 2018
Balance at beginning of period $ 63,850 $ 61,324
Provision for loan losses 5,201 5,238
Recoveries on loans previously charged off 2,013 779
Charge-offs on loans (4,842) (6,120)
Balance at end of period $ 66,222 $ 61,221
Annualized ratio of net charge offs to average loans 0.14 % 0.28 %
Nine Months Ended
September 30,
2019 2018
Balance at beginning of period $ 61,963 $ 55,686
Provision for loan losses 11,754 14,332
Recoveries on loans previously charged off 4,077 2,711
Charge-offs on loans (11,572) (11,508)
Balance at end of period $ 66,222 $ 61,221
Annualized ratio of net charge offs to average loans 0.13 % 0.17 %

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


NONPERFORMING ASSETS		September 30,									December 31,
															June 30,									December 31,
		2019			2018			2018			2017				2020			2019			2019			2018
Nonaccrual loans	Nonaccrual loans	$	72,208		$	73,060		$	71,943		$	62,581		Nonaccrual loans	$	91,609		$	79,619		$	76,548		$	71,943
Loans contractually past due 90 days or more	Loans contractually past due 90 days or more	40			154			726			830			Loans contractually past due 90 days or more	1,360			285			4,105			726
Total nonperforming loans	Total nonperforming loans	72,248			73,214			72,669			63,411			Total nonperforming loans	92,969			79,904			80,653			72,669
Other real estate	Other real estate	6,425			11,908			6,153			10,777			Other real estate	5,539			6,646			6,914			6,153
Other repossessed assets	Other repossessed assets	13			495			459			411			Other repossessed assets	29			39			11			459
Total nonperforming assets	Total nonperforming assets	$	78,686		$	85,617		$	79,281		$	74,599		Total nonperforming assets	$	98,537		$	86,589		$	87,578		$	79,281

Performing troubled debt restructured loans⁽¹⁾	Performing troubled debt restructured loans⁽¹⁾	$	3,199		$	4,180		$	4,026		$	6,617		Performing troubled debt restructured loans⁽¹⁾	$	2,636		$	3,539		$	3,794		$	4,026
Nonperforming loans to total loans	Nonperforming loans to total loans	0.91		%	0.99		%	0.98		%	0.99		%	Nonperforming loans to total loans	1.01		%	1.02		%	0.96		%	0.98		%
Nonperforming assets to total loans plus repossessed property	Nonperforming assets to total loans plus repossessed property	0.99		%	1.16		%	1.07		%	1.17		%	Nonperforming assets to total loans plus repossessed property	1.06		%	1.10		%	1.05		%	1.07		%
Nonperforming assets to total assets	Nonperforming assets to total assets	0.63		%	0.76		%	0.69		%	0.76		%	Nonperforming assets to total assets	0.66		%	0.71		%	0.66		%	0.69		%

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

The performing troubled debt restructured loans above do not include any loan modifications made under COVID-19 modification programs, which will be expiring throughout the third quarter. Heartland expects that the majority will be returning to full payment status, however, it is likely that some of the modifications will be extended for an additional 90 days in order to provide the necessary support for certain COVID-19 impacted customers. Refer to the "Overview" section of Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, for further information on these modifications.

The schedules below summarize the changes in Heartland's nonperforming assets during the three- and ~~nine-month~~six-month periods ~~of 2019,~~ended June 30, 2020, in thousands:


		Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets			Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
June 30, 2019		$	79,904	$	6,646	$	39	$	86,589
March 31, 2020										March 31, 2020	$	79,280	$	6,074	$	17	$	85,371
Loan foreclosures	Loan foreclosures	(2,784)		2,766		18		—		Loan foreclosures	(837)		810		27		—
Net loan charge-offs	Net loan charge-offs	(2,829)		—		—		(2,829)		Net loan charge-offs	(2,420)		—		—		(2,420)
Acquired nonperforming assets		—		—		—		—

New nonperforming loans	New nonperforming loans	6,818		—		—		6,818		New nonperforming loans	26,857		—		—		26,857
Reduction of nonperforming loans⁽¹⁾	Reduction of nonperforming loans⁽¹⁾	(8,861)		—		—		(8,861)		Reduction of nonperforming loans⁽¹⁾	(9,911)		—		—		(9,911)
OREO/Repossessed assets sales proceeds	OREO/Repossessed assets sales proceeds	—		(3,043)		(22)		(3,065)		OREO/Repossessed assets sales proceeds	—		(759)		(5)		(764)
OREO/Repossessed assets writedowns, net	OREO/Repossessed assets writedowns, net	—		56		(20)		36		OREO/Repossessed assets writedowns, net	—		(586)		(10)		(596)
Net activity at Citizens Finance Co.		—		—		(2)		(2)
September 30, 2019		$	72,248	$	6,425	$	13	$	78,686

June 30, 2020										June 30, 2020	$	92,969	$	5,539	$	29	$	98,537
(1) Includes principal reductions and transfers to performing status.	(1) Includes principal reductions and transfers to performing status.																	(1) Includes principal reductions and transfers to performing status.


	Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
December 31, 2019	$	80,653	$	6,914	$	11	$	87,578
Loan foreclosures	(1,088)		1,055		33		—
Net loan charge-offs	(7,401)		—		—		(7,401)

New nonperforming loans	42,653		—		—		42,653
Reduction of nonperforming loans⁽¹⁾	(21,848)		—		—		(21,848)
OREO/Repossessed assets sales proceeds	—		(1,778)		(5)		(1,783)
OREO/Repossessed assets writedowns, net	—		(652)		(10)		(662)

June 30, 2020	$	92,969	$	5,539	$	29	$	98,537

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

Nonperforming
Loans Other
Real Estate
Owned Other
Repossessed
Assets Total
Nonperforming
Assets
December 31, 2018 $ 72,669 $ 6,153 $ 459 $ 79,281
Loan foreclosures (7,631) 7,421 210 —
Net loan charge-offs (7,495) — — (7,495)
Acquired nonperforming assets 230 — — 230
New nonperforming loans 35,820 — — 35,820
Reduction of nonperforming loans⁽¹⁾
(21,345) — — (21,345)
OREO/Repossessed assets sales proceeds — (6,268) (177) (6,445)
OREO/Repossessed assets writedowns, net — (881) (32) (913)
Net activity at Citizens Finance Co. — — (447) (447)
September 30, 2019 $ 72,248 $ 6,425 $ 13 $ 78,686
(1) Includes principal reductions and transfers to performing status.
Total nonperforming assets increased $11.0 million or 13% to $98.5 million or 0.66% of total assets at June 30, 2020, compared to $87.6 million or 0.66% of total assets at December 31, 2019. Nonperforming loans were $93.0 million or 1.01% of total loans at June 30, 2020, compared to $80.7 million or 0.96% of total loans at December 31, 2019. At June 30, 2020, approximately $51.7 million or 56% of Heartland's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to thirteen borrowers. The portion of Heartland's nonperforming nonresidential real estate loans covered by government guarantees totaled $20.0 million at June 30, 2020, compared to $18.1 million at December 31, 2019.

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

Securities

The composition of Heartland's securities portfolio is managed to maximize the return on the portfolio while considering the impact it has on Heartland's asset/liability position and liquidity needs. Securities represented ~~25%~~28% and ~~24%~~26% of total assets at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, respectively. Total securities carried at fair value as of ~~September~~June 30, ~~2019,~~2020, were ~~$3.02~~$4.13 billion, an increase of ~~$569.9~~$813.6 million or ~~23%~~25% from ~~$2.45~~$3.31 billion at December 31, ~~2018.~~2019.

The table below presents the composition of the securities portfolio, including securities carried at fair value, held to maturity securities, net of allowance for credit losses, and other, by major category, as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


SECURITIES PORTFOLIO COMPOSITION		September 30, 2019						December 31, 2018
											June 30, 2020						December 31, 2019
		Amount		Percent		Amount		Percent			Amount		Percent		Amount		Percent
U.S. government corporations and agencies	U.S. government corporations and agencies	$	8,950	0.29	%	$	31,951	1.18	%	U.S. government corporations and agencies	$	5,842	0.14	%	$	9,893	0.29	%
Mortgage and asset-backed securities	Mortgage and asset-backed securities	2,480,677		79.05		2,026,698		74.64		Mortgage and asset-backed securities	3,134,439		73.71		2,577,278		75.02
Obligation of states and political subdivisions	Obligation of states and political subdivisions	600,544		19.14		611,257		22.50		Obligation of states and political subdivisions	1,057,258		24.86		798,514		23.24

Equity securities	Equity securities	18,362		0.59		17,086		0.63		Equity securities	19,391		0.46		18,435		0.54
Other securities	Other securities	29,042		0.93		28,396		1.05		Other securities	35,902		0.84		31,321		0.91
Total securities	Total securities	$	3,137,575	100.00	%	$	2,715,388	100.00	%	Total securities	$	4,252,832	100.00	%	$	3,435,441	100.00	%

The percentage of Heartland's securities portfolio comprised of mortgage and asset-backed securities was ~~79%~~74% at ~~September~~June 30, ~~2019,~~2020, compared to 75% at December 31, ~~2018.~~2019. Heartland's securities portfolio had an expected modified duration of ~~5.63~~5.69 years as of ~~September~~June 30, ~~2019,~~2020, compared to ~~4.01~~6.17 years as of year-end ~~2018.~~2019.

At ~~September~~June 30, ~~2019,~~2020, Heartland had ~~$29.0~~$35.9 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 ~~$10.47~~$12.71 billion as of ~~September~~June 30, ~~2019,~~2020, compared to ~~$9.40~~$11.04 billion at December 31, ~~2018,~~2019, an increase of ~~$1.07~~$1.66 billion or ~~11%~~15%. T~~his increase includes $617.1 million of~~Growth in non-time deposits ~~acquired at fair value in the BVBC transaction. During~~during the first ~~quarter~~six months of ~~2019, Heartland classified $77.0 million of deposits as held for sale in conjunction with the branch sales. Exclusive of the reclassification of deposits to held for sale~~2020 was positively impacted by federal government stimulus payments and ~~the deposits acquired at fair value in the BVBC transaction, total deposits increased $533.3 million or 6% since December 31, 2018. Deposit changes by category were:~~other COVID-19 relief programs.

•~~Demand deposits increased $316.4 million or 10% to $3.58 billion at September 30, 2019, compared to $3.26 billion at December 31, 2018. Excluding $164.9 million of demand deposits acquired~~The following table shows the changes in ~~the BVBC transaction and $17.3 million of demand deposits classified as held for sale in the first quarter of 2019, demand deposits increased $168.8 million or 5%~~deposit balances by deposit type since year-end ~~2018.~~2019, in thousands:

•Savings deposits increased $662.8 million or 13% to $5.77 billion at September 30, 2019, from $5.11 billion at December 31, 2018. Excluding savings deposits of $346.2 million acquired in the BVBC transaction and $47.8 million of savings deposits classified as held for sale in the first quarter of 2019, savings deposits increased $364.4 million or 7% since year-end 2018.


	June 30, 2020		December 31, 2019		Change		% Change
Demand deposits	$	4,831,151	$	3,543,863	$	1,287,288	36	%
Savings deposits	6,810,296		6,307,425		502,871		8
Time deposits	1,067,252		1,193,043		(125,791)		(11)
	$	12,708,699	$	11,044,331	$	1,664,368	15	%

•Time deposits increased $94.2 million or 9% to $1.12 billion at September 30, 2019 from $1.02 billion at December 31, 2018. Excluding time deposits of $106.0 million acquired in the BVBC transaction and $11.9 million of time deposits classified as held for sale in the first quarter of 2019, time deposits increased $100,000 or less than 1% since year-end 2018.

The table below presents the composition of Heartland's deposits by category as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


	June 30, 2020						December 31, 2019
	Amount		Percent		Amount		Percent
Demand	$	4,831,151	38.01	%	$	3,543,863	32.09	%
Savings	6,810,296		53.59		6,307,425		57.11
Time	1,067,252		8.40		1,193,043		10.80
Total	$	12,708,699	100.00	%	$	11,044,331	100.00	%

DEPOSITS September 30, 2019 December 31, 2018
Amount Percent Amount Percent
Demand $ 3,581,127 34.20 % $ 3,264,737 34.74 %
Savings 5,770,754 55.12 5,107,962 54.37
Time 1,117,975 10.68 1,023,730 10.89
Total $ 10,469,856 100.00 % $ 9,396,429 100.00 %

Short-Term Borrowings

Short-term borrowings, which Heartland defines as borrowings with an original maturity of one year or less, were as follows as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


		September 30, 2019		December 31, 2018			June 30, 2020		December 31, 2019
Securities sold under agreement to repurchase	Securities sold under agreement to repurchase	$	85,715	$	80,124	Securities sold under agreement to repurchase	$	69,338	$	84,486
Federal funds purchased	Federal funds purchased	5,850		35,400		Federal funds purchased	4,800		2,450
Advances from the FHLB	Advances from the FHLB	—		100,838		Advances from the FHLB	—		81,198

Other short-term borrowings	Other short-term borrowings	16,288		10,648		Other short-term borrowings	14,493		14,492
Total	Total	$	107,853	$	227,010	Total	$	88,631	$	182,626

Short-term borrowings generally include federal funds purchased, securities sold under agreements to repurchase, short-term FHLB advances and discount window borrowings from the Federal Reserve Bank. These funding alternatives are utilized in varying degrees depending on their pricing and availability. All of Heartland's bank subsidiaries own FHLB stock in one of the

Chicago, Dallas, Des Moines, San Francisco or Topeka FHLBs, enabling them to borrow funds from their respective FHLB for short-term or long-term purposes under a variety of programs. The amount of short-term borrowings of Heartland was ~~$107.9~~$88.6 million at ~~September~~June 30, ~~2019,~~2020, compared to ~~$227.0~~$182.6 million at year-end ~~2018,~~2019, a decrease of ~~$119.2~~$94.0 million or ~~52%~~51%.

All of the Heartland bank subsidiaries provide retail repurchase agreements to their customers as a cash management tool, which sweep excess funds from demand deposit accounts into these agreements. Although the aggregate balance of these retail repurchase agreements is subject to variation, the account relationships represented by these balances are principally local. The balances of retail repurchase agreements were ~~$85.7~~$69.3 million at ~~September~~June 30, ~~2019,~~2020, compared to ~~$80.1~~$84.5 million at December 31, ~~2018, an increase~~2019, a decrease of ~~$5.6~~$15.1 million or 7%18%.

Heartland renewed its ~~$30.0 million~~ revolving credit line agreement with an unaffiliated bank on June 14, ~~2019.~~2020. This revolving credit line agreement, which has $45.0 million of borrowing capacity, is included in short-term borrowings, and the primary purpose of this credit line agreement is to provide liquidity to Heartland. Heartland had no advances on this line during the first ~~nine~~six months of ~~2019,~~2020, and the outstanding balance was $0 at both ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018.~~2019.

Other Borrowings

The outstanding balances of other borrowings, which Heartland defines as borrowings with an original maturity date of more than one year, are shown in the table below, net of discount and issuance costs amortization as of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, in thousands:


		September 30, 2019		December 31, 2018			June 30, 2020		December 31, 2019
Advances from the FHLB	Advances from the FHLB	$	3,260	$	3,399	Advances from the FHLB	$	2,777	$	2,835

Trust preferred securities	Trust preferred securities	145,098		130,913		Trust preferred securities	145,833		145,343
Senior notes		—		5,000

Note payable to unaffiliated bank	Note payable to unaffiliated bank	53,167		58,417		Note payable to unaffiliated bank	47,917		51,417
Contracts payable for purchase of real estate and other assets	Contracts payable for purchase of real estate and other assets	1,908		1,953		Contracts payable for purchase of real estate and other assets	3,756		1,892
Subordinated notes	Subordinated notes	74,250		74,143		Subordinated notes	74,357		74,286
Other borrowings		734		1,080
Paycheck Protection Program Liquidity Fund						Paycheck Protection Program Liquidity Fund	31,819		—
Total	Total	$	278,417	$	274,905	Total	$	306,459	$	275,773

As of ~~September~~June 30, ~~2019,~~2020, the amount of other borrowings was ~~$278.4~~$306.5 million, an increase of ~~$3.5~~$30.7 million or 1%11% since year-end ~~2018.~~2019.

Each of Heartland's subsidiary banks has been approved by their respective Federal Reserve Bank for the Paycheck Protection Program Liquidity Fund ("PPPLF"), and as of June 30, 2020, $31.8 million was outstanding. Heartland ~~acquired $6.9 million of subordinated debt in the BVBC transaction that was simultaneously paid off with the closing~~anticipates increased utilization of the ~~transaction. Trust preferred securities with a fair value~~PPPLF through the third quarter of ~~$16.1 million were also acquired in the BVBC transaction.~~2020 as customers utilize their loan proceeds for payroll and payroll related purposes. Through June 30, 2020, Heartland's subsidiary banks have funded approximately $1.20 billion PPP loans.

Heartland has a non-revolving credit facility with an unaffiliated bank, which provides a borrowing capacity of up to ~~$70.0~~$55.0 million. At ~~September~~June 30, ~~2019, $53.2~~2020, $47.9 million was outstanding on this non-revolving credit line compared to ~~$58.4~~$51.4 million

outstanding at December 31, ~~2018.~~2019. At ~~September~~June 30, ~~2019,~~2020, Heartland had ~~$14.8~~$6.5 million available on this non-revolving credit facility, of which no balance was drawn.

A schedule of Heartland's trust preferred securities outstanding excluding deferred issuance costs as of ~~September~~June 30, ~~2019,~~2020, is as follows, in thousands:

Amount
Issued

Issuance
Date

Interest
Rate

Interest

Rate as of 9/30/19⁽¹⁾

Maturity
Date

Callable
Date

Amount
Issued

Issuance
Date

Interest
Rate

Interest

Rate as of 6/30/2020⁽¹⁾

Maturity
Date

Callable
Date

Heartland Financial Statutory Trust IV

10,310

03/17/2004

2.75% over LIBOR

4.89%

⁽²⁾

03/17/2034

12/17/2019

Heartland Financial Statutory Trust IV

10,310

03/17/2004

2.75% over LIBOR

3.05%

⁽²⁾

03/17/2034

09/17/2020

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

3.63%

⁽³⁾

04/07/2036

01/07/2020

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

2.55%

04/07/2036

10/07/2020

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

3.60%

⁽⁴⁾

09/15/2037

12/15/2019

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

1.79%

⁽³⁾

09/15/2037

09/15/2020

Heartland Financial Statutory Trust VII

18,042

06/26/2007

1.48% over LIBOR

3.61%

⁽⁵⁾

09/01/2037

12/01/2019

Heartland Financial Statutory Trust VII

18,042

06/26/2007

1.48% over LIBOR

1.83%

⁽⁴⁾

09/01/2037

09/01/2020

Morrill Statutory Trust I

9,064

12/19/2002

3.25% over LIBOR

5.36%

12/26/2032

12/26/2019

Morrill Statutory Trust I

9,135

12/19/2002

3.25% over LIBOR

3.53%

12/26/2032

09/26/2020

Morrill Statutory Trust II

8,726

12/17/2003

2.85% over LIBOR

4.99%

12/17/2033

12/17/2019

Morrill Statutory Trust II

8,809

12/17/2003

2.85% over LIBOR

3.15%

12/17/2033

09/17/2020

Sheboygan Statutory Trust I

6,506

09/17/2003

2.95% over LIBOR

5.09%

09/17/2033

12/17/2019

Sheboygan Statutory Trust I

6,571

09/17/2003

2.95% over LIBOR

3.25%

09/17/2033

09/17/2020

CBNM Capital Trust I

4,396

09/10/2004

3.25% over LIBOR

5.37%

12/15/2034

12/15/2019

CBNM Capital Trust I

4,434

09/10/2004

3.25% over LIBOR

3.56%

12/15/2034

09/15/2020

Citywide Capital Trust III

6,424

12/19/2003

2.80% over LIBOR

5.07%

12/19/2033

01/23/2020

Citywide Capital Trust III

6,466

12/19/2003

2.80% over LIBOR

3.56%

12/19/2033

10/23/2020

Citywide Capital Trust IV

4,281

09/30/2004

2.20% over LIBOR

4.35%

09/30/2034

11/23/2019

Citywide Capital Trust IV

4,324

09/30/2004

2.20% over LIBOR

2.56%

09/30/2034

08/23/2020

Citywide Capital Trust V

11,692

05/31/2006

1.54% over LIBOR

3.66%

07/25/2036

12/15/2019

Citywide Capital Trust V

11,861

05/31/2006

1.54% over LIBOR

1.85%

07/25/2036

09/15/2020

OCGI Statutory Trust III

2,995

06/27/2002

3.65% over LIBOR

5.95%

⁽⁶⁾

09/30/2032

12/30/2019

OCGI Statutory Trust III

3,000

06/27/2002

3.65% over LIBOR

4.87%

⁽⁵⁾

09/30/2032

09/30/2020

OCGI Capital Trust IV

5,328

09/23/2004

2.50% over LIBOR

4.62%

⁽⁷⁾

12/15/2034

12/15/2019

OCGI Capital Trust IV

5,371

09/23/2004

2.50% over LIBOR

2.81%

⁽⁶⁾

12/15/2034

09/15/2020

BVBC Capital Trust II

7,187

04/10/2003

3.25% over LIBOR

5.50%

04/24/2033

01/24/2020

BVBC Capital Trust II

7,218

04/10/2003

3.25% over LIBOR

3.94%

04/24/2033

10/24/2020

BVBC Capital Trust III

9,003

07/29/2005

1.60% over LIBOR

3.70%

09/30/2035

12/30/2019

BVBC Capital Trust III

9,136

07/29/2005

1.60% over LIBOR

1.91%

09/30/2035

09/30/2020

Total trust preferred costs

145,915

Less: deferred issuance costs

(82)

145,192

145,833

(1) Effective weighted average interest rate as of September 30, 2019, was 4.94% due to interest rate swap transactions on the variable rate securities as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(2) Effective interest rate as of September 30, 2019, was 5.01% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(3) Effective interest rate as of September 30, 2019, was 4.69% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(4) Effective interest rate as of September 30, 2019, was 3.87% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(5) Effective interest rate as of September 30, 2019, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(6) Effective interest rate as of September 30, 2019, was 5.53% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(7) Effective interest rate as of September 30, 2019, was 4.37% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(1) Effective weighted average interest rate as of June 30, 2020, was 3.63% 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, 2020, was 5.01% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(3) Effective interest rate as of June 30, 2020, was 3.87% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(4) Effective interest rate as of June 30, 2020, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(5) Effective interest rate as of June 30, 2020, was 5.53% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

(6) Effective interest rate as of June 30, 2020, was 4.37% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

CAPITAL REQUIREMENTS

The Federal Reserve Board, which supervises bank holding companies, has adopted capital adequacy guidelines that are used to assess the adequacy of capital of a bank holding company. Under Basel III, Heartland must hold a conservation buffer above the adequately capitalized risk-based capital ratios; however, the transition provisions related to the conservation buffer have been extended indefinitely.

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

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


		Total Capital (to Risk- Weighted Assets)			Tier 1 Capital (to Risk- Weighted Assets)			Common Equity Tier 1 (to Risk- Weighted Assets)			Tier 1 Capital (to Average Assets)				Total Capital (to Risk- Weighted Assets)			Tier 1 Capital (to Risk- Weighted Assets)			Common Equity Tier 1 (to Risk- Weighted Assets)			Tier 1 Capital (to Average Assets)
September 30, 2019		14.55		%	13.04		%	11.50		%	10.39		%
June 30, 2020														June 30, 2020	15.16		%	13.34		%	10.87		%	9.95		%
Minimum capital requirement	Minimum capital requirement	8.00		%	6.00		%	4.50		%	4.00		%	Minimum capital requirement	8.00		%	6.00		%	4.50		%	4.00		%
Well capitalized requirement	Well capitalized requirement	10.00		%	8.00		%	6.50		%	5.00		%	Well capitalized requirement	10.00		%	8.00		%	6.50		%	5.00		%
Minimum capital requirement, including fully-phased in capital conservation buffer	Minimum capital requirement, including fully-phased in capital conservation buffer	10.50		%	8.50		%	7.00		%	N/A			Minimum capital requirement, including fully-phased in capital conservation buffer	10.50		%	8.50		%	7.00		%	N/A
Risk-weighted assets	Risk-weighted assets	$	9,418,827		$	9,418,827		$	9,418,827		N/A			Risk-weighted assets	$	10,373,392		$	10,373,392		$	10,373,392		N/A
Average Assets	Average Assets	N/A			N/A			N/A			$	11,830,836		Average Assets	N/A			N/A			N/A			$	13,903,801

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

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

At ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, retained earnings that could be available for the payment of dividends to meet the minimum capital requirements totaled ~~$555.2~~$576.5 million and ~~$486.5~~$533.9 million, respectively. Retained earnings that could be available for the payment of dividends to Heartland from its banks totaled approximately ~~$366.3~~$369.6 million and ~~$311.3~~$331.5 million at ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, respectively, under the capital requirements to remain well capitalized. These dividends are the principal source of funds to pay dividends on Heartland's common and preferred stock and to pay interest and principal on its debt.

On June 26, 2020, Heartland issued and sold 4.6 million depositary shares, each representing a 1/400th interest in a share of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E. The depositary shares are listed on The Nasdaq Global Select Market under the symbol "HTLFP." If declared, dividends are paid quarterly in arrears at a rate of 7.00% per annum beginning on October 15, 2020. For the dividend period beginning on the first reset date of July 15, 2025, and for dividend periods beginning every fifth anniversary thereafter, each a reset date, the rate per annum will be reset based on a recent five-year treasury rate plus 6.675%. The earliest redemption date for the preferred shares is July 15, 2025. Dividends payable on common shares are subject to quarterly dividends payable on these outstanding preferred shares at the applicable dividend rate. The net proceeds of $110.7 million are expected to be used for general corporate purposes, which may include organic and acquired growth, financing investments, capital expenditures, investments in wholly-owned subsidiaries as regulatory capital and repayment of debt.

On February 11, 2020, Heartland announced its entry into a definitive merger agreement for the acquisition of AIM Bancshares, Inc. AimBank, the wholly-owned subsidiary of AIM Bancshares, Inc. had $1.95 billion in assets as of June 30, 2020. The issuance of preferred equity in the second quarter of 2020 will ensure that regulatory capital ratios remain strong after the closing of the AIM Bancshares, Inc. transaction, which will trigger the Collins Amendment to the Sarbanes-Oxley legislation resulting in $145 million of trust preferred securities losing Tier 1 Capital treatment.

On August 8, 2019, Heartland filed a universal shelf registration statement with the SEC to register debt or equity securities. This shelf registration statement, which was effective immediately, provided Heartland with the ability to raise capital, subject to market conditions and SEC rules and limitations, if Heartland's board of directors decided to do so. This registration statement permitted Heartland, from time to time, in one or more public offerings, to offer debt securities, subordinated notes, common stock, preferred stock, rights or any combination of these securities. The amount of securities that may have been offered was not specified in the registration statement, and the terms of any future offerings were to be established at the time of the offering.

~~OFF-BALANCE SHEET ARRANGEMENTS~~

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

Heartland also enters into financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of customers. These financial instruments include commitments to extend credit and standby letters of credit.

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

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

Commitments and Contractual Obligations

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Heartland's bank subsidiaries evaluate the creditworthiness of customers to which they extend a credit commitment on a case-by-case basis and may require collateral to secure any credit extended. The amount of collateral obtained is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees are conditional commitments issued by Heartland's bank subsidiaries to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, commitments to extend credit aggregated ~~$2.66~~$3.07 billion and ~~$2.47~~$2.97 billion, respectively. Standby letters of credit aggregated ~~$77.2~~$72.4 million at ~~September~~June 30, ~~2019,~~2020, and ~~$71.9~~$79.5 million at December 31, ~~2018.~~2019.

Contractual obligations and other commitments were disclosed in Heartland's Annual Report on Form 10-K for the year ended December 31, 2018. Except for the purchase and assumption agreement entered into by Heartland's Illinois Bank & Trust subsidiary to acquire substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company described below, there2019. There have been no material changes to Heartland's contractual obligations and other commitments since that report was filed.

On August 13, 2019, Heartland's Illinois Bank & Trust subsidiary entered into a purchase and assumption agreement to acquire substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank and Trust Company ("RB&T"), headquartered in Rockford, Illinois. RB&T is a wholly-owned subsidiary of Moline, Illinois-based QCR Holdings, Inc. As of September 30, 2019, RB&T had total assets of $519.5 million, which included $417.3 million of gross loans held to maturity, and $451.5 million of deposits. RB&T serves the Rockford market from two full-service banking locations. The all-cash transaction is subject to regulatory approval and to customary closing conditions and is expected to close in the fourth quarter of 2019. The systems conversion is expected to occur in the first quarter of 2020.

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

Derivative Financial Instruments

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

LIQUIDITY

Liquidity refers to Heartland's ability to maintain a cash flow that is adequate to meet maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund operations and to provide for customers’ credit needs. The liquidity of Heartland principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and its ability to borrow funds in the money or capital markets. For COVID-19 trends and uncertainties impacting Heartland’s liquidity, see the discussion of "Capital and Liquidity" under Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

At ~~September~~June 30, ~~2019,~~2020, Heartland had ~~$447.8~~$453.6 million of cash and cash equivalents, time deposits in other financial institutions of ~~$3.7~~$3.1 million and securities carried at fair value of ~~$3.02~~$4.13 billion.

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

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

Additional funding is provided by long-term debt and short-term borrowings. In the event of short-term liquidity needs, Heartland's banks may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank. As of ~~September~~June 30, ~~2019,~~2020, Heartland had ~~$107.9~~$88.6 million of short-term borrowings outstanding.

As of ~~September~~June 30, ~~2019,~~2020, Heartland had ~~$278.4~~$306.5 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure. Additionally, the subsidiary banks' FHLB memberships give them the ability to borrow funds for short-term and long-term purposes under a variety of programs. At ~~September~~June 30, ~~2019,~~2020, Heartland had ~~$1.55~~$1.59 billion of borrowing capacity under these programs. Under the PPPLF, Heartland had $1.12 billion of borrowing capacity as of June 30, 2020. Additionally, at June 30, 2020, Heartland had $1.53 billion of borrowing capacity at the Federal Reserve Banks' discount window.

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

At the parent company level, routine funding requirements consist primarily of dividends paid to stockholders, debt service on revolving credit arrangements and trust preferred securities issuances, repayment requirements under other debt obligations and payments for acquisitions. The parent company obtains the funding to meet these obligations from dividends paid by its bank subsidiaries and the issuance of debt and equity securities. Heartland has a revolving credit agreement and non-revolving credit line with an unaffiliated bank, which ~~was~~is renewed annually, most recently on June 14, ~~2019.~~2020. Heartland's revolving credit agreement has ~~$30.0~~$45.0 million of maximum borrowing capacity, of which none was outstanding at ~~September~~June 30, ~~2019.~~2020. At ~~September~~June 30, ~~2019, $14.8~~2020, $6.5 million was available on the non-revolving credit line. These credit agreements contain specific financial covenants, all of which Heartland complied with as of ~~September~~June 30, ~~2019.~~2020.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a regular basis by the asset/liability committees of Heartland's bank subsidiaries and, on a consolidated basis, by Heartland's executive management and board of directors. At least quarterly, a detailed review of the balance sheet risk profile is performed for Heartland and each of its bank subsidiaries. Included in these reviews are interest rate sensitivity analyses, which simulate changes in net interest income in response to various interest rate scenarios. These analyses consider current portfolio rates, existing maturities, repricing opportunities and market interest rates, in addition to prepayments and growth under different interest rate assumptions. Selected strategies are modeled prior to implementation to determine their effect on Heartland's interest rate risk profile and net interest income. Heartland believes its primary market risk exposures did not change significantly in the first ~~nine~~six months of ~~2019.~~2020.

The core interest rate risk analysis utilized by Heartland examines the balance sheet under increasing and decreasing interest rate scenarios that are neither too modest nor too extreme. All rate changes are ramped over a 12-month horizon based upon a parallel shift in the yield curve and then maintained at those levels over the remainder of the simulation horizon. Using this approach, management is able to see the effect that both a gradual change of rates (year one) and a rate shock (year two and beyond) could have on Heartland's net interest income. Starting balances in the model reflect actual balances on the "as of" date, adjusted for material transactions. Pro-forma balances remain static. This methodology enables interest rate risk embedded within the existing balance sheet structure to be isolated from the interest rate risk often caused by growth in assets and liabilities. Due to the low interest rate environment, the simulations under a decreasing interest rate scenario were prepared using a 100 basis point shift in rates. The most recent reviews at ~~September~~June 30, ~~2019,~~2020, and ~~September~~June 30, ~~2018,~~2019, provided the following results, in thousands:


		2019						2018							2020				2019
		Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base			Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base
Year 1	Year 1									Year 1
Down 100 Basis Points	Down 100 Basis Points	$	425,662	(3.37)	%	$	442,187	(3.07)	%	Down 100 Basis Points	$	440,176	(0.92)	%	$	414,461	(3.28)	%
Base	Base	$	440,498	—	%	$	456,192	—	%	Base	444,243		—		428,520		—
Up 200 Basis Points	Up 200 Basis Points	$	468,374	6.33	%	$	454,513	(0.37)	%	Up 200 Basis Points	468,051		5.36		455,185		6.22
Year 2	Year 2									Year 2
Down 100 Basis Points	Down 100 Basis Points	$	388,722	(11.75)	%	$	423,766	(7.11)	%	Down 100 Basis Points	394,839		(11.12)		385,037		(10.15)
Base	Base	$	426,489	(3.18)	%	$	463,765	1.66	%	Base	442,038		(0.50)		425,238		(0.77)
Up 200 Basis Points	Up 200 Basis Points	$	485,463	10.21	%	$	474,816	4.08	%	Up 200 Basis Points	508,018		14.36		483,672		12.87

Heartland uses derivative financial instruments to manage the impact of changes in interest rates on its future interest income or interest expense. Heartland is exposed to credit-related losses in the event of nonperformance by the counterparties to these derivative instruments but believes it has minimized the risk of these losses by entering into the contracts with large, stable financial institutions. The estimated fair market values of these derivative instruments are presented in Note 7 to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

•During the ~~quarter~~three months ended ~~September~~June 30, ~~2019,~~2020, there have been no changes in Heartland's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, Heartland's internal ~~control~~controls 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”~~"Risk Factors" in Heartland's ~~2018~~2019 Annual Report on Form ~~10-K. Please refer~~10-K, except as described below:

The ongoing COVID-19 pandemic and measures intended to prevent its spread could adversely affect our business activities, financial condition, and results of operations and such effects will depend on future developments, which are highly uncertain and difficult to predict.

The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, including the declaration of a federal National Emergency; multiple cities’ and states’ declarations of states of emergency; school and business closings; limitations on social or public gatherings and other social distancing measures, such as working remotely; travel restrictions, quarantines and shelter-in-place orders. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending, borrowing needs and saving habits. Governmental authorities worldwide have taken unprecedented measures to stabilize markets and support economic growth. To that end, the President, Congress, and various federal agencies and state governments have taken measures to address the economic and social consequences of the pandemic, including the passage of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), and the Main Street Lending Program. The CARES Act, among other things, provides certain measures to support individuals and businesses in maintaining solvency through monetary relief, including in the form of financing, loan forgiveness and automatic forbearance. There can be no assurance, however, that the steps taken by the worldwide community or the U.S. government will be sufficient to address the negative economic effects of COVID-19 or avert severe and prolonged reductions in economic activity.

The pandemic has adversely impacted and could potentially further adversely impact our workforce and operations, and the operations of its customers and business partners. In particular, we may experience adverse financial consequences due to a number of factors, including, but not limited to:

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

•declines in collateral values

•a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause management to perform impairment testing on its goodwill or core deposit and customer relationships intangibles that could result in an impairment charge being recorded for that period, which would adversely impact our results of operations and the ability of certain of our bank subsidiaries to pay dividends to us;

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

•the negative effect on earnings resulting from the Banks modifying loans and agreeing to loan payment deferrals due to the COVID-19 crisis;

•increased demand on our liquidity as we meet borrowers’ needs and cover expenses related to the pandemic management plan;

•reduced liquidity may negatively affect our capital and leverage ratios, and although not currently contemplated, reduce or force suspension of dividends;

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

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

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

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

Additionally, the COVID-19 pandemic has significantly affected the financial markets and has resulted in a number of Federal Reserve actions. Market interest rates have declined significantly. In March 2020, the Federal Reserve reduced the target federal funds rate, and in June 2020, it announced that the low rate would be maintained through 2022. The Federal Reserve also announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-19 pandemic. In addition, the Federal Reserve reduced the interest that it pays on excess reserves. We expect that these reductions in interest rates, especially if prolonged, could adversely affect our net interest income and margins and our profitability. The Federal Reserve also launched the Main Street Lending Program, which will offer deferred interest on four-year loans to small and mid-sized businesses. The full impact of the COVID-19 pandemic on our business activities as a result of new government and regulatory policies, programs and guidelines, as well as market reactions to such activities, remains uncertain.

Our subsidiary banks (collectively, the "Banks") are participating lenders in the Paycheck Protection Program ("PPP"), a loan program administered through the Small Business Administration (“SBA”) that was created under the CARES Act to help eligible businesses, organizations and self-employed persons fund their operational costs during the COVID-19 pandemic. Under this program, the SBA guarantees 100% of the amounts loaned under the PPP, and borrowers are eligible to apply to the FDIC for forgiveness of their PPP loan obligations. The PPP opened on April 3, 2020; however, because of the short window between the passing of the CARES Act and the opening of the PPP, there was some initial ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposed Heartland and the Banks to risks relating to noncompliance with the PPP. For instance, other financial institutions have experienced litigation related to their process and procedures used in processing applications for the PPP. Under the PPP, lending banks are generally entitled to rely on borrower representations and certifications of eligibility to participate in the program, and lending banks may also be held harmless by the SBA in certain circumstances for actions taken in reliance on borrower representations and certifications. The PPP was modified on June 5, 2020, with the adoption of the Paycheck Protection Program Flexibility Act (the "PPFA"). The PPFA increased the amount of time that borrowers have to use PPP loan proceeds and apply for loan forgiveness and made other changes to make the program more favorable to borrowers. Notwithstanding the foregoing, the Banks have been, and may continue to be, exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced. If a deficiency is identified, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Banks.

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

In addition, while the COVID-19 pandemic had a material impact on the provision for credit losses, we are unable to fully predict the impact that COVID-19 will have on the credit quality of the loan portfolios of the Banks and any acquired banks, our financial position and results of operations due to numerous uncertainties. We will continue to assess the potential impacts on the credit quality of the loan portfolios of the Banks and any acquired banks, our financial position and results of operations.

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

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

We rely on dividends from our subsidiaries for most of our revenue and ~~uncertainties related~~are subject to restrictions on payment of dividends.

The primary source of funds for Heartland is dividends from the Banks. In general, the Banks may only pay dividends either out of their historical net income after any required transfers to surplus or reserves have been made or out of their retained earnings. The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited frompaying any dividends if, following payment thereof, the institution would be undercapitalized. These dividends are the principal source of funds to pay dividends on Heartland's ~~business.~~common and preferred stock and to pay interest and principal on our debt. Dividends payable on common shares are also subject to quarterly dividends payable on outstanding preferred shares at the applicable dividend rate.

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

On March 17, 2020, Heartland's board of directors ~~has~~ authorized management to acquire and hold up to ~~500,000 shares~~5% of ~~common stock~~capital or $81.8 million as of June 30, 2020, as treasury shares at any one time. Heartland and its affiliated purchasers made no purchases of its common stock during the quarter ended ~~September~~June 30, ~~2019.~~2020.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits


2 .1	⁽¹⁾⁽²⁾	~~Purchase and Assumption Agreement between Illinois Bank & Trust, Rockford Bank and Trust Company, and QCR Holdings, Inc., dated August 13, 2019.~~

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

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

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

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

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


3.1		Certificate of Designation of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E, filed with the Secretary of State of the State of Delaware and effective June 25, 2020 (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on June 26, 2020)

4.1		Form of certificate representing the 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E (incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on June 26, 2020)

4.2		Deposit Agreement, dated June 26, 2020, by and among Heartland Financial USA, Inc., Broadridge Corporate Issuer Solutions, Inc. and the holders from time to time of Depositary Receipts described therein (incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K filed on June 26, 2020)

4.3		Form of Depositary Receipt representing Depositary Shares (included as Exhibit A to Exhibit 4.2)

10.1	(1)	Amendment to Business Loan Agreement dated June 14, 2019

10.2	(1)	Promissory Note Revolving L OC dated June 14, 2020

10.3	(1)	Promissory Note Non- Revolving LOC dated June 14, 2020

10.4		Heartland Financial USA, Inc. 2020 Long-Term Incentive Plan (incorporated by reference to Annex A to the Registrant's Definitive Proxy Statement filed on April 6, 2020)

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

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

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

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

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

______________

(1) ~~The disclosure schedules to the Purchase and Assumption Agreement have been omitted pursuant to Item 601(b)(2)(ii) of Regulation S-K.~~

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

SIGNATURES

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


HEARTLAND FINANCIAL USA, INC.
(Registrant)


/s/ Bruce K. Lee
By: Bruce K. Lee
President and Chief Executive Officer
(Principal Executive Officer and Duly Authorized Officer)


/s/ Bryan R. McKeag
By: Bryan R. McKeag
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)


/s/ Janet M. Quick
By: Janet M. Quick
Executive Vice President and Deputy Chief Financial Officer
(Principal Accounting Officer and Duly Authorized Officer)

Dated: ~~November~~August 6, ~~2019~~2020


Part I
Item 1.			Financial Statements
Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.			Quantitative and Qualitative Disclosures About Market Risk
Item 4.			Controls and Procedures
Part II
Item 1.			Legal Proceedings
Item 1A.			Risk Factors
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.			Defaults Upon Senior Securities
Item 4.			Mine Safety Disclosures
Item 5.			Other Information
Item 6.			Exhibits


Securities held to maturity	Less than 12 months						12 months or longer						Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2019

Obligations of states and political subdivisions	$	—	$	—	$	—	$	—	$	—	$	—
Total temporarily impaired securities	$	—	$	—	$	—	$	—	$	—	$	—
December 31, 2018

Obligations of states and political subdivisions	$	10,802	$	(17)	$	19,508	$	(479)	$	30,310	$	(496)
Total temporarily impaired securities	$	10,802	$	(17)	$	19,508	$	(479)	$	30,310	$	(496)


	Allowance For Loan Losses										Gross Loans Receivable Held to Maturity
	Ending Balance Under ASC 310-10-35		Ending Balance Under ASC 450-20		Total		Ending Balance Evaluated for Impairment Under ASC 310-10-35		Ending Balance Evaluated for Impairment Under ASC 450-20		Total
September 30, 2019
Commercial	$	6,124	$	19,161	$	25,285	$	23,355	$	2,253,561	$	2,276,916
Commercial real estate	308		29,073		29,381		19,913		4,096,767		4,116,680
Agricultural and agricultural real estate	1,084		4,267		5,351		20,073		524,933		545,006
Residential real estate	123		1,319		1,442		17,552		572,241		589,793
Consumer	475		4,288		4,763		5,100		442,618		447,718

Total	$	8,114	$	58,108	$	66,222	$	85,993	$	7,890,120	$	7,976,113
December 31, 2018
Commercial	$	5,733	$	18,772	$	24,505	$	24,202	$	1,996,029	$	2,020,231
Commercial real estate	218		25,320		25,538		14,388		3,697,093		3,711,481
Agricultural and agricultural real estate	686		4,267		4,953		15,951		549,457		565,408
Residential real estate	168		1,617		1,785		20,251		653,352		673,603
Consumer	749		4,433		5,182		7,004		433,154		440,158

Total	$	7,554	$	54,409	$	61,963	$	81,796	$	7,329,085	$	7,410,881


	September 30, 2019										December 31, 2018
	Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans		Impaired Purchased Loans		Non Impaired Purchased Loans		Total Purchased Loans
Commercial	$	6,744	$	260,192	$	266,936	$	3,801	$	243,693	$	247,494
Commercial real estate	3,260		1,086,336		1,089,596		158		1,098,171		1,098,329
Agricultural and agricultural real estate	—		9,827		9,827		—		27,115		27,115
Residential real estate	—		157,575		157,575		231		184,389		184,620
Consumer loans	—		85,918		85,918		—		75,773		75,773
Total covered loans	$	10,004	$	1,599,848	$	1,609,852	$	4,190	$	1,629,141	$	1,633,331


	Commercial		Commercial Real Estate		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at June 30, 2019	$	24,082	$	27,300	$	6,049	$	1,572	$	4,847	$	63,850
Charge-offs	(2,175)		(135)		(1,670)		(3)		(859)		(4,842)
Recoveries	1,273		204		198		25		313		2,013
Provision	2,105		2,012		774		(152)		462		5,201
Balance at September 30, 2019	$	25,285	$	29,381	$	5,351	$	1,442	$	4,763	$	66,222

	Commercial		Commercial Real Estate		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at December 31, 2018	$	24,505	$	25,538	$	4,953	$	1,785	$	5,182	$	61,963
Charge-offs	(6,506)		(295)		(2,098)		(316)		(2,357)		(11,572)
Recoveries	1,642		381		533		72		1,449		4,077
Provision	5,644		3,757		1,963		(99)		489		11,754
Balance at September 30, 2019	$	25,285	$	29,381	$	5,351	$	1,442	$	4,763	$	66,222


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


LOAN PORTFOLIO	September 30, 2019						December 31, 2018
	Amount		Percent		Amount		Percent
Loans receivable held to maturity:
Commercial	$	2,276,916	28.56	%	$	2,020,231	27.26	%
Commercial real estate	4,116,680		51.61		3,711,481		50.08
Agricultural and agricultural real estate	545,006		6.83		565,408		7.63
Residential mortgage	589,793		7.39		673,603		9.09
Consumer	447,718		5.61		440,158		5.94
Gross loans receivable held to maturity	7,976,113		100.00	%	7,410,881		100.00	%
Unearned discount	(833)				(1,624)
Deferred loan fees	(3,672)				(1,560)
Total net loans receivable held to maturity	7,971,608				7,407,697






Allowance for loan losses	(66,222)				(61,963)
Loans receivable, net	$	7,905,386			$	7,345,734


LOANS SECURED BY REAL ESTATE
	September 30, 2019		December 31, 2018
Residential real estate, excluding residential construction and residential lot loans	$	1,051,362	$	1,119,942
Industrial, manufacturing, business and commercial	630,781		805,265
Agriculture	281,143		270,023
Retail	465,184		435,680
Office	681,065		485,262
Land development and lots	228,997		216,665
Hotel, resort and hospitality	316,795		233,735
Multi-family	346,381		311,319
Food and beverage	134,721		130,981
Warehousing	203,697		186,436
Health services	262,696		182,882
Residential construction	188,639		171,116
All other	309,949		255,145


Total loans secured by real estate	$	5,101,410	$	4,804,451


ANALYSIS OF ALLOWANCE FOR LOAN LOSSES	Three Months Ended September 30,
	2019			2018
Balance at beginning of period	$	63,850		$	61,324
Provision for loan losses	5,201			5,238
Recoveries on loans previously charged off	2,013			779

Charge-offs on loans	(4,842)			(6,120)
Balance at end of period	$	66,222		$	61,221
Annualized ratio of net charge offs to average loans	0.14		%	0.28		%

	Nine Months Ended September 30,
	2019			2018
Balance at beginning of period	$	61,963		$	55,686
Provision for loan losses	11,754			14,332
Recoveries on loans previously charged off	4,077			2,711

Charge-offs on loans	(11,572)			(11,508)

Balance at end of period	$	66,222		$	61,221
Annualized ratio of net charge offs to average loans	0.13		%	0.17		%