HEARTLAND FINANCIAL USA INC - Quarter Report: 2021 September (Form 10-Q)

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 30, 2021


☐			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 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 ☒

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, 2021, the Registrant had outstanding 42,251,798 shares of common stock, $1.00 par value per share.

HEARTLAND FINANCIAL USA, INC.

Form 10-Q Quarterly Report

Table of Contents


Part I
Item 1.			Financial Statements
Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.			Quantitative and Qualitative Disclosures About Market Risk
Item 4.			Controls and Procedures
Part II
Item 1.			Legal Proceedings
Item 1A.			Risk Factors
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.			Defaults Upon Senior Securities
Item 4.			Mine Safety Disclosures
Item 5.			Other Information
Item 6.			Exhibits

PART I

ITEM 1. FINANCIAL STATEMENTS


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
	September 30, 2021 (Unaudited)		December 31, 2020
ASSETS
Cash and due from banks	$	192,247	$	219,243
Interest bearing deposits with other banks and other short-term investments	135,158		118,660
Cash and cash equivalents	327,405		337,903
Time deposits in other financial institutions	3,138		3,129
Securities:

Carried at fair value (cost of $7,416,143 at September 30, 2021, and $6,024,225 at December 31, 2020)	7,449,936		6,127,975
Held to maturity, net of allowance for credit losses of $0 at September 30, 2021, and $51 at December 31, 2020 (fair value of $95,010 at September 30, 2021, and $100,041 at December 31, 2020)	85,354		88,839
Other investments, at cost	83,332		75,253
Loans held for sale	37,078		57,949
Loans receivable:
Held to maturity	9,854,907		10,023,051

Allowance for credit losses	(117,533)		(131,606)
Loans receivable, net	9,737,374		9,891,445
Premises, furniture and equipment, net	219,297		219,595
Premises, furniture and equipment held for sale	2,699		6,499
Other real estate, net	4,744		6,624
Goodwill	576,005		576,005
Core deposit intangibles and customer relationship intangibles, net	35,157		42,383
Servicing rights, net	6,351		6,052
Cash surrender value on life insurance	190,576		187,664

Other assets	237,779		281,024
TOTAL ASSETS	$	18,996,225	$	17,908,339
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	6,537,722	$	5,688,810
Savings	8,416,204		8,019,704
Time	1,068,317		1,271,391
Total deposits	16,022,243		14,979,905

Short-term borrowings	265,620		167,872
Other borrowings	371,765		457,042
Accrued expenses and other liabilities	164,345		224,289
TOTAL LIABILITIES	16,823,973		15,829,108
STOCKHOLDERS' EQUITY:


Preferred stock (par value $1 per share; authorized 6,104 shares at both September 30, 2021, and December 31, 2020; none issued or outstanding at both September 30, 2021, and December 31, 2020)	—		—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both September 30, 2021, and December 31, 2020)	—		—
Series B Fixed Rate Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2021 and December 31, 2020; none issued or outstanding at both September 30, 2021 and December 31, 2020)	—		—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2021, and December 31, 2020; none issued or outstanding at both September 30, 2021, and December 31, 2020)	—		—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both September 30, 2021, and December 31, 2020; none issued or outstanding at both September 30, 2021, and December 31, 2020)	—		—
Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 shares authorized at both September 30, 2021, and December 31, 2020; 11,500 shares issued and outstanding at both September 30, 2021 and December 31, 2020)	110,705		110,705
Common stock (par value $1 per share; 60,000,000 shares authorized at both September 30, 2021, and December 31, 2020; issued 42,250,092 shares at September 30, 2021, and 42,093,862 shares at December 31, 2020)	42,250		42,094
Capital surplus	1,068,913		1,062,083
Retained earnings	926,834		791,630
Accumulated other comprehensive income	23,550		72,719



TOTAL STOCKHOLDERS' EQUITY	2,172,252		2,079,231
TOTAL LIABILITIES AND EQUITY	$	18,996,225	$	17,908,339

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,
	2021		2020		2021		2020
INTEREST INCOME:
Interest and fees on loans	$	112,062	$	102,657	$	336,416	$	316,076
Interest on securities:
Taxable	32,384		25,016		94,373		70,109
Nontaxable	4,609		3,222		13,673		8,749
Interest on federal funds sold	—		—		1		—
Interest on interest bearing deposits in other financial institutions	132		72		258		847
TOTAL INTEREST INCOME	149,187		130,967		444,721		395,781
INTEREST EXPENSE:
Interest on deposits	3,444		4,962		11,629		25,678
Interest on short-term borrowings	98		78		348		435
Interest on other borrowings (includes $543 and $595 of interest benefit related to derivatives reclassified from accumulated other comprehensive income (loss) for the three months ended September 30, 2021 and 2020, respectively, and $1,601 and $1,195 of interest benefit related to derivatives reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 2021 and 2020, respectively)	3,102		3,430		9,378		10,514
TOTAL INTEREST EXPENSE	6,644		8,470		21,355		36,627
NET INTEREST INCOME	142,543		122,497		423,366		359,154
Provision (benefit) for credit losses	(4,534)		1,678		(12,262)		49,994
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	147,077		120,819		435,628		309,160
NONINTEREST INCOME:
Service charges and fees	15,551		11,749		44,354		34,742
Loan servicing income	784		638		2,495		1,980
Trust fees	6,221		5,357		18,037		15,356
Brokerage and insurance commissions	866		649		2,584		1,977
Securities gains, net (includes $1,535 and $1,099 of net security gains reclassified from accumulated other comprehensive income (loss) for the three months ended September 30, 2021 and 2020, respectively, and $4,347 and $4,763 of net security gains reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 2021 and 2020, respectively)	1,535		1,300		4,347		4,964


Unrealized gain on equity securities, net	112		155		85		604
Net gains on sale of loans held for sale	5,281		8,894		16,454		21,411
Valuation adjustment on servicing rights	195		(120)		586		(1,676)
Income on bank owned life insurance	940		868		2,706		2,533
Other noninterest income	1,239		1,726		4,557		5,779
TOTAL NONINTEREST INCOME	32,724		31,216		96,205		87,670
NONINTEREST EXPENSES:
Salaries and employee benefits	60,689		50,978		177,083		151,053
Occupancy	7,366		6,732		22,683		19,705
Furniture and equipment	3,365		2,500		9,959		8,601
Professional fees	17,242		12,802		46,969		38,951

Advertising	1,921		928		5,039		4,128
Core deposit and customer relationship intangibles amortization	2,295		2,492		7,226		8,169
Other real estate and loan collection expenses	78		335		627		872
(Gain)/loss on sales/valuations of assets, net	(3)		1,763		374		2,480
Acquisition, integration and restructuring costs	204		1,146		3,342		3,195
Partnership investment in tax credit projects	2,374		927		3,754		1,902
Other noninterest expenses	15,096		9,793		39,370		32,638
TOTAL NONINTEREST EXPENSES	110,627		90,396		316,426		271,694
INCOME BEFORE INCOME TAXES	69,174		61,639		215,407		125,136
Income taxes (includes $524 and $429 of income tax expense reclassified from accumulated other comprehensive income (loss) for the three months ended September 30, 2021 and 2020, respectively, and $1,501 and $1,509 of income tax expense reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 2021 and 2020, respectively)	13,250		13,681		45,064		27,007
NET INCOME	55,924		47,958		170,343		98,129


Preferred dividends	(2,013)		(2,437)		(6,038)		(2,437)

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	53,911	$	45,521	$	164,305	$	95,692
EARNINGS PER COMMON SHARE - BASIC	$	1.27	$	1.23	$	3.89	$	2.59
EARNINGS PER COMMON SHARE - DILUTED	$	1.27	$	1.23	$	3.88	$	2.59
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.25	$	0.20	$	0.69	$	0.60

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,
	2021		2020		2021		2020
NET INCOME	$	55,924	$	47,958	$	170,343	$	98,129
OTHER COMPREHENSIVE INCOME (LOSS)
Securities:
Net change in unrealized gain/(loss) on securities	(44,968)		31,340		(65,613)		84,564

Reclassification adjustment for net gains realized in net income	(1,535)		(1,099)		(4,347)		(4,763)

Income tax (expense)/benefit	12,181		(7,845)		18,264		(20,777)
Other comprehensive gain/(loss) on securities	(34,322)		22,396		(51,696)		59,024
Derivatives used in cash flow hedging relationships:
Net change in unrealized gain/(loss) on derivatives	2,220		1,199		4,853		(2,164)
Reclassification adjustment for net gains on derivatives realized in net income	(543)		(601)		(1,601)		(1,214)
Income tax (expense)/benefit	(392)		(126)		(725)		706
Other comprehensive income (loss) on cash flow hedges	1,285		472		2,527		(2,672)
Other comprehensive income (loss)	(33,037)		22,868		(49,169)		56,352
TOTAL COMPREHENSIVE INCOME	$	22,887	$	70,826	$	121,174	$	154,481

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,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	170,343	$	98,129
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	20,342		20,726
Provision (benefit) for credit losses	(12,262)		49,994
Net amortization of premium on securities	30,975		9,925
Securities gains, net	(4,347)		(4,964)

Unrealized gain on equity securities, net	(85)		(604)
Stock based compensation	6,732		5,551

Loans originated for sale	(364,808)		(461,723)
Proceeds on sales of loans held for sale	401,078		443,913
Net gains on sale of loans held for sale	(15,399)		(21,411)
(Increase) decrease in accrued interest receivable	353		(7,955)
Decrease in prepaid expenses	318		408
Decrease in accrued interest payable	(271)		(1,461)

Capitalization of servicing rights	(1,055)		(2,633)
Valuation adjustment on servicing rights	(586)		1,676
Loss on sales/valuations of assets, net	1,970		2,480
Net excess tax benefit (expense) from stock based compensation	304		(93)
Other, net	(751)		(48,914)
NET CASH PROVIDED BY OPERATING ACTIVITIES	232,851		83,044
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits in other financial institutions	(9)		(8)
Proceeds from the sale of securities available for sale	799,588		818,022
Proceeds from the sale of securities held to maturity	—		1,056


Proceeds from the maturity of and principal paydowns on securities available for sale	722,512		400,565
Proceeds from the maturity of and principal paydowns on securities held to maturity	4,634		3,235
Proceeds from the maturity of time deposits in other financial institutions	—		593
Proceeds from the sale, maturity of and principal paydowns on other investments	2,843		6,297
Purchase of securities available for sale	(2,941,662)		(2,777,981)

Purchase of other investments	(10,922)		(10,916)
Net (increase) decrease in loans	150,876		(746,723)
Purchase of bank owned life insurance policies	(196)		(208)
Proceeds from bank owned life insurance policies	—		606

Capital expenditures	(15,705)		(13,178)

Proceeds from the sale of equipment	7,332		3,339
Net cash expended in divestitures	(15,682)		—
Proceeds on sale of OREO and other repossessed assets	5,032		2,559
NET CASH USED BY INVESTING ACTIVITIES	$	(1,291,359)	$	(2,312,742)


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands)
	Nine Months Ended September 30,
	2021		2020
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits	$	855,996	$	1,478,704
Net increase in savings deposits	411,864		434,726
Net decrease in time deposit accounts	(198,024)		(190,651)


Net increase in short-term borrowings	97,748		205,277
Proceeds from short term advances	51,700		541,545
Repayments of short term advances	(51,700)		(622,742)
Proceeds from other borrowings	147,614		254,833
Repayments of other borrowings	(233,765)		(7,399)



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

Proceeds from issuance of common stock	1,716		2,150
Dividends paid	(35,139)		(24,529)
NET CASH PROVIDED BY FINANCING ACTIVITIES	1,048,010		2,182,619
Net decrease in cash and cash equivalents	(10,498)		(47,079)
Cash and cash equivalents at beginning of year	337,903		378,734
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	327,405	$	331,655
Supplemental disclosures:
Cash paid for income/franchise taxes	$	42,425	$	26,701
Cash paid for interest	21,632		38,088
Loans transferred to OREO	2,713		1,706
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale	1,564		—
Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net	396		450


Dividends declared, not paid	2,013		—
Purchases of securities available for sale, accrued, not settled	—		4,792


Transfer of available for sale securities to held to maturity securities	—		462
Purchases of loans held to maturity accrued, not settled	—		9,600


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 June 30, 2020	$	110,705	$	36,845	$	844,202	$	723,067	$	32,558	$	1,747,377
Comprehensive income							47,958		22,868		70,826

Cash dividends declared:
Preferred, $211.94 per share							(2,437)				(2,437)
Common, $0.20 per share							(7,377)				(7,377)


Issuance of 40,646 shares of common stock			40		1,182						1,222
Stock based compensation					1,993						1,993
Balance at September 30, 2020	$	110,705	$	36,885	$	847,377	$	761,211	$	55,426	$	1,811,604

Balance at January 1, 2020	$	—	$	36,704	$	839,857	$	702,502	$	(926)	$	1,578,137
Cumulative effect adjustment from the adoption of ASU 2016-13 on January 1, 2020							(14,891)				(14,891)
Adjusted balance on January 1, 2020	—		36,704		839,857		687,611		(926)		1,563,246
Comprehensive income							98,129		56,352		154,481



Cash dividends declared:
Preferred, $211.94 per share							(2,437)				(2,437)

Common, $0.60 per share							(22,092)				(22,092)

Issuance of 11,500 shares of Series E Preferred Stock	110,705										110,705


Issuance of 181,112 shares of common stock			181		1,969						2,150
Stock based compensation					5,551						5,551
Balance at September 30, 2020	$	110,705	$	36,885	$	847,377	$	761,211	$	55,426	$	1,811,604

Balance at June 30, 2021	$	110,705	$	42,245	$	1,066,765	$	883,484	$	56,587	$	2,159,786
Comprehensive income (loss)							55,924		(33,037)		22,887

Cash dividends declared:
Preferred, $175.00 per share							(2,013)				(2,013)
Common, $0.25 per share							(10,561)				(10,561)

Issuance of 4,640 shares of common stock			5		192						197
Stock based compensation					1,956						1,956
Balance at September 30, 2021	$	110,705	$	42,250	$	1,068,913	$	926,834	$	23,550	$	2,172,252

Balance at January 1, 2021	$	110,705	$	42,094	$	1,062,083	$	791,630	$	72,719	$	2,079,231


Comprehensive income (loss)							170,343		(49,169)		121,174

Cash dividends declared:

Preferred, $525.00 per share							(6,038)				(6,038)
Common, $0.69 per share							(29,101)				(29,101)




Issuance of 156,230 shares of common stock			156		98						254
Stock based compensation					6,732						6,732
Balance at September 30, 2021	$	110,705	$	42,250	$	1,068,913	$	926,834	$	23,550	$	2,172,252

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, 2020, included in the Annual Report on Form 10-K of Heartland Financial USA, Inc. ("HTLF") filed with the Securities and Exchange Commission ("SEC") on February 25, 2021. 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 included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended September 30, 2021, are not necessarily indicative of the results expected for the year ending December 31, 2021.

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-months ended September 30, 2021, and 2020, are shown in the table below, dollars and number of shares in thousands, except per share data:


	Three Months Ended September 30,
	2021		2020
Net income	$	55,924	$	47,958
Preferred dividends	(2,013)		(2,437)


Net income available to common stockholders	$	53,911	$	45,521

Weighted average common shares outstanding for basic earnings per share	42,303		36,941
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	113		54
Weighted average common shares for diluted earnings per share	42,416		36,995
Earnings per common share — basic	$	1.27	$	1.23
Earnings per common share — diluted	$	1.27	$	1.23
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	3		41

	Nine Months Ended September 30,
	2021		2020
Net income	$	170,343	$	98,129
Preferred dividends	(6,038)		(2,437)

Net income available to stockholders	$	164,305	$	95,692

Weighted average common shares outstanding for basic earnings per share	42,241		36,882
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	140		74
Weighted average common shares for diluted earnings per share	42,381		36,956
Earnings per common share — basic	$	3.89	$	2.59
Earnings per common share — diluted	$	3.88	$	2.59
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	1		—

Subsequent Events - HTLF has evaluated subsequent events that may require recognition or disclosure through the filing date of this Quarterly Report on Form 10-Q with the SEC.

Effect of New Financial Accounting Standards

ASU 2018-16

In October 2018, the FASB issued ASU 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting." In the United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate ("LIBOR") swap rate, and the Overnight Index Swap ("OIS") Rate based on the Fed Funds Effective Rate. When the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, in August 2017, it introduced the Securities Industry and Financial Markets Association ("SIFMA") Municipal Swap Rate as the fourth permissible U.S. benchmark rate. ASU 2018-16 adds the OIS rate based on the Secured Overnight Financing Rate ("SOFR") as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. ASU 2018-16 became effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and the financial statement impact immediately upon adoption was immaterial. The future financial statement impact will depend on any new contracts entered into using new benchmark rates, as well as any existing contracts that are migrated from LIBOR to new benchmark interest rates. HTLF has a formal working group that is responsible for the planning, assessment and execution of the transition from LIBOR as an interest rate benchmark to term SOFR. Currently, HTLF has adjustable rate loans, several debt obligations and securities and derivative instruments in place that reference LIBOR-based rates. HTLF’s transition plan provides for the cessation in new contracts of the use of LIBOR as a reference rate no later than December 31, 2021. Management will continue to assess HTLF preparedness and risk management through oversight and internal reporting on the progress of the transition plan.

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. HTLF adopted this ASU on January 1, 2021, as required, and the adoption did not have a material impact on its 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. HTLF 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

Johnson Bank branches

On December 4, 2020, Arizona Bank & Trust ("AB&T"), a wholly-owned subsidiary headquartered in Phoenix, Arizona, completed its acquisition of certain assets and assumed 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. As of the closing date, AB&T acquired, at fair value, total assets of $419.7 million, which included gross loans of $150.7 million and assumed deposits of $415.5 million and certain other liabilities.

AIM Bancshares, Inc.

On December 4, 2020, HTLF completed the acquisition of AIM Bancshares, Inc. ("AIM") and its wholly-owned subsidiary, AimBank, headquartered in Levelland, Texas. Pursuant to the agreement, each share of AimBank common stock was converted into the right to receive 207.0 shares of HTLF common stock and $1,887.16 of cash, subject to certain hold-back provisions of the agreement. Based on the closing price of $41.89 per share of HTLF common stock on December 4, 2020, the aggregate merger consideration received by AimBank stockholders was valued at approximately $264.5 million, which was paid by delivery of HTLF common stock valued at $217.2 million and cash of $47.3 million subject to certain hold-back provisions of the merger agreement relating to the cash consideration. In addition, holders of in-the-money options to acquire shares of AimBank common stock received aggregate consideration of approximately $4.9 million in exchange for the cancellation of such stock options. The combined entity, resulting from the merger of AimBank into First Bank & Trust, operates as First Bank & Trust. The transaction included, at fair value, total assets of $1.97 billion, including $1.09 billion of gross loans held to maturity, and $1.67 billion of deposits. The transaction is structured as a tax-free reorganization with respect to the stock consideration received by shareholders of AIM. On February 19, 2021, HTLF completed the systems conversion of AimBank, and subsequent to the systems conversion, seven of AimBank's twenty-five bank branches were transferred to HTLF's New Mexico Bank & Trust subsidiary.

NOTE 3: SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of debt securities available for sale and equity securities with a readily determinable fair value that are carried at fair value as of September 30, 2021, and December 31, 2020, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
September 30, 2021
U.S. treasuries	$	997	$	16	$	—	$	1,013
U.S. agencies	35,453		208		(628)		35,033
Obligations of states and political subdivisions	1,790,972		53,601		(21,108)		1,823,465
Mortgage-backed securities - agency	2,387,792		17,104		(33,632)		2,371,264
Mortgage-backed securities - non-agency	1,619,636		9,760		(1,493)		1,627,903
Commercial mortgage-backed securities - agency	128,609		2,021		(2,769)		127,861
Commercial mortgage-backed securities - non-agency	560,445		1,612		(390)		561,667
Asset-backed securities	868,215		10,570		(1,139)		877,646
Corporate bonds	3,234		63		(3)		3,294
Total debt securities	7,395,353		94,955		(61,162)		7,429,146
Equity securities with a readily determinable fair value	20,790		—		—		20,790
Total	$	7,416,143	$	94,955	$	(61,162)	$	7,449,936
December 31, 2020
U.S. treasuries	$	1,995	$	31	$	—	$	2,026
U.S. agencies	167,048		657		(926)		166,779
Obligations of states and political subdivisions	1,562,631		75,555		(2,959)		1,635,227
Mortgage-backed securities - agency	1,351,964		16,029		(12,723)		1,355,270
Mortgage-backed securities - non-agency	1,428,068		22,688		(1,640)		1,449,116
Commercial mortgage-backed securities - agency	171,451		3,440		(738)		174,153
Commercial mortgage-backed securities - non-agency	253,421		37		(691)		252,767
Asset-backed securities	1,064,255		9,421		(4,410)		1,069,266
Corporate bonds	3,763		8		(29)		3,742
Total debt securities	6,004,596		127,866		(24,116)		6,108,346
Equity securities with a readily determinable fair value	19,629		—		—		19,629
Total	$	6,024,225	$	127,866	$	(24,116)	$	6,127,975

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of September 30, 2021, and December 31, 2020, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Allowance for Credit Losses
September 30, 2021

Obligations of states and political subdivisions	$	85,354	$	9,656	$	—	$	95,010	$	—
Total	$	85,354	$	9,656	$	—	$	95,010	$	—
December 31, 2020

Obligations of states and political subdivisions	$	88,890	$	11,151	$	—	$	100,041	$	(51)
Total	$	88,890	$	11,151	$	—	$	100,041	$	(51)

As of September 30, 2021, and December 31, 2020, HTLF had $25.3 million and $20.8 million, respectively, of accrued interest receivable, which is included in other assets on the consolidated balance sheet. HTLF does not consider accrued interest receivable in the carrying amount of financial assets held at amortized cost basis or in the allowance for credit losses calculation.

The amortized cost and estimated fair value of investment securities carried at fair value at September 30, 2021, 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, 2021
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	12,487	$	12,527
Due in 1 to 5 years	19,354		20,278
Due in 5 to 10 years	238,253		241,971
Due after 10 years	1,560,562		1,588,029
Total debt securities	1,830,656		1,862,805
Mortgage and asset-backed securities	5,564,697		5,566,341
Equity securities with a readily determinable fair value	20,790		20,790
Total investment securities	$	7,416,143	$	7,449,936

The amortized cost and estimated fair value of debt securities held to maturity at September 30, 2021, 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, 2021
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	2,547	$	2,553
Due in 1 to 5 years	42,225		44,163
Due in 5 to 10 years	34,046		39,188
Due after 10 years	6,536		9,106
Total debt securities	85,354		95,010

As of September 30, 2021, and December 31, 2020, securities with a carrying value of $1.88 billion and $2.12 billion, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.

Gross gains and losses realized related to the sales of securities carried at fair value for the three and nine months ended September 30, 2021 and 2020, are summarized as follows, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Proceeds from sales	$	169,108	$	306,383	$	799,588	$	818,022
Gross security gains	1,591		1,825		5,880		8,687
Gross security losses	56		726		1,533		3,924

The following 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 the securities portfolio as of September 30, 2021, and December 31, 2020. The investments were segregated into two categories: those that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for

12 months or more. The reference point for determining how long an investment was in an unrealized loss position was September 30, 2020, and December 31, 2019, respectively.


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
September 30, 2021

U.S. agencies	$	18,861	$	(628)	1	$	—	$	—	—	$	18,861	$	(628)	1
Obligations of states and political subdivisions	740,885		(18,939)		131	47,453		(2,169)		13	788,338		(21,108)		144
Mortgage-backed securities - agency	1,413,527		(21,898)		58	336,528		(11,734)		15	1,750,055		(33,632)		73
Mortgage-backed securities - non-agency	468,119		(1,241)		12	48,728		(252)		5	516,847		(1,493)		17
Commercial mortgage-backed securities - agency	80,595		(2,769)		14	—		—		—	80,595		(2,769)		14
Commercial mortgage-backed securities - non-agency	76,559		(218)		1	14,944		(172)		2	91,503		(390)		3
Asset-backed securities	127,455		(943)		10	21,692		(196)		8	149,147		(1,139)		18
Corporate bonds	497		(3)		1	—		—		—	497		(3)		1


Total temporarily impaired securities	$	2,926,498	$	(46,639)	228	$	469,345	$	(14,523)	43	$	3,395,843	$	(61,162)	271
December 31, 2020

U.S. agencies	$	2,981	$	(8)	5	$	99,922	$	(918)	72	$	102,903	$	(926)	77
Obligations of states and political subdivisions	346,598		(2,959)		49	—		—		—	346,598		(2,959)		49
Mortgage-backed securities - agency	653,793		(12,342)		35	31,012		(381)		3	684,805		(12,723)		38
Mortgage-backed securities - non-agency	378,843		(1,639)		17	1,622		(1)		1	380,465		(1,640)		18
Commercial mortgage-backed securities - agency	46,541		(738)		6	—		—		—	46,541		(738)		6
Commercial mortgage-backed securities - non-agency	100,042		(15)		2	35,428		(676)		3	135,470		(691)		5
Asset-backed securities	141,824		(643)		9	340,452		(3,767)		24	482,276		(4,410)		33
Corporate bonds	1,908		(29)		4	—		—		—	1,908		(29)		4


Total temporarily impaired securities	$	1,672,530	$	(18,373)	127	$	508,436	$	(5,743)	103	$	2,180,966	$	(24,116)	230

HTLF had no securities held to maturity with unrealized losses at September 30, 2021, or December 31, 2020.

HTLF reviews the investment securities portfolio at the security level on a quarterly basis for potential credit losses, which takes into consideration numerous factors, and the relative significance of any single factor can vary by security. Some factors HTLF may consider include 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, HTLF may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain debt securities in unrealized loss positions, HTLF prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

The remaining unrealized losses on HTLF'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 HTLF has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the three and nine months ended September 30, 2021 and 2020.

The unrealized losses on HTLF'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 HTLF has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the three and nine months ended September 30, 2021 and 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 tables present, in thousands, the activity in the allowance for credit losses for securities held to maturity by obligations of states and political subdivisions securities for the three and nine months ended September 30, 2021 and 2020:


	Three Months Ended September 30,
	2021		2020
Beginning balance	$	51	$	62
Provision (benefit) for credit losses	(51)		(1)
Balance at period end	$	—	$	61

	Nine Months Ended September 30,
	2021		2020
Beginning balance	$	51	$	—
Impact of ASU 2016-13 adoption on January 1,	—		158
Adjusted balance at January 1,	51		158
Provision (benefit) for credit losses	(51)		(97)
Balance at period end	$	—	$	61

Based on HTLF's credit loss model applicable to held to maturity debt securities, no allowance for credit losses was required at September 30, 2021 compared to $51,000 at December 31, 2020.

The following table summarizes, in thousands, the carrying amount of HTLF's held to maturity debt securities by investment rating as of September 30, 2021 and December 31, 2020, which are updated quarterly and used to monitor the credit quality of the securities:


	September 30, 2021		December 31, 2020
Rating
AAA	$	3,236	$	—
AA, AA+, AA-	61,793		64,385
A+, A, A-	14,933		18,353
BBB	4,914		4,208
Not Rated	478		1,944
Total	$	85,354	$	88,890

Included in other securities were shares of stock in each Federal Home Loan Bank (the "FHLB") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of $21.9 million at September 30, 2021 and $19.5 million at December 31, 2020.

The HTLF banks are required by federal law to maintain FHLB stock as members of the various FHLBs. These equity securities are "restricted" in that they can only be sold back to the respective institutions from which they were acquired or another member institution at par. Therefore, the FHLB stock is less liquid than other marketable equity securities, and the fair value approximates amortized cost. HTLF considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. HTLF evaluates impairment in these investments based on the ultimate recoverability of the par value and, at September 30, 2021, did not consider the investments to be impaired.

NOTE 4: LOANS

Loans as of September 30, 2021, and December 31, 2020, were as follows, in thousands:


	September 30, 2021		December 31, 2020
Loans receivable held to maturity:
Commercial and industrial	$	2,538,369	$	2,534,799
Paycheck Protection Program ("PPP")	409,247		957,785
Owner occupied commercial real estate	2,135,227		1,776,406
Non-owner occupied commercial real estate	2,020,487		1,921,481
Real estate construction	814,001		863,220
Agricultural and agricultural real estate	684,670		714,526
Residential real estate	840,356		840,442
Consumer	412,550		414,392
Total loans receivable held to maturity	9,854,907		10,023,051






Allowance for credit losses	(117,533)		(131,606)
Loans receivable, net	$	9,737,374	$	9,891,445

As of September 30, 2021, and December 31, 2020, HTLF had $37.4 million and $42.4 million, respectively, of accrued interest receivable, which is included in other assets on the consolidated balance sheet. HTLF does not consider accrued interest receivable in the allowance for credit losses calculation.

The following table shows the balance in the allowance for credit losses at September 30, 2021, and December 31, 2020, and the related loan balances, disaggregated on the basis of measurement methodology, in thousands. If a loan no longer shares similar risk characteristics with other loans in the pool, it is evaluated on an individual basis and is not included in the collective evaluation. Lending relationships with $500,000 or more of total exposure and are on nonaccrual are individually assessed using a collateral dependency calculation. All other loans are collectively evaluated for losses.


	Allowance For Credit Losses						Gross Loans Receivable Held to Maturity
	Individually Evaluated for Credit Losses		Collectively Evaluated for Credit Losses		Total		Loans Individually Evaluated for Credit Losses		Loans Collectively Evaluated for Credit Losses		Total
September 30, 2021
Commercial and industrial	$	4,710	$	23,198	$	27,908	$	15,524	$	2,522,845	$	2,538,369
PPP	—		—		—		—		409,247		409,247
Owner occupied commercial real estate	110		19,018		19,128		10,166		2,125,061		2,135,227
Non-owner occupied commercial real estate	2,847		19,268		22,115		19,314		2,001,173		2,020,487
Real estate construction	—		23,698		23,698		—		814,001		814,001
Agricultural and agricultural real estate	3,062		3,264		6,326		13,917		670,753		684,670
Residential real estate	—		9,238		9,238		—		840,356		840,356
Consumer	—		9,120		9,120		—		412,550		412,550

Total	$	10,729	$	106,804	$	117,533	$	58,921	$	9,795,986	$	9,854,907


	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
December 31, 2020
Commercial and industrial	$	4,077	$	34,741	$	38,818	$	16,578	$	2,518,221	$	2,534,799
PPP	—		—		—		—		957,785		957,785
Owner occupied commercial real estate	111		19,890		20,001		11,174		1,765,232		1,776,406
Non-owner occupied commercial real estate	3,250		17,623		20,873		13,490		1,907,991		1,921,481
Real estate construction	—		20,080		20,080		—		863,220		863,220
Agricultural and agricultural real estate	1,988		5,141		7,129		15,453		699,073		714,526
Residential real estate	—		11,935		11,935		535		839,907		840,442
Consumer	—		12,770		12,770		—		414,392		414,392

Total	$	9,426	$	122,180	$	131,606	$	57,230	$	9,965,821	$	10,023,051

HTLF had $13.2 million of troubled debt restructured loans at September 30, 2021, of which $11.4 million were classified as nonaccrual and $1.8 million were accruing according to the restructured terms. HTLF had $6.2 million of troubled debt restructured loans at December 31, 2020, of which $3.8 million were classified as nonaccrual and $2.4 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- months ended September 30, 2021, and September 30, 2020, dollars in thousands:


	Three Months Ended September 30,
	2021					2020
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial	—	$	—	$	—	1	$	20	$	20
PPP	—	—		—		—	—		—
Owner occupied commercial real estate	—	—		—		—	—		—
Non-owner occupied commercial real estate	—	—		—		1	9,434		9,434
Real estate construction	—	—		—		—	—		—
Agricultural and agricultural real estate	—	—		—		—	—		—
Residential real estate	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	—	$	—	$	—	2	$	9,454	$	9,454


	Nine Months Ended September 30,
	2021					2020
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial and industrial	—	$	—	$	—	1	$	20	$	20
PPP	—	—		—		—	—		—
Owner occupied commercial real estate	—	—		—		—	—		—
Non-owner occupied commercial real estate	2	7,850		7,850		1	9,434		9,434
Real estate construction	—	—		—		—	—		—
Agricultural and agricultural real estate	—	—		—		—	—		—


	Nine Months Ended September 30,
	2021					2020
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Residential real estate	—	—		—		2	92		98
Consumer	—	—		—		—	—		—
Total	2	$	7,850	$	7,850	4	$	9,546	$	9,552

At September 30, 2021, 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.

The following tables show troubled debt restructured loans for which there was a payment default during the three- and nine- months ended September 30, 2021, and September 30, 2020, that had been modified during the twelve-month period prior to default.


	With Payment Defaults During the Three Months Ended September 30,
	2021			2020
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
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	—	$	—	—	$	—


	With Payment Defaults During the Nine Months Ended September 30,
	2021			2020
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
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	—	—		1	236
Consumer	—	—		—	—
Total	—	$	—	1	$	236

HTLF'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 watch, substandard, doubtful and loss rated loans. The "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 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 HTLF will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following weaknesses: deteriorating financial trends, lack of earnings, inadequate debt service capacity, excessive debt and/or lack of liquidity.

The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring the rating of the loan as "loss" until the exact status of the loan can be determined. The "loss" rating is assigned to loans considered uncollectible. HTLF had no loans classified as "loss" or "doubtful" as of September 30, 2021, and December 31, 2020.

The following tables show the risk category of loans by loan category and year of origination as of September 30, 2021, and December 31, 2020, in thousands:


As of September 30, 2021	Amortized Cost Basis of Term Loans by Year of Origination
	2021		2020		2019		2018		2017		2016 and Prior		Revolving		Total
Commercial and industrial
Pass	$	460,258	$	401,606	$	239,419	$	100,840	$	179,241	$	343,238	$	602,155	$	2,326,757
Watch	13,274		14,096		13,982		11,230		6,363		16,657		30,157		105,759
Substandard	14,511		9,315		14,949		8,858		10,880		16,921		30,419		105,853
Commercial and industrial total	$	488,043	$	425,017	$	268,350	$	120,928	$	196,484	$	376,816	$	662,731	$	2,538,369

PPP
Pass	$	297,218	$	59,481	$	—	$	—	$	—	$	—	$	—	$	356,699
Watch	19,656		11,210		—		—		—		—		—		30,866
Substandard	19,434		2,248		—		—		—		—		—		21,682
PPP total	$	336,308	$	72,939	$	—	$	—	$	—	$	—	$	—	$	409,247
Owner occupied commercial real estate
Pass	$	679,698	$	378,366	$	337,572	$	207,982	$	128,973	$	220,013	$	29,446	$	1,982,050
Watch	2,517		16,981		13,277		18,264		15,618		9,216		1,853		77,726
Substandard	4,490		17,518		13,338		2,866		13,857		21,632		1,750		75,451
Owner occupied commercial real estate total	$	686,705	$	412,865	$	364,187	$	229,112	$	158,448	$	250,861	$	33,049	$	2,135,227
Non-owner occupied commercial real estate
Pass	$	394,782	$	316,992	$	353,092	$	274,618	$	166,123	$	199,072	$	37,518	$	1,742,197
Watch	12,832		17,170		48,377		35,098		7,595		35,783		—		156,855
Substandard	18,113		15,291		22,011		2,828		14,848		48,036		308		121,435
Non-owner occupied commercial real estate total	$	425,727	$	349,453	$	423,480	$	312,544	$	188,566	$	282,891	$	37,826	$	2,020,487
Real estate construction
Pass	$	240,048	$	282,023	$	177,594	$	15,228	$	8,501	$	9,628	$	13,269	$	746,291
Watch	2,191		876		15,006		47,267		—		—		112		65,452
Substandard	—		50		47		1,992		—		169		—		2,258
Real estate construction total	$	242,239	$	282,949	$	192,647	$	64,487	$	8,501	$	9,797	$	13,381	$	814,001

Agricultural and agricultural real estate
Pass	$	174,014	$	114,928	$	66,869	$	37,763	$	24,751	$	39,479	$	128,684	$	586,488


As of September 30, 2021	Amortized Cost Basis of Term Loans by Year of Origination
	2021		2020		2019		2018		2017		2016 and Prior		Revolving		Total
Watch	5,343		10,435		5,967		3,013		38		3,711		6,840		35,347
Substandard	7,559		6,354		8,570		18,243		3,937		9,826		8,346		62,835
Agricultural and agricultural real estate total	$	186,916	$	131,717	$	81,406	$	59,019	$	28,726	$	53,016	$	143,870	$	684,670

Residential real estate
Pass	$	251,931	$	103,529	$	58,179	$	68,551	$	50,817	$	244,641	$	32,474	$	810,122
Watch	1,086		4,650		1,205		1,503		807		5,043		—		14,294
Substandard	4,085		537		496		2,555		1,185		7,082		—		15,940
Residential real estate total	$	257,102	$	108,716	$	59,880	$	72,609	$	52,809	$	256,766	$	32,474	$	840,356
Consumer
Pass	$	57,680	$	22,845	$	16,732	$	10,290	$	11,722	$	18,442	$	265,241	$	402,952
Watch	912		196		281		1,368		190		542		1,387		4,876
Substandard	891		359		511		259		335		1,742		625		4,722
Consumer total	$	59,483	$	23,400	$	17,524	$	11,917	$	12,247	$	20,726	$	267,253	$	412,550

Total Pass	$	2,555,629	$	1,679,770	$	1,249,457	$	715,272	$	570,128	$	1,074,513	$	1,108,787	$	8,953,556
Total Watch	57,811		75,614		98,095		117,743		30,611		70,952		40,349		491,175
Total Substandard	69,083		51,672		59,922		37,601		45,042		105,408		41,448		410,176
Total Loans	$	2,682,523	$	1,807,056	$	1,407,474	$	870,616	$	645,781	$	1,250,873	$	1,190,584	$	9,854,907


As of December 31, 2020	Amortized Cost Basis of Term Loans by Year of Origination
	2020		2019		2018		2017		2016		2015 and Prior		Revolving		Total
Commercial and industrial
Pass	$	557,853	$	340,809	$	168,873	$	215,696	$	101,010	$	337,834	$	541,627	$	2,263,702
Watch	41,574		24,676		19,672		14,262		8,072		2,474		49,432		160,162
Substandard	23,024		16,274		8,897		15,717		9,098		19,537		18,388		110,935
Commercial and industrial total	$	622,451	$	381,759	$	197,442	$	245,675	$	118,180	$	359,845	$	609,447	$	2,534,799
PPP
Pass	$	880,709	$	—	$	—	$	—	$	—	$	—	$	—	$	880,709
Watch	22,533		—		—		—		—		—		—		22,533
Substandard	54,543		—		—		—		—		—		—		54,543
PPP total	$	957,785	$	—	$	—	$	—	$	—	$	—	$	—	$	957,785
Owner occupied commercial real estate
Pass	$	400,662	$	369,401	$	300,242	$	167,470	$	107,234	$	213,780	$	33,759	$	1,592,548
Watch	15,345		13,764		22,488		20,811		8,717		15,282		4,311		100,718
Substandard	15,914		9,522		12,164		14,147		8,580		21,708		1,105		83,140
Owner occupied commercial real estate total	$	431,921	$	392,687	$	334,894	$	202,428	$	124,531	$	250,770	$	39,175	$	1,776,406
Non-owner occupied commercial real estate
Pass	$	334,722	$	411,301	$	305,456	$	194,101	$	108,070	$	233,153	$	24,466	$	1,611,269
Watch	22,826		55,225		24,718		18,724		20,954		45,672		5,114		193,233
Substandard	30,899		15,035		23,290		17,046		9,147		21,060		502		116,979
Non-owner occupied commercial real estate total	$	388,447	$	481,561	$	353,464	$	229,871	$	138,171	$	299,885	$	30,082	$	1,921,481
Real estate construction
Pass	$	311,625	$	309,678	$	157,171	$	12,625	$	6,954	$	5,110	$	21,431	$	824,594
Watch	2,105		26,659		2,403		332		55		388		1,295		33,237
Substandard	196		2,760		2,036		—		39		358		—		5,389
Real estate construction total	$	313,926	$	339,097	$	161,610	$	12,957	$	7,048	$	5,856	$	22,726	$	863,220


As of December 31, 2020	Amortized Cost Basis of Term Loans by Year of Origination
	2020		2019		2018		2017		2016		2015 and Prior		Revolving		Total
Agricultural and agricultural real estate
Pass	$	171,578	$	90,944	$	62,349	$	39,252	$	17,626	$	37,696	$	148,456	$	567,901
Watch	20,500		16,202		8,854		2,448		3,515		3,157		12,282		66,958
Substandard	17,403		7,044		23,519		6,758		3,917		9,952		11,074		79,667
Agricultural and agricultural real estate total	$	209,481	$	114,190	$	94,722	$	48,458	$	25,058	$	50,805	$	171,812	$	714,526
Residential real estate
Pass	$	153,017	$	99,440	$	118,854	$	83,534	$	63,477	$	244,852	$	33,467	$	796,641
Watch	3,986		4,507		2,188		1,896		3,117		8,525		—		24,219
Substandard	980		442		2,507		1,528		884		12,141		1,100		19,582
Residential real estate total	$	157,983	$	104,389	$	123,549	$	86,958	$	67,478	$	265,518	$	34,567	$	840,442
Consumer
Pass	$	37,037	$	27,646	$	18,811	$	15,034	$	4,009	$	19,483	$	280,996	$	403,016
Watch	168		352		647		340		82		646		1,622		3,857
Substandard	481		959		1,884		500		897		1,976		822		7,519
Consumer total	$	37,686	$	28,957	$	21,342	$	15,874	$	4,988	$	22,105	$	283,440	$	414,392

Total Pass	$	2,847,203	$	1,649,219	$	1,131,756	$	727,712	$	408,380	$	1,091,908	$	1,084,202	$	8,940,380
Total Watch	129,037		141,385		80,970		58,813		44,512		76,144		74,056		604,917
Total Substandard	143,440		52,036		74,297		55,696		32,562		86,732		32,991		477,754
Total Loans	$	3,119,680	$	1,842,640	$	1,287,023	$	842,221	$	485,454	$	1,254,784	$	1,191,249	$	10,023,051

Included in the nonpass loans at September 30, 2021 and December 31, 2020 were $52.5 million and $77.1 million, respectively, of nonpass PPP loans as a result of risk ratings on non-PPP related credits. HTLF's risk rating methodology assigns a risk rating to the whole lending relationship. HTLF has no allowance recorded related to the PPP loans because of the 100% government guarantee.

As of September 30, 2021, HTLF had $712,000 of loans secured by residential real estate property that were in the process of foreclosure.

The following table sets forth information regarding accruing and nonaccrual loans at September 30, 2021, and December 31, 2020, in thousands:


	Accruing Loans
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual		Total Loans
September 30, 2021
Commercial and industrial	$	3,800	$	653	$	727	$	5,180	$	2,513,785	$	19,404	$	2,538,369
PPP	—		—		—		—		409,247		—		409,247
Owner occupied commercial real estate	1,255		952		6		2,213		2,120,755		12,259		2,135,227
Non-owner occupied commercial real estate	41		26		—		67		1,999,904		20,516		2,020,487
Real estate construction	50		101		52		203		813,343		455		814,001
Agricultural and agricultural real estate	625		—		—		625		668,065		15,980		684,670
Residential real estate	2,168		903		76		3,147		825,013		12,196		840,356
Consumer	1,112		27		—		1,139		409,846		1,565		412,550
Total gross loans receivable held to maturity	$	9,051	$	2,662	$	861	$	12,574	$	9,759,958	$	82,375	$	9,854,907
December 31, 2020
Commercial and industrial	$	5,825	$	2,322	$	720	$	8,867	$	2,504,170	$	21,762	$	2,534,799
PPP	1		—		—		1		957,784		—		957,785
Owner occupied commercial real estate	2,815		167		—		2,982		1,759,649		13,775		1,776,406
Non-owner occupied commercial real estate	2,143		2,674		—		4,817		1,902,003		14,661		1,921,481
Real estate construction	2,446		96		—		2,542		859,784		894		863,220
Agricultural and agricultural real estate	1,688		—		—		1,688		694,150		18,688		714,526
Residential real estate	1,675		83		—		1,758		825,047		13,637		840,442
Consumer	807		139		—		946		409,477		3,969		414,392
Total gross loans receivable held to maturity	$	17,400	$	5,481	$	720	$	23,601	$	9,912,064	$	87,386	$	10,023,051

Loans delinquent 30 to 89 days as a percent of total loans were 0.12% at September 30, 2021, compared to 0.23% at December 31, 2020. Changes in credit risk are monitored on a continuous basis as part of relationship management, and changes in risk ratings are made when identified. All individually assessed loans are reviewed at least annually.

HTLF recognized $0 of interest income on nonaccrual loans during the three and nine months ended September 30, 2021 and September 30, 2020. As of September 30, 2021, and December 31, 2020, HTLF had $28.6 million and $32.5 million of nonaccrual loans with no related allowance, respectively.

On December 4, 2020, HTLF's Arizona Bank & Trust subsidiary completed the acquisition of certain assets and substantially all of the deposits and certain other liabilities of Johnson Bank's Arizona operations, headquartered in Racine, Wisconsin. As of December 4, 2020, the Johnson Bank branches acquired had gross loans with a fair value of $150.7 million.

On December 4, 2020, HTLF completed the acquisition of AimBank, headquartered in Levelland, Texas. As of December 4, 2020, AimBank had gross loans with a fair value of $1.09 billion.

NOTE 5: ALLOWANCE FOR CREDIT LOSSES

Changes in the allowance for credit losses on loans for the three- and nine- months ended September 30, 2021, and September 30, 2020, 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 June 30, 2021	$	31,332	$	—	$	19,990	$	22,828	$	19,580	$	7,160	$	9,741	$	10,095	$	120,726
Charge-offs	(106)		—		(119)		—		—		(195)		(22)		(725)		(1,167)
Recoveries	1,553		—		46		20		2		466		2		333		2,422
Provision (benefit)	(4,871)		—		(789)		(733)		4,116		(1,105)		(483)		(583)		(4,448)
Balance at September 30, 2021	$	27,908	$	—	$	19,128	$	22,115	$	23,698	$	6,326	$	9,238	$	9,120	$	117,533

	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, 2020	$	38,818	$	—	$	20,001	$	20,873	$	20,080	$	7,129	$	11,935	$	12,770	$	131,606


Charge-offs	(1,896)		—		(232)		(1,637)		(10)		(870)		(113)		(2,032)		(6,790)
Recoveries	2,111		—		143		33		8		487		7		826		3,615
Provision (benefit)	(11,125)		—		(784)		2,846		3,620		(420)		(2,591)		(2,444)		(10,898)
Balance at September 30, 2021	$	27,908	$	—	$	19,128	$	22,115	$	23,698	$	6,326	$	9,238	$	9,120	$	117,533


	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 June 30, 2020	$	32,518			$	—	$	23,402	$	10,161	$	28,667	$	5,701	$	9,304	$	10,184	$	119,937
Charge-offs	(6,888)				—		(13,328)		(25)		—		(936)		(54)		(522)		(21,753)
Recoveries	283				—		1		10		2		1		2		153		452
Provision (benefit)	8,668				—		1,154		1,981		(7,882)		576		419		(175)		4,741
Balance at September 30, 2020	$	34,581	$	32,531	$	—	$	11,229	$	12,127	$	20,787	$	5,342	$	9,671	$	9,640	$	103,377

	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	$	34,207			$	—	$	7,921	$	7,584	$	8,677	$	5,680	$	1,504	$	4,822	$	70,395
Impact of ASU 2016-13 adoption	(272)				—		(114)		(2,617)		6,335		(387)		4,817		4,309		12,071
Adjusted balance at January 1, 2020	33,935				—		7,807		4,967		15,012		5,293		6,321		9,131		82,466
Charge-offs	(14,655)				—		(13,541)		(44)		(105)		(1,190)		(368)		(1,715)		(31,618)
Recoveries	893				—		193		18		217		827		97		671		2,916
Provision (benefit)	14,408				—		16,770		7,186		5,663		412		3,621		1,553		49,613
Balance at September 30, 2020	$	34,581			$	—	$	11,229	$	12,127	$	20,787	$	5,342	$	9,671	$	9,640	$	103,377

Management allocates the allowance for credit losses by pools of risk within each loan portfolio. The allocation of the allowance for 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 credit losses is available to absorb losses from any segment of the loan portfolio.

Changes in the allowance for credit losses on unfunded commitments for the three and nine months ended September 30, 2021 and September 30, 2020, were as follows:


	For the Three Months Ended September 30,
	2021		2020
Balance at June 30,	$	14,002	$	17,392
Provision (benefit)	(35)		(3,062)
Balance at September 30,	$	13,967	$	14,330


	For the Nine Months Ended September 30,
	2021		2020
Balance at December 31,	$	15,280	$	248
Impact of ASU 2016-13 adoption on January 1, 2020	—		13,604
Adjusted balance at January 1,	15,280		13,852
Provision (benefit)	(1,313)		478
Balance at September 30,	$	13,967	$	14,330

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

HTLF had goodwill of $576.0 million at both September 30, 2021 and December 31, 2020. HTLF conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. Due to the COVID-19 pandemic and economic conditions, HTLF performed an interim quantitative assessment of goodwill in the second quarter of 2020, which was the most recent annual assessment, and there was no goodwill impairment.

HTLF recorded $91.4 million of goodwill and $3.1 million of core deposit intangible in connection with the acquisition of AimBank, headquartered in Levelland, Texas on December 4, 2020.

HTLF recorded $38.4 million of goodwill and $1.3 million of core deposit intangible in connection with the acquisition of certain assets and substantially all of the deposits and certain other liabilities of Johnson Bank's Arizona operations, headquartered in Racine, Wisconsin, on December 4, 2020.

The core deposit intangible recorded with the AimBank acquisition is not deductible for tax purposes and is expected to be amortized over a period of 10 years on an accelerated basis.

Goodwill related to the AimBank 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 intangible and goodwill recorded with the Johnson Bank transaction are deductible for tax purposes, and the core deposit intangible is expected to be amortized over a period of 10 years on an accelerated basis.

HTLF's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangibles, and commercial servicing rights. The gross carrying amount of these intangible assets and the associated accumulated amortization at September 30, 2021, and December 31, 2020, are presented in the table below, in thousands:


	September 30, 2021						December 31, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	101,185	$	66,169	$	35,016	$	101,185	$	58,970	$	42,215
Customer relationship intangibles	1,177		1,036		141		1,177		1,009		168
Mortgage servicing rights	12,323		6,522		5,801		11,268		6,079		5,189
Commercial servicing rights	7,054		6,504		550		7,054		6,191		863
Total	$	121,739	$	80,231	$	41,508	$	120,684	$	72,249	$	48,435

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
Three months ending December 31, 2021	$	2,160	$	9	$	304	$	51	$	2,524
Year ending December 31,
2022	7,702		34		1,374		181		9,291
2023	6,739		33		1,178		130		8,080
2024	5,591		33		982		91		6,697
2025	4,700		32		785		97		5,614
2026	3,533		—		589		—		4,122
Thereafter	4,591		—		589		—		5,180
Total	$	35,016	$	141	$	5,801	$	550	$	41,508

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of September 30, 2021. HTLF's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others were approximately $711.6 million at September 30, 2021, compared to $743.3 million at December 31, 2020. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $16.2 million at September 30, 2021, and $5.7 million at December 31, 2020.

At September 30, 2021, the fair value of the mortgage servicing rights was estimated at $5.8 million compared to $5.2 million at December 31, 2020. The fair value of mortgage servicing rights is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings of the mortgage servicing rights are considered in the calculation. The average constant prepayment rate was 14.80% for the September 30, 2021, valuation compared to 16.20% for the December 31, 2020 valuation. The discount rate was 9.02% for both September 30, 2021 and December 31, 2020. The average capitalization rate for the first nine months of 2021 ranged from 76 to 120 basis points compared to a range of 76 to 116 basis points for the first nine months of 2020. Fees collected for the servicing of mortgage loans for others were $446,000 and $443,000 for the quarters ended September 30, 2021 and September 30, 2020, respectively. Fees collected for the servicing of mortgage loans for others were $1.4 million and $1.3 million for the nine months ended September 30, 2021 and 2020, respectively.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the nine months ended September 30, 2021, and September 30, 2020:


	2021			2020
Balance at January 1,	$	5,189		$	5,621
Originations	1,055			2,571
Amortization	(1,029)			(1,693)



Valuation adjustment	586			(1,676)
Balance at period end	$	5,801		$	4,823

Mortgage servicing rights, net to servicing portfolio	0.82		%	0.68		%

HTLF's commercial servicing portfolio is comprised of loans guaranteed by the United States Small Business Administration ("SBA") and United States Department of Agriculture that have been sold with servicing retained by HTLF, which totaled $52.8 million at September 30, 2021 and $66.2 million at December 31, 2020. The commercial servicing rights portfolio is separated into two tranches at each respective HTLF 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 $102,000 and $70,000 for the quarters ended September 30, 2021 and September 30, 2020, respectively, and $396,000 and $242,000 for the nine months ended September 30, 2021 and September 30, 2020, respectively.

The fair value of each commercial servicing rights portfolio is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds and servicing costs, are considered in the calculation. The range of average constant prepayment rates for the valuations was 13.45% to 16.85% as of September 30, 2021 compared to 14.95% to 19.25% as of December 31, 2020. The discount rate range was 8.02% to 9.42% for the September 30, 2021, valuations compared to 7.70% to 12.88% for the December 31, 2020 valuations. The capitalization rate for 2020 ranged from 310 to 445 basis points. The total fair value of the commercial servicing rights was estimated at $958,000 as of September 30, 2021, and $1.3 million as of December 31, 2020.

The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the nine months ended September 30, 2021, and September 30, 2020:


	2021			2020
Balance at January 1,	$	863		$	1,115

Originations	—			62
Amortization	(313)			(248)

Balance at period end	$	550		$	929
Fair value of commercial servicing rights	$	958		$	1,497
Commercial servicing rights, net to servicing portfolio	1.04		%	1.31		%

Mortgage and commercial servicing rights are initially recorded at fair value in net gains on sale of loans held for sale when they are capitalized 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 HTLF 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 the carrying amount at each HTLF subsidiary. At September 30, 2021, a $435,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $1.7 million valuation allowance was required on the mortgage servicing rights 30-year tranche. At December 31, 2020, a $422,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $1.4 million valuation allowance was required on the mortgage servicing rights 30-year tranche. At both September 30, 2021 and December 31, 2020, no valuation allowance was required on commercial servicing rights with a term less than 20 years and no valuation allowance was required on commercial servicing rights with a term greater than 20 years.

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 September 30, 2021, and December 31, 2020:


	Book Value 15-Year Tranche		Fair Value 15-Year Tranche		Valuation Allowance 15-Year Tranche		Book Value 30-Year Tranche		Fair Value 30-Year Tranche		Valuation Allowance 30-Year Tranche

September 30, 2021	$	1,622	$	1,187	$	435	$	6,340	$	4,614	$	1,726



December 31, 2020	$	1,522	$	1,100	$	422	$	5,445	$	4,089	$	1,356

The following table summarizes, in thousands, the book value and the fair value of each tranche of the commercial servicing rights at September 30, 2021, and December 31, 2020.


	Book Value Less than 20 Years		Fair Value Less than 20 Years		Book Value More than 20 Years		Fair Value More than 20 Years



September 30, 2021	$	51	$	211	$	499	$	747




December 31, 2020	$	87	$	203	$	776	$	1,085

NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

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

In addition, interest rate-related derivative instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by the credit ratings of each counterparty. HTLF was required to pledge cash of $2.7 million as collateral at September 30, 2021 compared to $3.8 million at December 31, 2020. At both September 30, 2021 and December 31, 2020, no collateral was required to be pledged by HTLF's counterparties.

HTLF'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

HTLF 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, HTLF entered into various interest rate swap agreements. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are received or made on HTLF's variable-rate liabilities. For the nine months ended September 30, 2021, 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 (loss) to interest expense totaling $1.4 million.

HTLF entered into forward starting interest rate swap transactions to effectively convert Heartland Financial Statutory Trust VI and VII, which total $40.0 million, from variable rate subordinated debentures to fixed rate debt. For accounting purposes, these swap transactions were designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $40.0 million of HTLF's subordinated debentures that reset quarterly on a specified reset date.

During the third quarter of 2021, the interest rate swap transactions associated with Heartland Financial Statutory VI and VII were terminated, and the debt was converted to variable rate subordinated debentures. In addition, HTLF had two swap transactions associated with an unaffiliated bank, one of which matured in the second quarter, and the other was terminated in the third quarter. The underlying debt with the unaffiliated bank was paid off in the third quarter of 2021. For the next twelve months, HTLF estimates that cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense related to the terminated swaps will total $733,000.

At September 30, 2021, HTLF had no derivative instruments designated as cash flow hedges. The table below identifies the balance sheet category and fair values of HTLF's derivative instruments designated as cash flow hedges at December 31, 2020, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity













December 31, 2020
Interest rate swap	$	25,000	$	(127)	Other liabilities	0.229	%	2.255	%	03/17/2021

Interest rate swap	21,667		(91)		Other liabilities	2.649		3.674		05/10/2021
Interest rate swap	22,750		(2,220)		Other liabilities	2.643		5.425		07/24/2028
Interest rate swap	20,000		(1,482)		Other liabilities	0.217		2.390		06/15/2024
Interest rate swap	20,000		(1,385)		Other liabilities	0.225		2.352		03/01/2024
Interest rate swap	6,000		(50)		Other liabilities	0.217		1.866		06/15/2021
Interest rate swap	3,000		(25)		Other liabilities	0.241		1.878		06/30/2021

The table below identifies the gains and losses recognized on HTLF's derivative instruments designated as cash flow hedges for the three- and nine-months ended September 30, 2021, and September 30, 2020, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Effective Portion
Gain (loss) recognized in other comprehensive income (loss) on interest rate swaps	$	3,792	$	(604)	$	5,380	$	(3,359)
Gain (loss) reclassified from accumulated other comprehensive income (loss) into income (expense) on interest rate swaps	358		595		1,403		1,195

Fair Value Hedges

HTLF uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. HTLF 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. HTLF uses statistical regression to assess hedge effectiveness, both at the inception of the hedge as well as on a continual basis. The regression analysis involves regressing the periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.

HTLF was required to pledge $3.8 million and $4.2 million of cash as collateral for these fair value hedges at September 30, 2021, and December 31, 2020, respectively.

The table below identifies the notional amount, fair value and balance sheet category of HTLF's fair value hedges at September 30, 2021, and December 31, 2020, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category
September 30, 2021

Fair value hedges	$	16,829	$	(1,550)	Other liabilities
December 31, 2020

Fair value hedges	$	20,841	$	(2,480)	Other liabilities

The table below identifies the gains and losses recognized on HTLF's fair value hedges for the three- and nine-months ended September 30, 2021, and September 30, 2020, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Gain (loss) recognized in interest income on fair value hedges	$	35	$	26	$	930	$	(1,647)

Embedded Derivatives

HTLF has fixed rate loans with embedded derivatives. These loans contain terms that affect the cash flows or value of the loan similar to a derivative instrument, and therefore are considered to contain an embedded derivative. The embedded derivatives are bifurcated from the loans because the terms of the derivative instrument are not clearly and closely related to the loans. The embedded derivatives are recorded at fair value on the consolidated balance sheets as a part of other assets, and changes in the fair value are a component of noninterest income. The table below identifies the notional amount, fair value and balance sheet category of the embedded derivatives at September 30, 2021, and December 31, 2020, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category
September 30, 2021
Embedded derivatives	$	8,857	$	431	Other assets

December 31, 2020
Embedded derivatives	$	9,198	$	680	Other assets

The table below identifies the gains and losses recognized on HTLF's embedded derivatives for the three- and nine- months ended September 30, 2021, and September 30, 2020, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Gain (loss) recognized in other noninterest income on embedded derivatives	$	(66)	$	(69)	$	(249)	$	293

Back-to-Back Loan Swaps

HTLF has interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan swaps, HTLF enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the consolidated balance sheets. HTLF was required to post $28.6 million and $46.5 million as of September 30, 2021, and December 31, 2020, respectively, as collateral related to these back-to-back swaps. HTLF's counterparties were required to pledge $0 at both September 30, 2021, and December 31, 2020. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the three and nine months ended September 30, 2021 and September 30, 2020, no gain or loss was recognized. The table below identifies the balance sheet category and fair values of the derivative instruments designated as loan swaps at September 30, 2021, and December 31, 2020, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
September 30, 2021
Customer interest rate swaps	$	428,782	$	25,801	Other assets	4.49	%	2.41	%
Customer interest rate swaps	428,782		(25,801)		Other liabilities	2.41		4.49
December 31, 2020
Customer interest rate swaps	$	440,719	$	43,422	Other assets	4.46	%	2.46	%
Customer interest rate swaps	440,719		(43,422)		Other liabilities	2.46		4.46

Other Free Standing Derivatives

HTLF has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments. HTLF enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future 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. HTLF was required to pledge no collateral at both September 30, 2021, and December 31, 2020. HTLF's counterparties were required to pledge no collateral at both September 30, 2021 and December 31, 2020, as collateral for these forward commitments.

HTLF acquired undesignated interest rate swaps in 2015. These swaps were entered into primarily for the benefit of customers seeking to manage their interest rate risk and are not designated against specific assets or liabilities on the consolidated balance sheet 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 HTLF's other free standing derivative instruments not designated as hedging instruments at September 30, 2021, and December 31, 2020, in thousands:


	Balance Sheet Category	Notional Amount		Fair Value
September 30, 2021
Interest rate lock commitments (mortgage)	Other assets	$	37,209	$	1,204

Forward commitments	Other assets	47,500		278
Forward commitments	Other liabilities	19,500		(59)
Undesignated interest rate swaps	Other liabilities	8,857		(431)

December 31, 2020
Interest rate lock commitments (mortgage)	Other assets	$	42,078	$	1,827

Forward commitments	Other assets	—		—
Forward commitments	Other liabilities	86,500		(697)
Undesignated interest rate swaps	Other liabilities	9,198		(680)

HTLF recognizes gains and losses on other free standing derivatives in two separate income statement categories. Interest rate lock commitments and forward commitments are recognized in net gains on sale of loans held for sale and undesignated interest rate swaps are recognized in other noninterest income. The table below identifies the gains and losses recognized in income on HTLF's other free standing derivative instruments not designated as hedging instruments for the three- and nine- months ended September 30, 2021, and September 30, 2020, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Interest rate lock commitments (mortgage)	$	(189)	$	249	$	(1,924)	$	3,243

Forward commitments	413		(44)		916		(228)
Undesignated interest rate swaps	66		69		249		(293)

NOTE 8: FAIR VALUE

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

Fair Value Hierarchy

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

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

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

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

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

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 HTLF's primary pricing service.

Equity Securities with a Readily Determinable Fair Value

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

Loans Held for Sale

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

Loans Held to Maturity

HTLF does not record loans held to maturity at fair value on a recurring basis. However, from time to time, certain loans are considered collateral dependent and an allowance for credit losses is established. The fair value of individually assessed loans is measured using the fair value of the collateral. In accordance with ASC 820, 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

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

Mortgage Servicing Rights

Mortgage servicing rights assets represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. 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. HTLF 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 HTLF. HTLF 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. HTLF classifies commercial servicing rights as nonrecurring with Level 3 measurement inputs.

Derivative Financial Instruments

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

Although HTLF has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2021, and December 31, 2020, HTLF has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, HTLF has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Interest rate lock commitments

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

Forward commitments

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

Other Real Estate Owned

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

The table below presents HTLFs assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2021, and December 31, 2020, 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
September 30, 2021
Assets

Securities available for sale
U.S. treasuries	$	1,013	$	1,013	$	—	$	—
U.S. agencies	35,033		—		35,033		—
Obligations of states and political subdivisions	1,823,465		—		1,823,465		—
Mortgage-backed securities - agency	2,371,264		—		2,371,264		—
Mortgage-backed securities - non-agency	1,627,903		—		1,627,903		—
Commercial mortgage-backed securities - agency	127,861		—		127,861		—
Commercial mortgage-backed securities - non-agency	561,667		—		561,667		—
Asset-backed securities	877,646		—		877,646		—
Corporate bonds	3,294		—		3,294		—
Equity securities with a readily determinable fair value	20,790		—		20,790		—
Derivative financial instruments(1)	26,232		—		26,232		—
Interest rate lock commitments	1,204		—		—		1,204
Forward commitments	278		—		278		—
Total assets at fair value	$	7,477,650	$	1,013	$	7,475,433	$	1,204
Liabilities
Derivative financial instruments(2)	$	27,782	$	—	$	27,782	$	—
Forward commitments	59		—		59		—

Total liabilities at fair value	$	27,841	$	—	$	27,841	$	—
December 31, 2020
Assets

Securities available for sale
U.S. treasuries	$	2,026	$	2,026	$	—	$	—
U.S. agencies	166,779		—		166,779		—
Obligations of states and political subdivisions	1,635,227		—		1,635,227		—
Mortgage-backed securities - agency	1,355,270		—		1,355,270		—
Mortgage-backed securities - non-agency	1,449,116		—		1,449,116		—
Commercial mortgage-backed securities - agency	174,153		—		174,153		—
Commercial mortgage-backed securities - non-agency	252,767		—		252,767		—
Asset-backed securities	1,069,266		—		1,069,266		—
Corporate bonds	3,742		—		3,742		—
Equity securities with a readily determinable fair value	19,629		—		19,629		—
Derivative financial instruments(1)	44,102		—		44,102		—
Interest rate lock commitments	1,827		—		—		1,827

Total assets at fair value	$	6,173,904	$	2,026	$	6,170,051	$	1,827
Liabilities
Derivative financial instruments(2)	$	51,962	$	—	$	51,962	$	—
Forward commitments	697		—		697		—

Total liabilities at fair value	$	52,659	$	—	$	52,659	$	—

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

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


	Fair Value Measurements at September 30, 2021
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses
Collateral dependent individually assessed loans:
Commercial and industrial	$	10,270	$	—	$	—	$	10,270	$	248
Owner occupied commercial real estate	3,552		—		—		3,552		—
Non-owner occupied commercial real estate	15,212		—		—		15,212		1,637

Agricultural and agricultural real estate	9,145		—		—		9,145		—


Total collateral dependent individually assessed loans	$	38,179	$	—	$	—	$	38,179	$	1,885
Loans held for sale	$	37,078	$	—	$	37,078	$	—	$	(1,335)
Other real estate owned	4,744		—		—		4,744		(119)
Premises, furniture and equipment held for sale	2,699		—		—		2,699		(86)
Servicing rights	5,801		—		—		5,801		(586)


	Fair Value Measurements at December 31, 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
Collateral dependent individually assessed loans:
Commercial and industrial	$	11,256	$	—	$	—	$	11,256	$	451
Owner occupied commercial real estate	5,874		—		—		5,874		11,631
Non-owner occupied commercial real estate	4,907		—		—		4,907		—

Agricultural and agricultural real estate	12,451		—		—		12,451		—


Total collateral dependent individually assessed loans	$	34,488	$	—	$	—	$	34,488	$	12,082
Loans held for sale	$	57,949	$	—	$	57,949	$	—	$	(982)

Other real estate owned	6,624		—		—		6,624		1,044
Premises, furniture and equipment held for sale	6,499		—		—		6,499		3,288
Servicing rights	5,189		—		—		5,189		1,778

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

Fair Value
at
9/30/2021

Valuation
Technique

Unobservable
Input

Range
(Weighted
Average)

Interest rate lock commitments

1,204

Discounted cash flows

Closing ratio

0-99% (88%)(1)

Other real estate owned

4,744

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Servicing rights

5,801

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

2,699

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Collateral dependent individually assessed loans:

Commercial

10,270

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%(3)

Owner occupied commercial real estate

3,552

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-11%(3)

Non-owner occupied commercial real estate

15,212

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-11%(3)

Agricultural and agricultural real estate

9,145

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

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

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

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

(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
12/31/2020

Valuation
Technique

Unobservable
Input

Range
(Weighted
Average)

Interest rate lock commitments

1,827

Discounted cash flows

Closing ratio

0-99% (86%)(1)

Other real estate owned

6,624

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Servicing rights

5,189

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

6,499

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Collateral dependent individually assessed loans:

Commercial and industrial

11,256

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%(3)

Fair Value
at
12/31/2020

Valuation
Technique

Unobservable
Input

Range
(Weighted
Average)

Owner occupied commercial real estate

5,874

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-12%(3)

Non-owner occupied commercial real estate

4,907

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Agricultural and agricultural real estate

12,451

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

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

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, 2021		For the Year Ended December 31, 2020
Balance at January 1,	$	1,827	$	681

Total net gains included in earnings	(1,924)		2,803
Issuances	12,548		17,221
Settlements	(11,247)		(18,878)
Balance at period end	$	1,204	$	1,827

Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at September 30, 2021, and December 31, 2020, were $1.2 million and $1.8 million, respectively.

The table below is a summary of the estimated fair value of HTLF's financial instruments (as defined by ASC 825) as of September 30, 2021, and December 31, 2020, 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.

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


					Fair Value Measurements at September 30, 2021
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	327,405	$	327,405	$	327,405	$	—	$	—
Time deposits in other financial institutions	3,138		3,138		3,138		—		—
Securities:

Carried at fair value	7,449,936		7,449,936		1,013		7,448,923		—
Held to maturity	85,354		95,010		—		95,010		—
Other investments	83,332		83,332		—		83,332		—
Loans held for sale	37,078		37,078		—		37,078		—
Loans, net:
Commercial and industrial	2,510,461		2,498,314		—		2,488,044		10,270
PPP	409,247		409,247		—		409,247		—
Owner occupied commercial real estate	2,116,099		2,119,011		—		2,115,459		3,552
Non-owner occupied commercial real estate	1,998,372		2,008,824		—		1,993,612		15,212
Real estate construction	790,303		803,298		—		803,298		—
Agricultural and agricultural real estate	678,344		680,701		—		671,556		9,145
Residential real estate	831,118		831,021		—		831,021		—
Consumer	403,430		408,147		—		408,147		—
Total Loans, net	9,737,374		9,758,563		—		9,720,384		38,179
Cash surrender value on life insurance	190,576		190,576		—		190,576		—
Derivative financial instruments(1)	26,232		26,232		—		26,232		—
Interest rate lock commitments	1,204		1,204		—		—		1,204
Forward commitments	278		278		—		278		—
Financial liabilities:
Deposits
Demand deposits	6,537,722		6,537,722		—		6,537,722		—
Savings deposits	8,416,204		8,416,204		—		8,416,204		—
Time deposits	1,068,317		1,070,957		—		1,070,957		—

Short term borrowings	265,620		265,620		—		265,620		—
Other borrowings	371,765		372,902		—		372,902		—
Derivative financial instruments(2)	27,782		27,782		—		27,782		—
Forward commitments	59		59		—		59		—

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


					Fair Value Measurements at December 31, 2020
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	337,903	$	337,903	$	337,903	$	—	$	—
Time deposits in other financial institutions	3,129		3,129		3,129		—		—
Securities:

Carried at fair value	6,127,975		6,127,975		2,026		6,125,949		—
Held to maturity	88,839		100,041		—		100,041		—
Other investments	75,253		75,523		—		75,523		—
Loans held for sale	57,949		57,949		—		57,949		—
Loans, net:
Commercial and industrial	2,495,981		2,391,041		—		2,379,785		11,256
PPP	957,785		957,785		—		957,785		—
Owner occupied commercial real estate	1,756,405		1,745,397		—		1,739,523		5,874
Non-owner occupied commercial real estate	1,900,608		1,892,213		—		1,887,306		4,907
Real estate construction	843,140		849,224		—		849,224		—
Agricultural and agricultural real estate	707,397		697,729		—		685,278		12,451
Residential real estate	828,507		828,366		—		828,366		—
Consumer	401,622		407,914		—		407,914		—
Total Loans, net	9,891,445		9,769,669		—		9,735,181		34,488
Cash surrender value on life insurance	187,664		187,664		—		187,664		—
Derivative financial instruments(1)	44,102		44,102		—		44,102		—
Interest rate lock commitments	1,827		1,827		—		—		1,827

Financial liabilities:
Deposits
Demand deposits	5,688,810		5,688,810		—		5,688,810		—
Savings deposits	8,019,704		8,019,704		—		8,019,704		—
Time deposits	1,271,391		1,273,468		—		1,273,468		—

Short term borrowings	167,872		167,872		—		167,872		—
Other borrowings	457,042		458,806		—		458,806		—
Derivative financial instruments(1)	51,962		51,962		—		51,962		—
Forward commitments	697		697		—		697		—

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

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

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

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

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

Loans — The fair value of loans is determined using an exit price 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 individually assessed or impaired loans is measured using the fair value of the underlying collateral. The fair value of loans held for sale is estimated using quoted market prices.

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

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

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

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

NOTE 9: REVENUE

Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, requires revenue to be recognized at an amount that reflects the consideration to which HTLF expects to be entitled in exchange for transferring goods or services to a customer. ASC 606 applies to all contracts with customers to provide goods or services in the ordinary course of business, except for contracts that are specifically excluded from its scope. The majority of HTLF's revenue streams including interest income, 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 and other noninterest income are outside the scope of ASC 606. Revenue streams including service charges and fees, interchange fees on credit and debit cards, trust fees and brokerage and insurance commissions are within the scope of ASC 606.

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. HTLF'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 transaction 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 services, cashier’s checks, and other services. HTLF'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 HTLF's banks or a non-bank cardholder uses a HTLF-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. HTLF'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. HTLF does not earn performance-based incentives. HTLF'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 commissions primarily consist of commissions related to broker-dealer contracts. The contracts are between the customer and the broker-dealer, and HTLF 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. HTLF acts as an insurance agent between the customer and the insurance carrier. HTLF'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 table presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2021, and 2020, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
In-scope of Topic 606
Service charges and fees
Service charges and fees on deposit accounts	$	4,146	$	3,710	$	12,096	$	10,623
Overdraft fees	3,044		2,184		8,185		6,627
Customer service and other service fees	52		39		152		133
Credit card fee income	5,673		3,894		15,835		11,861
Debit card income	2,636		1,922		8,086		5,498

Total service charges and fees	15,551		11,749		44,354		34,742
Trust fees	6,221		5,357		18,037		15,356
Brokerage and insurance commissions	866		649		2,584		1,977
Total noninterest income in-scope of Topic 606	22,638		17,755		64,975		52,075

Out-of-scope of Topic 606
Loan servicing income	$	784	$	638	$	2,495	$	1,980
Securities gains, net	1,535		1,300		4,347		4,964
Unrealized gain on equity securities, net	112		155		85		604
Net gains on sale of loans held for sale	5,281		8,894		16,454		21,411
Valuation adjustment on servicing rights	195		(120)		586		(1,676)
Income on bank owned life insurance	940		868		2,706		2,533
Other noninterest income	1,239		1,726		4,557		5,779
Total noninterest income out-of-scope of Topic 606	10,086		13,461		31,230		35,595
Total noninterest income	$	32,724	$	31,216	$	96,205	$	87,670

Contract Balances

HTLF does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2021, and December 31, 2020, HTLF did not have any significant contract balances or capitalized contract acquisition costs.

NOTE 10: STOCK COMPENSATION

HTLF may grant, through its Nominating, Compensation and Corporate Governance 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 2020 Long-Term Incentive Plan (the "Plan"). The Plan was approved by stockholders in May 2020 and replaces the 2012 Long-Term Incentive Plan. The Plan increased the number of shares of common stock authorized for issuance to 1,460,000 and made certain other changes to the Plan. As of September 30, 2021, 1,194,377 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, HTLF or its subsidiaries.

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

HTLF's income tax expense included $304,000 of tax benefit during the nine months ended September 30, 2021 and a tax expense of $93,000 during the nine months ended September 30, 2020, related to the exercise, vesting and forfeiture of equity-based awards.

Restricted Stock Units

The Plan permits the Compensation Committee to grant restricted stock units ("RSUs"). The time-based RSUs represent the right, without payment, to receive shares of HTLF common stock on a specified date in the future. Generally, the time-based RSUs vest over three years in equal installments in March of each of the three years following the year of the grant.

The Compensation Committee has also granted three-year performance-based RSUs. These performance-based RSUs will be earned based on satisfaction of performance targets for the three-year performance period as defined in the RSU agreement. These performance-based RSUs or a portion thereof may vest after measurement of performance in relation to the performance targets.

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

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

A summary of the RSUs outstanding as of September 30, 2021, and September 30, 2020, and changes during the nine months ended September 30, 2021 and 2020, follows:


	2021			2020
	Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value
Outstanding at January 1,	348,275	$	38.22	254,383	$	46.76
Granted	214,943	51.49		220,688	31.95
Vested	(146,864)	40.87		(119,325)	44.49
Forfeited	(24,088)	42.98		(15,674)	47.13
Outstanding at September 30,	392,266	$	44.14	340,072	$	38.37

Total compensation costs recorded for RSUs were $6.5 million and $5.4 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021, there were $8.5 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2024.

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. ("HTLF") and its management may contain, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to the business, financial condition, results of operations, plans, objectives and future performance of HTLF.

Any statements about HTLF's expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These forward-looking statements are generally identified by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "project," "may," "will," "would," "could," "should," "opportunity," "potential" or other similar or negative expressions of these words or phrases. Although HTLF has made these statements based on management's experience, beliefs, expectations, assumptions and best estimate of future events, the ability of the company to predict results or the actual effect or outcomes of plans or strategies is inherently uncertain, and there may be events or factors that management has not anticipated. Therefore, the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, many of which are beyond the ability of management to control or predict, that could cause actual results to differ materially from those in its forward-looking statements. These factors, which the company currently believes could have a material effect on its operations and future prospects include, among others, those described below and in the risk factors in HTLF's reports filed with the Securities and Exchange Commission ("SEC"), including the "Risk Factors" section under Item 1A of Part I of the company’s Annual Report on Form 10-K for the year ended December 31, 2020:

•COVID-19 Pandemic Risks, including risks related to the ongoing COVID-19 pandemic and measures enacted by the U.S. federal and state governments and adopted by private businesses in response to the COVID-19 pandemic;

•Economic and Market Conditions Risks, including risks related to changes in the U.S. economy in general and in the local economies in which HTLF conducts its operations and future civil unrest, natural disasters, terrorist threats or acts of war;

•Credit Risks, including risks of increasing credit losses due to deterioration in the financial condition of HTLF's borrowers, changes in asset and collateral values and climate and other borrower industry risks which may impact the provision for credit losses and net charge-offs;

•Liquidity and Interest Rate Risks, including the impact of capital market conditions and changes in monetary policy on our borrowings and net interest income;

•Operational Risks, including processing, information systems, cybersecurity, vendor, business interruption, and fraud risks;

•Strategic and External Risks, including competitive forces impacting our business and strategic acquisition risks;

•Legal, Compliance and Reputational Risks, including regulatory and litigation risks; and

•Risks of Owning Stock in HTLF, including stock price volatility and dilution as a result of future equity offerings and acquisitions.

These risks and uncertainties should be considered in evaluating forward-looking statements made by HTLF or on its behalf, and undue reliance should not be placed on these statements. There can be no assurance that other factors not currently anticipated by HTLF will not materially and adversely affect the company's business, financial condition and results of operations. In addition, many of these risks and uncertainties are currently amplified by and may continue to be amplified by the COVID-19 pandemic and the impact of varying governmental responses that affect HTLF’s employees, customers and the economies where they operate. All statements in this Quarterly Report on Form 10-Q, including forward-looking statements, speak only as of the date they are made. HTLF does not undertake and specifically disclaims any obligation to publicly release the results of any revisions which may be made or to correct or update any forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events or to otherwise update any statement in light of new information or future events. Further information concerning HTLF and its business, including additional factors that could materially affect HTLF’s financial results, is included in the company’s filings with the SEC.

CRITICAL ACCOUNTING POLICIES

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 HTLF's reported financial position and results of operations are described as critical accounting policies in the company's Annual Report on Form 10-K for the year ended December 31, 2020. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2020.

OVERVIEW

Heartland Financial USA, Inc. is a financial services company operating under the brand name HTLF. HTLF's banks serve communities in Arizona, California, Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, New Mexico, Texas and Wisconsin. HTLF is committed to its core commercial business supported by a strong retail operation and provides a diversified line of financial services including residential mortgage, wealth management, investments and insurance. As of September 30, 2021, HTLF had eleven banking subsidiaries with 131 locations.

HTLF's results of operations depend primarily on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges and fees, loan servicing income, trust income, brokerage and insurance commissions, securities gains, net gains on sale of loans held for sale, and income on bank owned life insurance, also affects the results of operations. HTLF's principal operating expenses, aside from interest expense, consist of the provision for 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.

HTLF reported the following results for the quarter ended September 30, 2021, compared to the quarter ended September 30, 2020:

•net income available to common stockholders of $53.9 million compared to $45.5 million, an increase of $8.4 million or 18%,

•earnings per diluted common share of $1.27 compared to $1.23, an increase of $0.04 or 3%,

•net interest income of $142.5 million compared to $122.5 million, an increase of $20.0 million or 16%,

•return on average common equity was 10.32% compared to 10.90%,

•return on average assets was 1.19% compared to 1.26%, and

•return on average tangible common equity (non-GAAP) was 15.14% compared to 16.11%.

HTLF reported the following results for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020:

•net income available to common stockholders of $164.3 million compared to $95.7 million, an increase of $68.6 million or 72%,

•earnings per diluted common share of $3.88 compared to $2.59, an increase of $1.29 or 50%,

•net interest income of $423.4 million compared to $359.2 million, an increase of $64.2 million or 18%,

•return on average common equity was 10.95% compared to 7.90%,

•return on average assets was 1.25% compared to 0.92%, and

•return on average tangible common equity (non-GAAP) was 16.34% compared to 12.10%.

For the third quarter of 2021, net interest margin was 3.30% (3.34% on a fully tax-equivalent basis, non-GAAP), which compares to 3.37% (3.41% on a fully tax-equivalent basis, non-GAAP) and 3.51% (3.55% on a fully-tax equivalent basis, non-GAAP) for the second quarter of 2021 and third quarter of 2020, respectively. For the first nine months of 2021, net interest margin was 3.37% (3.41% on a fully tax-equivalent basis, non-GAAP), which compares to 3.70% (3.74% on a fully tax-equivalent basis, non-GAAP), for the first nine months of 2020.

The efficiency ratio on a fully tax-equivalent basis (non-GAAP) was 60.38% for the third quarter of 2021 compared to 54.67% for the same quarter of 2020. For the first nine months of 2021, the efficiency ratio on a fully tax-equivalent basis (non-GAAP) was 58.05% compared to 57.28% for the first nine months of 2020.

Total assets were $19.00 billion at September 30, 2021, an increase of $1.09 billion or 6% since December 31, 2020. Securities represented 40% of total assets at September 30, 2021, and 35% of total assets at December 31, 2020. Total loans held to maturity were $9.85 billion at September 30, 2021 compared to $10.02 billion at December 31, 2020, which was a decrease of $168.1 million or 2%. Excluding total Paycheck Protection Program ("PPP") loans, total loans held to maturity increased $380.4 million or 4% since year-end 2020.

The total allowance for lending related credit losses was $131.5 million or 1.33% of total loans at September 30, 2021, compared to $146.9 million or 1.47% of total loans at December 31, 2020. Excluding total PPP loans, the allowance for lending related credit losses as percentage of loans was 1.39% and 1.62% as of September 30, 2021, and December 31, 2020, respectively.

Total deposits were $16.02 billion as of September 30, 2021, compared to $14.98 billion at December 31, 2020, an increase of $1.04 billion or 7%.

Total equity was $2.17 billion at September 30, 2021, compared to $2.08 billion at December 31, 2020. Book value per common share was $48.79 at September 30, 2021, compared to $46.77 at year-end 2020. The unrealized gain on securities available for sale, net of applicable taxes, was $25.1 million at September 30, 2021, compared to an unrealized gain of $76.8 million, net of applicable taxes, at December 31, 2020.

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.

2021 Developments

AimBank Systems Conversion

On February 19, 2021, HTLF successfully completed the systems conversion of AimBank, which was acquired by HTLF in the fourth quarter of 2020 and merged into HTLF's Texas subsidiary, First Bank & Trust. Subsequent to the systems conversion, seven of AimBank's twenty-five bank branches were transferred to HTLF's New Mexico Bank & Trust subsidiary.

Branding Change

On April 14, 2021, a branding change from Heartland Financial to HTLF was announced and rolled out across the organization. The branding was refreshed to better reflect the financial and non-financial strengths of HTLF, including a diverse footprint and the continued growth of the company.

Paycheck Protection Program Loans

HTLF originated a second round of Paycheck Protection Program loans ("PPP II") totaling $473.9 million since the beginning of 2021. PPP II loans are 100% United States Small Business Administration ("SBA") guaranteed, and borrowers may be eligible to have an amount up to the entire principal balance forgiven and paid by the SBA. As of September 30, 2021, approximately 73% of total PPP loans have been forgiven.

Issuance of Subordinated Debt

On September 8, 2021, HTLF closed its public offering of $150 million aggregate principal amount of its 2.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "subordinated notes"). The subordinated notes were registered under HTLF’s effective shelf registration statement and qualify as Tier 2 capital for regulatory purposes. The net proceeds are expected to be used for general corporate purposes, which may include, without limitation, providing capital to support HTLF's organic growth or growth through strategic acquisitions, financing investments, capital expenditures, investments in the subsidiary banks as regulatory capital, and repaying indebtedness. The subordinated notes have a fixed interest rate of 2.75% until September 15, 2026, at which time the interest rate will be reset quarterly to a benchmark interest rate, which is expected to be three-month term Secure Overnight Financing Rate ("SOFR") plus a spread of 210 basis points. The subordinated notes mature on September 15, 2031, and become redeemable at HTLF's option on September 15, 2026.

Branch Optimization

During the first nine months of 2021, HTLF consolidated six legacy bank branches and three AimBank branches and sold one branch in a Midwestern market as it continues to respond to customer preferences and closely manage expenses. HTLF will

continue to review its branch network for optimization and consolidation opportunities and anticipates reducing branch locations by approximately 7%, which may result in additional write-downs of fixed assets in future periods.

Common Stock Dividend Increase

Subsequent to September 30, 2021, the HTLF Board of Directors approved an 8% increase in its quarterly common share dividend to $0.27 from $0.25. Since 2020, the dividend has been increased 35%, from $0.20 per common share in each quarter of 2020 to $0.27 per common share in fourth quarter of 2021.

COVID-19

HTLF continues to monitor the expected rulemaking by the Occupational Safety and Health Administration that would mandate vaccinations or weekly COVID-19 testing at employers with over 100 workers as well as monitoring and adjusting its policies in response to the developments in the laws of the states in which it operates.


FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
STATEMENT OF INCOME DATA
Interest income	$	149,187		$	130,967		$	444,721		$	395,781
Interest expense	6,644			8,470			21,355			36,627
Net interest income	142,543			122,497			423,366			359,154
Provision (benefit) for credit losses	(4,534)			1,678			(12,262)			49,994
Net interest income after provision for credit losses	147,077			120,819			435,628			309,160
Noninterest income	32,724			31,216			96,205			87,670
Noninterest expenses	110,627			90,396			316,426			271,694
Income taxes	13,250			13,681			45,064			27,007
Net income	55,924			47,958			170,343			98,129
Preferred dividends	(2,013)			(2,437)			(6,038)			(2,437)

Net income available to common stockholders	$	53,911		$	45,521		$	164,305		$	95,692

KEY PERFORMANCE RATIOS
Annualized return on average assets	1.19		%	1.26		%	1.25		%	0.92		%
Annualized return on average common equity (GAAP)	10.32			10.90			10.95			7.90
Annualized return on average tangible common equity (non-GAAP)(1)	15.14			16.11			16.34			12.10

Annualized ratio of net charge-offs to average loans	(0.05)			0.92			0.04			0.43
Annualized net interest margin (GAAP)	3.30			3.51			3.37			3.70
Annualized net interest margin, fully tax-equivalent (non-GAAP)(1)	3.34			3.55			3.41			3.74
Efficiency ratio, fully tax-equivalent (non-GAAP)(1)	60.38			54.67			58.05			57.28


Dollars in thousands, expect per share data	As Of and For the Quarter Ended
	9/30/2021		6/30/2021		3/31/2021		12/31/2020		9/30/2020
BALANCE SHEET DATA
Investments	$	7,618,622	$	6,706,226	$	6,530,723	$	6,292,067	$	5,075,338
Loans held for sale	37,078		33,248		43,037		57,949		65,969
Loans receivable held to maturity	9,854,907		10,012,014		10,050,456		10,023,051		9,099,646
Allowance for credit losses	117,533		120,726		130,172		131,606		103,377
Total assets	18,996,225		18,371,006		18,244,427		17,908,339		15,612,664
Total deposits	16,022,243		15,615,118		15,559,051		14,979,905		12,767,110
Long-term obligations	371,765		271,244		349,514		457,042		524,045

Common equity	2,061,547		2,049,081		1,945,502		1,968,526		1,700,899


Dollars in thousands, expect per share data	As Of and For the Quarter Ended
	9/30/2021			6/30/2021			3/31/2021			12/31/2020			9/30/2020
COMMON SHARE DATA
Book value per common share (GAAP)	$	48.79		$	48.50		$	46.13		$	46.77		$	46.11
Tangible book value per common share (non-GAAP)(1)	$	34.33		$	33.98		$	31.53		$	32.07		$	32.91

Common shares outstanding, net of treasury stock	42,250,092			42,245,452			42,173,675			42,093,862			36,885,390
Tangible common equity ratio (non-GAAP)(1)	7.89		%	8.08		%	7.54		%	7.81		%	8.03		%

(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
	9/30/2021			6/30/2021			3/31/2021			12/31/2020			9/30/2020
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common stockholders (GAAP)	$	53,911		$	59,593		$	50,801		$	37,795		$	45,521
Plus core deposit and customer relationship intangibles amortization, net of tax(1)	1,814			1,907			1,988			1,975			1,969
Net income excluding intangible amortization (non-GAAP)	$	55,725		$	61,500		$	52,789		$	39,770		$	47,490

Average common equity (GAAP)	$	2,072,593		$	1,980,904		$	1,963,674		$	1,769,575		$	1,661,381
Less average goodwill	576,005			576,005			576,005			488,151			446,345
Less average core deposit and customer relationship intangibles, net	36,279			38,614			41,399			42,733			42,145
Average tangible common equity (non-GAAP)	$	1,460,309		$	1,366,285		$	1,346,270		$	1,238,691		$	1,172,891
Annualized return on average common equity (GAAP)	10.32		%	12.07		%	10.49		%	8.50		%	10.90		%
Annualized return on average tangible common equity (non-GAAP)	15.14		%	18.05		%	15.90		%	12.77		%	16.11		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net Interest Income (GAAP)	$	142,543		$	141,218		$	139,605		$	132,575		$	122,497
Plus tax-equivalent adjustment(1)	1,714			1,762			1,761			1,529			1,390
Net interest income, fully tax-equivalent (non-GAAP)	$	144,257		$	142,980		$	141,366		$	134,104		$	123,887

Average earning assets	$	17,123,824		$	16,819,978		$	16,460,124		$	15,042,079		$	13,868,360

Annualized net interest margin (GAAP)	3.30		%	3.37		%	3.44		%	3.51		%	3.51		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)	3.34			3.41			3.48			3.55			3.55
Net purchase accounting discount accretion on loans included in annualized net interest margin	0.08			0.09			0.12			0.10			0.10


	As Of and For the Quarter Ended
	9/30/2021			6/30/2021			3/31/2021			12/31/2020			9/30/2020
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)
Common equity (GAAP)	$	2,061,547		$	2,049,081		$	1,945,502		$	1,968,526		$	1,700,899
Less goodwill	576,005			576,005			576,005			576,005			446,345
Less core deposit and customer relationship intangibles, net	35,157			37,452			39,867			42,383			40,520
Tangible common equity (non-GAAP)	$	1,450,385		$	1,435,624		$	1,329,630		$	1,350,138		$	1,214,034

Common shares outstanding, net of treasury stock	42,250,092			42,245,452			42,173,675			42,093,862			36,885,390
Common equity (book value) per share (GAAP)	$	48.79		$	48.50		$	46.13		$	46.77		$	46.11
Tangible book value per common share (non-GAAP)	$	34.33		$	33.98		$	31.53		$	32.07		$	32.91

Reconciliation of Tangible Common Equity Ratio (non-GAAP)
Tangible common equity (non-GAAP)	$	1,450,385		$	1,435,624		$	1,329,630		$	1,350,138		$	1,214,034

Total assets (GAAP)	$	18,996,225		$	18,371,006		$	18,244,427		$	17,908,339		$	15,612,664
Less goodwill	576,005			576,005			576,005			576,005			446,345
Less core deposit and customer relationship intangibles, net	35,157			37,452			39,867			42,383			40,520
Total tangible assets (non-GAAP)	$	18,385,063		$	17,757,549		$	17,628,555		$	17,289,951		$	15,125,799
Tangible common equity ratio (non-GAAP)	7.89		%	8.08		%	7.54		%	7.81		%	8.03		%

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


Reconciliation of Efficiency Ratio (non-GAAP)	For the Quarter Ended
	9/30/2021			6/30/2021			3/31/2021			12/31/2020			9/30/2020
Net interest income (GAAP)	$	142,543		$	141,218		$	139,605		$	132,575		$	122,497
Tax-equivalent adjustment(1)	1,714			1,762			1,761			1,529			1,390
Fully tax-equivalent net interest income	144,257			142,980			141,366			134,104			123,887
Noninterest income	32,724			33,164			30,317			32,621			31,216
Securities (gains)/losses, net	(1,535)			(2,842)			30			(2,829)			(1,300)
Unrealized (gain)/loss on equity securities, net	(112)			(83)			110			(36)			(155)

Valuation adjustment on servicing rights	(195)			526			(917)			102			120
Adjusted revenue (non-GAAP)	$	175,139		$	173,745		$	170,906		$	163,962		$	153,768

Total noninterest expenses (GAAP)	$	110,627		$	103,376		$	102,423		$	99,269		$	90,396
Less:
Core deposit and customer relationship intangibles amortization	2,295			2,415			2,516			2,501			2,492
Partnership investment in tax credit projects	2,374			1,345			35			1,899			927
(Gain)/loss on sales/valuation of assets, net	(3)			183			194			2,621			1,763
Acquisition, integration and restructuring costs	204			210			2,928			2,186			1,146
Adjusted noninterest expenses (non-GAAP)	$	105,757		$	99,223		$	96,750		$	90,062		$	84,068
Efficiency ratio, fully tax-equivalent (non-GAAP)	60.38		%	57.11		%	56.61		%	54.93		%	54.67		%

Acquisition, integration and restructuring costs
Salaries and employee benefits	$	—		$	44		$	534		$	232		$	—
Occupancy	—			1			9			—			—
Furniture and equipment	7			41			607			423			496
Professional fees	145			63			670			1,422			476
Advertising	11			6			156			42			8
(Gain)/loss on sales/valuations of assets, net	39			—			—			—			—
Other noninterest expenses	2			55			952			67			166
Total acquisition, integration and restructuring costs	$	204		$	210		$	2,928		$	2,186		$	1,146
After tax impact on diluted earnings per common share(1)	$	—		$	—		$	0.05		$	0.04		$	0.02
















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




DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
	For the Quarter Ended September 30,						For the Nine Months Ended September 30,
	2021			2020			2021			2020
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common stockholders (GAAP)	$	53,911		$	45,521		$	164,305		$	95,692
Plus core deposit and customer relationship intangibles amortization, net of tax(1)	1,814			1,969			5,709			6,454
Net income available to common stockholders excluding intangible amortization (non-GAAP)	$	55,725		$	47,490		$	170,014		$	102,146

Average common equity (GAAP)	$	2,072,593		$	1,661,381		$	2,006,123		$	1,618,811
Less average goodwill	576,005			446,345			576,005			446,345
Less average core deposit and customer relationship intangibles, net	36,279			42,145			38,745			44,824
Average tangible common equity (non-GAAP)	$	1,460,309		$	1,172,891		$	1,391,373		$	1,127,642
Annualized return on average common equity (GAAP)	10.32		%	10.90		%	10.95		%	7.90		%
Annualized return on average tangible common equity (non-GAAP)	15.14		%	16.11		%	16.34		%	12.10		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net Interest Income (GAAP)	$	142,543		$	122,497		$	423,366		$	359,154
Plus tax-equivalent adjustment(1)	1,714			1,390			5,237			3,937
Net interest income, fully tax-equivalent (non-GAAP)	$	144,257		$	123,887		$	428,603		$	363,091

Average earning assets	$	17,123,824		$	13,868,360		$	16,803,740		$	12,957,661

Annualized net interest margin (GAAP)	3.30		%	3.51		%	3.37		%	3.70		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)	3.34			3.55			3.41			3.74
Net purchase accounting discount accretion on loans included in annualized net interest margin	0.08			0.10			0.10			0.12

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




DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
Reconciliation of Efficiency Ratio (non-GAAP)	For the Quarter Ended September 30,						For the Nine Months Ended September 30,
	2021			2020			2021			2020
Net interest income (GAAP)	$	142,543		$	122,497		$	423,366		$	359,154
Tax-equivalent adjustment(1)	1,714			1,390			5,237			3,937
Fully tax-equivalent net interest income	144,257			123,887			428,603			363,091
Noninterest income	32,724			31,216			96,205			87,670
Securities gains, net	(1,535)			(1,300)			(4,347)			(4,964)
Unrealized (gain)/loss on equity securities, net	(112)			(155)			(85)			(604)

Valuation adjustment on servicing rights	(195)			120			(586)			1,676
Adjusted revenue (non-GAAP)	$	175,139		$	153,768		$	519,790		$	446,869

Total noninterest expenses (GAAP)	$	110,627		$	90,396		$	316,426		$	271,694
Less:
Core deposit and customer relationship intangibles amortization	2,295			2,492			7,226			8,169
Partnership investment in tax credit projects	2,374			927			3,754			1,902
Loss on sales/valuation of assets, net	(3)			1,763			374			2,480
Acquisition, integration and restructuring costs	204			1,146			3,342			3,195
Adjusted noninterest expenses (non-GAAP)	$	105,757		$	84,068		$	301,730		$	255,948
Efficiency ratio, fully tax-equivalent (non-GAAP)	60.38		%	54.67		%	58.05		%	57.28		%

Acquisition, integration and restructuring costs
Salaries and employee benefits	$	—		$	—		$	578		$	166
Occupancy	—			—			10			—
Furniture and equipment	7			496			655			535
Professional fees	145			476			878			1,977
Advertising	11			8			173			101
(Gain)/loss on sales/valuations of assets, net	39			—			39			—
Other noninterest expenses	2			166			1,009			416
Total acquisition, integration and restructuring costs	$	204		$	1,146		$	3,342		$	3,195
After tax impact on diluted earnings per common share(1)	$	—		$	0.02		$	0.06		$	0.07
















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

Non-GAAP Financial Measures

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

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

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

•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 the reconciliation contained in this Quarterly Report on Form 10-Q.

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

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

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

•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.

RESULTS OF OPERATIONS

Net Interest Margin and Net Interest Income

Management closely monitors and manages net interest income and net interest margin, the results of which are shared with investors because they are important indicators of the company's profitability as well as the growth and mix of earning assets.

Net interest income is the difference between interest income on earning assets and interest expense paid on interest bearing liabilities. As such, net interest income is affected by changes in volumes and yields on earning assets and the volume and rates paid on interest bearing liabilities. Net interest margin is the ratio of net interest income to average earning assets.

HTLF's success in maintaining a favorable net interest margin despite the low-interest rate environment has been the result of an increase in average earning assets and a favorable deposit mix. Also contributing to HTLF's ability to maintain its net interest margin has been the amortization of purchase accounting discounts associated with acquisitions completed since 2015.

For the Quarters ended September 30, 2021 and 2020

Net interest margin, expressed as a percentage of average earning assets, was 3.30% (3.34% on a fully tax-equivalent basis, non-GAAP) during the third quarter of 2021, compared to 3.51% (3.55% on a fully tax-equivalent basis, non-GAAP) during the third quarter of 2020. For the quarters ended September 30, 2021 and 2020, net interest margin included 8 basis points and 10 basis points, respectively, of net purchase accounting discount amortization.

Total interest income and average earning asset changes for the third quarter of 2021 compared to the third quarter of 2020 were:

•Total interest income was $149.2 million, which was an increase of $18.2 million or 14% from $131.0 million and primarily attributable to an increase in average earning assets partially offset by lower yields.

•Total interest income on a tax-equivalent basis (non-GAAP) was $150.9 million, which was an increase of $18.5 million or 14% from $132.4 million.

•Average earning assets increased $3.26 billion or 23% to $17.12 billion compared to $13.87 billion, which was primarily attributable to recent acquisitions and loan growth, including PPP loans.

•The average rate on earning assets decreased 30 basis points to 3.50% compared to 3.80%, which was primarily due to recent decreases in market interest rates and a shift in the mix of earning assets. Total average securities were 41% of total average earning assets compared to 33%.

Total interest expense and average interest bearing liability changes for the third quarter of 2021 compared to the third quarter of 2020 were:

•Total interest expense was $6.6 million, a decrease of $1.8 million or 22% from $8.5 million, based on a decrease in the average interest rate paid, which was partially offset by an increase in average interest bearing liabilities.

•The average interest rate paid on interest bearing liabilities decreased to 0.27% compared to 0.40%, which was primarily due to recent decreases in market interest rates.

•Average interest bearing deposits increased $1.70 billion or 22% to $9.46 billion from $7.76 billion which was primarily attributable to recent acquisitions and deposit growth.

•The average interest rate paid on interest bearing deposits decreased 11 basis points to 0.14% compared to 0.25%.

•Average borrowings decreased $140.5 million or 25% to $419.9 million from $560.4 million, which was primarily attributable to reduced advances from the PPP lending fund used to fund PPP loans to borrowers. Average advances from the PPP lending fund totaled $2.9 million compared to $158.3 million. The average interest rate paid on borrowings was 3.02% compared to 2.49%.

Net interest income increased for the third quarter of 2021 compared to the third quarter of 2020:

•Net interest income totaled $142.5 million compared to $122.5 million, which was an increase of $20.0 million or 16%.

•Net interest income on a tax-equivalent basis (non-GAAP) totaled $144.3 million compared to $123.9 million, which was an increase of $20.4 million or 16%.

For the Nine Months ended September 30, 2021 and 2020

Net interest margin, expressed as a percentage of average earning assets, was 3.37% (3.41% on a fully tax-equivalent basis, non-GAAP) during the first nine months of 2021, compared to 3.70% (3.74% on a fully tax-equivalent basis, non-GAAP) during the first nine months of 2020. For the nine months ended September 30, 2021 and 2020, net interest margin included 10 basis points and 12 basis points, respectively, of net purchase accounting discount amortization.

Total interest income and average earning asset changes for the first nine months of 2021 compared to the first nine months of 2020 were:

•Total interest income was $444.7 million, which was an increase of $48.9 million or 12% from $395.8 million, primarily attributable to an increase in average earning assets partially offset by lower yields.

•Total interest income on a tax-equivalent basis (non-GAAP) was $450.0 million, which was an increase of $50.2 million or 13% from $399.7 million.

•Average earning assets increased $3.85 billion or 30% to $16.80 billion compared to $12.96 billion, which was primarily attributable to recent acquisitions and loan growth, including PPP loans.

•The average rate on earning assets decreased 54 basis points to 3.58% compared to 4.12%, which was primarily due to recent decreases in market interest rates and a shift in the mix of earning assets. Total average securities were 40% of total average earning assets compared to 30%, and the average tax-effected rate on securities was 2.24% compared to 2.76%.

Total interest expense and average interest bearing liability changes for the first nine months of 2021 compared to the first nine months of 2020 were:

•Total interest expense was $21.4 million, a decrease of $15.3 million or 42% from $36.6 million, based on a decrease in the average interest rate paid, which was partially offset by an increase in average interest bearing liabilities.

•The average interest rate paid on interest bearing liabilities decreased to 0.29% compared to 0.60%, which was primarily due to recent decreases in market interest rates.

•Average interest bearing deposits increased $1.72 billion or 22% to $9.38 billion from $7.66 billion, which was primarily attributable to recent acquisitions and deposit growth.

•The average interest rate paid on interest bearing deposits decreased 28 basis points to 0.17% compared to 0.45%.

•Average borrowings increased $62.0 million or 14% to $511.5 million from $449.4 million, which was primarily attributable to outstanding advances from the PPP lending fund used to fund PPP loans to borrowers. The average interest rate paid on borrowings was 2.54% compared to 3.25%.

Net interest income increased for the first nine months of 2021 compared to the first nine months of 2020:

•Net interest income totaled $423.4 million compared to $359.2 million, which was an increase of $64.2 million or 18%.

•Net interest income on a tax-equivalent basis (non-GAAP) totaled $428.6 million compared to $363.1 million, which was an increase of $65.5 million or 18%.

See "Analysis of Average Balances, Tax-Equivalent Yields and Rates" for additional information relating to net interest income on a fully tax-equivalent basis, which is not defined by GAAP.

Management believes net interest margin expressed in dollars will continue to increase as the amount of earning assets grows, however net interest margin as a percentage of average earning assets may decrease because of interest rate changes and competitive market conditions. The Federal Reserve has indicated it will closely assess economic data and be patient before moving ahead with any additional changes to the Federal Funds rate pending further progress towards goals on employment and inflation; therefore, the timing and magnitude of any such changes are uncertain and will depend on domestic and global economic conditions.

HTLF attempts to manage its balance sheet to minimize the effect that a change in interest rates has on its net interest income. Management continues to work toward improving both its earning assets and funding mix through targeted organic growth strategies, which management believes will result in additional net interest income. HTLF 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 HTLF 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 the 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 utilized to manage its interest rate risk.

The following tables set forth certain information relating to 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) (DOLLARS IN THOUSANDS)

	For the Quarter Ended
	September 30, 2021							June 30, 2021							September 30, 2020
	Average Balance			Interest		Rate		Average Balance			Interest		Rate		Average Balance			Interest		Rate
Earning Assets
Securities:
Taxable	$	6,244,097		$	32,384	2.06	%	$	5,862,683		$	31,546	2.16	%	$	4,125,700		$	25,016	2.41	%
Nontaxable(1)	759,073			5,835		3.05		740,601			5,773		3.13		429,710			4,078		3.78
Total securities	7,003,170			38,219		2.17		6,603,284			37,319		2.27		4,555,410			29,094		2.54
Interest on deposits with other banks and short-term investments	322,430			132		0.16		271,891			60		0.09		215,361			72		0.13
Federal funds sold	—			—		—		—			—		—		—			—		—
Loans:(2)
Commercial and industrial(1)	2,588,270			28,224		4.33		2,469,742			28,562		4.64		2,331,467			27,777		4.74
PPP loans	602,675			11,186		7.36		1,047,559			11,186		4.28		1,128,488			7,462		2.63
Owner occupied commercial real estate	1,990,538			20,048		4.00		1,858,891			20,097		4.34		1,463,538			17,359		4.72
Non-owner occupied commercial real estate	1,964,609			22,129		4.47		1,980,374			21,734		4.40		1,589,073			18,860		4.72
Real estate construction	835,976			9,591		4.55		815,738			9,212		4.53		1,023,490			11,628		4.52
Agricultural and agricultural real estate	674,510			7,415		4.36		672,560			7,267		4.33		514,442			5,968		4.62
Residential mortgage	855,734			9,068		4.20		827,291			9,255		4.49		774,850			8,915		4.58
Consumer	407,735			4,889		4.76		399,916			5,152		5.17		395,318			5,222		5.26
Less: allowance for credit losses-loans	(121,823)			—		—		(127,268)			—		—		(123,077)			—		—
Net loans	9,798,224			112,550		4.56		9,944,803			112,465		4.54		9,097,589			103,191		4.51
Total earning assets	17,123,824			150,901		3.50	%	16,819,978			149,844		3.57	%	13,868,360			132,357		3.80	%
Nonearning Assets	1,484,951							1,473,778							1,298,865
Total Assets	$	18,608,775						$	18,293,756						$	15,167,225
Interest Bearing Liabilities
Savings	$	8,364,326		$	2,240	0.11	%	$	8,234,151		$	2,233	0.11	%	$	6,723,962		$	1,940	0.11	%
Time deposits	1,097,126			1,204		0.44		1,171,266			1,557		0.53		1,035,715			3,022		1.16
Short-term borrowings	139,001			98		0.28		169,822			98		0.23		128,451			78		0.24
Other borrowings	280,897			3,102		4.38		296,063			2,976		4.03		431,995			3,430		3.16
Total interest bearing liabilities	9,881,350			6,644		0.27	%	9,871,302			6,864		0.28	%	8,320,123			8,470		0.40
Noninterest Bearing Liabilities
Noninterest bearing deposits	6,356,326							6,170,928							4,891,145
Accrued interest and other liabilities	187,801							159,917							183,871
Total noninterest bearing liabilities	6,544,127							6,330,845							5,075,016
Equity	2,183,298							2,091,609							1,772,086
Total Liabilities and Equity	$	18,608,775						$	18,293,756						$	15,167,225
Net interest income, fully tax-equivalent (non-GAAP)(1)(3)				$	144,257						$	142,980						$	123,887
Net interest spread(1)						3.23	%						3.29	%						3.40	%
Net interest income, fully tax-equivalent to total earning assets (non-GAAP)(1)(3)						3.34	%						3.41	%						3.55	%
Interest bearing liabilities to earning assets	57.71		%					58.69		%					59.99		%









(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.
(3) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures.


ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) (DOLLARS IN THOUSANDS)
	For the Nine Months Ended
	September 30, 2021							September 30, 2020
	Average Balance			Interest		Rate		Average Balance			Interest		Rate
Earning Assets
Securities:
Taxable	$	5,935,295		$	94,373	2.13	%	$	3,546,471		$	70,109	2.64	%
Nontaxable(1)	743,534			17,308		3.11		384,026			11,074		3.85
Total securities	6,678,829			111,681		2.24		3,930,497			81,183		2.76
Interest bearing deposits with other banks and other short-term investments	266,701			258		0.13		202,390			847		0.56
Federal funds sold	4,622			1		0.03		—			—		—
Loans:(2)
Commercial and industrial(1)	2,519,608			85,008		4.51		2,463,546			90,990		4.93
PPP loans	879,489			32,521		4.94		683,262			13,479		2.64
Owner occupied commercial real estate	1,876,929			59,710		4.25		1,440,981			53,610		4.97
Non-owner occupied commercial real estate	1,961,016			65,984		4.50		1,534,293			57,445		5.00
Real estate construction	819,452			28,501		4.65		1,056,493			37,062		4.69
Agricultural and agricultural real estate	676,091			22,733		4.50		533,290			19,178		4.80
Residential mortgage	844,337			28,153		4.46		796,497			28,922		4.85
Consumer	404,384			15,408		5.09		416,654			17,002		5.45

Less: allowance for loan losses	(127,718)			—		—		(100,242)			—		—
Net loans	9,853,588			338,018		4.59		8,824,774			317,688		4.81
Total earning assets	16,803,740			449,958		3.58	%	12,957,661			399,718		4.12	%
Nonearning Assets	1,487,704							1,281,490
Total Assets	$	18,291,444						$	14,239,151
Interest Bearing Liabilities
Savings	$	8,211,478		$	6,903	0.11	%	$	6,564,582		$	14,394	0.29	%
Time deposits	1,166,858			4,726		0.54		1,092,698			11,284		1.38
Short-term borrowings	182,583			348		0.25		117,526			435		0.49
Other borrowings	328,887			9,378		3.81		331,915			10,514		4.23
Total interest bearing liabilities	9,889,806			21,355		0.29	%	8,106,721			36,627		0.60	%
Noninterest Bearing Liabilities
Noninterest bearing deposits	6,104,058							4,315,335
Accrued interest and other liabilities	180,752							159,089
Total noninterest bearing liabilities	6,284,810							4,474,424
Equity	2,116,828							1,658,006
Total Liabilities and Equity	$	18,291,444						$	14,239,151
Net interest income, fully tax-equivalent (non-GAAP)(1)(3)				$	428,603						$	363,091
Net interest spread(1)						3.29	%						3.52	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(1)(3)						3.41	%						3.74	%
Interest bearing liabilities to earning assets	58.85		%					62.56		%




(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.
(3) Refer to "Non-GAAP Financial Measures" for additional information on the usage and presentation of these non-GAAP measures, and refer to the financial tables under "Financial Highlights" for the reconciliations to the most directly comparable GAAP measures.

Provision For Credit Losses

The allowance for credit losses is established through provision expense to provide, in management's opinion, an appropriate allowance for credit losses. The following table shows the components of provision for credit losses for the three and nine months ended September 30, 2021 and 2020, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Provision (benefit) for credit losses-loans	$	(4,448)	$	4,741	$	(10,898)	$	49,613
Provision (benefit) for credit losses-unfunded commitments	(35)		(3,062)		(1,313)		478
Provision (benefit) for credit losses-held to maturity securities	(51)		(1)		(51)		(97)
Total provision expense (benefit)	$	(4,534)	$	1,678	$	(12,262)	$	49,994

The provision benefit for credit losses for loans was $4.4 million for the third quarter of 2021, which was a decrease of $9.2 million from provision expense of $4.7 million recorded in the third quarter of 2020. The provision benefit for the third quarter of 2021 was impacted by several factors, including:

•decrease in nonperforming loans of $2.1 million to $83.2 million or 0.84% of total loans compared to $85.4 million or 0.85% of total loans at June 30, 2021,

•nonpass loans declined to 9.15% of total loans as of September 30, 2021, compared to 10.37% of total loans at June 30, 2021,

•loans delinquent 30-89 days as a percent of total loans fell to 0.12% compared to 0.17% at June 30, 2021,

•net recoveries of $1.3 million, and

•stable macroeconomic factors compared to the second quarter of 2021.

The provision benefit for credit losses for loans was $10.9 million for the first nine months of 2021 compared to provision expense of $49.6 million for the first nine months of 2020, which was a decrease of $60.5 million. The provision benefit for the first nine months of 2021 was impacted by several factors, including:

•increases in balances of loans held to maturity of $380.4 million excluding total PPP loans from year-end 2020, which included an increase of $291.5 million of government guaranteed loans for which no provision was required,

•decrease in nonperforming loans of $4.9 million to $83.2 million and nonpass loans of 9.15% of total loans as of September 30, 2021, compared to nonperforming loans of $88.1 million and nonpass loans of 10.80% of total loans at December 31, 2020,

•net charge offs of $3.2 million compared to $28.7 million for the first nine months of 2020, and

•improved macroeconomic factors compared to the first nine months of 2020.

Given the size of the loan portfolio, the level of organic loan growth including government guaranteed loans, 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 credit losses, the provision for credit losses will vary from quarter to quarter. For additional details on the specific factors considered in establishing the allowance for 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 HTLF's Annual Report on Form 10-K for the year ended December 31, 2020, "Allowance For 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.

Management believes the allowance for credit losses as of September 30, 2021, was at a level commensurate with the overall risk exposure of the loan portfolio. However, deterioration in current economic conditions related to the COVID-19 pandemic could cause certain borrowers to experience difficulty. Due to the uncertainty of future economic conditions resulting from the COVID-19 pandemic, including recent concerns over COVID-19 variants, the provision for credit losses could be volatile over the next several quarters.

Noninterest Income

The tables below show noninterest income for the three- and nine- months ended September 30, 2021 and 2020, in thousands:


	Three Months Ended September 30,
	2021		2020		Change		% Change
Service charges and fees	$	15,551	$	11,749	$	3,802	32	%
Loan servicing income	784		638		146		23
Trust fees	6,221		5,357		864		16
Brokerage and insurance commissions	866		649		217		33
Securities gains, net	1,535		1,300		235		18
Unrealized gain on equity securities, net	112		155		(43)		(28)

Net gains on sale of loans held for sale	5,281		8,894		(3,613)		(41)
Valuation adjustment on servicing rights	195		(120)		315		263
Income on bank owned life insurance	940		868		72		8
Other noninterest income	1,239		1,726		(487)		(28)
Total noninterest income	$	32,724	$	31,216	$	1,508	5	%


	Nine Months Ended September 30,
	2021		2020		Change		% Change
Service charges and fees	$	44,354	$	34,742	$	9,612	28	%
Loan servicing income	2,495		1,980		515		26
Trust fees	18,037		15,356		2,681		17
Brokerage and insurance commissions	2,584		1,977		607		31
Securities gains, net	4,347		4,964		(617)		(12)
Unrealized gain on equity securities, net	85		604		(519)		(86)

Net gains on sale of loans held for sale	16,454		21,411		(4,957)		(23)
Valuation adjustment on servicing rights	586		(1,676)		2,262		135
Income on bank owned life insurance	2,706		2,533		173		7
Other noninterest income	4,557		5,779		(1,222)		(21)
Total noninterest income	$	96,205	$	87,670	$	8,535	10	%

Total noninterest income totaled $32.7 million during the third quarter of 2021 compared to $31.2 million during the third quarter of 2020, an increase of $1.5 million or 5%. Total noninterest income was $96.2 million for the first nine months of 2021 compared to $87.7 million for the same period of 2020, which was an increase of $8.5 million or 10%.

Notable changes in noninterest income categories for the three- and nine months ended September 30, 2021 and 2020 are as follows:

Service Charges and Fees

The following tables summarize the changes in service charges and fees for the three- and nine- months ended September 30, 2021 and 2020, in thousands:


	Three Months Ended September 30,
	2021		2020		Change		% Change
Service charges and fees on deposit accounts	$	4,146	$	3,710	$	436	12	%
Overdraft fees	3,044		2,184		860		39
Customer service and other service fees	52		39		13		33
Credit card fee income	5,673		3,894		1,779		46
Debit card income	2,636		1,922		714		37
Total service charges and fees	$	15,551	$	11,749	$	3,802	32	%

	Nine Months Ended September 30,
	2021		2020		Change		% Change
Service charges and fees on deposit accounts	$	12,096	$	10,623	$	1,473	14	%
Overdraft fees	8,185		6,627		1,558		24
Customer service and other service fees	152		133		19		14
Credit card fee income	15,835		11,861		3,974		34
Debit card income	8,086		5,498		2,588		47
Total service charges and fees	$	44,354	$	34,742	$	9,612	28	%

The changes detailed in the tables above were primarily attributable to HTLF's larger customer base as a result of recent acquisitions. Additionally, HTLF was waiving retail and small business service charges and fees through August 2020 in recognition of the impact of the COVID-19 pandemic on those customers, and transaction volumes were lower throughout the first nine months of 2020 due to the COVID-19 pandemic.

Loan Servicing Income

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. The following tables show the changes in loan servicing income for the three- and nine- months ended September 30, 2021, and 2020, in thousands:


	Three Months Ended September 30,
	2021		2020		Change		% Change
Commercial and agricultural loan servicing fees(1)	$	642	$	820	$	(178)	(22)	%
Residential mortgage servicing fees	446		443		3		1
Mortgage servicing rights amortization	(304)		(625)		321		51
Total loan servicing income	$	784	$	638	$	146	23	%

	Nine Months Ended September 30,
	2021		2020		Change		% Change
Commercial and agricultural loan servicing fees(1)	$	2,155	$	2,411	$	(256)	(11)	%
Residential mortgage servicing fees	1,369		1,262		107		8
Mortgage servicing rights amortization	(1,029)		(1,693)		664		39
Total loan servicing income	$	2,495	$	1,980	$	515	26	%

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

Stable residential mortgage rates for the third quarter and first nine months of 2021 compared to the same periods of 2020 caused residential mortgage loan refinancing activity to decrease, which reduced mortgage servicing rights amortization.

Trust Fees

Trust fees increased $864,000 or 16% to $6.2 million for the third quarter of 2021 compared to $5.4 million for the same quarter of 2020. For the nine months ended September 30, 2021 and 2020, trust fees totaled $18.0 million compared to $15.4 million, respectively, which was an increase of $2.7 million or 17%. The increase for both the three- and nine month periods was primarily attributable to an increase in the fair market value of assets under management.

Securities Gains, Net

For the third quarter of 2021, net securities gains totaled $1.5 million compared to $1.3 million for the third quarter of 2020, which was an increase of $235,000 or 18%. For the nine months ended September 30, 2021 and 2020, net securities gains totaled $4.3 million and $5.0 million, respectively, which was a decrease of $617,000 or 12%. The net unrealized gain on securities carried at fair value was $33.8 million at September 30, 2021, $80.3 million at June 30, 2021, and $103.8 million at year-end 2020.

Net Gains on Sale of Loans Held for Sale

During the third quarter of 2021, net gains on sale of loans held for sale totaled $5.3 million compared to $8.9 million during the same period in 2020, a decrease of $3.6 million or 41%. Loans sold to investors in the third quarter of 2021 totaled $116.2 million compared to $179.0 million during the third quarter of 2020, which was a decrease of $62.7 million or 35%.

For the first nine months of 2021, net gains on sales of loans held for sale totaled $16.5 million compared to $21.4 million, which was a decrease of $5.0 million or 23%. Loans sold to investors for the first nine months of 2021 totaled $385.7 million compared to $422.5 million, which was a decrease of $36.8 million or 9%.

Noninterest Expenses

The tables below show noninterest expenses for the three- and nine months ended September 30, 2021, and 2020, in thousands:


	Three Months Ended September 30,
	2021		2020		Change		% Change
Salaries and employee benefits	$	60,689	$	50,978	$	9,711	19	%
Occupancy	7,366		6,732		634		9
Furniture and equipment	3,365		2,500		865		35
Professional fees	17,242		12,802		4,440		35

Advertising	1,921		928		993		107
Core deposit and customer relationship intangibles amortization	2,295		2,492		(197)		(8)
Other real estate and loan collection expenses	78		335		(257)		(77)
(Gain)/loss on sales/valuations of assets, net	(3)		1,763		(1,766)		(100)
Acquisition, integration and restructuring costs	204		1,146		(942)		(82)
Partnership investment in tax credit projects	2,374		927		1,447		156
Other noninterest expenses	15,096		9,793		5,303		54
Total noninterest expenses	$	110,627	$	90,396	$	20,231	22	%


	Nine Months Ended September 30,
	2021		2020		Change		% Change
Salaries and employee benefits	$	177,083	$	151,053	$	26,030	17	%
Occupancy	22,683		19,705		2,978		15
Furniture and equipment	9,959		8,601		1,358		16
Professional fees	46,969		38,951		8,018		21

Advertising	5,039		4,128		911		22
Core deposit and customer relationship intangibles amortization	7,226		8,169		(943)		(12)
Other real estate and loan collection expenses	627		872		(245)		(28)
(Gain)/loss on sales/valuations of assets, net	374		2,480		(2,106)		(85)
Acquisition, integration and restructuring costs	3,342		3,195		147		5
Partnership investment in tax credit projects	3,754		1,902		1,852		97
Other noninterest expenses	39,370		32,638		6,732		21
Total noninterest expenses	$	316,426	$	271,694	$	44,732	16	%

For the third quarter of 2021, noninterest expenses totaled $110.6 million compared to $90.4 million during the third quarter of 2020, an increase of $20.2 million or 22%. For the nine months ended September 30, 2021, noninterest expenses totaled $316.4 million, which was an increase of $44.7 million or 16% from $271.7 million for the same period in 2020.

Notable changes in noninterest expense categories for the three- and nine months ended September 30, 2021 and 2020 are as follows:

Salaries and employee benefits

Salaries and employee benefits increased $9.7 million or 19% to $60.7 million for the third quarter of 2021 compared to $51.0 million for the third quarter of 2020. For the first nine months of 2021, salaries and benefits totaled $177.1 million, which was an increase of $26.0 million or 17% from $151.1 million for the same period of 2020. The increase for the quarterly and year-to-date comparisons was primarily attributable to higher salary and health care expenses as a result of more full-time equivalent employees and normalized health care usage.

Full-time equivalent employees totaled 2,163 at September 30, 2021 compared to 1,827 at September 30, 2020, which was primarily attributable to the acquisitions completed in the fourth quarter of 2020 and the addition of specialized commercial and agribusiness lending teams in the third quarter of 2021.

Occupancy

Occupancy expense totaled $7.4 million for the third quarter of 2021 compared to $6.7 million for the third quarter of 2020, which was an increase of $634,000 or 9%. Occupancy expense totaled $22.7 million and $19.7 million for the nine months ended September 30, 2021 and 2020, respectively, which was an increase of $3.0 million or 15%. The increase for the three and nine month periods was a result of acquisitions completed in the fourth quarter of 2020.

Professional Fees

Professional fees increased $4.4 million or 35% to $17.2 million for the third quarter of 2021 compared to $12.8 million for the same period of 2020. For the nine months ended September 30, 2021 and 2020, professional fees totaled $47.0 million and $39.0 million, respectively, which was an increase of $8.0 million or 21%. The increases for the three and nine month periods were primarily attributable to the utilization of external resources to support automation and technology projects, higher cloud based computing expenses and acquisitions completed in the fourth quarter of 2020.

Advertising

Advertising expense totaled $1.9 million for the quarter ended September 30, 2021 compared to $928,000 for the same quarter in 2020, which was an increase of $993,000 or 107%. Advertising expense for nine months ended September 30, 2021 totaled $5.0 million compared to $4.1 million for the same period of 2020, which was an increase of $911,000 or 22%. In 2020, HTLF adjusted its advertising strategy and reduced in-person customer events in response to changes in business practices due to the COVID-19 pandemic, some of which has resumed in 2021.

Acquisition, integration and restructuring costs

Acquisition, integration and restructuring costs decreased $942,000 or 82% to $204,000 for the third quarter of 2021 compared to $1.1 million for the third quarter of 2020. Acquisition, integration and restructuring costs totaled $3.3 million for the first nine months of 2021 compared to $3.2 million for the same period of 2020, which was an increase of $147,000 or 5%. HTLF completed the AimBank conversion in February 2021.

Other noninterest expenses

Other noninterest expenses totaled $15.1 million for the third quarter of 2021 compared to $9.8 million for the third quarter of 2020, which was an increase of $5.3 million or 54%. The following items impacted the third quarter of 2021 compared to the third quarter of 2020:

•Travel and staff and customer entertainment expenses increased $817,000 to $1.1 million from $308,000. Travel and customer events were limited in the third quarter of 2020 due to the pandemic.

•Credit card processing and rebate expenses increased $1.8 million or 126% to $3.3 million from $1.4 million, which was primarily attributable to increased volume.

•Fraud losses increased $569,000 or 123% to $1.0 million from $461,000. The increase was primarily attributable to check fraud and wire fraud transactions given the heightened fraud environment.

For the nine months ended September 30, 2021, other noninterest expenses totaled $39.4 million compared to $32.6 million for the same period of 2020, which was an increase of $6.7 million or 21%. The following items impacted other noninterest expenses for the year to date comparison:

•Travel and staff and customer entertainment expenses increased $670,000 to $2.3 million from $1.7 million. Travel and customer events were limited in the first nine months of 2020 due to the pandemic.

•Credit card processing and rebate expenses increased $2.3 million or 42% to $7.9 million from $5.6 million, which was primarily attributable to increased volume.

The remainder of the increases for both the three and nine month comparisons were primarily attributable to acquisitions completed in the fourth quarter of 2020.

Efficiency Ratio

One of HTLF's strategic priorities is to improve its efficiency ratio, on a fully tax-equivalent basis (non-GAAP), with the goal of reducing to below 57%. During the third quarter of 2021, the efficiency ratio on a fully tax-equivalent basis (non-GAAP) increased by 571 basis points to 60.38% in comparison with 54.67% for the quarter ended September 30, 2020, which was primarily attributable to the increase in noninterest expenses as noted above. For the nine months ended September 30, 2021, the efficiency ratio on a fully tax-equivalent basis, (non-GAAP) was 58.05% compared to 57.28% for the same period of 2020, which was an increase of 77 basis points.

HTLF continues to explore strategies to improve operational efficiency, which include the following items:

•An evaluation of the consolidation of its 11 bank charters. Two key tenets of the proposed charter consolidation would be the retention of brand identities and local market decision-making and leadership and the maintenance of operational and administrative functions in Dubuque, Iowa.

•A reduction in HTLF's branch network by approximately 7% is expected through its branch optimization strategy.

•A reduction of expenses through the realization and further adoption of cost-efficient technologies.

In spite of cost savings initiatives, management believes the efficiency ratio could remain elevated in the next several quarters due to the continued low interest rate environment, wage pressure and workforce shortages, supply chain disruptions and inflation.

Income Taxes

The effective tax rate was 19.15% for the third quarter of 2021 compared to 22.20% for the third quarter of 2020. The following items impacted the third quarter 2021 and 2020 tax calculations:

•Solar energy tax credits of $2.1 million compared to $965,000.

•Federal low-income housing tax credits of $135,000 compared to $195,000.

•New markets tax credits of $75,000 in each quarterly calculation.

•Historic rehabilitation tax credits of $327,000 compared to $0.

•Tax-exempt interest income as a percentage of pre-tax income of 9.32% compared to 8.48%.

The effective tax rate was 20.92% for the first nine months of 2021 compared to 21.58% for the first nine months of 2020. The following items impacted HTLF's tax calculation for the first nine months of 2021 and 2020:

•Solar energy tax credits of $3.5 million compared to $1.8 million.

•Federal low-income housing tax credits of $404,000 compared to $585,000.

•New markets tax credits of $225,000 for both nine month periods.

•Historic rehabilitation tax credits of $450,000 compared to $0.

•Tax-exempt interest income as a percentage of pre-tax income of 9.15% compared to 11.84%.

•Tax benefit of $304,000 compared to tax expense of $93,000 resulting from the vesting of restricted stock unit awards.

FINANCIAL CONDITION

Total assets were $19.00 billion at September 30, 2021, an increase of $1.09 billion or 6% since December 31, 2020. Securities represented 40% and 35% of total assets at September 30, 2021, and December 31, 2020, respectively.

LENDING ACTIVITIES

HTLF's board of directors establishes an acceptable level of credit risk appetite, and the subsidiary banks have certain lending policies and procedures in place that are designed to provide for a level of credit risk commensurate within the defined risk parameters. 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.

HTLF originates commercial and industrial loans and owner occupied commercial real estate loans for a wide variety of business 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.

HTLF originated PPP loans in 2020 ("PPP I") totaling $1.20 billion and acquired $53.1 million of PPP loans in the AimBank transaction. Additionally, in 2021, HTLF originated $473.9 million of PPP II loans. At September 30, 2021, total PPP I loans outstanding totaled $74.3 million, which was net of $613,000 of unamortized deferred fees. Total PPP II loans outstanding at

September 30, 2021 was $335.0 million, which was net of $13.2 million of unamortized deferred fees. Both PPP I and PPP II loans are 100% SBA guaranteed, and borrowers may be eligible to have an amount up to the entire principal balance forgiven and paid by the SBA. All PPP loans also carry a zero risk rating for regulatory capital purposes. Because these loans are 100% guaranteed by the SBA, there is no allowance recorded related to the PPP loans.

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 required for most of these loans is based upon the discounted market value of the collateral. 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. 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.

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 work closely with governmental agencies, including the SBA 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, 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. The acquisition of First Bank & Trust in Lubbock, Texas, in 2018 included its wholly owned mortgage subsidiary, 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 many of HTLF's markets. First Bank & Trust services the conventional mortgage loans it sells into the secondary market.

Consumer lending includes home equity lines and term loans, motor vehicle, home improvement 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 $9.85 billion at September 30, 2021, and $10.02 billion at December 31, 2020, a decrease of $168.1 million or 2%. Excluding PPP loans, total loans held to maturity increased $380.4 million or 4% since year-end 2020.

The following table shows the changes in loan balances by loan category since December 31, 2020, in thousands:


	September 30, 2021		December 31, 2020		Change		% Change
Commercial and industrial	$	2,538,369	$	2,534,799	$	3,570	—	%
PPP	409,247		957,785		(548,538)		(57)	%
Owner occupied commercial real estate	2,135,227		1,776,406		358,821		20
Non-owner occupied commercial real estate	2,020,487		1,921,481		99,006		5
Real estate construction	814,001		863,220		(49,219)		(6)
Agricultural and agricultural real estate	684,670		714,526		(29,856)		(4)
Residential mortgage	840,356		840,442		(86)		—
Consumer	412,550		414,392		(1,842)		—
Total loans held to maturity	$	9,854,907	$	10,023,051	$	(168,144)	(2)	%

Notable changes in the loan portfolio include:

•PPP loans decreased $548.5 million or 57% to $409.2 million at September 30, 2021 compared to $957.8 million at year-end 2020. PPP I loans decreased $883.5 million during the first nine months of 2021 due to forgiveness payments from the SBA. PPP II loans outstanding at September 30, 2021, totaled $335.0 million, which was net of $13.2 million of unamortized deferred fees. Approximately 73% of total PPP loans have been forgiven.

•Owner occupied commercial real estate loans increased $358.8 million or 20% to $2.14 billion at September 30, 2021 compared to $1.78 billion at year-end 2020, which included an increase of $200.2 million in government guaranteed loans.

The table below presents the composition of the loan portfolio as of September 30, 2021, and December 31, 2020, in thousands:


	September 30, 2021				December 31, 2020
	Amount		Percent		Amount		Percent
Loans receivable held to maturity:
Commercial and industrial	$	2,538,369	25.75	%	$	2,534,799	25.29	%
PPP	409,247		4.15		957,785		9.56
Owner occupied commercial real estate	2,135,227		21.67		1,776,406		17.72
Non-owner occupied commercial real estate	2,020,487		20.50		1,921,481		19.17
Real estate construction	814,001		8.26		863,220		8.61
Agricultural and agricultural real estate	684,670		6.95		714,526		7.13
Residential mortgage	840,356		8.53		840,442		8.39
Consumer	412,550		4.19		414,392		4.13
Gross loans receivable held to maturity	9,854,907		100.00	%	10,023,051		100.00	%






Allowance for credit losses-loans	(117,533)				(131,606)
Loans receivable, net	$	9,737,374			$	9,891,445

The following table shows the total loans exposure as of September 30, 2021 and December 31, 2020, to customer segment profiles that HTLF believes have been and could continue to be more heavily impact by COVID-19, dollars in thousands:


	As of September 30, 2021				As of December 31, 2020
Industry	Total Exposure(1)		% of Gross Exposure(1)		Total Exposure(1)		% of Gross Exposure(1)
Lodging	$	519,567	3.87	%	$	539,434	4.38	%
Retail trade	438,442		3.26	%	465,980		3.78
Retail properties	394,430		2.94	%	422,794		3.43
Restaurants and bars	234,840		1.75	%	266,053		2.16

Total	$	1,587,279	11.82	%	$	1,694,261	13.75	%

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

While HTLF has seen overall improvement in customers' financial position since the onset of the COVID-19 pandemic, further economic disruption resulting from COVID-19 and its variants could make it difficult for some customers to repay the principal and interest on their loans. As of September 30, 2021, of the approximately $985.8 million of loans modified under COVID-19 relief programs, $945.3 million of loans have returned to full payment status and $23.0 million of loans remain in the original deferral status. Additional loan modifications have been made on approximately $17.5 million of loans in the portfolio, which are primarily interest-only payment modifications.

ALLOWANCE FOR CREDIT LOSSES

The process utilized by HTLF to determine the appropriateness of the allowance for credit losses is considered a critical accounting practice. The allowance for credit losses represents management's estimate of lifetime losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for credit losses, refer to the critical accounting policies section of HTLF's Annual Report on Form 10-K for the year ended December 31, 2020.

Total Allowance for Lending Related Credit Losses

The total allowance for lending related credit losses was $131.5 million at September 30, 2021, which was 1.33% of loans as of September 30, 2021, compared to $146.9 million or 1.47% of loans at December 31, 2020. Excluding PPP loans, the allowance for lending related credit losses as a percentage of total loans was 1.39% and 1.62% as of September 30, 2021, and December 31, 2020, respectively. The following table shows, in thousands, the components of the allowance for lending related credit losses as of September 30, 2021, and December 31, 2020:


	September 30, 2021				December 31, 2020
	Amount		% of Allowance		Amount		% of Allowance
Quantitative	$	94,033	72	%	$	102,398	70	%
Qualitative	26,612		20		29,101		20
Economic Forecast	10,855		8		15,387		10
Total	$	131,500	100	%	$	146,886	100	%

Quantitative Allowance

The quantitative allowance decreased $8.4 million to $94.0 million or 72% of the total allowance for lending related credit losses at September 30, 2021, compared to $102.4 million or 70% of the total allowance at December 31, 2020. Positively impacting the quantitative allowance was a reduction of $181.3 million in nonpass loans and an increase of $291.5 million in government guaranteed loans, for which no provision expense is required, since year-end 2020. Included in the quantitative allowance for September 30, 2021, and December 31, 2020, were specific reserves of $10.7 million and $9.4 million, respectively.

Qualitative Allowance

The qualitative allowance totaled $26.6 million or 20% of the total allowance for lending related credit losses at September 30, 2021, compared to $29.1 million or 20% at December 31, 2020. Management assesses several risk factors in the qualitative calculation, and in making its assessment at September 30, 2021, decreased the level of qualitative adjustment based on improving market conditions and credit quality trends.

Economic Forecasting

The economic forecast allowance was $10.9 million or 8% of the total allowance for lending related credit losses at September 30, 2021, compared to $15.4 million or 10% of the total allowance for lending related credit losses at December 31, 2020. HTLF has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in the methodology. At September 30, 2021, Moody's September 7, 2021, baseline forecast scenario was utilized, which was the most currently available forecast, and HTLF continued to use a one year reasonable and supportable forecast period.

For the September 30, 2021 calculation, the economic outlook factors used to develop the allowance retained a measured level of caution and uncertainty that management deemed appropriate for lingering economic headwinds, such as COVID-19 variants, supply chain challenges, and workforce shortages and wage pressures, that are yet to be resolved.

Allowance for Credit Losses-Loans

The tables below present the changes in the allowance for credit losses for loans during the three- and nine- months ended September 30, 2021 and 2020, in thousands:


	Three Months Ended September 30,
	2021			2020
Balance at beginning of period	$	120,726		$	119,937

Provision (benefit) for credit losses	(4,448)			4,741
Recoveries on loans previously charged off	2,422			452
Charge-offs on loans	(1,167)			(21,753)
Balance at end of period	$	117,533		$	103,377
Allowance for credit losses for loans as a percent of loans	1.19		%	1.14		%
Annualized ratio of net charge offs/(recoveries) to average loans	(0.05)		%	0.92		%

	Nine Months Ended September 30,
	2021			2020
Balance at beginning of period	$	131,606		$	70,395
Impact of ASU 2016-13 adoption on January 1, 2020	—			12,071
Adjusted balance at January 1, 2020	131,606			82,466
Provision (benefit) for credit losses	(10,898)			49,613
Recoveries on loans previously charged off	3,615			2,916
Charge-offs on loans	(6,790)			(31,618)
Balance at end of period	$	117,533		$	103,377

Allowance for credit losses for loans as a percent of loans	1.19		%	1.14		%
Annualized ratio of net charge offs to average loans	0.04		%	0.43		%

The allowance for credit losses for loans totaled $117.5 million at September 30, 2021, compared to $131.6 million at December 31, 2020, and $103.4 million at September 30, 2020. The allowance for credit losses for loans at September 30, 2021, was 1.19% of loans compared to 1.31% of loans at December 31, 2020. The following items have impacted the allowance for credit losses for loans for the nine months ended September 30, 2021:

•Provision benefit of $10.9 million, which was primarily attributable to improved macroeconomic factors compared to prior periods.

•Net charge offs for the first nine months of 2021 totaled $3.2 million compared to $28.7 million for the first nine months of 2020, which was a decrease of $25.5 million or 89%.

•Since year-end 2020, nonpass loans decreased $181.3 million, and government guaranteed loans increased $291.5 million, for which no provision expense is required.

The following tables show, in thousands, the changes in the allowance for unfunded commitments for the three and six months ended September 30, 2021 and 2020:


	Three Months Ended September 30,
	2021		2020
Balance at beginning of period	14,002		17,392
Provision (benefit) for credit losses	(35)		(3,062)
Balance at end of period	$	13,967	$	14,330

	Nine Months Ended September 30,
	2021		2020
Balance at beginning of period	$	15,280	$	248
Impact of ASU 2016-13 adoption on January 1, 2020	—		13,604
Adjusted balance at January 1, 2020	15,280		13,852
Provision (benefit) for credit losses	(1,313)		478
Balance at end of period	$	13,967	$	14,330

The allowance for unfunded commitments totaled $14.0 million as of September 30, 2021, compared to $15.3 million as of December 31, 2020, and $14.3 million as of September 30, 2020. Unfunded commitments increased $336.5 million to $3.58 billion at September 30, 2021 compared to $3.25 billion at December 31, 2020. Included in the increase of unfunded commitments was $35.9 million of commitments related to 100% government guaranteed lending, for which no provision expense was required.

CREDIT QUALITY AND NONPERFORMING ASSETS

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

The nonpass loans totaled $901.4 million or 9.15% of total loans as of September 30, 2021 compared to $1.08 billion or 10.80% of total loans as of December 31, 2020. As of September 30, 2021, the nonpass loans consisted of approximately 54% watch loans and 46% substandard loans. The percent of nonpass loans on nonaccrual status as of September 30, 2021, was 9%.

Included in the nonpass loans at September 30, 2021 were $52.5 million of nonpass PPP loans as a result of risk ratings on non-PPP related credits. HTLF's risk rating methodology assigns a risk rating to the whole lending relationship. No allowance was recorded related to the PPP loans because of the 100% SBA guarantee.

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


	September 30,						December 31,
	2021			2020			2020			2019
Nonaccrual loans	$	82,375		$	79,040		$	87,386		$	76,548
Loans contractually past due 90 days or more	861			1,681			720			4,105
Total nonperforming loans	83,236			80,721			88,106			80,653
Other real estate	4,744			5,050			6,624			6,914
Other repossessed assets	166			130			240			11
Total nonperforming assets	$	88,146		$	85,901		$	94,970		$	87,578







Performing troubled debt restructured loans(1)	$	1,817		$	11,818		$	2,370		$	3,794
Nonperforming loans to total loans	0.84		%	0.89		%	0.88		%	0.96		%
Nonperforming assets to total loans plus repossessed property	0.89			0.94			0.95			1.05
Nonperforming assets to total assets	0.46			0.55			0.53			0.66

(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 initially made under COVID-19 modification programs. Refer to the "Lending Activities" discussion included in the "Financial Condition" 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 nonperforming assets during the three and nine months ended September 30, 2021, in thousands:


	Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
June 30, 2021	$	85,365	$	6,314	$	50	$	91,729
Loan foreclosures	(1,711)		1,545		166		—
Net loan charge-offs	1,255		—		—		1,255

New nonperforming loans	6,908		—		—		6,908
Reduction of nonperforming loans(1)	(8,581)		—		—		(8,581)
OREO/Repossessed assets sales proceeds	—		(3,146)		(27)		(3,173)
OREO/Repossessed assets writedowns, net	—		31		(23)		8

September 30, 2021	$	83,236	$	4,744	$	166	$	88,146
(1) Includes principal reductions and transfers to performing status.


	Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
December 31, 2020	$	88,106	$	6,624	$	240	$	94,970
Loan foreclosures	(3,115)		2,713		402		—
Net loan charge-offs	(3,175)		—		—		(3,175)

New nonperforming loans	29,833		—		—		29,833
Reduction of nonperforming loans(1)	(28,413)		—		—		(28,413)
OREO/Repossessed assets sales proceeds	—		(4,712)		(320)		(5,032)
OREO/Repossessed assets writedowns, net	—		119		(156)		(37)

September 30, 2021	$	83,236	$	4,744	$	166	$	88,146

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

Total nonperforming assets decreased $6.8 million or 7% to $88.1 million or 0.46% of total assets at September 30, 2021, compared to $95.0 million or 0.53% of total assets at December 31, 2020. Nonperforming loans were $83.2 million at September 30, 2021, compared to $88.1 million at December 31, 2020, which represented 0.84% and 0.88% of total loans at September 30, 2021, and December 31, 2020, respectively. At September 30, 2021, approximately $49.6 million or 60% of HTLF's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to seventeen borrowers. The portion of the nonperforming nonresidential real estate loans covered by government guarantees totaled $14.1 million at September 30, 2021, compared to $14.6 million at December 31, 2020.

SECURITIES

The composition of the securities portfolio is managed to ensure liquidity needs are met while maximizing the return on the portfolio within the established HTLF risk appetite parameters and in consideration of the impact it has on HTLF's asset/liability position. Securities represented 40% and 35% of total assets at September 30, 2021, and December 31, 2020, respectively. Total securities carried at fair value as of September 30, 2021, were $7.45 billion, an increase of $1.32 billion or 22% from $6.13 billion at December 31, 2020.

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 30, 2021, and December 31, 2020, in thousands:


	September 30, 2021				December 31, 2020
	Amount		Percent		Amount		Percent
U.S. treasuries	$	1,013	0.01	%	$	2,026	0.03	%
U.S. agencies	35,033		0.46		166,779		2.65
Obligations of states and political subdivisions	1,908,819		25.05		1,724,066		27.40
Mortgage-backed securities - agency	2,371,264		31.12		1,355,270		21.54
Mortgage-backed securities - non-agency	1,627,903		21.37		1,449,116		23.03
Commercial mortgage-backed securities - agency	127,861		1.68		174,153		2.77
Commercial mortgage-backed securities - non-agency	561,667		7.37		252,767		4.02
Asset-backed securities	877,646		11.52		1,069,266		16.99
Corporate bonds	3,294		0.04		3,742		0.06

Equity securities with a readily determinable fair value	20,790		0.27		19,629		0.31
Other securities	83,332		1.11		75,253		1.20
Total securities	$	7,618,622	100.00	%	$	6,292,067	100.00	%

HTLF's securities portfolio had an expected modified duration of 5.31 years as of September 30, 2021, compared to 5.52 years as of December 31, 2020.

At September 30, 2021, HTLF had $83.3 million of other securities, including capital stock in each Federal Home Loan Bank ("FHLB") of which each of its bank subsidiaries is a member. All of these securities were classified as other securities held at cost.

DEPOSITS

Total deposits were $16.02 billion as of September 30, 2021, compared to $14.98 billion at December 31, 2020, an increase of $1.04 billion or 7%. Growth in non-time deposits during the first nine months of 2021 was positively impacted by payments related to federal government stimulus programs and other COVID-19 relief programs.

The following table shows the changes in deposit balances by deposit type since year-end 2020, in thousands:


	September 30, 2021		December 31, 2020		Change		% Change
Demand deposits	$	6,537,722	$	5,688,810	$	848,912	15	%
Savings deposits	8,416,204		8,019,704		396,500		5
Time deposits	1,068,317		1,271,391		(203,074)		(16)
Total	$	16,022,243	$	14,979,905	$	1,042,338	7	%

The table below presents the composition of deposits by category as of September 30, 2021, and December 31, 2020, in thousands:


	September 30, 2021				December 31, 2020
	Amount		Percent		Amount		Percent
Demand	$	6,537,722	40.80	%	$	5,688,810	37.98	%
Savings	8,416,204		52.53		8,019,704		53.54
Time	1,068,317		6.67		1,271,391		8.48
Total	$	16,022,243	100.00	%	$	14,979,905	100.00	%

SHORT-TERM BORROWINGS

Short-term borrowings, which HTLF defines as borrowings with an original maturity of one year or less, were as follows as of September 30, 2021, and December 31, 2020, in thousands:


	September 30, 2021		December 31, 2020		Change		% Change
Securities sold under agreement to repurchase	$	126,293	$	118,293	$	8,000	7	%
Federal funds purchased	2,300		2,100		200		10
Advances from the FHLB	40,000		—		40,000		—
Advances from the federal discount window	90,000		35,000		55,000		157	%
Other short-term borrowings	7,027		12,479		(5,452)		(44)
Total	$	265,620	$	167,872	$	97,748	58	%

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 HTLF'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 was $265.6 million at September 30, 2021, compared to $167.9 million at December 31, 2020, an increase of $97.7 million or 58%.

All of the 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 $126.3 million at September 30, 2021, compared to $118.3 million at December 31, 2020, an increase of $8.0 million or 7%.

HTLF renewed its revolving credit line agreement with an unaffiliated bank on June 14, 2021. This revolving credit line agreement, which has $75.0 million of borrowing capacity, is included in short-term borrowings, and the primary purpose of this credit line agreement is to provide liquidity. No advances occurred on this line during the first nine months of 2021, and the outstanding balance was $0 at both September 30, 2021, and December 31, 2020.

OTHER BORROWINGS

The outstanding balances of other borrowings, which HTLF defines as borrowings with an original maturity date of more than one year, are shown in the table below, net of discount and issuance costs amortization as of September 30, 2021, and December 31, 2020, in thousands:


	September 30, 2021		December 31, 2020		Change		% Change
Advances from the FHLB	$	928	$	1,018	$	(90)	(9)	%

Trust preferred securities	147,074		146,323		751		1

Note payable to unaffiliated bank	—		44,417		(44,417)		(100)
Contracts payable for purchase of real estate and other assets	1,593		1,983		(390)		(20)
Subordinated notes	222,170		74,429		147,741		198
Paycheck Protection Program Liquidity Fund	—		188,872		(188,872)		(100)
Total	$	371,765	$	457,042	$	(85,277)	(19)	%

As of September 30, 2021, the amount of other borrowings was $371.8 million, a decrease of $85.3 million or 19% since year-end 2020.

Each of HTLF's subsidiary banks had been approved by their respective Federal Reserve Bank for the Paycheck Protection Program Liquidity Fund ("PPPLF"). The PPPLF program ended on July 31, 2021, and at September 30, 2021, all advances had been repaid.

On September 8, 2021, HTLF closed its public offering of $150.0 million aggregate principal amount of its 2.75% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "subordinated notes"). The net proceeds of the subordinated notes totaled $147.6 million. The notes were registered under HTLF’s effective shelf registration statement and qualify as Tier 2 capital for regulatory purposes. The net proceeds are expected to be used for general corporate purposes, which may include, without limitation, providing capital to support HTLF's organic growth or growth through strategic acquisitions, financing investments, capital expenditures, investments in the subsidiary banks as regulatory capital, and repaying indebtedness. The subordinated notes have a fixed interest rate of 2.75% until September 15, 2026, at which time the interest rate will be reset quarterly to a benchmark interest rate, which is expected to be three-month term Secure Overnight Financing Rate ("SOFR") plus a spread of 210 basis points. The subordinated notes mature on September 15, 2031, and become redeemable at HTLF's option on September 15, 2026.

HTLF has a non-revolving credit facility with an unaffiliated bank, and at September 30, 2021, no balance was outstanding on this non-revolving credit line compared to $44.4 million outstanding at December 31, 2020. The decrease in this non-revolving credit line was primarily attributable to a paydown of $20.3 million in conjunction with the renewal of the credit line in the second quarter of 2021, and the remainder was repaid with proceeds from the subordinated notes issued in September 2021. At September 30, 2021, $3.5 million of borrowing capacity was available on this non-revolving credit facility, of which no balance was drawn.

A schedule of HTLF's trust preferred securities outstanding excluding deferred issuance costs as of September 30, 2021, is as follows, in thousands:

Amount
Issued

Issuance
Date

Interest
Rate

Interest

Rate as of 9/30/2021(1)

Maturity
Date

Callable
Date

Heartland Financial Statutory Trust IV

10,310

03/17/2004

2.75% over LIBOR

2.87%

03/17/2034

12/17/2021

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

1.46

04/07/2036

01/07/2022

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

1.60

09/15/2037

12/15/2021

Heartland Financial Statutory Trust VII

18,042

06/26/2007

1.48% over LIBOR

1.60

09/01/2037

12/01/2021

Morrill Statutory Trust I

9,252

12/19/2002

3.25% over LIBOR

3.38

12/26/2032

12/26/2021

Morrill Statutory Trust II

8,948

12/17/2003

2.85% over LIBOR

2.97

12/17/2033

12/17/2021

Sheboygan Statutory Trust I

6,681

09/17/2003

2.95% over LIBOR

3.07

09/17/2033

12/17/2021

CBNM Capital Trust I

4,496

09/10/2004

3.25% over LIBOR

3.37

12/15/2034

12/15/2021

Citywide Capital Trust III

6,536

12/19/2003

2.80% over LIBOR

2.93

12/19/2033

01/23/2022

Amount
Issued

Issuance
Date

Interest
Rate

Interest

Rate as of 9/30/2021(1)

Maturity
Date

Callable
Date

Citywide Capital Trust IV

4,396

09/30/2004

2.20% over LIBOR

2.33

09/30/2034

11/23/2021

Citywide Capital Trust V

12,142

05/31/2006

1.54% over LIBOR

1.66

07/25/2036

12/15/2021

OCGI Statutory Trust III

3,010

06/27/2002

3.65% over LIBOR

3.78

09/30/2032

12/30/2021

OCGI Capital Trust IV

5,441

09/23/2004

2.50% over LIBOR

2.62

12/15/2034

12/15/2021

BVBC Capital Trust II

7,268

04/10/2003

3.25% over LIBOR

3.38

04/24/2033

01/24/2022

BVBC Capital Trust III

9,359

07/29/2005

1.60% over LIBOR

1.73

09/30/2035

12/30/2021

Total trust preferred costs

147,119

Less: deferred issuance costs

(45)

147,074

(1) Effective weighted average interest rate as of September 30, 2021, was 2.46%

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, HTLF 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 HTLF 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.

HTLF's capital ratios are calculated in accordance with Federal Reserve Board instructions and are required regulatory financial measures. The following table illustrates the 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)
September 30, 2021	16.01		%	12.28		%	11.40		%	8.60		%
Minimum capital requirement	8.00			6.00			4.50			4.00
Well capitalized requirement	10.00			8.00			6.50			5.00
Minimum capital requirement, including fully-phased in capital conservation buffer	10.50			8.50			7.00			N/A
Risk-weighted assets	$	12,613,274		$	12,613,274		$	12,613,274		N/A
Average assets	N/A			N/A			N/A			$	18,005,817

December 31, 2020	14.71		%	11.85		%	10.92		%	9.02		%
Minimum capital requirement	8.00			6.00			4.50			4.00
Well capitalized requirement	10.00			8.00			6.50			5.00
Minimum capital requirement, including fully-phased in capital conservation buffer	10.50			8.50			7.00			N/A
Risk-weighted assets	$	11,819,037		$	11,819,037		$	11,819,037		N/A
Average assets	N/A			N/A			N/A			$	15,531,884

At September 30, 2021, and December 31, 2020, retained earnings that could be available for the payment of dividends to meet the minimum capital requirements totaled $761.7 million and $736.5 million, respectively. Retained earnings that could be available for the payment of dividends to HTLF from its banks totaled approximately $510.2 million and $500.9 million at

September 30, 2021, and December 31, 2020, respectively, under the capital requirements to remain well capitalized. These dividends are the principal source of funds to pay dividends on HTLF's common and preferred stock and to pay interest and principal on its debt.

On June 26, 2020, HTLF issued and sold 4.6 million depositary shares, each representing a 1/400th interest in a share of 7.00% Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock, Series E. The depositary shares are listed on The Nasdaq Global Select Market under the symbol "HTLFP." If declared, dividends are paid quarterly in arrears at a rate of 7.00% per annum beginning on October 15, 2020. For the dividend period beginning on the first reset date of July 15, 2025, and for dividend periods beginning every fifth anniversary thereafter, each a reset date, the rate per annum will be reset based on a recent five-year treasury rate plus 6.675%. The earliest redemption date for the preferred shares is July 15, 2025. Dividends payable on common shares are subject to quarterly dividends payable on these outstanding preferred shares at the applicable dividend rate.

On August 8, 2019, HTLF filed a universal shelf registration statement with the SEC to register debt or equity securities. This shelf registration statement, which was effective immediately, provides HTLF with the ability to raise capital, subject to market conditions and SEC rules and limitations, if the board of directors decides to do so. This registration statement permits HTLF, from time to time, in one or more public offerings, to offer debt securities, subordinated notes, common stock, preferred stock, depositary shares, warrants, rights or units of any combination of these securities. The amount of securities that may be offered was not specified in the registration statement, and the terms of any future offerings are to be established at the time of the offering. The registration statement expires on August 8, 2022.

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. HTLF'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 the bank subsidiaries to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At September 30, 2021, and December 31, 2020, commitments to extend credit aggregated $3.88 billion and $3.26 billion, respectively. Standby letters of credit aggregated $58.9 million at September 30, 2021, and $73.2 million at December 31, 2020.

At September 30, 2021, and December 31, 2020, HTLF's banks had $734.1 million and $607.0 million, respectively, of standby letters of credit with the respective FHLB to secure public funds and municipal deposits.

Contractual obligations and other commitments were disclosed in HTLF's Annual Report on Form 10-K for the year ended December 31, 2020. On July 1, 2021, HTLF and Fiserv Solutions, LLC executed a master agreement that replaced an existing license and service agreement between HTLF and Fiserv Solutions, LLC. The agreement was filed as an exhibit to HTLF's Quarterly Report on Form 10-Q for the period ended June 30, 2021. There have been no other material changes to HTLF's contractual obligations and other commitments since the Annual Report on Form 10-K was filed.

HTLF continues to explore opportunities to expand the size of its independent community banks. In the current banking industry environment, HTLF seeks these opportunities for growth through acquisitions. HTLF 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, HTLF 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

HTLF enters into mortgage banking derivatives, which are classified as free standing derivatives. These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of these loans. HTLF enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of

future interest rate changes on the commitments to fund these loans and on the residential mortgage loans held as available for sale. See Note 7 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on derivative financial instruments.

LIQUIDITY

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

At September 30, 2021, HTLF had $327.4 million of cash and cash equivalents, time deposits in other financial institutions of $3.1 million and securities carried at fair value of $7.45 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.

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, HTLF intends to rely on deposit growth and additional FHLB and discount window 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, HTLF'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 30, 2021, short-term borrowings outstanding totaled $265.6 million.

As of September 30, 2021, HTLF had $371.8 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 30, 2021, HTLF had $1.15 billion of borrowing capacity under these programs. Additionally, at September 30, 2021, HTLF had $1.01 billion of borrowing capacity at the Federal Reserve Banks' discount window.

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

At the parent company level, routine funding requirements consist primarily of dividends paid to stockholders, debt service on revolving credit arrangements and trust preferred securities issuances, repayment requirements under other debt obligations and payments for acquisitions. The parent company obtains the funding to meet these obligations from dividends paid by its bank subsidiaries and the issuance of debt and equity securities.

At September 30, 2021, the parent company had cash of $230.8 million. Additionally, HTLF has a revolving credit agreement and non-revolving credit line with an unaffiliated bank, which is renewed annually, most recently on June 14, 2021. The revolving credit agreement has $75.0 million of maximum borrowing capacity, of which none was outstanding at September 30, 2021. At September 30, 2021, $3.5 million was available on the non-revolving credit line. These credit agreements contain specific financial covenants, all of which HTLF complied with as of September 30, 2021.

The ability of HTLF to pay dividends to its stockholders is dependent upon dividends paid to HTLF 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 HTLF'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. HTLF's market risk is comprised primarily of interest rate risk resulting from its core banking activities of lending and accepting deposits. Interest rate risk measures the impact on earnings from changes in interest rates and the effect on the current fair market values of HTLF's assets,

liabilities and off-balance sheet contracts. HTLF's objective is to measure this risk and manage its balance sheet to avoid unacceptable potential for economic loss.

Management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a regular basis by the asset/liability committees of the bank subsidiaries and, on a consolidated basis, by HTLF's executive management and board of directors. At least quarterly, a detailed review of the balance sheet risk profile is performed for HTLF 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 HTLF's interest rate risk profile and net interest income.

The core interest rate risk analysis utilized 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 net interest income. Starting balances in the model reflect actual balances on the "as of" date, adjusted for material transactions. Pro-forma balances remain static. This methodology enables interest rate risk embedded within the existing balance sheet structure to be isolated from the interest rate risk often caused by growth in assets and liabilities. Due to the low interest rate environment, the simulations under a decreasing interest rate scenario were prepared using a 100 basis point shift in rates. The most recent reviews at September 30, 2021, and September 30, 2020, provided the following results, in thousands:


	2021				2020
	Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base
Year 1
Down 100 Basis Points	$	503,448	(2.15)	%	$	441,039	(0.87)	%
Base	514,512		—		444,918		—
Up 200 Basis Points	543,113		5.56		467,620		5.10
Year 2
Down 100 Basis Points	$	462,454	(10.12)	%	$	420,920	(5.39)	%
Base	494,746		(3.84)		435,536		(2.11)
Up 200 Basis Points	556,171		8.10		495,843		11.45

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

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

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

•During the three months ended September 30, 2021, there have been no changes in 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, the internal controls over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

There are certain legal proceedings pending against HTLF and its subsidiaries at September 30, 2021, that are ordinary routine litigation incidental to business.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors applicable to HTLF from those disclosed in Part I, Item 1A. "Risk Factors" in HTLF's 2020 Annual Report on Form 10-K.

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

On March 17, 2020, the board of directors authorized management to acquire and hold up to 5% of capital or $103.1 million as of September 30, 2021, as treasury shares at any one time. HTLF and its affiliated purchasers made no purchases of its common stock during the quarter ended September 30, 2021.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits


4.1		Indenture between Heartland Financial USA, Inc. and U.S. Bank National Association dated December 17, 2014 (incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated December 18, 2014)

4.2		Second Supplemental Indenture dated as of September 8, 2021 to the Indenture dated as of December 17, 2014 between Heartland Financial USA, Inc. and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated September 8, 2021)

4.3		Form of Global Note representing the Securities (included in Exhibit 4.1)

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) Filed or furnished herewith

SIGNATURES

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


HEARTLAND FINANCIAL USA, INC.
(Registrant)


/s/ Bruce K. Lee
By: Bruce K. Lee
President and Chief Executive Officer
(Principal Executive Officer and Duly Authorized Officer)


/s/ Bryan R. McKeag
By: Bryan R. McKeag
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)


/s/ Janet M. Quick
By: Janet M. Quick
Executive Vice President and Deputy Chief Financial Officer
(Principal Accounting Officer and Duly Authorized Officer)

Dated: November 5, 2021