HEARTLAND FINANCIAL USA INC - Quarter Report: 2022 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, 2022


☐			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, 2022, the Registrant had outstanding 42,444,820 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, 2022 (Unaudited)		December 31, 2021
ASSETS
Cash and due from banks	$	250,394	$	163,895
Interest bearing deposits with other banks and other short-term investments	149,466		271,704
Cash and cash equivalents	399,860		435,599
Time deposits in other financial institutions	1,740		2,894
Securities:

Carried at fair value (cost of $6,739,802 at September 30, 2022, and $7,536,338 at December 31, 2021)	6,060,331		7,530,374
Held to maturity, net of allowance for credit losses of $0 at both September 30, 2022, and December 31, 2021 (fair value of $782,805 at September 30, 2022, and $94,139 at December 31, 2021)	830,247		84,709
Other investments, at cost	80,286		82,567
Loans held for sale	9,570		21,640
Loans receivable:
Held to maturity	10,923,532		9,954,572

Allowance for credit losses	(105,715)		(110,088)
Loans receivable, net	10,817,817		9,844,484
Premises, furniture and equipment, net	194,789		204,999
Premises, furniture and equipment held for sale	8,796		10,828
Other real estate, net	8,030		1,927
Goodwill	576,005		576,005
Core deposit intangibles and customer relationship intangibles, net	26,995		32,988
Servicing rights, net	8,379		6,890
Cash surrender value on life insurance	193,184		191,722

Other assets	466,921		246,923
TOTAL ASSETS	$	19,682,950	$	19,274,549
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	6,083,563	$	6,495,326
Savings	10,060,523		8,897,909
Time	1,123,035		1,024,020
Total deposits	17,267,121		16,417,255

Short-term borrowings	147,000		131,597
Other borrowings	371,446		372,072
Accrued expenses and other liabilities	241,425		171,447
TOTAL LIABILITIES	18,026,992		17,092,371
STOCKHOLDERS' EQUITY:


Preferred stock (par value $1 per share; authorized 6,104 shares at both September 30, 2022, and December 31, 2021; none issued or outstanding at both September 30, 2022, and December 31, 2021)	—		—
Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both September 30, 2022, and December 31, 2021)	—		—
Series B Fixed Rate Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2022, and December 31, 2021; none issued or outstanding at both September 30, 2022, and December 31, 2021)	—		—
Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both September 30, 2022, and December 31, 2021; none issued or outstanding at both September 30, 2022, and December 31, 2021)	—		—
Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both September 30, 2022, and December 31, 2021; none issued or outstanding at both September 30, 2022, and December 31, 2021)	—		—
Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 shares authorized at both September 30, 2022, and December 31, 2021; 11,500 shares issued and outstanding at both September 30, 2022 and December 31, 2021)	110,705		110,705
Common stock (par value $1 per share; 60,000,000 shares authorized at both September 30, 2022, and December 31, 2021; issued 42,444,106 shares at September 30, 2022, and 42,275,264 shares at December 31, 2021)	42,444		42,275
Capital surplus	1,079,277		1,071,956
Retained earnings	1,074,168		962,994
Accumulated other comprehensive loss	(650,636)		(5,752)



TOTAL STOCKHOLDERS' EQUITY	1,655,958		2,182,178
TOTAL LIABILITIES AND EQUITY	$	19,682,950	$	19,274,549

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,
	2022		2021		2022		2021
INTEREST INCOME:
Interest and fees on loans	$	122,913	$	112,062	$	334,000	$	336,416
Interest on securities:
Taxable	45,648		32,384		116,366		94,373
Nontaxable	6,164		4,609		17,874		13,673
Interest on federal funds sold	—		—		—		1
Interest on interest bearing deposits in other financial institutions	1,081		132		1,715		258
TOTAL INTEREST INCOME	175,806		149,187		469,955		444,721
INTEREST EXPENSE:
Interest on deposits	15,158		3,444		24,665		11,629
Interest on short-term borrowings	360		98		494		348
Interest on other borrowings (includes $189 and $(543) of interest expense (benefit) related to derivatives reclassified from accumulated other comprehensive income (loss) for the three months ended September 30, 2022 and 2021, respectively, and $552 and $(1,601) of interest expense (benefit) related to derivatives reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 2022 and 2021, respectively)	4,412		3,102		11,780		9,378
TOTAL INTEREST EXPENSE	19,930		6,644		36,939		21,355
NET INTEREST INCOME	155,876		142,543		433,016		423,366
Provision (benefit) for credit losses	5,492		(4,534)		11,983		(12,262)
NET INTEREST INCOME AFTER PROVISION (BENEFIT) FOR CREDIT LOSSES	150,384		147,077		421,033		435,628
NONINTEREST INCOME:
Service charges and fees	17,282		15,551		50,599		44,354
Loan servicing income	831		784		1,951		2,495
Trust fees	5,372		6,221		17,130		18,037
Brokerage and insurance commissions	649		866		2,357		2,584
Securities gains (losses), net (includes $(1,070) and $1,535 of net security gains (losses) reclassified from accumulated other comprehensive income (loss) for the three months ended September 30, 2022 and 2021, respectively, and $(1,720) and $4,347 of net security gains (losses) reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 2022 and 2021, respectively)	(1,055)		1,535		(272)		4,347


Unrealized gain (loss) on equity securities, net	(211)		112		(615)		85
Net gains on sale of loans held for sale	1,832		5,281		8,144		16,454
Valuation adjustment on servicing rights	—		195		1,658		586
Income on bank owned life insurance	694		940		1,741		2,706
Other noninterest income	3,787		1,239		15,596		4,557
TOTAL NONINTEREST INCOME	29,181		32,724		98,289		96,205
NONINTEREST EXPENSES:
Salaries and employee benefits	62,661		60,689		192,867		177,083
Occupancy	6,794		7,366		21,250		22,683
Furniture and equipment	2,928		3,365		9,480		9,959
Professional fees	16,277		17,242		47,420		46,969

Advertising	1,554		1,921		4,392		5,039
Core deposit and customer relationship intangibles amortization	1,856		2,295		5,993		7,226
Other real estate and loan collection expenses	304		78		577		627
(Gain)/loss on sales/valuations of assets, net	(251)		(3)		(3,435)		374
Acquisition, integration and restructuring costs	2,156		204		5,144		3,342
Partnership investment in tax credit projects	979		2,374		1,793		3,754
Other noninterest expenses	13,625		15,096		40,678		39,370
TOTAL NONINTEREST EXPENSES	108,883		110,627		326,159		316,426
INCOME BEFORE INCOME TAXES	70,682		69,174		193,163		215,407
Income taxes (includes $302 and $524 of income tax benefit reclassified from accumulated other comprehensive income (loss) for the three months ended September 30, 2022 and 2021, respectively, and $466 and $1,501 of income tax benefit reclassified from accumulated other comprehensive income (loss) for the nine months ended September 30, 2022 and 2021, respectively)	14,118		13,250		41,637		45,064
NET INCOME	56,564		55,924		151,526		170,343


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

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	54,551	$	53,911	$	145,488	$	164,305
EARNINGS PER COMMON SHARE - BASIC	$	1.28	$	1.27	$	3.43	$	3.89
EARNINGS PER COMMON SHARE - DILUTED	$	1.28	$	1.27	$	3.42	$	3.88
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.27	$	0.25	$	0.81	$	0.69

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,
	2022		2021		2022		2021
NET INCOME	$	56,564	$	55,924	$	151,526	$	170,343
OTHER COMPREHENSIVE INCOME (LOSS)
Securities:
Net change in unrealized gain (loss) on securities	(218,463)		(44,968)		(860,365)		(65,613)

Reclassification adjustment for net (gains) losses realized in net income	1,070		(1,535)		1,720		(4,347)

Income taxes	53,529		12,181		213,328		18,264
Other comprehensive loss on securities	(163,864)		(34,322)		(645,317)		(51,696)
Derivatives used in cash flow hedging relationships:
Net change in unrealized gain on derivatives	—		2,220		—		4,853
Reclassification adjustment for net (gains) losses on derivatives realized in net income	189		(543)		552		(1,601)
Income taxes	(43)		(392)		(119)		(725)
Other comprehensive income on cash flow hedges	146		1,285		433		2,527
Other comprehensive loss	(163,718)		(33,037)		(644,884)		(49,169)
TOTAL COMPREHENSIVE INCOME (LOSS)	$	(107,154)	$	22,887	$	(493,358)	$	121,174

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,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	151,526	$	170,343
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	18,758		20,342
Provision (benefit) for credit losses	11,983		(12,262)
Net amortization of premium on securities	50,886		30,975
Securities (gains) losses, net	272		(4,347)

Unrealized (gain) loss on equity securities, net	615		(85)
Stock based compensation	7,411		6,732

Loans originated for sale	(244,908)		(364,808)
Proceeds on sales of loans held for sale	263,904		401,078
Net gains on sale of loans held for sale	(6,926)		(15,399)
(Increase) decrease in accrued interest receivable	(5,348)		353
Decrease in prepaid expenses	1,479		318
Increase (decrease) in accrued interest payable	483		(271)

Capitalization of servicing rights	(1,218)		(1,055)
Valuation adjustment on servicing rights	(1,658)		(586)
(Gain) loss on sales/valuations of assets, net	(390)		1,970
Net excess tax benefit from stock based compensation	129		304
Other, net	66,142		(751)
NET CASH PROVIDED BY OPERATING ACTIVITIES	313,140		232,851
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits in other financial institutions	—		(9)
Proceeds from the sale of securities available for sale	1,031,521		799,588
Proceeds from the sale of securities held to maturity	2,337		—


Proceeds from the maturity of and principal paydowns on securities available for sale	758,453		722,512
Proceeds from the maturity of and principal paydowns on securities held to maturity	2,500		4,634
Proceeds from the maturity of time deposits in other financial institutions	1,154		—
Proceeds from the sale, maturity of, redemption of and principal paydowns on other investments	13,674		2,843
Purchase of securities available for sale	(1,982,073)		(2,941,662)

Purchase of other investments	(10,045)		(10,922)
Net (increase) decrease in loans	(1,002,220)		150,876
Purchase of bank owned life insurance policies	(209)		(196)
Proceeds from bank owned life insurance policies	502		—

Capital expenditures	(12,276)		(15,705)

Proceeds from the sale of equipment	6,789		7,332
Net cash expended in divestitures	(50,616)		(15,682)
Proceeds on sale of OREO and other repossessed assets	2,564		5,032
NET CASH USED BY INVESTING ACTIVITIES	$	(1,237,945)	$	(1,291,359)


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands)
	Nine Months Ended September 30,
	2022		2021
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits	$	(396,552)	$	855,996
Net increase in savings deposits	1,204,574		411,864
Net increase (decrease) in time deposit accounts	105,695		(198,024)


Net increase in short-term borrowings	14,003		97,748
Proceeds from short term advances	236,000		51,700
Repayments of short term advances	(236,000)		(51,700)
Proceeds from other borrowings	—		147,614
Repayments of other borrowings	(198)		(233,765)





Proceeds from issuance of common stock	1,896		1,716
Dividends paid	(40,352)		(35,139)
NET CASH PROVIDED BY FINANCING ACTIVITIES	889,066		1,048,010
Net decrease in cash and cash equivalents	(35,739)		(10,498)
Cash and cash equivalents at beginning of year	435,599		337,903
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	399,860	$	327,405
Supplemental disclosures:
Cash paid for income/franchise taxes	$	33,412	$	42,425
Cash paid for interest	36,456		21,632
Loans transferred to OREO	8,458		2,713
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale	4,555		1,564
Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net	—		396


Dividends declared, not paid	2,013		2,013



Transfer of available for sale securities to held to maturity securities	748,252		—



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, 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

Balance at June 30, 2022	$	110,705	$	42,439	$	1,076,766	$	1,031,076	$	(486,918)	$	1,774,068
Comprehensive income (loss)							56,564		(163,718)		(107,154)

Cash dividends declared:
Preferred, $175.00 per share							(2,013)				(2,013)
Common, $0.27 per share							(11,459)				(11,459)

Issuance of 4,667 shares of common stock			5		190						195
Stock based compensation					2,321						2,321
Balance at September 30, 2022	$	110,705	$	42,444	$	1,079,277	$	1,074,168	$	(650,636)	$	1,655,958

Balance at January 1, 2022	$	110,705	$	42,275	$	1,071,956	$	962,994	$	(5,752)	$	2,182,178


Comprehensive income (loss)							151,526		(644,884)		(493,358)

Cash dividends declared:

Preferred, $525.00 per share							(6,038)				(6,038)
Common, $0.81 per share							(34,314)				(34,314)




Issuance of 168,842 shares of common stock			169		(90)						79
Stock based compensation					7,411						7,411
Balance at September 30, 2022	$	110,705	$	42,444	$	1,079,277	$	1,074,168	$	(650,636)	$	1,655,958

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, 2021, 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 24, 2022. 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, 2022, are not necessarily indicative of the results expected for the year ending December 31, 2022.

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, 2022 and 2021, are shown in the table below, dollars and number of shares in thousands, except per share data:


	Three Months Ended September 30,
	2022		2021
Net income	$	56,564	$	55,924
Preferred dividends	(2,013)		(2,013)


Net income available to common stockholders	$	54,551	$	53,911

Weighted average common shares outstanding for basic earnings per share	42,575		42,303
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	69		113
Weighted average common shares for diluted earnings per share	42,644		42,416
Earnings per common share — basic	$	1.28	$	1.27
Earnings per common share — diluted	$	1.28	$	1.27
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	4		3

	Nine Months Ended September 30,
	2022		2021
Net income	$	151,526	$	170,343
Preferred dividends	(6,038)		(6,038)

Net income available to stockholders	$	145,488	$	164,305

Weighted average common shares outstanding for basic earnings per share	42,471		42,241
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	125		140
Weighted average common shares for diluted earnings per share	42,596		42,381
Earnings per common share — basic	$	3.43	$	3.89
Earnings per common share — diluted	$	3.42	$	3.88
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	8		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 formed a working group that was 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 included the cessation of the use of LIBOR as a reference rate to term SOFR as a replacement rate at December 31, 2021.

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.

ASU 2022-02

In March 2022, the FASB issued ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." These amendments eliminate the troubled debt restructurings ("TDR") recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, these amendments require that an entity disclose current-period gross charge-offs by year of origination for loans receivable within the scope of Subtopic 326-20. The guidance is effective for entities that have adopted ASU 2016-13 for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. These amendments should be applied prospectively. If an entity elects to early adopt ASU 2022-02 in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. Management is assessing the impact of ASU 2022-02 on its results of operations, financial position and financial statement disclosures.

NOTE 2: 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, 2022, and December 31, 2021, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
September 30, 2022
U.S. treasuries	$	27,364	$	—	$	(627)	$	26,737
U.S. agencies	49,604		—		(6,304)		43,300
Obligations of states and political subdivisions	1,052,960		1		(218,338)		834,623
Mortgage-backed securities - agency	2,097,286		67		(269,077)		1,828,276
Mortgage-backed securities - non-agency	2,261,005		2,730		(140,876)		2,122,859
Commercial mortgage-backed securities - agency	102,289		—		(16,141)		86,148
Commercial mortgage-backed securities - non-agency	708,763		—		(19,088)		689,675
Asset-backed securities	411,063		—		(11,031)		400,032
Corporate bonds	9,210		—		(787)		8,423
Total debt securities	6,719,544		2,798		(682,269)		6,040,073
Equity securities with a readily determinable fair value	20,258		—		—		20,258
Total	$	6,739,802	$	2,798	$	(682,269)	$	6,060,331
December 31, 2021
U.S. treasuries	$	997	$	11	$	—	$	1,008
U.S. agencies	193,932		264		(812)		193,384
Obligations of states and political subdivisions	2,045,386		56,263		(16,616)		2,085,033
Mortgage-backed securities - agency	2,388,601		11,870		(51,182)		2,349,289
Mortgage-backed securities - non-agency	1,749,838		4,570		(11,029)		1,743,379
Commercial mortgage-backed securities - agency	125,397		1,429		(2,914)		123,912
Commercial mortgage-backed securities - non-agency	600,253		998		(363)		600,888
Asset-backed securities	408,167		2,803		(1,317)		409,653
Corporate bonds	2,979		61		—		3,040
Total debt securities	7,515,550		78,269		(84,233)		7,509,586
Equity securities with a readily determinable fair value	20,788		—		—		20,788
Total	$	7,536,338	$	78,269	$	(84,233)	$	7,530,374

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of September 30, 2022, and December 31, 2021, 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, 2022

Obligations of states and political subdivisions	$	830,247	$	1,761	$	(49,203)	$	782,805	$	—
Total	$	830,247	$	1,761	$	(49,203)	$	782,805	$	—
December 31, 2021

Obligations of states and political subdivisions	$	84,709	$	9,430	$	—	$	94,139	$	—
Total	$	84,709	$	9,430	$	—	$	94,139	$	—

During the third quarter of 2022, HTLF transferred taxable municipal bonds with an amortized cost basis of $934.5 million and fair value of $748.3 million from available for sale to held to maturity. On the date of the transfer, accumulated other

comprehensive income (loss) included $186.3 million of net unrealized losses, after tax, attributable to these securities, and the net unrealized losses will be amortized into interest income over the remaining life of the transferred securities. The bonds were transferred at fair value at the date of transfer.

As of September 30, 2022, and December 31, 2021, HTLF had $28.5 million and $29.4 million, respectively, of accrued interest receivable, which is included in other assets on the consolidated balance sheets. 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, 2022, 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, 2022
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	1,490	$	1,486
Due in 1 to 5 years	30,702		29,814
Due in 5 to 10 years	54,131		46,087
Due after 10 years	1,052,815		835,696
Total debt securities	1,139,138		913,083
Mortgage and asset-backed securities	5,580,406		5,126,990
Equity securities with a readily determinable fair value	20,258		20,258
Total investment securities	$	6,739,802	$	6,060,331

The amortized cost and estimated fair value of debt securities held to maturity at September 30, 2022, 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, 2022
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	4,772	$	4,773
Due in 1 to 5 years	68,014		67,496
Due in 5 to 10 years	125,603		121,978
Due after 10 years	631,858		588,558
Total debt securities	$	830,247	$	782,805

As of September 30, 2022, and December 31, 2021, securities with a carrying value of $1.27 billion and $1.66 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, 2022 and 2021, are summarized as follows, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Proceeds from sales	$	57,610	$	169,108	$	1,031,521	$	799,588
Gross security gains	—		1,591		7,298		5,880
Gross security losses	1,070		56		9,018		1,533

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, 2022, and December 31, 2021. 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, 2021, and December 31, 2020, respectively. For the securities transferred to held to maturity during the third quarter of 2022, the reference point was the date of the transfer.


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, 2022
U.S. treasuries	$	26,737	$	(627)	4	$	—	$	—	—	$	26,737	$	(627)	4
U.S. agencies	27,662		(2,398)		6	15,638		(3,906)		1	43,300		(6,304)		7
Obligations of states and political subdivisions	703,542		(175,773)		141	127,428		(42,565)		41	830,970		(218,338)		182
Mortgage-backed securities - agency	523,192		(53,036)		143	1,303,192		(216,041)		82	1,826,384		(269,077)		225
Mortgage-backed securities - non-agency	1,317,914		(93,124)		35	394,034		(47,752)		16	1,711,948		(140,876)		51
Commercial mortgage-backed securities - agency	30,467		(2,733)		14	55,681		(13,408)		11	86,148		(16,141)		25
Commercial mortgage-backed securities - non-agency	626,025		(18,189)		19	63,650		(899)		2	689,675		(19,088)		21
Asset-backed securities	130,835		(4,860)		8	57,620		(6,171)		5	188,455		(11,031)		13
Corporate bonds	8,422		(787)		7	—		—		—	8,422		(787)		7


Total temporarily impaired securities	$	3,394,796	$	(351,527)	377	$	2,017,243	$	(330,742)	158	$	5,412,039	$	(682,269)	535
December 31, 2021

U.S. agencies	$	100,839	$	(812)	2	$	—	$	—	—	$	100,839	$	(812)	2
Obligations of states and political subdivisions	596,866		(10,115)		113	236,329		(6,501)		49	833,195		(16,616)		162
Mortgage-backed securities - agency	1,383,808		(33,291)		83	474,724		(17,891)		19	1,858,532		(51,182)		102
Mortgage-backed securities - non-agency	929,515		(10,870)		27	23,821		(159)		5	953,336		(11,029)		32
Commercial mortgage-backed securities - agency	26,999		(689)		8	53,025		(2,225)		5	80,024		(2,914)		13
Commercial mortgage-backed securities - non-agency	74,450		(145)		3	14,124		(218)		2	88,574		(363)		5
Asset-backed securities	113,945		(1,201)		6	13,799		(116)		6	127,744		(1,317)		12



Total temporarily impaired securities	$	3,226,422	$	(57,123)	242	$	815,822	$	(27,110)	86	$	4,042,244	$	(84,233)	328


Securities held to maturity	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count
September 30, 2022

Obligations of states and political subdivisions	$	708,291	$	(49,203)	161	$	—	$	—	—	$	708,291	$	(49,203)	161
Total temporarily impaired securities	$	708,291	(49,203)		161	$	—	$	—	—	$	708,291	(49,203)		161

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

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 unrealized losses on HTLF's commercial mortgage, 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, 2022 and 2021.

The unrealized losses on HTLF's obligations of states and political subdivisions available for sale 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, 2022 and 2021.

In the first quarter of 2022, HTLF sold two obligations of states and political subdivisions securities from the held to maturity portfolio. Because the evaluation of the underlying credit quality of the individual securities indicated significant deterioration, it was unlikely HTLF would recover the remaining basis of the securities prior to maturity and therefore inconsistent with HTLF's original intent upon purchase and classification of these held to maturity securities. The carrying value of these securities was $2.2 million, and the associated gross gains were $100,000.

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, 2022 and 2021:


	Three Months Ended September 30,
	2022		2021
Beginning balance	$	—	$	51
Provision (benefit) for credit losses	—		(51)
Balance at period end	$	—	$	—

	Nine Months Ended September 30,
	2022		2021
Beginning balance	$	—	$	51
Provision (benefit) for credit losses	—		(51)
Balance at period end	$	—	$	—

Based on HTLF's credit loss methodology applicable to held to maturity debt securities, no allowance for credit losses was required at both September 30, 2022, and December 31, 2021.

The following table summarizes, in thousands, the carrying amount of HTLF's held to maturity debt securities by investment rating as of September 30, 2022, and December 31, 2021, which are updated quarterly and used to monitor the credit quality of the securities:


	September 30, 2022		December 31, 2021
Rating
AAA	$	94,727	$	3,265
AA, AA+, AA-	576,141		61,471
A+, A, A-	135,835		15,034
BBB	23,544		4,939
Not Rated	—		—
Total	$	830,247	$	84,709

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 $18.6 million at September 30, 2022, and $22.6 million at December 31, 2021.

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, 2022, and December 31, 2021, did not consider the investments to be impaired.

NOTE 3: LOANS

Loans as of September 30, 2022, and December 31, 2021, were as follows, in thousands:


	September 30, 2022		December 31, 2021
Loans receivable held to maturity:
Commercial and industrial	$	3,278,703	$	2,645,085
Paycheck Protection Program ("PPP")	13,506		199,883
Owner occupied commercial real estate	2,285,973		2,240,334
Non-owner occupied commercial real estate	2,219,542		2,010,591
Real estate construction	996,017		856,119
Agricultural and agricultural real estate	781,354		753,753
Residential real estate	852,928		829,283
Consumer	495,509		419,524
Total loans receivable held to maturity	10,923,532		9,954,572






Allowance for credit losses	(105,715)		(110,088)
Loans receivable, net	$	10,817,817	$	9,844,484

As of September 30, 2022, and December 31, 2021, HTLF had $41.4 million and $35.3 million, respectively, of accrued interest receivable, which is included in other assets on the consolidated balance sheets. 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, 2022, and December 31, 2021, 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, 2022
Commercial and industrial	$	7,260	$	23,003	$	30,263	$	21,696	$	3,257,007	$	3,278,703
PPP	—		—		—		—		13,506		13,506
Owner occupied commercial real estate	365		16,607		16,972		8,851		2,277,122		2,285,973
Non-owner occupied commercial real estate	—		14,809		14,809		11,643		2,207,899		2,219,542
Real estate construction	—		24,270		24,270		1,547		994,470		996,017
Agricultural and agricultural real estate	128		2,439		2,567		6,343		775,011		781,354
Residential real estate	—		7,426		7,426		1,622		851,306		852,928
Consumer	—		9,408		9,408		—		495,509		495,509

Total	$	7,753	$	97,962	$	105,715	$	51,702	$	10,871,830	$	10,923,532

December 31, 2021
Commercial and industrial	$	4,562	$	23,176	$	27,738	$	13,551	$	2,631,534	$	2,645,085
PPP	—		—		—		—		199,883		199,883
Owner occupied commercial real estate	105		19,109		19,214		8,552		2,231,782		2,240,334
Non-owner occupied commercial real estate	610		17,298		17,908		12,557		1,998,034		2,010,591
Real estate construction	—		22,538		22,538		—		856,119		856,119
Agricultural and agricultural real estate	2,369		2,844		5,213		13,773		739,980		753,753
Residential real estate	—		8,427		8,427		855		828,428		829,283
Consumer	—		9,050		9,050		—		419,524		419,524

Total	$	7,646	$	102,442	$	110,088	$	49,288	$	9,905,284	$	9,954,572

HTLF had $15.9 million of troubled debt restructured loans at September 30, 2022, of which $7.9 million were classified as nonaccrual and $8.0 million were accruing according to the restructured terms. HTLF had $10.4 million of troubled debt restructured loans at December 31, 2021, of which $9.5 million were classified as nonaccrual and $817,000 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, 2022, and September 30, 2021, dollars in thousands. The provisions of the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act"), which modified troubled debt restructured loan classification, expired on January 1, 2022, and any new troubled debt restructured loan modifications are evaluated in accordance with generally accepted accounting principles.


	Three Months Ended September 30,
	2022					2021
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial	—	$	—	$	—	—	$	—	$	—
PPP	—	—		—		—	—		—
Owner occupied commercial real estate	1	5,058		5,058		—	—		—
Non-owner occupied commercial real estate	—	—		—		—	—		—
Real estate construction	—	—		—		—	—		—
Agricultural and agricultural real estate	1	1,400		1,400		—	—		—
Residential real estate	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	2	$	6,458	$	6,458	—	$	—	$	—


	Nine Months Ended September 30,
	2022					2021
	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	—	$	—	$	—	—	$	—	$	—
PPP	—	—		—		—	—		—
Owner occupied commercial real estate	1	5,058		5,058		—	—		—
Non-owner occupied commercial real estate	—	—		—		2	7,850		7,850
Real estate construction	—	—		—		—	—		—
Agricultural and agricultural real estate	1	1,400		1,400		—	—		—
Residential real estate	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	2	$	6,458	$	6,458	2	$	7,850	$	7,850

At September 30, 2022, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructured loan.

HTLF had no troubled debt restructured loans for which there was a payment default during the three- and nine- months ended September 30, 2022, and September 30, 2021, that had been modified during the twelve-month period prior to default.

HTLF's internal rating system is a series of grades reflecting management's credit 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, 2022, and December 31, 2021.

The following tables show the risk category of loans by loan category and year of origination as of September 30, 2022, and December 31, 2021, in thousands:


As of September 30, 2022	Amortized Cost Basis of Term Loans by Year of Origination
	2022		2021		2020		2019		2018		2017 and Prior		Revolving		Total
Commercial and industrial
Pass	$	802,007	$	463,440	$	280,255	$	111,725	$	64,394	$	425,882	$	970,691	$	3,118,394
Watch	8,503		3,509		4,036		5,597		4,477		2,187		24,689		52,998
Substandard	8,494		11,735		9,609		27,282		7,137		11,823		31,231		107,311
Commercial and industrial total	$	819,004	$	478,684	$	293,900	$	144,604	$	76,008	$	439,892	$	1,026,611	$	3,278,703
PPP
Pass	$	—	$	9,977	$	891	$	—	$	—	$	—	$	—	$	10,868
Watch	—		8		—		—		—		—		—		8
Substandard	—		2,625		5		—		—		—		—		2,630
PPP total	$	—	$	12,610	$	896	$	—	$	—	$	—	$	—	$	13,506
Owner occupied commercial real estate
Pass	$	449,289	$	805,870	$	273,696	$	275,330	$	111,317	$	207,964	$	35,402	$	2,158,868
Watch	11,806		5,806		3,114		5,573		6,601		5,923		35		38,858
Substandard	1,964		21,694		32,169		10,714		2,236		18,670		800		88,247
Owner occupied commercial real estate total	$	463,059	$	833,370	$	308,979	$	291,617	$	120,154	$	232,557	$	36,237	$	2,285,973
Non-owner occupied commercial real estate
Pass	$	576,309	$	524,138	$	220,635	$	274,791	$	134,255	$	206,540	$	69,166	$	2,005,834
Watch	771		802		5,222		38,563		42,302		58,714		555		146,929
Substandard	206		10,578		7,513		16,078		22,408		9,996		—		66,779
Non-owner occupied commercial real estate total	$	577,286	$	535,518	$	233,370	$	329,432	$	198,965	$	275,250	$	69,721	$	2,219,542


As of September 30, 2022	Amortized Cost Basis of Term Loans by Year of Origination
	2022		2021		2020		2019		2018		2017 and Prior		Revolving		Total
Real estate construction
Pass	$	475,313	$	351,155	$	103,214	$	40,638	$	2,983	$	6,602	$	7,915	$	987,820
Watch	654		11		1,220		—		—		16		—		1,901
Substandard	—		356		1,027		543		4,304		66		—		6,296
Real estate construction total	$	475,967	$	351,522	$	105,461	$	41,181	$	7,287	$	6,684	$	7,915	$	996,017
Agricultural and agricultural real estate
Pass	$	221,687	$	153,294	$	84,087	$	37,598	$	24,681	$	43,203	$	169,970	$	734,520
Watch	4,131		536		3,892		706		471		1,036		2,539		13,311
Substandard	4,270		8,463		204		2,527		12,600		4,319		1,140		33,523
Agricultural and agricultural real estate total	$	230,088	$	162,293	$	88,183	$	40,831	$	37,752	$	48,558	$	173,649	$	781,354
Residential real estate
Pass	$	168,663	$	277,074	$	67,491	$	41,412	$	36,411	$	224,410	$	21,187	$	836,648
Watch	429		769		562		987		1,554		2,377		—		6,678
Substandard	29		1,487		1,046		140		1,648		5,102		150		9,602
Residential real estate total	$	169,121	$	279,330	$	69,099	$	42,539	$	39,613	$	231,889	$	21,337	$	852,928

Consumer
Pass	$	65,800	$	51,732	$	13,587	$	7,053	$	5,496	$	25,705	$	320,071	$	489,444
Watch	40		123		56		227		77		957		1,432		2,912
Substandard	160		265		267		316		125		1,581		439		3,153
Consumer total	$	66,000	$	52,120	$	13,910	$	7,596	$	5,698	$	28,243	$	321,942	$	495,509

Total Pass	$	2,759,068	$	2,636,680	$	1,043,856	$	788,547	$	379,537	$	1,140,306	$	1,594,402	$	10,342,396
Total Watch	26,334		11,564		18,102		51,653		55,482		71,210		29,250		263,595
Total Substandard	15,123		57,203		51,840		57,600		50,458		51,557		33,760		317,541
Total Loans	$	2,800,525	$	2,705,447	$	1,113,798	$	897,800	$	485,477	$	1,263,073	$	1,657,412	$	10,923,532


As of December 31, 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	$	604,659	$	359,533	$	203,960	$	89,694	$	171,709	$	330,094	$	708,525	$	2,468,174
Watch	10,633		12,790		12,550		8,210		3,611		14,976		24,626		87,396
Substandard	19,888		6,391		13,050		8,535		6,619		12,052		22,980		89,515
Commercial and industrial total	$	635,180	$	378,714	$	229,560	$	106,439	$	181,939	$	357,122	$	756,131	$	2,645,085
PPP
Pass	$	146,370	$	25,707	$	—	$	—	$	—	$	—	$	—	$	172,077
Watch	10,726		127		—		—		—		—		—		10,853
Substandard	16,932		21		—		—		—		—		—		16,953
PPP total	$	174,028	$	25,855	$	—	$	—	$	—	$	—	$	—	$	199,883
Owner occupied commercial real estate
Pass	$	940,043	$	328,052	$	315,497	$	180,936	$	115,142	$	189,647	$	34,233	$	2,103,550
Watch	4,676		13,956		7,759		10,501		15,032		6,830		35		58,789
Substandard	11,958		20,769		13,734		2,809		13,912		13,063		1,750		77,995
Owner occupied commercial real estate total	$	956,677	$	362,777	$	336,990	$	194,246	$	144,086	$	209,540	$	36,018	$	2,240,334
Non-owner occupied commercial real estate
Pass	$	609,968	$	263,093	$	315,815	$	236,823	$	152,059	$	166,792	$	28,728	$	1,773,278
Watch	4,754		9,109		35,496		29,227		4,865		35,901		—		119,352
Substandard	15,722		10,612		21,798		3,599		14,023		51,766		441		117,961
Non-owner occupied commercial real estate total	$	630,444	$	282,814	$	373,109	$	269,649	$	170,947	$	254,459	$	29,169	$	2,010,591
Real estate construction
Pass	$	381,283	$	206,879	$	169,606	$	14,197	$	7,163	$	7,823	$	14,507	$	801,458
Watch	2,704		858		2,145		44,846		—		—		14		50,567
Substandard	—		50		46		3,944		—		54		—		4,094
Real estate construction total	$	383,987	$	207,787	$	171,797	$	62,987	$	7,163	$	7,877	$	14,521	$	856,119

Agricultural and agricultural real estate
Pass	$	217,179	$	102,030	$	47,927	$	32,913	$	22,029	$	35,548	$	220,065	$	677,691
Watch	4,018		10,390		4,688		2,270		33		2,038		2,948		26,385
Substandard	9,250		1,095		4,910		15,825		3,212		8,859		6,526		49,677
Agricultural and agricultural real estate total	$	230,447	$	113,515	$	57,525	$	51,008	$	25,274	$	46,445	$	229,539	$	753,753
Residential real estate
Pass	$	311,292	$	86,355	$	50,762	$	53,773	$	43,619	$	230,566	$	29,017	$	805,384
Watch	3,928		1,499		750		1,452		734		1,977		1,000		11,340
Substandard	2,528		444		410		2,317		1,139		5,721		—		12,559
Residential real estate total	$	317,748	$	88,298	$	51,922	$	57,542	$	45,492	$	238,264	$	30,017	$	829,283
Consumer
Pass	$	69,172	$	20,258	$	13,051	$	9,001	$	10,986	$	18,202	$	271,034	$	411,704
Watch	555		309		392		373		113		591		2,210		4,543
Substandard	267		204		218		236		363		1,611		378		3,277
Consumer total	$	69,994	$	20,771	$	13,661	$	9,610	$	11,462	$	20,404	$	273,622	$	419,524

Total Pass	$	3,279,966	$	1,391,907	$	1,116,618	$	617,337	$	522,707	$	978,672	$	1,306,109	$	9,213,316
Total Watch	41,994		49,038		63,780		96,879		24,388		62,313		30,833		369,225
Total Substandard	76,545		39,586		54,166		37,265		39,268		93,126		32,075		372,031
Total Loans	$	3,398,505	$	1,480,531	$	1,234,564	$	751,481	$	586,363	$	1,134,111	$	1,369,017	$	9,954,572

Included in the nonpass loans at September 30, 2022, and December 31, 2021, were $2.6 million and $27.8 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, 2022, HTLF had $846,000 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, 2022, and December 31, 2021, 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, 2022
Commercial and industrial	$	1,406	$	2,692	$	144	$	4,242	$	3,249,305	$	25,156	$	3,278,703
PPP	763		254		—		1,017		12,484		5		13,506
Owner occupied commercial real estate	—		—		—		—		2,276,146		9,827		2,285,973
Non-owner occupied commercial real estate	32		—		—		32		2,207,606		11,904		2,219,542
Real estate construction	4,475		—		—		4,475		989,271		2,271		996,017
Agricultural and agricultural real estate	—		—		534		534		772,666		8,154		781,354
Residential real estate	650		103		—		753		846,063		6,112		852,928
Consumer	786		134		—		920		493,458		1,131		495,509
Total gross loans receivable held to maturity	$	8,112	$	3,183	$	678	$	11,973	$	10,846,999	$	64,560	$	10,923,532
December 31, 2021
Commercial and industrial	$	1,024	$	183	$	541	$	1,748	$	2,625,109	$	18,228	$	2,645,085
PPP	—		—		—		—		199,883		—		199,883
Owner occupied commercial real estate	130		—		—		130		2,229,054		11,150		2,240,334
Non-owner occupied commercial real estate	3,929		—		—		3,929		1,993,346		13,316		2,010,591
Real estate construction	238		50		—		288		855,463		368		856,119
Agricultural and agricultural real estate	687		—		—		687		737,380		15,686		753,753
Residential real estate	767		46		9		822		819,294		9,167		829,283
Consumer	251		57		—		308		417,762		1,454		419,524
Total gross loans receivable held to maturity	$	7,026	$	336	$	550	$	7,912	$	9,877,291	$	69,369	$	9,954,572

Loans delinquent 30 to 89 days as a percent of total loans were 0.10% at September 30, 2022, compared to 0.07% at December 31, 2021. 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, 2022 and September 30, 2021. As of September 30, 2022, and December 31, 2021, HTLF had $32.5 million and $25.5 million of nonaccrual loans with no related allowance, respectively.

NOTE 4: ALLOWANCE FOR CREDIT LOSSES

Changes in the allowance for credit losses on loans for the three- and nine- months ended September 30, 2022, and September 30, 2021, were as follows, in thousands:


	Commercial and Industrial		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at June 30, 2022	$	27,668	$	17,658	$	15,738	$	19,391	$	2,948	$	8,571	$	9,379	$	101,353
Charge-offs	(385)		—		—		(35)		(34)		(1)		(483)		(938)
Recoveries	506		—		20		3		76		—		307		912
Provision (benefit)	2,474		(686)		(949)		4,911		(423)		(1,144)		205		4,388
Balance at September 30, 2022	$	30,263	$	16,972	$	14,809	$	24,270	$	2,567	$	7,426	$	9,408	$	105,715

	Commercial and Industrial		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at December 31, 2021	$	27,738	$	19,214	$	17,908	$	22,538	$	5,213	$	8,427	$	9,050	$	110,088


Charge-offs	(5,528)		—		(322)		(35)		(3,163)		(138)		(6,442)		(15,628)
Recoveries	1,157		40		53		12		653		—		779		2,694
Provision (benefit)	6,896		(2,282)		(2,830)		1,755		(136)		(863)		6,021		8,561
Balance at September 30, 2022	$	30,263	$	16,972	$	14,809	$	24,270	$	2,567	$	7,426	$	9,408	$	105,715


	Commercial and Industrial		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at 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		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

Management allocates the allowance for credit losses by pools of risk within each loan portfolio. 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 for unfunded commitments for the three and nine months ended September 30, 2022, and September 30, 2021, were as follows:


	For the Three Months Ended September 30,
	2022		2021
Balance at June 30,	$	17,780	$	14,002
Provision (benefit)	1,104		(35)
Balance at September 30,	$	18,884	$	13,967


	For the Nine Months Ended September 30,
	2022		2021
Balance at December 31,	$	15,462	$	15,280


Provision (benefit)	3,422		(1,313)
Balance at September 30,	$	18,884	$	13,967

NOTE 5: GOODWILL, CORE DEPOSIT PREMIUM AND OTHER INTANGIBLE ASSETS

HTLF had goodwill of $576.0 million at both September 30, 2022, and December 31, 2021. HTLF conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. HTLF 's annual quantitative assessment is completed in the fourth quarter of every year as of September 30. The most recent assessment was completed in the fourth quarter of 2021 as of September 30, 2021, and there was no goodwill impairment identified.

At September 30, 2022, HTLF's intangible assets consisted of core deposit intangibles and mortgage servicing rights. At December 31, 2021, HTLF's intangible assets consisted 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, 2022, and December 31, 2021, are presented in the table below, in thousands:


	September 30, 2022						December 31, 2021
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	101,185	$	74,190	$	26,995	$	101,185	$	68,330	$	32,855
Customer relationship intangibles	1,177		1,177		—		1,177		1,044		133
Mortgage servicing rights	14,008		5,629		8,379		12,790		6,378		6,412
Commercial servicing rights	7,054		7,054		—		7,054		6,576		478
Total	$	123,424	$	88,050	$	35,374	$	122,206	$	82,328	$	39,878

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


	Core Deposit Intangibles		Mortgage Servicing Rights		Total
Three months ending December 31, 2022	$	1,841	$	147	$	1,988
Year ending December 31,
2023	6,739		2,058		8,797
2024	5,591		1,764		7,355
2025	4,700		1,470		6,170
2026	3,533		1,176		4,709
2027	2,601		882		3,483
Thereafter	1,990		882		2,872
Total	$	26,995	$	8,379	$	35,374

Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of September 30, 2022. 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 $734.9 million at September 30, 2022, compared to $723.3 million at December 31, 2021. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio were approximately $17.0 million at September 30, 2022, and $4.5 million at December 31, 2021.

Fees collected for the servicing of mortgage loans for others were $472,000 and $446,000 for the quarters ended September 30, 2022, and September 30, 2021, respectively. Fees collected for the servicing of mortgage loans for others were $1.4 million and $1.4 million for the nine months ended September 30, 2022, and September 30, 2021, respectively.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the nine months ended September 30, 2022, and September 30, 2021:


	2022			2021
Balance at January 1,	$	6,412		$	5,189
Originations	1,218			1,055
Amortization	(909)			(1,029)



Valuation adjustment	1,658			586
Balance at period end	$	8,379		$	5,801

Mortgage servicing rights, net to servicing portfolio	1.14		%	0.82		%

Mortgage 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 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 which has servicing rights 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 which has servicing rights, and a valuation adjustment is recorded into noninterest income.

At September 30, 2022, no valuation allowance was required on the mortgage servicing rights 15-year tranche, and no valuation allowance was required on the mortgage servicing rights 30-year tranche. At December 31, 2021, a $327,000 valuation allowance was required on the mortgage servicing rights 15-year tranche and a $1.3 million valuation allowance was required on the mortgage servicing rights 30-year tranche.

For the three months ended September 30, 2022, and September 30, 2021, a valuation adjustment benefit of $0 and $195,000, respectively, was recorded for the total mortgage servicing rights portfolio. For the nine months ended September 30, 2022, and September 30, 2021, a valuation adjustment benefit of $1.7 million and $586,000, respectively, was recorded for the total mortgage servicing rights portfolio.

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, 2022, and December 31, 2021:


	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, 2022	$	1,540	$	1,871	$	—	$	6,839	$	8,176	$	—



December 31, 2021	$	1,607	$	1,280	$	327	$	6,463	$	5,132	$	1,331

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 following table presents key assumptions used to value the mortgage servicing rights as of September 30, 2022, and December 31, 2021, dollars in thousands:


	As of
	September 30, 2022			December 31, 2021
Weighted average constant prepayment rate	7.80		%	13.40		%
Weighted average discount rate	10.05		%	9.02		%
Fair value of mortgage servicing rights	$	10,047		$	6,412

The average capitalization rate of mortgage servicing rights for the first nine months of 2022 ranged from 83 to 133 basis points compared to a range of 76 to 120 basis points for the first nine months of 2021.

NOTE 6: 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, risk participation agreements, 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 their interest rate risk while executing offsetting interest rate swaps with dealer counterparties. 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 no cash as collateral at both September 30, 2022, and December 31, 2021. At both September 30, 2022, and December 31, 2021, 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 7, "Fair Value," for additional fair value information and disclosures.

Cash Flow Hedges

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 both September 30, 2022, and December 31, 2021, HTLF had no derivative instruments designated as cash flow hedges.

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 $481,000 and $3.8 million of cash as collateral for these fair value hedges at September 30, 2022, and December 31, 2021, respectively.

The table below identifies the notional amount, fair value and balance sheet category of HTLF's fair value hedges at September 30, 2022, and December 31, 2021, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category
September 30, 2022

Fair value hedges	$	1,237	$	56	Other assets
December 31, 2021

Fair value hedges	$	16,755	$	(1,208)	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, 2022, and September 30, 2021, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Gain recognized in interest income on fair value hedges	$	39	$	35	$	1,264	$	930

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, 2022, and December 31, 2021, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category
September 30, 2022
Embedded derivatives	$	6,118	$	129	Other assets

December 31, 2021
Embedded derivatives	$	7,496	$	(317)	Other liabilities

The table below identifies the gains and losses recognized on HTLF's embedded derivatives for the three- and nine- months ended September 30, 2022, and September 30, 2021, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Gain (loss) recognized in other noninterest income on embedded derivatives	$	121	$	(66)	$	446	$	(249)

Back-to-Back Loan Swaps

HTLF has interest rate swap loan relationships with customers to assist them in managing their interest rate risk. 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 $101,000 of collateral at September 30, 2022, compared to $24.1 million as of December 31, 2021, respectively, as collateral related to these back-to-back swaps. HTLF's counterparties were required to pledge $44.7 million at September 30, 2022, compared to $0 at December 31, 2021. 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, 2022, and September 30, 2021, 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, 2022, and December 31, 2021, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
September 30, 2022
Customer interest rate swaps	$	740,620	$	48,708	Other assets	4.16	%	5.83	%
Customer interest rate swaps	740,620		(48,708)		Other liabilities	5.83		4.16
December 31, 2021
Customer interest rate swaps	$	463,069	$	23,574	Other assets	4.44	%	2.35	%
Customer interest rate swaps	463,069		(23,574)		Other liabilities	2.35		4.44

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 and 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, 2022, and December 31, 2021. HTLF's counterparties were required to pledge no collateral at both September 30, 2022, and December 31, 2021, 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 sheets 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, 2022, and December 31, 2021, in thousands:


	Balance Sheet Category	Notional Amount		Fair Value
September 30, 2022
Interest rate lock commitments (mortgage)	Other assets	$	20,476	$	231

Forward commitments	Other assets	24,750		829
Forward commitments	Other liabilities	2,000		(11)
Undesignated interest rate swaps	Other liabilities	6,118		(129)

December 31, 2021
Interest rate lock commitments (mortgage)	Other assets	$	37,046	$	1,306

Forward commitments	Other assets	19,000		32
Forward commitments	Other liabilities	35,500		(95)
Undesignated interest rate swaps	Other assets	7,496		317

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, 2022, and September 30, 2021, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest rate lock commitments (mortgage)	$	(1,337)	$	(189)	$	(2,009)	$	(1,924)

Forward commitments	813		413		881		916
Undesignated interest rate swaps	(121)		66		(446)		249

NOTE 7: 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. 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.

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, 2022, and December 31, 2021, 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 HTLF's assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2022, and December 31, 2021, 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, 2022
Assets

Securities available for sale
U.S. treasuries	$	26,737	$	26,737	$	—	$	—
U.S. agencies	43,000		—		43,000		—
Obligations of states and political subdivisions	834,623		—		834,623		—
Mortgage-backed securities - agency	1,828,276		—		1,828,276		—
Mortgage-backed securities - non-agency	2,122,859		—		2,122,859		—
Commercial mortgage-backed securities - agency	86,148		—		86,148		—
Commercial mortgage-backed securities - non-agency	689,675		—		689,675		—
Asset-backed securities	400,032		—		400,032		—
Corporate bonds	8,423		—		8,423		—
Equity securities with a readily determinable fair value	20,258		—		20,258		—
Derivative financial instruments(1)	48,893		—		48,893		—
Interest rate lock commitments	231		—		—		231
Forward commitments	829		—		829		—
Total assets at fair value	$	6,109,984	$	26,737	$	6,083,016	$	231
Liabilities
Derivative financial instruments(2)	$	48,837	$	—	$	48,837	$	—
Forward commitments	11		—		11		—

Total liabilities at fair value	$	48,848	$	—	$	48,848	$	—
December 31, 2021
Assets

Securities available for sale
U.S. treasuries	$	1,008	$	1,008	$	—	$	—
U.S. agencies	193,384		—		193,384		—
Obligations of states and political subdivisions	2,085,033		—		2,085,033		—
Mortgage-backed securities - agency	2,349,289		—		2,349,289		—
Mortgage-backed securities - non-agency	1,743,379		—		1,743,379		—
Commercial mortgage-backed securities - agency	123,912		—		123,912		—
Commercial mortgage-backed securities - non-agency	600,888		—		600,888		—
Asset-backed securities	409,653		—		409,653		—
Corporate bonds	3,040		—		3,040		—
Equity securities with a readily determinable fair value	20,788		—		20,788		—
Derivative financial instruments(2)	23,891		—		23,891		—
Interest rate lock commitments	1,306		—		—		1,306
Forward commitments	32		—		32		—
Total assets at fair value	$	7,555,603	$	1,008	$	7,553,289	$	1,306
Liabilities
Derivative financial instruments(1)	$	25,099	$	—	$	25,099	$	—
Forward commitments	95		—		95		—

Total liabilities at fair value	$	25,194	$	—	$	25,194	$	—

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

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, 2022
	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	$	14,436	$	—	$	—	$	14,436	$	4,158
Owner occupied commercial real estate	8,486		—		—		8,486		129
Non-owner occupied commercial real estate	11,643		—		—		11,643		—
Real estate construction	1,547		—		—		1,547		—
Agricultural and agricultural real estate	6,215		—		—		6,215		533
Residential real estate	1,622		—		—		1,622		—

Total collateral dependent individually assessed loans	$	43,949	$	—	$	—	$	43,949	$	4,820
Loans held for sale	$	9,570	$	—	$	9,570	$	—	$	121
Other real estate owned	8,030		—		—		8,030		224
Premises, furniture and equipment held for sale	8,796		—		—		8,796		163


	Fair Value Measurements at December 31, 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	$	8,989	$	—	$	—	$	8,989	$	275
Owner occupied commercial real estate	8,447		—		—		8,447		—
Non-owner occupied commercial real estate	11,946		—		—		11,946		1,637

Agricultural and agricultural real estate	11,404		—		—		11,404		372
Residential real estate	855		—		—		855		—

Total collateral dependent individually assessed loans	$	41,641	$	—	$	—	$	41,641	$	2,284
Loans held for sale	$	21,640	$	—	$	21,640	$	—	$	(813)

Other real estate owned	1,927		—		—		1,927		686
Premises, furniture and equipment held for sale	10,828		—		—		10,828		241
Servicing rights	6,890		—		—		6,890		(1,088)

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
9/30/2022

Valuation
Technique

Unobservable
Input

Range (Weighted
Average)

Interest rate lock commitments

231

Discounted cash flows

Closing ratio

0-99% (88%)(1)

Other real estate owned

8,030

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Premises, furniture and equipment held for sale

8,796

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Collateral dependent individually assessed loans:

Commercial

14,436

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Owner occupied commercial real estate

8,486

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-7%(3)

Non-owner occupied commercial real estate

11,643

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Real estate construction

1,547

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Agricultural and agricultural real estate

6,215

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-6%(3)

Residential real estate

1,622

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-7%(3)

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

(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.

Fair Value at 12/31/2021

Valuation
Technique

Unobservable
Input

Range (Weighted Average)

Interest rate lock commitments

1,306

Discounted cash flows

Closing ratio

0-99% (88%)(1)

Other real estate owned

1,927

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Servicing rights

6,890

Discounted cash flows

Discount rate

9 - 11% (9.02%)(4)

Constant prepayment rate

13.1 - 18.6% (13.4%)(4)

Premises, furniture and equipment held for sale

10,828

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Collateral dependent individually assessed loans:

Commercial and industrial

8,989

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-6%(3)

Owner occupied commercial real estate

8,447

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-7%(3)

Non-owner occupied commercial real estate

11,946

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Agricultural and agricultural real estate

11,404

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-7%(3)

Residential real estate

855

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-7%(3)

(4) The significant unobservable input used in the discounted cash flow analysis are the discount rate and constant prepayment rate.

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, 2022		For the Year Ended December 31, 2021
Balance at January 1,	$	1,306	$	1,827

Total net gains included in earnings	(2,009)		(2,345)
Issuances	3,640		15,403
Settlements	(2,706)		(13,579)
Balance at period end	$	231	$	1,306

Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at September 30, 2022, and December 31, 2021, were $231,000 and $1.3 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, 2022, and December 31, 2021, 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, 2022
	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	$	399,860	$	399,860	$	399,860	$	—	$	—
Time deposits in other financial institutions	1,740		1,740		1,740		—		—
Securities:

Carried at fair value	6,060,331		6,060,031		26,737		6,033,294		—
Held to maturity	830,247		782,805		—		782,805		—
Other investments	80,286		80,286		—		80,286		—
Loans held for sale	9,570		9,570		—		9,570		—
Loans, net:
Commercial and industrial	3,248,440		3,131,766		—		3,117,330		14,436
PPP	13,506		13,506		—		13,506		—
Owner occupied commercial real estate	2,269,001		2,148,135		—		2,139,649		8,486
Non-owner occupied commercial real estate	2,204,733		2,112,901		—		2,101,258		11,643
Real estate construction	971,747		968,343		—		966,796		1,547
Agricultural and agricultural real estate	778,787		728,514		—		722,299		6,215
Residential real estate	845,502		810,833		—		809,211		1,622
Consumer	486,101		480,968		—		480,968		—
Total Loans, net	10,817,817		10,394,966		—		10,351,017		43,949
Cash surrender value on life insurance	193,184		193,184		—		193,184		—
Derivative financial instruments(1)	48,893		48,893		—		48,893		—
Interest rate lock commitments	231		231		—		—		231
Forward commitments	829		829		—		829		—
Financial liabilities:
Deposits
Demand deposits	6,083,563		6,083,563		—		6,083,563		—
Savings deposits	10,060,523		10,060,523		—		10,060,523		—
Time deposits	1,123,035		1,123,035		—		1,123,035		—

Short term borrowings	147,000		147,000		—		147,000		—
Other borrowings	371,446		372,308		—		372,308		—
Derivative financial instruments(2)	48,837		48,837		—		48,837		—
Forward commitments	11		11		—		11		—

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


					Fair Value Measurements at December 31, 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	$	435,599	$	435,599	$	435,599	$	—	$	—
Time deposits in other financial institutions	2,894		2,894		2,894		—		—
Securities:

Carried at fair value	7,530,374		7,530,374		1,008		7,529,366		—
Held to maturity	84,709		94,139		—		94,139		—
Other investments	82,567		82,567		—		82,567		—
Loans held for sale	21,640		21,640		—		21,640		—
Loans, net:
Commercial and industrial	2,617,347		2,603,001		—		2,594,012		8,989
PPP	199,883		199,883		—		199,883		—
Owner occupied commercial real estate	2,221,120		2,222,030		—		2,213,583		8,447
Non-owner occupied commercial real estate	1,992,683		1,998,161		—		1,986,215		11,946
Real estate construction	833,581		844,578		—		844,578		—
Agricultural and agricultural real estate	748,540		749,238		—		737,834		11,404
Residential real estate	820,856		819,178		—		818,323		855
Consumer	410,474		415,487		—		415,487		—
Total Loans, net	9,844,484		9,851,556		—		9,809,915		41,641
Cash surrender value on life insurance	191,722		191,722		—		191,722		—
Derivative financial instruments(1)	23,891		23,891		—		23,891		—
Interest rate lock commitments	1,306		1,306		—		—		1,306
Forward commitments	32		32		—		32		—
Financial liabilities:
Deposits
Demand deposits	6,495,326		6,495,326		—		6,495,326		—
Savings deposits	8,897,909		8,897,909		—		8,897,909		—
Time deposits	1,024,020		1,024,020		—		1,024,020		—

Short term borrowings	131,597		131,597		—		131,597		—
Other borrowings	372,072		373,194		—		373,194		—
Derivative financial instruments(1)	25,099		25,099		—		25,099		—
Forward commitments	95		95		—		95		—

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

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 8: STOCK COMPENSATION

HTLF may grant, through its Compensation, Nominating 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 has 1,460,000 shares of common stock authorized for issuance. As of September 30, 2022, 954,256 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 $129,000 of tax benefit during the nine months ended September 30, 2022, and a tax benefit of $304,000 during the nine months ended September 30, 2021, 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 are generally granted in March of each year and 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, generally in March of each year. 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, 2022, and September 30, 2021, and changes during the nine months ended September 30, 2022 and 2021, follows:


	2022			2021
	Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value
Outstanding at January 1,	389,885	$	44.19	348,275	$	38.22
Granted	238,495	48.41		214,943	51.49
Vested	(158,702)	45.04		(146,864)	40.87
Forfeited	(27,316)	46.69		(24,088)	42.98
Outstanding at September 30,	442,362	$	46.01	392,266	$	44.14

Total compensation costs recorded for RSUs were $7.4 million and $6.7 million for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, there were $10.8 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2025.

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) 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, 2021:

•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 ESTIMATES

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, 2021. There have been no significant changes in the critical accounting estimates or the assumptions and judgments utilized in applying these estimates since December 31, 2021.

OVERVIEW

Heartland Financial USA, Inc. is a financial services company operating under the brand name "HTLF". HTLF's independently branded and chartered 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 and products including treasury management, commercial credit cards, wealth management, investments and residential mortgages. As of September 30, 2022, HTLF had nine banking subsidiaries operating under 11 local bank brands through a total of 121 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 fees, brokerage and insurance commissions, net securities gains/(losses), 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, 2022, compared to the quarter ended September 30, 2021:

•net income available to common stockholders of $54.6 million compared to $53.9 million, an increase of $640,000 or 1%,

•earnings per diluted common share of $1.28 compared to $1.27, an increase of $0.01 or 1%,

•net interest income of $155.9 million compared to $142.6 million, an increase of $13.3 million or 9%,

•return on average assets was 1.13% compared to 1.19%,

•return on average common equity was 12.93% compared to 10.32%, and

•return on average tangible common equity (non-GAAP) was 20.76% compared to 15.14%.

HTLF reported the following results for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021:

•net income available to common stockholders of $145.5 million compared to $164.3 million, a decrease of $18.8 million or 11%,

•earnings per diluted common share of $3.42 compared to $3.88, a decrease of $0.46 or 12%,

•net interest income of $433.0 million compared to $423.4 million, an increase of $9.7 million or 2%,

•return on average assets was 1.04% compared to 1.25%,

•return on average common equity was 10.80% compared to 10.95%, and

•return on average tangible common equity (non-GAAP) was 16.79% compared to 16.34%,

For the third quarter of 2022, net interest margin was 3.41% (3.45% on a fully tax-equivalent basis, non-GAAP), which compares to 3.30% (3.34% on a fully tax-equivalent basis, non-GAAP) for the third quarter of 2021. For the first nine months of 2022, net interest margin was 3.22% (3.27% on a fully tax-equivalent basis, non-GAAP) which compares to 3.37% (3.41% on a fully tax equivalent basis, non-GAAP) for the first nine months of 2021.

The efficiency ratio on a fully tax-equivalent basis (non-GAAP) was 55.26% for the third quarter of 2022 compared to 60.38% for the same quarter of 2021. For the first nine months of 2022, the efficiency ratio on a fully tax-equivalent basis (non-GAAP) was 58.99% compared to 58.05% for the first nine months of 2021.

Total assets were $19.68 billion at September 30, 2022, an increase of $408.4 million or 2% since December 31, 2021. Securities represented 35% of total assets at September 30, 2022, and 40% of total assets at December 31, 2021. Total loans held to maturity were $10.92 billion at September 30, 2022, compared to $9.95 billion at December 31, 2021, which was an increase of $969.0 million or 10%. Excluding total Paycheck Protection Program ("PPP") loans, total loans held to maturity increased $1.16 billion or 12% since year-end 2021.

The total allowance for lending related credit losses was $124.6 million or 1.14% of total loans at September 30, 2022, compared to $125.6 million or 1.26% of total loans at December 31, 2021.

Total deposits were $17.27 billion as of September 30, 2022, compared to $16.42 billion at December 31, 2021, an increase of $849.9 million or 5%.

Total equity was $1.66 billion at September 30, 2022, compared to $2.18 billion at December 31, 2021. Book value per common share was $36.41 at September 30, 2022, compared to $49.00 at year-end 2021. The unrealized loss on securities available for sale, net of applicable taxes, was $649.7 million at September 30, 2022, compared to an unrealized loss of $4.4 million, net of applicable taxes, at December 31, 2021.

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.

2022 Developments

Charter Consolidation Update

In the second quarter of 2022, the consolidation of HTLF's eleven separate bank charters advanced from planning to execution with Citywide Banks operating as a division of HTLF Bank. During the third quarter of 2022, the charters of Premier Valley Bank and Minnesota Bank & Trust were consolidated into HTLF Bank. Subsequent to September 30, 2022, the Arizona Bank & Trust charter was consolidated into HTLF Bank. Citywide Banks, Premier Valley Bank, Minnesota Bank & Trust and Arizona Bank & Trust are now operating as divisions of HTLF Bank. During the fourth quarter of 2022, one additional charter consolidation is expected to be completed, and the remaining six charters are expected to be consolidated by the end of 2023. Charter consolidation follows a template that retains the current brands, local leadership and local decision making.

Consolidation restructuring costs are projected to be $19-$20 million with approximately $12-$13 million of expenses remaining to be incurred through 2023. Total costs incurred since the project started in the fourth quarter of 2021 through September 30, 2022, were $6.9 million, of which $2.1 million was incurred in the third quarter of 2022. For the nine months ended September 30, 2022, consolidation restructuring costs of $5.0 million have been incurred. Charter consolidation is designed to eliminate redundancies and improve HTLF’s operating efficiency and capacity to support ongoing product and service enhancements, as well as current and future growth. HTLF realized some operating efficiency and financial benefits in the third quarter of 2022 with the completion of two additional charter consolidations. The resulting efficiencies and expansion in capacity are projected to generate benefits of approximately $20.0 million annually when the project is completed with core operating expenses expected to decline to 2.10% or less of average assets.


FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
STATEMENT OF INCOME DATA
Interest income	$	175,806		$	149,187		$	469,955		$	444,721
Interest expense	19,930			6,644			36,939			21,355
Net interest income	155,876			142,543			433,016			423,366
Provision (benefit) for credit losses	5,492			(4,534)			11,983			(12,262)
Net interest income after provision (benefit) for credit losses	150,384			147,077			421,033			435,628
Noninterest income	29,181			32,724			98,289			96,205
Noninterest expenses	108,883			110,627			326,159			316,426
Income taxes	14,118			13,250			41,637			45,064
Net income	56,564			55,924			151,526			170,343
Preferred dividends	(2,013)			(2,013)			(6,038)			(6,038)

Net income available to common stockholders	$	54,551		$	53,911		$	145,488		$	164,305

KEY PERFORMANCE RATIOS
Annualized return on average assets	1.13		%	1.19		%	1.04		%	1.25		%
Annualized return on average common equity (GAAP)	12.93			10.32			10.80			10.95
Annualized return on average tangible common equity (non-GAAP)(1)	20.76			15.14			16.79			16.34

Annualized ratio of net charge-offs/(recoveries) to average loans	0.00			(0.05)			0.17			0.04
Annualized net interest margin (GAAP)	3.41			3.30			3.22			3.37
Annualized net interest margin, fully tax-equivalent (non-GAAP)(1)	3.45			3.34			3.27			3.41
Efficiency ratio, fully tax-equivalent (non-GAAP)(1)	55.26			60.38			58.99			58.05
Total noninterest expenses to average assets	2.18			2.36			2.23			2.31
Core noninterest expenses to average assets (non-GAAP)(1)	2.09			2.25			2.17			2.21


Dollars in thousands, expect per share data	As Of and For the Quarter Ended
	9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021
BALANCE SHEET DATA
Investments	$	6,970,864		$	7,274,056		$	7,189,779		$	7,697,650		$	7,618,622
Loans held for sale	9,570			18,803			22,685			21,640			37,078
Loans receivable held to maturity	10,923,532			10,678,218			10,177,385			9,954,572			9,854,907
Allowance for credit losses	105,715			101,353			100,522			110,088			117,533
Total assets	19,682,950			19,658,399			19,230,879			19,274,549			18,996,225
Total deposits	17,267,121			17,225,550			16,666,684			16,417,255			16,022,243
Long-term obligations	371,446			372,538			372,290			372,072			371,765

Common equity	1,545,253			1,663,363			1,821,152			2,071,473			2,061,547

COMMON SHARE DATA
Book value per common share (GAAP)	$	36.41		$	39.19		$	42.98		$	49.00		$	48.79
Tangible book value per common share (non-GAAP)(1)	$	22.20		$	24.94		$	28.66		$	34.59		$	34.33

Common shares outstanding, net of treasury stock	42,444,106			42,439,439			42,369,908			42,275,264			42,250,092
Tangible common equity ratio (non-GAAP)(1)	4.94		%	5.56		%	6.52		%	7.84		%	7.89		%

(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
	9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)
Common equity (GAAP)	$	1,545,253		$	1,663,363		$	1,821,152		$	2,071,473		$	2,061,547
Less goodwill	576,005			576,005			576,005			576,005			576,005
Less core deposit and customer relationship intangibles, net	26,995			28,851			30,934			32,988			35,157
Tangible common equity (non-GAAP)	$	942,253		$	1,058,507		$	1,214,213		$	1,462,480		$	1,450,385

Common shares outstanding, net of treasury stock	42,444,106			42,439,439			42,369,908			42,275,264			42,250,092
Common equity (book value) per share (GAAP)	$	36.41		$	39.19		$	42.98		$	49.00		$	48.79
Tangible book value per common share (non-GAAP)	$	22.20		$	24.94		$	28.66		$	34.59		$	34.33

Reconciliation of Tangible Common Equity Ratio (non-GAAP)
Tangible common equity (non-GAAP)	$	942,253		$	1,058,507		$	1,214,213		$	1,462,480		$	1,450,385

Total assets (GAAP)	$	19,682,950		$	19,658,399		$	19,230,879		$	19,274,549		$	18,996,225
Less goodwill	576,005			576,005			576,005			576,005			576,005
Less core deposit and customer relationship intangibles, net	26,995			28,851			30,934			32,988			35,157
Total tangible assets (non-GAAP)	$	19,079,950		$	19,053,543		$	18,623,940		$	18,665,556		$	18,385,063
Tangible common equity ratio (non-GAAP)	4.94		%	5.56		%	6.52		%	7.84		%	7.89		%





	For the Quarter Ended September 30,						For the Nine Months Ended September 30,
	2022			2021			2022			2021
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common stockholders (GAAP)	$	54,551		$	53,911		$	145,488		$	164,305
Plus core deposit and customer relationship intangibles amortization, net of tax(1)	1,466			1,814			4,734			5,709
Net income available to common stockholders excluding intangible amortization (non-GAAP)	$	56,017		$	55,725		$	150,222		$	170,014

Average common equity (GAAP)	$	1,674,306		$	2,072,593		$	1,801,835		$	2,006,123
Less average goodwill	576,005			576,005			576,005			576,005
Less average core deposit and customer relationship intangibles, net	27,902			36,279			29,878			38,745
Average tangible common equity (non-GAAP)	$	1,070,399		$	1,460,309		$	1,195,952		$	1,391,373
Annualized return on average common equity (GAAP)	12.93		%	10.32		%	10.80		%	10.95		%
Annualized return on average tangible common equity (non-GAAP)	20.76		%	15.14		%	16.79		%	16.34		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net Interest Income (GAAP)	$	155,876		$	142,543		$	433,016		$	423,366
Plus tax-equivalent adjustment(1)	2,151			1,714			6,247			5,237
Net interest income, fully tax-equivalent (non-GAAP)	$	158,027		$	144,257		$	439,263		$	428,603

Average earning assets	$	18,157,795		$	17,123,824		$	17,969,001		$	16,803,740

Annualized net interest margin (GAAP)	3.41		%	3.30		%	3.22		%	3.37		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)	3.45			3.34			3.27			3.41
Net purchase accounting discount accretion on loans included in annualized net interest margin	0.03			0.08			0.05			0.10

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





Non-GAAP Reconciliations (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,
	2022			2021			2022			2021
Net interest income (GAAP)	$	155,876		$	142,543		$	433,016		$	423,366
Tax-equivalent adjustment(1)	2,151			1,714			6,247			5,237
Fully tax-equivalent net interest income	158,027			144,257			439,263			428,603
Noninterest income	29,181			32,724			98,289			96,205
Securities (gains)/losses, net	1,055			(1,535)			272			(4,347)
Unrealized (gain)/loss on equity securities, net	211			(112)			615			(85)

Valuation adjustment on servicing rights	—			(195)			(1,658)			(586)
Adjusted revenue (non-GAAP)	$	188,474		$	175,139		$	536,781		$	519,790

Total noninterest expenses (GAAP)	$	108,883		$	110,627		$	326,159		$	316,426
Less:
Core deposit and customer relationship intangibles amortization	1,856			2,295			5,993			7,226
Partnership investment in tax credit projects	979			2,374			1,793			3,754
(Gain)/loss on sales/valuation of assets, net	(251)			(3)			(3,435)			374
Acquisition, integration and restructuring costs	2,156			204			5,144			3,342
Core expenses (non-GAAP)	$	104,143		$	105,757		$	316,664		$	301,730
Efficiency ratio, fully tax-equivalent (non-GAAP)	55.26		%	60.38		%	58.99		%	58.05		%

Reconciliation of Annualized Ratio of Core Expenses to Average Assets (non-GAAP)
Total noninterest expenses (GAAP)	$	108,883		$	110,627		$	326,159		$	316,426
Core expenses (non-GAAP)	104,143			105,757			316,664			301,730

Average assets	$	19,775,341		$	18,608,775		$	19,523,433		$	18,291,444
Total noninterest expenses to average assets (GAAP)	2.18		%	2.36		%	2.23		%	2.31		%
Core expenses to average assets (non-GAAP)	2.09		%	2.25		%	2.17		%	2.21		%

Acquisition, integration and restructuring costs
Salaries and employee benefits	$	365		$	—		$	980		$	578
Occupancy	—			—			—			10
Furniture and equipment	—			7			—			655
Professional fees	1,480			145			3,495			878
Advertising	131			11			287			173
(Gain)/loss on sales/valuations of assets, net	—			39			—			39
Other noninterest expenses	180			2			382			1,009
Total acquisition, integration and restructuring costs	$	2,156		$	204		$	5,144		$	3,342
After tax impact on diluted earnings per common share(1)	$	0.04		$	—		$	0.10		$	0.06
















(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.

•Annualized ratio of core expenses to average assets adjusts noninterest expenses to exclude specific items noted in the reconciliation. Management includes this measure as it is considered to be a critical metric to analyze and evaluate controllable expenses related to primary business operations.

RESULTS OF OPERATIONS

Net Interest Margin and Net Interest Income

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. Net interest income, net interest margin and the mix and growth of earning assets are important indicators of HTLF's profitability.

HTLF's ability to maintain a favorable net interest margin 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, 2022 and 2021

Net interest margin, expressed as a percentage of average earning assets, was 3.41% (3.45% on a fully tax-equivalent basis, non-GAAP) during the third quarter of 2022, compared to 3.30% (3.34% on a fully tax-equivalent basis, non-GAAP) during the third quarter of 2021. For the quarters ended September 30, 2022 and 2021, net interest margin included 3 basis points and 8 basis points, respectively, of net purchase accounting discount amortization.

Total interest income and average earning asset changes for the third quarter of 2022 compared to the third quarter of 2021 were:

•Total interest income was $175.8 million compared to $149.2 million, which was an increase of $26.6 million or 18% and primarily attributable to an increase in average earning assets and higher yields partially offset by a reduction of PPP loan interest income. PPP loan interest income totaled $363,000 compared to $11.2 million, which was a decrease of $10.8 million or 97%.

•Total interest income on a tax-equivalent basis (non-GAAP) was $178.0 million, which was an increase of $27.1 million or 18% from $150.9 million.

•Average earning assets increased $1.03 billion or 6% to $18.16 billion compared to $17.12 billion.

•The average rate on earning assets increased 39 basis points to 3.89% compared to 3.50%, which was primarily due to recent interest rate increases.

Total interest expense and average interest bearing liability changes for the third quarter of 2022 compared to the third quarter of 2021 were:

•Total interest expense was $19.9 million, an increase of $13.3 million from $6.6 million, based on an increase in the average interest rate paid and an increase in average interest bearing liabilities.

•The average interest rate paid on interest bearing liabilities increased to 0.67% from 0.27%.

•Average interest bearing deposits increased $1.76 billion or 19% to $11.22 billion from $9.46 billion. Average wholesale funding deposits totaled $1.25 billion for the third quarter of 2022 compared to $0 for the third quarter of 2021.

•The average interest rate paid on interest bearing deposits increased 40 basis points to 0.54% compared to 0.14%.

•Average borrowings increased $86.6 million or 21% to $506.5 million from $419.9 million, and the average interest rate paid on borrowings was 3.74% compared to 3.02%.

Net interest income increased for the third quarter of 2022 compared to the third quarter of 2021:

•Net interest income totaled $155.9 million compared to $142.5 million, which was an increase of $13.3 million or 9%. PPP loan interest income totaled $363,000 compared to $11.2 million, which was a decrease of $10.8 million or 97%.

•Net interest income on a tax-equivalent basis (non-GAAP) totaled $158.0 million compared to $144.3 million, which was an increase of $13.8 million or 10%.

For the Nine Months ended September 30, 2022 and 2021

Net interest margin, expressed as a percentage of average earning assets, was 3.22% (3.27% on a fully tax-equivalent basis, non-GAAP) during the first nine months of 2022, compared to 3.37% (3.41% on a fully tax-equivalent basis, non-GAAP) during the first nine months of 2021. For the nine months ended September 30, 2022 and 2021, net interest margin included 5 basis points and 10 basis points, respectively, of net purchase accounting discount amortization.

Total interest income and average earning asset changes for the first nine months of 2022 compared to the first nine months of 2021 were:

•Total interest income was $470.0 million, which was an increase of $25.2 million or 6% from $444.7 million. PPP loan interest income totaled $6.5 million compared to $32.5 million, which was a decrease of $26.0 million or 80%.

•Total interest income on a tax-equivalent basis (non-GAAP) was $476.2 million, which was an increase of $26.2 million or 6% from $450.0 million.

•Average earning assets increased $1.17 billion or 7% to $17.97 billion compared to $16.80 billion.

Total interest expense and average interest bearing liability changes for the first nine months of 2022 compared to the first nine months of 2021 were:

•Total interest expense was $36.9 million, an increase of $15.6 million or 73% from $21.4 million, based on an increase in the average interest rate paid and an increase in average interest bearing liabilities.

•The average interest rate paid on interest bearing liabilities increased to 0.44% compared to 0.29%.

•Average interest bearing deposits increased $1.38 billion or 15% to $10.76 billion from $9.38 billion. Average wholesale funding deposits totaled $845.7 million for the first nine months of 2022 compared to $0 for the first nine months of 2021.

•The average interest rate paid on interest bearing deposits increased to 0.31% compared to 0.17%.

Net interest income increased for the first nine months of 2022 compared to the first nine months of 2021:

•Net interest income totaled $433.0 million compared to $423.4 million, which was an increase of $9.7 million or 2%. PPP loan interest income totaled $6.5 million compared to $32.5 million, which was a decrease of $26.0 million or 80%.

•Net interest income on a tax-equivalent basis (non-GAAP) totaled $439.3 million compared to $428.6 million, which was an increase of $10.7 million or 2%.

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 earning assets grow and a favorable deposit profile is maintained. In 2022, the Federal Reserve has increased the federal funds rates five times for a total of 300 basis points through its September 2022 meeting. The Federal Reserve has indicated it will closely assess economic data and is expected to continue to raise the federal funds interest rate in the fourth quarter of 2022. Ultimately, the timing and magnitude of any such changes are uncertain and will depend on domestic and global economic conditions. The increases to the federal funds interest rate in 2022 have had a positive impact on HTLF's net interest income due to its asset sensitive balance sheet, and any future increases to the federal funds interest rate would be favorable to HTLF's net interest income.

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 models and reviews simulations using various improving and deteriorating 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 6 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)

	For the Quarter Ended
	September 30, 2022						June 30, 2022						September 30, 2021
	Average Balance		Interest		Rate		Average Balance		Interest		Rate		Average Balance		Interest		Rate
Earning Assets
Securities:
Taxable	$	6,303,278	$	45,648	2.87	%	$	6,419,615	$	38,098	2.38	%	$	6,244,097	$	32,384	2.06	%
Nontaxable(1)	951,232		7,802		3.25		915,880		6,972		3.05		759,073		5,835		3.05
Total securities	7,254,510		53,450		2.92		7,335,495		45,070		2.46		7,003,170		38,219		2.17
Interest on deposits with other banks and short-term investments	222,170		1,081		1.93		277,773		563		0.81		322,430		132		0.16
Federal funds sold	11		—		—		—		—		—		—		—		—
Loans:(2)
Commercial and industrial(1)	3,182,134		37,526		4.68		3,002,822		30,441		4.07		2,588,270		28,224		4.33
PPP loans	17,859		363		8.06		41,370		1,801		17.46		602,675		11,186		7.36
Owner occupied commercial real estate	2,272,666		23,601		4.12		2,294,524		22,863		4.00		1,990,538		20,048		4.00
Non-owner occupied commercial real estate	2,258,424		25,895		4.55		2,179,048		22,871		4.21		1,964,609		22,129		4.47
Real estate construction	914,520		12,382		5.37		878,555		10,015		4.57		835,976		9,591		4.55
Agricultural and agricultural real estate	799,823		8,966		4.45		782,610		7,933		4.07		674,510		7,415		4.36
Residential mortgage	858,119		8,665		4.01		849,174		8,358		3.95		855,734		9,068		4.20
Consumer	479,590		6,028		4.99		449,265		4,949		4.42		407,735		4,889		4.76
Less: allowance for credit losses-loans	(102,031)		—		—		(102,902)		—		—		(121,823)		—		—
Net loans	10,681,104		123,426		4.58		10,374,466		109,231		4.22		9,798,224		112,550		4.56
Total earning assets	18,157,795		177,957		3.89	%	17,987,734		154,864		3.45	%	17,123,824		150,901		3.50	%
Nonearning Assets	1,617,546						1,571,357						1,484,951
Total Assets	$	19,775,341					$	19,559,091					$	18,608,775
Interest Bearing Liabilities
Savings	$	10,059,652	$	12,907	0.51	%	$	9,995,497	$	5,372	0.22	%	$	8,364,326	$	2,240	0.11	%
Time deposits	1,156,908		2,251		0.77		1,088,765		1,158		0.43		1,097,126		1,204		0.44
Short-term borrowings	134,974		360		1.06		118,646		88		0.30		139,001		98		0.28
Other borrowings	371,492		4,412		4.71		372,411		3,808		4.10		280,897		3,102		4.38
Total interest bearing liabilities	11,723,026		19,930		0.67	%	11,575,319		10,426		0.36	%	9,881,350		6,644		0.27	%
Noninterest Bearing Liabilities
Noninterest bearing deposits	6,065,729						5,960,217						6,356,326
Accrued interest and other liabilities	201,575						181,457						187,801
Total noninterest bearing liabilities	6,267,304						6,141,674						6,544,127
Equity	1,785,011						1,842,098						2,183,298
Total Liabilities and Equity	$	19,775,341					$	19,559,091					$	18,608,775
Net interest income, fully tax-equivalent (non-GAAP)(1)(3)			$	158,027					$	144,438					$	144,257
Net interest spread(1)					3.22	%					3.09	%					3.23	%
Net interest income, fully tax-equivalent to total earning assets (non-GAAP)(1)(3)					3.45	%					3.22	%					3.34	%










(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)
	For the Nine Months Ended
	September 30, 2022							September 30, 2021
	Average Balance			Interest		Rate		Average Balance			Interest		Rate
Earning Assets
Securities:
Taxable	$	6,407,459		$	116,366	2.43	%	$	5,935,295		$	94,373	2.13	%
Nontaxable(1)	990,784			22,625		3.05		743,534			17,308		3.11
Total securities	7,398,243			138,991		2.51		6,678,829			111,681		2.24
Interest bearing deposits with other banks and other short-term investments	238,819			1,715		0.96		266,701			258		0.13
Federal funds sold	7			—		—		4,622			1		0.03
Loans:(2)
Commercial and industrial(1)	2,977,751			95,020		4.27		2,519,608			85,008		4.51
PPP loans	63,342			6,487		13.69		879,489			32,521		4.94
Owner occupied commercial real estate	2,270,486			67,742		3.99		1,876,929			59,710		4.25
Non-owner occupied commercial real estate	2,166,873			69,929		4.31		1,961,016			65,984		4.50
Real estate construction	880,354			31,673		4.81		819,452			28,501		4.65
Agricultural and agricultural real estate	776,127			23,905		4.12		676,091			22,733		4.50
Residential mortgage	850,444			25,108		3.95		844,337			28,153		4.46
Consumer	452,032			15,632		4.62		404,384			15,408		5.09

Less: allowance for loan losses	(105,477)			—		—		(127,718)			—		—
Net loans	10,331,932			335,496		4.34		9,853,588			338,018		4.59
Total earning assets	17,969,001			476,202		3.54	%	16,803,740			449,958		3.58	%
Nonearning Assets	1,554,432							1,487,704
Total Assets	$	19,523,433						$	18,291,444
Interest Bearing Liabilities
Savings	$	9,652,651		$	20,673	0.29	%	$	8,211,478		$	6,903	0.11	%
Time deposits	1,106,095			3,992		0.48		1,166,858			4,726		0.54
Short-term borrowings	124,459			494		0.53		182,583			348		0.25
Other borrowings	372,027			11,780		4.23		328,887			9,378		3.81
Total interest bearing liabilities	11,255,232			36,939		0.44	%	9,889,806			21,355		0.29	%
Noninterest Bearing Liabilities
Noninterest bearing deposits	6,172,984							6,104,058
Accrued interest and other liabilities	182,677							180,752
Total noninterest bearing liabilities	6,355,661							6,284,810
Equity	1,912,540							2,116,828
Total Liabilities and Equity	$	19,523,433						$	18,291,444
Net interest income, fully tax-equivalent (non-GAAP)(1)(3)				$	439,263						$	428,603
Net interest spread(1)						3.10	%						3.29	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(1)(3)						3.27	%						3.41	%
Interest bearing liabilities to earning assets	62.64		%					58.85		%




(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, 2022 and 2021, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Provision expense (benefit) for credit losses-loans	$	4,388	$	(4,448)	$	8,561	$	(10,898)
Provision expense (benefit) for credit losses-unfunded commitments	1,104		(35)		3,422		(1,313)
Provision expense (benefit) for credit losses-held to maturity securities	—		(51)		—		(51)
Total provision expense (benefit)	$	5,492	$	(4,534)	$	11,983	$	(12,262)

The provision expense for credit losses for loans was $4.4 million for the third quarter of 2022, which was a change of $8.8 million from provision benefit of $4.4 million recorded in the third quarter of 2021. The provision expense for the third quarter of 2022 compared to the third quarter of 2021 was impacted by several factors, including:

•loan growth exclusive of PPP loans totaled of $254.8 million compared to $262.8 million,

•provision expense of $2.8 million was recorded for individually assessed loans compared to a provision benefit of $661,000, and

•declines in macroeconomic factors due to the long-term impact of rising interest rates and record high inflation compared to improved macroeconomic factors in the third quarter of 2021 due to waning COVID concerns.

The provision expense for credit losses for loans was $8.6 million for the first nine months of 2022 compared to a benefit of $10.9 million for the first nine months of 2021. The provision expense for the first nine months of 2022 compared to the first nine months of 2021 was impacted by several factors, including

•loan growth of $1.16 billion and $380.4 million excluding PPP loans since December 31, 2021 and 2020, respectively,

•net charge-offs of $12.9 million for the first nine months of 2022 compared to $3.2 million for first nine months of 2021, and

•deteriorated macroeconomic factors compared to the first nine months of 2021 as described above.

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, including the impact of economic conditions, are all considered when determining the appropriateness of the allowance for credit losses and will contribute to the variability in the provision for credit losses 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 estimates 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, 2021, "Allowance For Credit Losses" and "Provision for Credit Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 4, "Allowance for Credit Losses," to the consolidated financial statements included herein.

Management believes the allowance for credit losses as of September 30, 2022, was at a level commensurate with the overall risk exposure of the loan portfolio. However, deterioration in current economic conditions, including a recession, could cause certain borrowers to experience difficulty and impede their ability to meet debt service. Due to the uncertainty of future economic conditions resulting from the COVID-19 pandemic and other economic headwinds, including recent concerns over COVID-19 variants, inflation, supply chain challenges, workforce shortages and wage pressures and the waning effects of recent economic stimulus, 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, 2022 and 2021, in thousands:


	Three Months Ended September 30,
	2022		2021		Change		% Change
Service charges and fees	$	17,282	$	15,551	$	1,731	11	%
Loan servicing income	831		784		47		6
Trust fees	5,372		6,221		(849)		(14)
Brokerage and insurance commissions	649		866		(217)		(25)
Securities gains/(losses), net	(1,055)		1,535		(2,590)		(169)
Unrealized gain/(loss) on equity securities, net	(211)		112		(323)		(288)

Net gains on sale of loans held for sale	1,832		5,281		(3,449)		(65)
Valuation adjustment on servicing rights	—		195		(195)		(100)
Income on bank owned life insurance	694		940		(246)		(26)
Other noninterest income	3,787		1,239		2,548		206
Total noninterest income	$	29,181	$	32,724	$	(3,543)	(11)	%


	Nine Months Ended September 30,
	2022		2021		Change		% Change
Service charges and fees	$	50,599	$	44,354	$	6,245	14	%
Loan servicing income	1,951		2,495		(544)		(22)
Trust fees	17,130		18,037		(907)		(5)
Brokerage and insurance commissions	2,357		2,584		(227)		(9)
Securities gains/(losses), net	(272)		4,347		(4,619)		(106)
Unrealized gain/(loss) on equity securities, net	(615)		85		(700)		(824)

Net gains on sale of loans held for sale	8,144		16,454		(8,310)		(51)
Valuation adjustment on servicing rights	1,658		586		1,072		183
Income on bank owned life insurance	1,741		2,706		(965)		(36)
Other noninterest income	15,596		4,557		11,039		242
Total noninterest income	$	98,289	$	96,205	$	2,084	2	%

Total noninterest income totaled $29.2 million during the third quarter of 2022 compared to $32.7 million for the third quarter of 2021, a decrease of $3.5 million or 11%. Total noninterest income was $98.3 million during the first nine months of 2022 compared to $96.2 million during the first nine months of 2021, an increase of $2.1 million or 2%.

Notable changes in noninterest income categories for the three- and nine- months ended September 30, 2022 and 2021 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, 2022 and 2021, in thousands:


	Three Months Ended September 30,
	2022		2021		Change		% Change
Service charges and fees on deposit accounts	$	4,764	$	4,146	$	618	15	%
Overdraft fees	3,152		3,044		108		4
Customer service and other service fees	102		52		50		96
Credit card fee income	6,885		5,673		1,212		21
Debit card income	2,379		2,636		(257)		(10)
Total service charges and fees	$	17,282	$	15,551	$	1,731	11	%

	Nine Months Ended September 30,
	2022		2021		Change		% Change
Service charges and fees on deposit accounts	$	13,831	$	12,096	$	1,735	14	%
Overdraft fees	8,959		8,185		774		9
Customer service and other service fees	289		152		137		90
Credit card fee income	20,419		15,835		4,584		29
Debit card income	7,101		8,086		(985)		(12)
Total service charges and fees	$	50,599	$	44,354	$	6,245	14	%

The increase in credit card fee income for the three and nine month comparisons was primarily the result of a larger commercial credit card customer base and increased utilization. The decline in debit card income for the three and nine month comparisons was primarily attributable to reduced volume due to shifting customer behavior.

Management is monitoring and assessing industry changes related to the consumer overdraft fees, and any future changes could negatively impact overdraft fee income.

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, 2022, and 2021, in thousands:


	Three Months Ended September 30,
	2022		2021		Change		% Change
Commercial and agricultural loan servicing fees(1)	$	583	$	642	$	(59)	(9)	%
Residential mortgage servicing fees	471		446		25		6
Mortgage servicing rights amortization	(223)		(304)		81		27
Total loan servicing income	$	831	$	784	$	47	6	%

	Nine Months Ended September 30,
	2022		2021		Change		% Change
Commercial and agricultural loan servicing fees(1)	$	1,469	$	2,155	$	(686)	(32)	%
Residential mortgage servicing fees	1,391		1,369		22		2
Mortgage servicing rights amortization	(909)		(1,029)		120		12
Total loan servicing income	$	1,951	$	2,495	$	(544)	(22)	%

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

Securities Gains/Losses, Net

For the third quarter of 2022, net security losses totaled $1.1 million compared to net gains of $1.5 million for the third quarter of 2021, a decrease of $2.6 million. During the third quarter of 2022, HTLF sold approximately $59.1 million of securities with an average yield of 2.32%, which resulted in a net loss of $1.1 million. The proceeds were used to purchase securities with an average yield of 5.75%.

For the nine months ended September 30, 2022, net securities losses totaled $272,000 compared to net securities gains of $4.3 million for nine months ended September 30, 2021, which was a decrease of $4.6 million. During the first nine months of 2022, HTLF sold $217.8 million of lower yielding securities, resulting in net losses of $3.7 million.

Net Gains on Sale of Loans Held for Sale

For the third quarter of 2022, net gains on sale of loans held for sale totaled $1.8 million, which was a decrease of $3.4 million or 65% from $5.3 million in the same quarter of 2021. Loans sold to investors in the third quarter of 2022 totaled $74.1 million compared to $116.2 million during the third quarter of 2021, which was a decrease of $42.2 million or 36%.

For the nine months ended September 30, 2022, net gains on sale of loans held for sale totaled $8.1 million compared to $16.5 million during the same period in 2021, a decrease of $8.3 million or 51%. Loans sold to investors in first nine months of 2022 totaled $257.0 million compared to $385.7 million for the first nine months of 2021, which was a decrease of $128.7 million or 33%.

The decrease for both the quarterly and year-to date comparisons was primarily attributable to a reduction in residential mortgage activity due to recent increases in residential mortgage loan interest rates.

Valuation Adjustment on Servicing Rights

The valuation adjustment on servicing rights was $0 for the third quarter of 2022 compared to $195,000 for the third quarter of 2021. The valuation adjustment on servicing rights totaled $1.7 million for the first nine months of 2022 compared to $586,000 for the first nine months of 2021, which was an increase of $1.1 million. HTLF recovered its valuation allowance in the first quarter of 2022 due to recent increases in residential mortgage loan interest rates, and no valuation allowance was required for the three and nine months ended September 30, 2022.

Other Noninterest Income

Other noninterest income totaled $3.8 million for the third quarter of 2022, which was an increase of $2.5 million from $1.2 million for the third quarter of 2021. Commercial swap fees and syndication income totaled $1.8 million in the third quarter of 2022 compared to $131,000 for the third quarter of 2021, which was an increase of $1.7 million.

Other noninterest income totaled $15.6 million for the first nine months of 2022 compared to $4.6 million for the first nine months of 2021. Commercial swap fees and syndication income totaled $9.7 million in the first nine months of 2022 compared

to $402,000 for the first nine months of 2021, which was an increase of $9.3 million. Gains of $1.9 million were recorded in the second quarter of 2022 on the sale of VISA B shares held by two subsidiary banks.

Noninterest Expenses

The tables below show noninterest expenses for the three- and nine- months ended September 30, 2022, and 2021, in thousands:


	Three Months Ended September 30,
	2022		2021		Change		% Change
Salaries and employee benefits	$	62,661	$	60,689	$	1,972	3	%
Occupancy	6,794		7,366		(572)		(8)
Furniture and equipment	2,928		3,365		(437)		(13)
Professional fees	16,277		17,242		(965)		(6)

Advertising	1,554		1,921		(367)		(19)
Core deposit and customer relationship intangibles amortization	1,856		2,295		(439)		(19)
Other real estate and loan collection expenses	304		78		226		290
(Gain)/loss on sales/valuations of assets, net	(251)		(3)		(248)		(8,267)
Acquisition, integration and restructuring costs	2,156		204		1,952		957
Partnership investment in tax credit projects	979		2,374		(1,395)		(59)
Other noninterest expenses	13,625		15,096		(1,471)		(10)
Total noninterest expenses	$	108,883	$	110,627	$	(1,744)	(2)	%


	Nine Months Ended September 30,
	2022		2021		Change		% Change
Salaries and employee benefits	$	192,867	$	177,083	$	15,784	9	%
Occupancy	21,250		22,683		(1,433)		(6)
Furniture and equipment	9,480		9,959		(479)		(5)
Professional fees	47,420		46,969		451		1

Advertising	4,392		5,039		(647)		(13)
Core deposit and customer relationship intangibles amortization	5,993		7,226		(1,233)		(17)
Other real estate and loan collection expenses	577		627		(50)		(8)
(Gain)/loss on sales/valuations of assets, net	(3,435)		374		(3,809)		(1,018)
Acquisition, integration and restructuring costs	5,144		3,342		1,802		54
Partnership investment in tax credit projects	1,793		3,754		(1,961)		(52)
Other noninterest expenses	40,678		39,370		1,308		3
Total noninterest expenses	$	326,159	$	316,426	$	9,733	3	%

For the third quarter of 2022, total noninterest expenses were $108.9 million compared to $110.6 million for the third quarter of 2021, a decrease of $1.7 million or 2%. For the first nine months of 2022, noninterest expenses totaled $326.2 million compared to $316.4 million during the first nine months of 2021, an increase of $9.7 million or 3%.

Notable changes in noninterest expense categories for the three- and nine- months ended September 30, 2022 and 2021 are as follows:

Salaries and employee benefits

Salaries and employee benefits totaled $62.7 million for the third quarter of 2022 compared to $60.7 million for the third quarter of 2021, which was an increase of $2.0 million or 3%. Salaries and employee benefits totaled $192.9 million and $177.1 million for the nine months ended September 30, 2022 and 2021, respectively, which was an increase of $15.8 million or 9%. The increases for the three and nine month periods are primarily attributable to higher salaries expense due to inflationary wage pressures and normalized health care usage in 2022 compared to 2021.

Occupancy

Occupancy expense totaled $6.8 million for the third quarter of 2022, which was a decrease of $572,000 or 8% from $7.4 million for the third quarter of 2021. For the nine months ended September 30, 2022 and 2021, occupancy expense totaled $21.3 million and $22.7 million, respectively, which was a decrease of $1.4 million or 6%.

Furniture and Equipment

Furniture and equipment expense totaled $2.9 million for the third quarter of 2022, which was a decrease of $437,000 or 13% from $3.4 million for the third quarter of 2021. For the nine months ended September 30, 2022, furniture and equipment expense totaled $9.5 million, which was a decrease of $479,000 or 5% from $10.0 million for the first nine months of 2021.

The decreases in occupancy expense and furniture and equipment expense are primarily attributable to the decreased number of branch locations as a result of HTLF's branch optimization strategy. At September 30, 2022, HTLF had 121 branches compared to 131 at September 30, 2021.

Gain/loss on sales/valuations of assets, net

Net gains on sales/valuations of assets were $251,000 for the third quarter of 2022 compared to net gains of $3,000 for the third quarter of 2021. For the nine months ended September 30, 2022, net gains on sales/valuations of assets were $3.4 million compared to net losses of $374,000 for the nine months ended September 30, 2021. During the second quarter of 2022, two branches in Illinois were sold for a gain of $3.0 million, and a gain of $413,000 was also recorded in conjunction with the sale of an insurance subsidiary.

Acquisition, integration and restructuring costs

Acquisition, integration and restructuring costs were $2.2 million for the third quarter of 2022, which was an increase of $2.0 million from $204,000 for the third quarter of 2021. Acquisition, integration and restructuring costs increased $1.8 million or 54% to $5.1 million for the first nine months of 2022 compared to $3.3 million for the first nine months of 2021. The expenses incurred in the third quarter and first nine months of 2022 were primarily related to further progress on the charter consolidation project and will continue through the end of 2023. The expenses incurred in the first nine months of 2021 were primarily attributable to the AimBank conversion in February 2021.

Partnership investment in tax credit projects

Partnership investments in tax credit projects decreased $1.4 million or 59% to $979,000 for the third quarter of 2022 compared to $2.4 million for the same quarter of 2021. For the first nine months of 2022, partnership investment in tax credit projects decreased $2.0 million or 52% to $1.8 million from $3.8 million for the first nine months of 2021. The expense is dependent upon the number of tax credit projects placed into service during the period.

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 maintaining it at or below 57%. During the third quarter of 2022, the efficiency ratio on a fully tax-equivalent basis (non-GAAP) decreased 512 basis points to 55.26% from 60.38% for the third quarter of 2021. For the nine months ended September 30, 2022, the efficiency ratio on a fully tax-equivalent basis (non-GAAP) increased by 94 basis points to 58.99% in comparison with 58.05% for the nine months ended September 30, 2021.

The efficiency ratio for the three months ended September 30, 2022, was positively impacted by higher net interest income. The efficiency ratio for the nine months ended September 30, 2022, was positively impacted by higher net interest income and noninterest income, which was partially offset by increases in noninterest expenses as noted above.

HTLF continues to pursue strategies to improve operational efficiency, which include the following initiatives:

•The consolidation of its eleven bank charters. Charter consolidation is designed to eliminate redundancies and improve HTLF’s operating efficiency and capacity to support ongoing product and service enhancements and current and future growth. Through the end of the third quarter of 2022, three charters have been consolidated into HTLF Bank, and subsequent to September 30, 2022, one charter was consolidated. The consolidated charters are now operating as divisions of HTLF Bank. HTLF expects to complete one additional charter consolidation in the fourth quarter of 2022, and the remaining six charters are expected to be consolidated in 2023.

Consolidation restructuring costs are projected to be $19-20 million with approximately $12-13 million of expenses remaining to be incurred through 2023. Total costs incurred since the project started in the fourth quarter of 2021 through September 30, 2022 were $6.9 million, of which $2.1 million was incurred in the third quarter of 2022. For the

nine months ended September 30, 2022, consolidation restructuring costs of $5.0 million have been incurred. HTLF realized some operating efficiencies and financial benefits in the third quarter of 2022 with the completion of two charter consolidations. The resulting efficiencies and expansion in capacity are projected to generate benefits of approximately $20.0 million annually when the project is completed with core operating expenses expected to decline to 2.10% or less of average assets.

•Branch optimization strategy. During the nine months ended September 30, 2022, HTLF sold, closed or consolidated 9 branch locations and expects to reduce its branch count by one additional branch before December 31, 2022.

Income Taxes

The effective tax rate was 19.97% for the third quarter of 2022 compared to 19.15% for the third quarter of 2021. The following items impacted the third quarter 2022 and 2021 tax calculations:

•Solar energy tax credits of $1.1 million compared to $2.1 million.

•Federal low-income housing tax credits of $519,000 compared to $135,000.

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

•Historic rehabilitation tax credits of $63,000 compared to $327,000.

•Tax-exempt interest income as a percentage of pre-tax income of 11.45% compared to 9.32%.

The effective tax rate was 21.56% for the nine months ended September 30, 2022, compared to 20.92% for the nine months ended September 30, 2021. The following items impacted HTLF's tax calculation for the first nine months of 2022 and 2021:

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

•Federal low-income housing tax credits of $789,000 compared to $404,000.

•New markets tax credits of $225,000 in each period.

•Historic rehabilitation tax credits of $190,000 compared to $450,000.

•Tax-exempt interest income as a percentage of pre-tax income of 12.17% compared to 9.15%.

•Tax benefit of $129,000 compared to a tax benefit of $304,000 resulting from the vesting of restricted stock units.

FINANCIAL CONDITION

Total assets were $19.68 billion at September 30, 2022, an increase of $408.4 million or 2% from $19.27 billion at December 31, 2021. Securities represented 35% and 40% of total assets at September 30, 2022, and December 31, 2021, respectively.

LENDING ACTIVITIES

HTLF's board of directors establishes an acceptable level of credit risk appetite, and the subsidiary banks follow certain centralized lending policies and procedures 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, 2022, HTLF had $1.9 million of PPP I loans outstanding. PPP II loans outstanding at September 30, 2022 totaled $11.6 million, which was net of $366,000 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, changes 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 $10.92 billion at September 30, 2022, and $9.95 billion at December 31, 2021, an increase of $969.0 million or 10%. Excluding PPP loans, total loans held to maturity increased $1.16 billion or 12% since year-end 2021.

The following table shows the changes in loan balances by loan category since December 31, 2021, in thousands:


	September 30, 2022		December 31, 2021		Change		% Change
Commercial and industrial	$	3,278,703	$	2,645,085	$	633,618	24	%
PPP	13,506		199,883		(186,377)		(93)
Owner occupied commercial real estate	2,285,973		2,240,334		45,639		2
Non-owner occupied commercial real estate	2,219,542		2,010,591		208,951		10
Real estate construction	996,017		856,119		139,898		16
Agricultural and agricultural real estate	781,354		753,753		27,601		4
Residential mortgage	852,928		829,283		23,645		3
Consumer	495,509		419,524		75,985		18
Total loans held to maturity	$	10,923,532	$	9,954,572	$	968,960	10	%

Notable changes in the loan portfolio include:

•Commercial and industrial loans increased $633.6 million or 24% to $3.28 billion at September 30, 2022, compared to $2.65 billion at December 31, 2021.

•PPP loans decreased $186.4 million or 93% to $13.5 million at September 30, 2022, compared to $199.9 million at year-end 2021 due to forgiveness payments from the SBA. Approximately 99% of total PPP loans have been forgiven.

•Non-owner occupied commercial real estate loans increased $209.0 million or 10% to $2.22 billion at September 30, 2022, compared to $2.01 billion at year-end 2021.

•Real estate construction loans increased $139.9 million or 16% to $996.0 million at September 30, 2022, compared to $856.1 million at year-end 2021.

The loan growth in the first nine months of 2022 was primarily attributable to the expansion of specific commercial lending teams and further market penetration in various HTLF growth markets.

The table below presents the composition of the loan portfolio as of September 30, 2022, and December 31, 2021, in thousands:


	September 30, 2022				December 31, 2021
	Amount		Percent		Amount		Percent
Loans receivable held to maturity:
Commercial and industrial	$	3,278,703	30.01	%	$	2,645,085	26.57	%
PPP	13,506		0.12		199,883		2.01
Owner occupied commercial real estate	2,285,973		20.93		2,240,334		22.51
Non-owner occupied commercial real estate	2,219,542		20.32		2,010,591		20.20
Real estate construction	996,017		9.12		856,119		8.60
Agricultural and agricultural real estate	781,354		7.15		753,753		7.57
Residential mortgage	852,928		7.81		829,283		8.33
Consumer	495,509		4.54		419,524		4.21
Gross loans receivable held to maturity	10,923,532		100.00	%	9,954,572		100.00	%






Allowance for credit losses-loans	(105,715)				(110,088)
Loans receivable, net	$	10,817,817			$	9,844,484

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 estimates section of HTLF's Annual Report on Form 10-K for the year ended December 31, 2021.

Total Allowance for Lending Related Credit Losses

The total allowance for lending related credit losses was $124.6 million at September 30, 2022, which was 1.14% of loans, compared to $125.6 million or 1.26% of loans at December 31, 2021. The following table shows, in thousands, the components of the allowance for lending related credit losses as of September 30, 2022, and December 31, 2021:


	September 30, 2022				December 31, 2021
	Amount		% of Allowance		Amount		% of Allowance
Quantitative	$	85,026	68.24	%	$	88,635	70.60	%
Qualitative/Economic Forecast	39,573		31.76		36,915		29.40

Total	$	124,599	100.00	%	$	125,550	100.00	%

Quantitative Allowance

The quantitative allowance decreased $3.6 million to $85.0 million or 68% of the total allowance for lending related credit losses at September 30, 2022, compared to $88.6 million or 71% of the total allowance at December 31, 2021. Positively impacting the quantitative allowance was a reduction of $160.1 million in nonpass loans since year-end 2021. Included in the quantitative allowance for September 30, 2022, and December 31, 2021, were specific reserves of $7.8 million and $7.6 million, respectively.

Qualitative Allowance/Economic Forecast

The qualitative allowance totaled $39.6 million or 32% of the total allowance for lending related credit losses at September 30, 2022, compared to $36.9 million or 29% at December 31, 2021. Management's assessment of the risk factors in the qualitative calculation at September 30, 2022, reflected an adjustment for the sustainability of current credit quality trends. HTLF has access to various third-party economic forecast scenarios provided by Moody's which are updated quarterly in the methodology. At September 30, 2022, Moody's September 6, 2022, 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, 2022, calculation, the economic outlook factors used to develop the allowance retained a measured level of caution and uncertainty that management deemed appropriate for continued economic headwinds, such as inflation, supply chain challenges, workforce shortages, wage pressures and COVID-19 variants, which are leading to higher interest rates and recession concerns.

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, 2022 and 2021, in thousands:


	Three Months Ended September 30,
	2022			2021
Balance at beginning of period	$	101,353		$	120,726

Provision (benefit) for credit losses	4,388			(4,448)
Recoveries on loans previously charged off	912			2,422
Charge-offs on loans	(938)			(1,167)
Balance at end of period	$	105,715		$	117,533
Allowance for credit losses for loans as a percent of loans	0.97		%	1.19		%
Annualized ratio of net charge offs (recoveries) to average loans	—		%	(0.05)		%


	Nine Months Ended September 30,
	2022			2021
Balance at beginning of period	$	110,088		$	131,606


Provision (benefit) for credit losses	8,561			(10,898)
Recoveries on loans previously charged off	2,694			3,615
Charge-offs on loans	(15,628)			(6,790)
Balance at end of period	$	105,715		$	117,533
Allowance for credit losses for loans as a percent of loans	0.97		%	1.19		%
Annualized ratio of net charge offs to average loans	0.17		%	0.04		%

The allowance for credit losses for loans totaled $105.7 million at September 30, 2022, compared to $110.1 million at December 31, 2021, and $117.5 million at September 30, 2021. The allowance for credit losses for loans at September 30, 2022, was 0.97% of loans compared to 1.11% of loans at December 31, 2021. The following items have impacted the allowance for credit losses for loans for the nine months ended September 30, 2022:

•Net charge offs for the first nine months of 2022 totaled $12.9 million compared to $3.2 million for the first nine months of 2021, which was an increase of $9.8 million. Included in net charge-offs for the first nine months of 2022 were two charge-offs due to customer fraud totaling $9.2 million related to two lending relationships which had collateral deficiencies. Additionally, in the first nine months of 2022, a charge-off totaling $2.6 million was recorded for one agricultural-related credit that had been substantially reserved for in a prior period.

•Nonpass loans decreased $160.1 million or 22% to $581.1 million at September 30, 2022, from $741.3 million at December 31, 2021.

The following tables show, in thousands, the changes in the allowance for unfunded commitments for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,
	2022		2021
Balance at beginning of period	17,780		14,002
Provision (benefit) for credit losses	1,104		(35)
Balance at end of period	$	18,884	$	13,967

	Nine Months Ended September 30,
	2022		2021
Balance at beginning of period	$	15,462	$	15,280


Provision (benefit) for credit losses	3,422		(1,313)
Balance at end of period	$	18,884	$	13,967

The allowance for unfunded commitments totaled $18.9 million as of September 30, 2022, compared to $15.5 million as of December 31, 2021, and $14.0 million as of September 30, 2021. Unfunded commitments increased $834.2 million to $4.66 billion at September 30, 2022, compared to $3.83 billion at December 31, 2021.

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 3 of the consolidated financial statements in this Quarterly Report on Form 10-Q.

The nonpass loans totaled $581.1 million or 5.3% of total loans as of September 30, 2022, compared to $741.3 million or 7.4% of total loans as of December 31, 2021. As of September 30, 2022, the nonpass loans consisted of approximately 45% watch loans and 55% substandard loans compared to approximately 50% watch loans and 50% substandard loans as of December 31, 2021. The percent of nonpass loans on nonaccrual status as of September 30, 2022, was 11% compared to 9% as of December 31, 2021.

Included in the nonpass loans at September 30, 2022, were $2.6 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,
	2022			2021			2021			2020
Nonaccrual loans	$	64,560		$	82,375		$	69,369		$	87,386
Loans contractually past due 90 days or more	678			861			550			720
Total nonperforming loans	65,238			83,236			69,919			88,106
Other real estate	8,030			4,744			1,927			6,624
Other repossessed assets	—			166			43			240
Total nonperforming assets	$	73,268		$	88,146		$	71,889		$	94,970







Performing troubled debt restructured loans(1)	$	8,047		$	1,817		$	817		$	2,370
Nonperforming loans to total loans	0.60		%	0.84		%	0.70		%	0.88		%
Nonperforming assets to total loans plus repossessed property	0.67			0.89			0.72			0.95
Nonperforming assets to total assets	0.37			0.46			0.37			0.53

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

The schedules below summarize the changes in nonperforming assets during the three- and nine- months ended September 30, 2022, in thousands:


	Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
June 30, 2022	$	63,004	$	4,528	$	—	$	67,532
Loan foreclosures	(4,113)		3,774		339		—
Net loan charge-offs	(26)		—		—		(26)

New nonperforming loans	8,388		—		—		8,388
Reduction of nonperforming loans(1)	(2,015)		—		—		(2,015)
OREO/Repossessed assets sales proceeds	—		(239)		(398)		(637)
OREO/Repossessed assets writedowns, net	—		(33)		59		26

September 30, 2022	$	65,238	$	8,030	$	—	$	73,268
(1) Includes principal reductions and transfers to performing status.


	Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
December 31, 2021	$	69,919	$	1,927	$	43	$	71,889
Loan foreclosures	(8,850)		8,458		392		—
Net loan charge-offs	(12,934)		—		—		(12,934)

New nonperforming loans	32,810		—		—		32,810
Reduction of nonperforming loans(1)	(15,707)		—		—		(15,707)
OREO/Repossessed assets sales proceeds	—		(2,074)		(490)		(2,564)
OREO/Repossessed assets writedowns, net	—		(281)		55		(226)

September 30, 2022	$	65,238	$	8,030	$	—	$	73,268

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

Total nonperforming assets increased $1.4 million or 2% to $73.3 million or 0.37% of total assets at September 30, 2022, compared to $71.9 million or 0.37% of total assets at December 31, 2021. Nonperforming loans were $65.2 million at September 30, 2022, compared to $69.9 million at December 31, 2021, which represented 0.60% and 0.70% of total loans at September 30, 2022, and December 31, 2021, respectively. At September 30, 2022, approximately $40.6 million or 62% of HTLF's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to fourteen borrowers. The portion of the nonperforming nonresidential real estate loans covered by government guarantees totaled $14.5 million at both September 30, 2022, and December 31, 2021.

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 35% and 40% of total assets at September 30, 2022, and December 31, 2021, respectively. Total securities carried at fair value as of September 30, 2022, were $6.06 billion, a decrease of $1.47 billion or 20% from $7.53 billion at December 31, 2021.

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, 2022, and December 31, 2021, in thousands:


	September 30, 2022				December 31, 2021
	Amount		Percent		Amount		Percent
U.S. treasuries	$	26,737	0.38	%	$	1,008	0.01	%
U.S. agencies	43,300		0.62		193,384		2.51
Obligations of states and political subdivisions	1,664,870		23.88		2,169,742		28.19
Mortgage-backed securities - agency	1,828,276		26.23		2,349,289		30.52
Mortgage-backed securities - non-agency	2,122,859		30.46		1,743,379		22.65
Commercial mortgage-backed securities - agency	86,148		1.24		123,912		1.61
Commercial mortgage-backed securities - non-agency	689,675		9.89		600,888		7.81
Asset-backed securities	400,032		5.74		409,653		5.32
Corporate bonds	8,423		0.12		3,040		0.04

Equity securities with a readily determinable fair value	20,258		0.29		20,788		0.27
Other securities	80,286		1.15		82,567		1.07
Total securities	$	6,970,864	100.00	%	$	7,697,650	100.00	%

HTLF's securities portfolio had an expected modified duration of 6.09 years as of September 30, 2022, compared to 5.26 years as of December 31, 2021.

At September 30, 2022, HTLF had $80.3 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 $17.27 billion as of September 30, 2022, compared to $16.42 billion at December 31, 2021, an increase of $849.9 million or 5%.

The following table shows the changes in deposit balances by deposit type since year-end 2021, in thousands:


	September 30, 2022		December 31, 2021		Change		% Change
Demand deposits	$	6,083,563	$	6,495,326	$	(411,763)	(6)	%
Savings deposits	10,060,523		8,897,909		1,162,614		13
Time deposits	1,123,035		1,024,020		99,015		10
Total	$	17,267,121	$	16,417,255	$	849,866	5	%

At September 30, 2022, HTLF had $1.28 billion of wholesale funding deposits, of which $1.13 billion were included in savings deposits and $150.0 million were included in time deposits. HTLF had $235.0 million of wholesale funding deposits at December 31, 2021, which were included in savings deposits.

The table below presents the composition of deposits by category as of September 30, 2022, and December 31, 2021, in thousands:


	September 30, 2022				December 31, 2021
	Amount		Percent		Amount		Percent
Demand	$	6,083,563	35.23	%	$	6,495,326	39.57	%
Savings	10,060,523		58.27		8,897,909		54.20
Time	1,123,035		6.50		1,024,020		6.23
Total	$	17,267,121	100.00	%	$	16,417,255	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, 2022, and December 31, 2021, in thousands:


	September 30, 2022		December 31, 2021		Change		% Change
Securities sold under agreement to repurchase	$	111,047	$	122,996	$	(11,949)	(10)	%


Advances from the federal discount window	30,000		—		30,000		100
Other short-term borrowings	5,953		8,601		(2,648)		(31)
Total	$	147,000	$	131,597	$	15,403	12	%

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. Short-term borrowings totaled $147.0 million at September 30, 2022, compared to $131.6 million at December 31, 2021, an increase of $15.4 million or 12%.

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 $111.0 million at September 30, 2022, compared to $123.0 million at December 31, 2021, a decrease of $11.9 million or 10%.

HTLF renewed its revolving credit line agreement with an unaffiliated bank on June 14, 2022. This revolving credit line agreement, which has $100.0 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 2022, and the outstanding balance was $0 at both September 30, 2022, and December 31, 2021.

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, 2022, and December 31, 2021, in thousands:


	September 30, 2022		December 31, 2021		Change		% Change
Advances from the FHLB	$	770	$	898	$	(128)	(14)	%

Trust preferred securities	148,042		147,316		726		—


Contracts payable	82		1,593		(1,511)		(95)
Subordinated notes	222,552		222,265		287		—

Total	$	371,446	$	372,072	$	(626)	—	%

As of September 30, 2022, other borrowings totaled $371.4 million compared to $372.1 million as of December 31, 2021, a decrease of $626,000 or less than 1% since year-end 2021.

A schedule of HTLF's trust preferred securities outstanding excluding deferred issuance costs as of September 30, 2022, is as follows, in thousands:

Amount
Issued

Issuance
Date

Interest
Rate

Interest

Rate as of 9/30/2022(1)

Maturity
Date

Callable
Date

Heartland Financial Statutory Trust IV

10,310

03/17/2004

2.75% over LIBOR

6.28%

03/17/2034

12/17/2022

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

3.84

04/07/2036

01/07/2023

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

4.77

09/15/2037

12/15/2022

Heartland Financial Statutory Trust VII

18,042

06/26/2007

1.48% over LIBOR

4.56

09/01/2037

12/01/2022

Morrill Statutory Trust I

9,346

12/19/2002

3.25% over LIBOR

6.89

12/26/2032

12/26/2022

Morrill Statutory Trust II

9,059

12/17/2003

2.85% over LIBOR

6.38

12/17/2033

12/17/2022

Sheboygan Statutory Trust I

6,769

09/17/2003

2.95% over LIBOR

6.48

09/17/2033

12/17/2022

CBNM Capital Trust I

4,545

09/10/2004

3.25% over LIBOR

6.54

12/15/2034

12/15/2022

Citywide Capital Trust III

6,591

12/19/2003

2.80% over LIBOR

5.58

12/19/2033

01/23/2023

Citywide Capital Trust IV

4,454

09/30/2004

2.20% over LIBOR

5.16

09/30/2034

11/23/2022

Citywide Capital Trust V

12,368

05/31/2006

1.54% over LIBOR

4.83

07/25/2036

12/15/2022

OCGI Statutory Trust III

3,018

06/27/2002

3.65% over LIBOR

6.16

09/30/2032

12/30/2022

OCGI Capital Trust IV

5,497

09/23/2004

2.50% over LIBOR

5.79

12/15/2034

12/15/2022

BVBC Capital Trust II

7,308

04/10/2003

3.25% over LIBOR

6.03

04/24/2033

01/24/2023

BVBC Capital Trust III

9,538

07/29/2005

1.60% over LIBOR

5.27

09/30/2035

12/30/2022

Total trust preferred costs

148,083

Less: deferred issuance costs

(41)

148,042

(1) Effective weighted average interest rate as of September 30, 2022, was 5.75%.

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, 2022	15.01		%	11.89		%	11.12		%	8.93		%
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	$	14,418,824		$	14,418,824		$	14,418,824		N/A
Average assets	N/A			N/A			N/A			$	19,182,687

December 31, 2021	15.90		%	12.39		%	11.53		%	8.57		%
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	$	12,829,318		$	12,829,318		$	12,829,318		N/A
Average assets	N/A			N/A			N/A			$	18,553,872

At September 30, 2022, and December 31, 2021, retained earnings that could be available for the payment of dividends to meet the minimum capital requirements totaled $704.3 million and $758.6 million, respectively. Retained earnings that could be available for the payment of dividends to HTLF from its banks totaled approximately $416.2 million and $502.1 million at September 30, 2022, and December 31, 2021, 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, 2022, 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, 2025.

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, 2022, and December 31, 2021, commitments to extend credit aggregated $4.66 billion and $3.83 billion, respectively. Standby letters of credit aggregated $63.6 million at September 30, 2022, and $51.4 million at December 31, 2021.

At September 30, 2022, and December 31, 2021, HTLF's banks had $723.5 million and $735.3 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, 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.

There are certain legal proceedings pending against HTLF and its subsidiaries at September 30, 2022, that are ordinary routine litigation incidental to business.

On August 5, 2022, HTLF paid $4.5 million to settle a lawsuit related to pending litigation involving a former customer of AimBank. The aggregate amount of cash consideration paid in the AimBank transaction in December 2020 was reduced by $5.3 million as a holdback against any litigation losses and expenses, net of any tax benefits, that might be incurred as a result of this litigation. The final amount payable to the AimBank shareholders under the holdback will be determined in accordance with the terms of the merger agreement.

HTLF continues to explore opportunities to expand the size of its banking footprint. 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 6 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, 2022, HTLF had $399.9 million of cash and cash equivalents, time deposits in other financial institutions of $1.7 million and securities carried at fair value of $6.06 billion. Management expects the securities portfolio to produce cash flows exceeding $1 billion over the next twelve months.

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, 2022, short-term borrowings outstanding totaled $147.0 million.

As of September 30, 2022, HTLF had $371.4 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, 2022, HTLF had $762.0 million of borrowing capacity under these programs. Additionally, at September 30, 2022, HTLF had $567.3 million of borrowing capacity at the Federal Reserve Banks' discount window.

HTLF is focused on loan growth and strives to fund the loan growth with the least expensive source of deposits, sales of securities or borrowings. While securities are generally considered as a source of cash, in the current environment, it is unlikely that they would be sold at a loss for such funding needs. The securities portfolio is expected to produce cash flows exceeding $1 billion over the next twelve months, which could be used to fund loan growth. Additionally, growing deposits will continue to be a focus. HTLF offers the Insured Cash Sweep ("ICS") product accessed through the Promontory network of financial institutions, which helps to reduce the amount of pledged securities.

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, 2022, the parent company had cash of $297.3 million. Additionally, HTLF has a revolving credit agreement with an unaffiliated bank, which is renewed annually, most recently on June 14, 2022. The revolving credit agreement has $100.0 million of maximum borrowing capacity, of which none was outstanding at September 30, 2022. This credit agreement contains specific financial covenants, all of which HTLF complied with as of September 30, 2022.

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.

HTLF has filed a universal shelf registration statement with the SEC that provides HTLF the ability to raise both debt and capital, subject to SEC rules and limitations, if HTLF's board of directors decides to do so. This registration statement expires in August 2025.

Management believes that cash on hand, cash flows from operations and cash availability under existing borrower programs and facilities will be sufficient to meet any recurring and additional operating cash needs in 2022.

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, 2022, and September 30, 2021, provided the following results, in thousands:


	2022				2021
	Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base
Year 1
Down 100 Basis Points	$	680,345	(1.29)	%	$	503,448	(2.15)	%
Base	689,218		—		514,512		—
Up 200 Basis Points	694,854		0.82		543,113		5.56
Year 2
Down 100 Basis Points	$	682,744	(0.94)	%	$	462,454	(10.12)	%
Base	720,883		4.59		494,746		(3.84)
Up 200 Basis Points	734,620		6.59		556,171		8.10

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 6 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 sheets 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, 2022, 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, 2022, 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 2021 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 $77.3 million as of September 30, 2022, 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, 2022.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Exhibits



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 7, 2022