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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 June 30, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from __________ to __________

Commission File Number: 001-15393

HEARTLAND FINANCIAL USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
42-1405748
(I.R.S. employer identification number)
1398 Central Avenue, Dubuque, Iowa  52001
(Address of principal executive offices)(Zip Code)
(563) 589-2100
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes No
     Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated Filer
Non-accelerated filer
 
Smaller reporting company
Emerging growth company
 
 
 
    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes No

Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.00 per share
HTLF
Nasdaq Stock Market
    
Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date:  As of August 6, 2019, the Registrant had outstanding 36,690,358 shares of common stock, $1.00 par value per share.





HEARTLAND FINANCIAL USA, INC.
Form 10-Q Quarterly Report
Table of Contents

Part I
Part II






PART I

ITEM 1. FINANCIAL STATEMENTS
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
 
 
 
June 30, 2019 (Unaudited)
 
December 31, 2018
ASSETS
 
 
 
Cash and due from banks
$
198,664

 
$
223,135

Interest bearing deposits with other banks and other short-term investments
443,475

 
50,495

Cash and cash equivalents
642,139

 
273,630

Time deposits in other financial institutions
4,430

 
4,672

Securities:
 
 

Carried at fair value (cost of $2,552,214 at June 30, 2019, and $2,492,620 at December 31, 2018)
2,561,887

 
2,450,709

Held to maturity, at cost (fair value of $96,619 at June 30, 2019, and $245,341 at December 31, 2018)
88,166

 
236,283

Other investments, at cost
31,366

 
28,396

Loans held for sale
34,575

 
119,801

Loans receivable:
 
 

Held to maturity
7,853,051

 
7,407,697

Allowance for loan and lease losses
(63,850
)
 
(61,963
)
Loans receivable, net
7,789,201

 
7,345,734

Premises, furniture and equipment, net
194,628

 
187,418

Premises, furniture and equipment held for sale
3,701

 
7,258

Other real estate, net
6,646

 
6,153

Goodwill
427,097

 
391,668

Core deposit intangibles and customer relationship intangibles, net
52,718

 
47,479

Servicing rights, net
7,180

 
31,072

Cash surrender value on life insurance
170,421

 
162,892

Other assets
146,135

 
114,841

TOTAL ASSETS
$
12,160,290

 
$
11,408,006

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Deposits:
 
 
 
Demand
$
3,426,758

 
$
3,264,737

Savings
5,533,503

 
5,107,962

Time
1,148,296

 
1,023,730

Total deposits
10,108,557

 
9,396,429

Deposits held for sale

 
106,409

Short-term borrowings
107,260

 
227,010

Other borrowings
282,863

 
274,905

Accrued expenses and other liabilities
139,823

 
78,078

TOTAL LIABILITIES
10,638,503

 
10,082,831

STOCKHOLDERS' EQUITY:
 
 
 
Preferred stock (par value $1 per share; authorized 17,604 shares; none issued or outstanding at both June 30, 2019, and December 31, 2018)

 

Series A Junior Participating preferred stock (par value $1 per share; authorized 16,000 shares; none issued or outstanding at both June 30, 2019, and December 31, 2018)

 

Series C Senior Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 81,698 shares authorized at both June 30, 2019, and December 31, 2018, none issued or outstanding at both June 30, 2019, and December 31, 2018)

 

Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock (par value $1 per share; 3,000 shares authorized at both June 30, 2019, and December 31, 2018; none issued or outstanding at both June 30, 2019, and December 31, 2018)

 

Common stock (par value $1 per share; 60,000,000 shares authorized at June 30, 2019, and 40,000,000 shares authorized at December 31, 2018; issued 36,690,061 shares at June 30, 2019, and 34,477,499 shares at December 31, 2018)
36,690

 
34,477

Capital surplus
837,150

 
743,095

Retained earnings
642,808

 
579,252

Accumulated other comprehensive income/(loss)
5,139

 
(31,649
)
TOTAL STOCKHOLDERS' EQUITY
1,521,787

 
1,325,175

TOTAL LIABILITIES AND EQUITY
$
12,160,290

 
$
11,408,006

 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 





HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
 
 
 
 
 
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
INTEREST INCOME:
 
 
 
 
 
 
 
Interest and fees on loans
$
106,027

 
$
96,787

 
$
206,483

 
$
182,438

Interest on securities:
 
 
 
 
 
 
 
Taxable
16,123

 
12,270

 
31,999

 
23,847

Nontaxable
2,554

 
3,584

 
5,647

 
7,163

Interest on federal funds sold

 

 
4

 

Interest on interest bearing deposits in other financial institutions
2,299

 
768

 
3,591

 
1,175

TOTAL INTEREST INCOME
127,003

 
113,409

 
247,724


214,623

INTEREST EXPENSE:
 
 
 
 
 
 
 
Interest on deposits
16,138

 
7,983

 
29,351

 
13,749

Interest on short-term borrowings
338

 
547

 
1,227

 
815

Interest on other borrowings (includes $100 and $30 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the three months ended June 30, 2019 and 2018, respectively, and $265 and $227 of interest expense related to derivatives reclassified from accumulated other comprehensive income for the six months ended June 30, 2019 and 2018, respectively)
3,819

 
3,470

 
7,483

 
7,066

TOTAL INTEREST EXPENSE
20,295

 
12,000

 
38,061


21,630

NET INTEREST INCOME
106,708

 
101,409

 
209,663


192,993

Provision for loan losses
4,918

 
4,831

 
6,553

 
9,094

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
101,790

 
96,578

 
203,110


183,899

NONINTEREST INCOME:
 
 
 
 
 
 
 
Service charges and fees
14,629

 
12,072

 
27,423

 
22,151

Loan servicing income
1,338

 
1,807

 
3,067

 
3,561

Trust fees
4,825

 
4,615

 
9,299

 
9,295

Brokerage and insurance commissions
1,028

 
877

 
1,762

 
1,784

Securities gains/(losses), net (includes $3,580 of net security gains and $259 of net security losses reclassified from accumulated other comprehensive income for the three months ended June 30, 2019 and 2018, respectively and $5,155 and $1,182 of net security gains reclassified from accumulated other comprehensive income for the six months ended June 30, 2019 and 2018, respectively)
3,580

 
(259
)
 
5,155

 
1,182

Unrealized gain on equity securities, net
112

 
71

 
370

 
43

Net gains on sale of loans held for sale
4,343

 
6,800

 
7,519

 
10,851

Valuation allowance on servicing rights
(364
)
 
(216
)
 
(953
)
 
(218
)
Income on bank owned life insurance
888

 
700

 
1,787

 
1,314

Other noninterest income
1,682

 
1,167

 
3,349

 
2,387

TOTAL NONINTEREST INCOME
32,061

 
27,634

 
58,778


52,350

NONINTEREST EXPENSES:
 
 
 
 
 
 
 
Salaries and employee benefits
49,995

 
50,758

 
100,280

 
99,468

Occupancy
6,436

 
6,315

 
13,043

 
12,358

Furniture and equipment
3,220

 
3,184

 
5,912

 
5,933

Professional fees
14,968

 
10,632

 
26,347

 
20,080

Advertising
2,661

 
2,145

 
4,986

 
4,085

Core deposit intangibles and customer relationship intangibles amortization
3,313

 
2,274

 
6,155

 
4,137

Other real estate and loan collection expenses
162

 
948

 
863

 
1,680

(Gain)/loss on sales/valuations of assets, net
(18,286
)
 
1,528

 
(21,290
)
 
1,331

Restructuring expenses

 

 
3,227

 
2,564

Other noninterest expenses
12,629

 
11,098

 
23,805

 
20,892

TOTAL NONINTEREST EXPENSES
75,098

 
88,882

 
163,328


172,528

INCOME BEFORE INCOME TAXES
58,753

 
35,330

 
98,560


63,721

Income taxes (includes $880 and $(61) of income tax expense/(benefit) reclassified from accumulated other comprehensive income for the three months ended June 30, 2019 and 2018, respectively and $1,238 and $201 of income tax expense reclassified from accumulated other comprehensive income for the six months ended June 30, 2019 and 2018, respectively)
13,584

 
7,451

 
21,894

 
12,574

NET INCOME
45,169

 
27,879

 
76,666


51,147

Preferred dividends

 
(13
)
 

 
(26
)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
45,169

 
$
27,866

 
$
76,666


$
51,121

EARNINGS PER COMMON SHARE - BASIC
$
1.26

 
$
0.85

 
$
2.18

 
$
1.62

EARNINGS PER COMMON SHARE - DILUTED
$
1.26

 
$
0.85

 
$
2.17

 
$
1.61

CASH DIVIDENDS DECLARED PER COMMON SHARE
$
0.16

 
$
0.13

 
$
0.32

 
$
0.26

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 





HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
NET INCOME
$
45,169

 
$
27,879

 
$
76,666

 
$
51,147

OTHER COMPREHENSIVE INCOME/(LOSS)
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
Net change in unrealized gain/(loss) on securities
28,422

 
(8,501
)
 
58,387

 
(28,335
)
Reclassification adjustment for net (gains)/losses realized in net income
(3,580
)
 
259

 
(5,155
)
 
(1,182
)
Income taxes
(6,383
)
 
2,117

 
(13,664
)
 
7,508

Other comprehensive income/(loss) on securities
18,459

 
(6,125
)
 
39,568

 
(22,009
)
Derivatives used in cash flow hedging relationships:
 
 
 
 
 
 
 
Net change in unrealized gain/(loss) on derivatives
(2,263
)
 
897

 
(3,768
)
 
2,596

Reclassification adjustment for net losses on derivatives realized in net income
94

 
30

 
252

 
227

Income taxes
453

 
105

 
736

 
(603
)
Other comprehensive income/(loss) on cash flow hedges
(1,716
)
 
1,032

 
(2,780
)
 
2,220

Other comprehensive income/(loss)
16,743

 
(5,093
)
 
36,788

 
(19,789
)
TOTAL COMPREHENSIVE INCOME
$
61,912

 
$
22,786

 
$
113,454

 
$
31,358

 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 





HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 
 
Six Months Ended
June 30,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
76,666

 
$
51,147

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
16,315

 
14,273

Provision for loan losses
6,553

 
9,094

Net amortization of premium on securities
10,927

 
12,587

Securities gains, net
(5,155
)
 
(1,182
)
Unrealized gain on equity securities, net
(370
)
 
(43
)
Stock based compensation
3,602

 
2,770

Loans originated for sale
(165,249
)
 
(317,979
)
Proceeds on sales of loans held for sale
161,625

 
346,083

Net gains on sale of loans held for sale
(7,177
)
 
(8,178
)
(Increase) decrease in accrued interest receivable
2,421

 
(35
)
Decrease in prepaid expenses
229

 
2,263

Increase (decrease) in accrued interest payable
1,021

 
(25
)
Capitalization of servicing rights
(415
)
 
(2,694
)
Valuation allowance on servicing rights
953

 
218

(Gain)/loss on sales/valuations of assets, net
(10,735
)
 
1,331

Net excess tax benefit from stock based compensation
272

 
660

Other, net
(29,184
)
 
(16,605
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
62,299

 
93,685

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of time deposits in other financial institutions
(248
)
 
(1,000
)
Proceeds from the sale of securities available for sale
1,194,897

 
635,735

Proceeds from the redemption of time deposits in other financial institutions

 
8,767

Proceeds from the maturity of and principal paydowns on securities available for sale
178,930

 
112,166

Proceeds from the maturity of and principal paydowns on securities held to maturity
2,406

 
8,897

Proceeds from the maturity of and principal paydowns on time deposits in other financial institutions
490

 
4,862

Proceeds from the sale, maturity of and principal paydowns on other investments
7,992

 
1,400

Purchase of securities available for sale
(1,148,238
)
 
(733,030
)
Purchase of other investments
(4,899
)
 
(1,842
)
Net (increase) decrease in loans
77,147

 
(86,466
)
Purchase of bank owned life insurance policies
(16
)
 

Proceeds from bank owned life insurance policies
421

 

Proceeds from sale of mortgage servicing rights
33,823

 

Capital expenditures
(3,909
)
 
(9,788
)
Net cash and cash equivalents received in acquisitions
38,650

 
212,197

Proceeds from the sale of equipment
829

 
622

Net cash expended in divestitures
(49,264
)
 

Proceeds on sale of OREO and other repossessed assets
3,825

 
2,091

NET CASH PROVIDED BY INVESTING ACTIVITIES
$
332,836

 
$
154,611

 
 
 
 





HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited)
(Dollars in thousands)
 
 
 
 
Six Months Ended
June 30,
 
2019
 
2018
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net increase in demand deposits
$
4,675

 
$
117,456

Net increase in savings deposits
110,498

 
5,408

Net increase (decrease) in time deposit accounts
29,924

 
(31,789
)
Proceeds on short-term revolving credit line

 
25,000

Net decrease in short-term borrowings
(44,326
)
 
(155,403
)
Proceeds from short term FHLB advances
430,888

 
302,102

Repayments of short term FHLB advances
(531,725
)
 
(266,500
)
Proceeds from other borrowings
50

 

Repayments of other borrowings
(15,621
)
 
(44,654
)
Purchase of treasury stock

 
(97
)
Proceeds from issuance of common stock
408

 
156

Dividends paid
(11,397
)
 
(7,972
)
NET CASH USED BY FINANCING ACTIVITIES
(26,626
)
 
(56,293
)
Net increase in cash and cash equivalents
368,509

 
192,003

Cash and cash equivalents at beginning of year
273,630

 
196,003

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
642,139

 
$
388,006

Supplemental disclosures:
 
 
 
Cash paid for income/franchise taxes
$
19,495

 
$
8,254

Cash paid for interest
$
37,099

 
$
21,655

Loans transferred to OREO
$
4,655

 
$
2,264

Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale
$
2,568

 
$
2,501

Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net,
$
1,564

 
$

Deposits transferred to held for sale
$
76,968

 
$

Loans transferred to held for sale
$
32,111

 
$

Securities transferred from held to maturity to available for sale
$
148,030

 
$

Purchases of securities available for sale, accrued, not settled
$
37,373

 
$

Stock consideration granted for acquisitions
$
92,258

 
$
238,075

 
 
 
 
See accompanying notes to consolidated financial statements.





HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited)
(Dollars in thousands, except per share data)
 
 
Heartland Financial USA, Inc. Stockholders' Equity
 
 
Preferred
 Stock
 
Common
 Stock
 
Capital
 Surplus
 
Retained
 Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury
Stock
 
Total
 Equity
Balance at March 31, 2018
$
938

 
$
31,068

 
$
557,990

 
$
500,959

 
$
(39,450
)
 
$

 
$
1,051,505

Comprehensive income
 
 
 
 
 
 
27,879

 
(5,093
)
 
 
 
22,786

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 


Series D Preferred, $17.50 per share
 
 
 
 
 
 
(13
)
 
 
 
 
 
(13
)
Common, $0.13 per share
 
 
 
 
 
 
(4,039
)
 
 
 
 
 
(4,039
)
Issuance of 3,370,206 shares of common stock
 
 
3,370

 
181,226

 
 
 
 
 
 
 
184,596

Stock based compensation
 
 
 
 
912

 
 
 
 
 
 
 
912

Balance at June 30, 2018
$
938

 
$
34,438

 
$
740,128

 
$
524,786

 
$
(44,543
)
 
$

 
$
1,255,747

Balance at January 1, 2018
$
938

 
$
29,953

 
$
503,709

 
$
481,331

 
$
(24,474
)
 
$

 
$
991,457

Comprehensive income


 






51,147

 
(19,789
)




31,358

Reclassification of unrealized net gain on equity securities


 






280

 
(280
)





Cash dividends declared:


 


 


 


 


 


 
 
Series D Preferred, $35.00 per share
 
 
 
 
 
 
(26
)
 
 
 
 
 
(26
)
Common, $0.26 per share


 






(7,946
)
 






(7,946
)
Purchase of 1,761 shares of common stock


 








 



(97
)

(97
)
Issuance of 4,486,850 shares of common stock


 
4,485


233,649




 



97


238,231

Stock based compensation


 



2,770




 






2,770

Balance at June 30, 2018
$
938

 
$
34,438

 
$
740,128

 
$
524,786

 
$
(44,543
)
 
$

 
$
1,255,747

Balance at March 31, 2019
$

 
$
34,604

 
$
745,596

 
$
603,506

 
$
(11,604
)
 
$

 
$
1,372,102

Comprehensive income
 
 
 
 
 
 
$
45,169

 
$
16,743

 
 
 
61,912

Cash dividends declared:
 
 
 
 
 
 
 
 
 
 
 
 


Common, $0.16 per share
 
 
 
 
 
 
$
(5,867
)
 
 
 
 
 
(5,867
)
Issuance of 2,086,450 shares of common stock
 
 
$
2,086

 
$
90,327

 
 
 
 
 
 
 
92,413

Stock based compensation
 
 
 
 
$
1,227

 
 
 
 
 
 
 
1,227

Balance at June 30, 2019
$

 
$
36,690

 
$
837,150

 
$
642,808

 
$
5,139

 
$

 
$
1,521,787

Balance at January 1, 2019
$

 
$
34,477

 
$
743,095

 
$
579,252

 
$
(31,649
)
 
$

 
$
1,325,175

Comprehensive income
 
 
 
 
 
 
76,666

 
36,788

 


 
113,454

Retained earnings adjustment for adoption of leasing standard
 
 
 
 
 
 
(1,713
)
 
 
 
 
 
(1,713
)
Cash dividends declared:
 
 
 
 
 
 
 
 


 


 


Common, $0.32 per share
 
 
 

 

(11,397
)
 






(11,397
)
Issuance of 2,212,562 shares of common stock
 
 
2,213


90,453

 


 






92,666

Stock based compensation
 
 
 

3,602




 






3,602

Balance at June 30, 2019
$

 
$
36,690

 
$
837,150

 
$
642,808

 
$
5,139

 
$

 
$
1,521,787

 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to consolidated financial statements.
 
 
 
 
 
 
 
 






HEARTLAND FINANCIAL USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

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

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

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 six-month periods ended June 30, 2019, and 2018, are shown in the table below:
 
Three Months Ended
June 30,
(Dollars and number of shares in thousands, except per share data)
2019
 
2018
Net income
$
45,169

 
$
27,879

Preferred dividends

 
(13
)
Net income available to common stockholders
$
45,169

 
$
27,866

Weighted average common shares outstanding for basic earnings per share
35,744

 
32,621

Assumed incremental common shares issued upon vesting of outstanding restricted stock units
135

 
210

Weighted average common shares for diluted earnings per share
35,879

 
32,831

Earnings per common share — basic
$
1.26

 
$
0.85

Earnings per common share — diluted
$
1.26

 
$
0.85

Number of antidilutive common stock equivalents excluded from diluted earnings per share computation
7

 

 
 
 
 
 
Six Months Ended
June 30,
(Dollars and number of shares in thousands, except per share data)
2019
 
2018
Net income
$
76,666

 
$
51,147

Preferred dividends

 
(26
)
Net income available to common stockholders
$
76,666

 
$
51,121

Weighted average common shares outstanding for basic earnings per share
35,157

 
31,537

Assumed incremental common shares issued upon vesting of outstanding restricted stock units
138

 
209

Weighted average common shares for diluted earnings per share
35,295

 
31,746

Earnings per common share — basic
$
2.18

 
$
1.62

Earnings per common share — diluted
$
2.17

 
$
1.61

Number of antidilutive common stock equivalents excluded from diluted earnings per share computation
7

 



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






Effect of New Financial Accounting Standards

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." Topic 842 requires a lessee to recognize leases on-balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as financing or operating, with classification affecting the pattern and classification of expense recognition in the income statement. The amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and is applied on a modified retrospective basis. Heartland leases certain properties and equipment under operating leases that resulted in recognition of lease assets and lease liabilities on the consolidated balance sheets under the ASU; however the majority of Heartland's properties and equipment are owned, not leased. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date, and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. Early adoption is permitted. In January 2018, the FASB issued an amendment to provide entities with the optional practical expedient to not evaluate existing or expired land easements that were previously not accounted for as leases under Topic 840. In July 2018, the FASB issued ASU 2018-11, "Leases - Targeted Improvements" to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, Specifically, under the amendments in ASU 2018-11, entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02. Heartland adopted the accounting standard on January 1, 2019, on a modified retrospective basis, as required, and has not restated comparative periods. Heartland adopted the practical expedients, which allow for existing leases to be accounted for under previous guidance with the exception of balance sheet recognition for lessees. The adoption of the new standard resulted in the recording of ROU assets and lease liabilities of approximately $25.9 million and $27.6 million, respectively, on January 1, 2019. The difference between the lease assets and lease liabilities, which was $1.7 million, was recorded as an adjustment to retained earnings. The adoption of the standard did not impact Heartland's results of operations or liquidity. See Note 11, "Leases", for more information on Heartland's leases.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)." The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU indicate that an entity should not use the length of time a security has been in an unrealized loss position to avoid recording a credit loss. In addition, in determining whether a credit loss exists, the amendments in this ASU also remove the requirements to consider the historical and implied volatility of the fair value of a security and recoveries or declines in fair value after the balance sheet date. The amendment is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. An entity may adopt the amendments earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Heartland intends to adopt the accounting standard in 2020, as required. In April 2019, the FASB also issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments." As it relates to current expected credit losses, this guidance amends certain provisions contained in ASU 2016-13, particularly with regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying the extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity's determination of expected credit losses. Upon adoption of ASU 2016-13, a cumulative-effect adjustment to retained earnings will be recorded as of the beginning of the first reporting period in which the guidance is effective. Heartland has formed an internal committee to assess and implement the standard. Heartland entered into an agreement with a third party vendor and is in the final stages of implementing a technology solution. Management expects that the preliminary model will be ready for detailed review and testing during the third quarter of 2019. Based on the results of Heartland's parallel runs, management expects to have an estimate of the impact that this new guidance will have on the consolidated financial statements in the fourth quarter of 2019. Management expects that testing, control design and model validation will continue through the remainder of 2019.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350)." This amendment is to simplify the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. Instead, an entity will perform only step one of its quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and then recognizing the impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. An entity will still have the option to perform a qualitative assessment for a reporting unit to determine if the quantitative step one impairment test is necessary. This amendment is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and should be applied prospectively. Early adoption is permitted, including in an interim period for impairment tests





performed after January 1, 2017. Heartland intends to adopt this ASU in the third quarter of 2020, consistent with the annual impairment test as of September 30, 2020, and is currently evaluating the potential impact of this guidance on its results of operations, financial position and liquidity.

In March 2017, the FASB issued ASU 2017-08, "Receivables - Nonrefundable Fee and Other Costs (Subtopic 310-20)." These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount. Discounts continue to be amortized to maturity. These amendments are effective for public business entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If any entity early adopts the amendments in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes the interim period. The amendments must be applied and Heartland intends to apply these amendments on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Heartland adopted this ASU on January 1, 2019, as required, and the adoption did not have a material impact on its results of operations, financial position and liquidity.

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

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

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

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





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





NOTE 2: ACQUISITIONS

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

First Bank Lubbock Bancshares, Inc.
On May 18, 2018, Heartland completed the acquisition of Lubbock, Texas based First Bank Lubbock Bancshares, Inc. ("FBLB"), parent company of First Bank & Trust, and PrimeWest Mortgage Corporation, which is a wholly-owned subsidiary of First Bank & Trust. Under the terms of the definitive merger agreement, Heartland acquired FBLB in a transaction valued at approximately $189.9 million, of which $5.5 million was cash, and the remainder was settled by delivery of 3,350,664 shares of Heartland common stock. On the closing date, in addition to this merger consideration, Heartland provided FBLB the funds necessary to repay outstanding debt of $3.9 million, and Heartland assumed $8.2 million of trust preferred securities at fair value. Immediately after the close of the transaction, Heartland paid $13.3 million to the holders of FBLB's stock appreciation rights. The transaction included, at fair value, total assets of $1.12 billion, including $681.1 million of gross loans held to maturity, and deposits of $893.8 million. Upon closing of the transaction, First Bank & Trust became a wholly-owned subsidiary of Heartland and continues to operate under its current name and management team as Heartland's eleventh state-chartered bank. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of FBLB.
Signature Bancshares, Inc.
On February 23, 2018, Heartland completed the acquisition of Signature Bancshares, Inc., parent company of Signature Bank, headquartered in Minnetonka, Minnesota. Under the terms of the definitive merger agreement, Heartland acquired Signature Bancshares, Inc. in a transaction valued at approximately $61.4 million, of which $7.8 million was cash, and the remainder was settled by delivery of 1,000,843 shares of Heartland common stock. Simultaneous with the close, Signature Bank merged into Heartland's wholly-owned Minnesota Bank & Trust subsidiary, and the combined entity operates under the Minnesota Bank & Trust brand name. The transaction included, at fair value, total assets of $427.1 million, including $324.5 million of gross loans held to maturity, and deposits of $357.3 million. On the closing date, Heartland provided Signature Bancshares, Inc. the funds necessary to repay outstanding subordinated debt of $5.9 million. The transaction was a tax-free reorganization with respect to the stock consideration received by the stockholders of Signature Bancshares, Inc.






NOTE 3: SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of debt securities available for sale and equity securities with a readily determinable fair value that are carried at fair value as of June 30, 2019, and December 31, 2018, are summarized in the table below, in thousands:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
June 30, 2019
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
18,660

 
$
48

 
$
(87
)
 
$
18,621

Mortgage and asset-backed securities
2,191,327

 
17,472

 
(15,473
)
 
2,193,326

Obligations of states and political subdivisions
324,070

 
8,097

 
(384
)
 
331,783

Total debt securities
2,534,057

 
25,617

 
(15,944
)
 
2,543,730

Equity securities with a readily determinable fair value
18,157

 

 

 
18,157

Total
$
2,552,214

 
$
25,617

 
$
(15,944
)
 
$
2,561,887

December 31, 2018
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
32,075

 
$
3

 
$
(127
)
 
$
31,951

Mortgage and asset-backed securities
2,061,358

 
3,740

 
(38,400
)
 
2,026,698

Obligations of states and political subdivisions
382,101

 
919

 
(8,046
)
 
374,974

Total debt securities
2,475,534


4,662


(46,573
)

2,433,623

Equity securities with a readily determinable fair value
17,086

 

 

 
17,086

Total
$
2,492,620

 
$
4,662

 
$
(46,573
)
 
$
2,450,709



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

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of June 30, 2019, and December 31, 2018, are summarized in the table below, in thousands:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
June 30, 2019
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
88,166

 
$
8,453

 
$

 
$
96,619

Total
$
88,166

 
$
8,453

 
$

 
$
96,619

December 31, 2018
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
236,283

 
$
9,554

 
$
(496
)
 
$
245,341

Total
$
236,283

 
$
9,554

 
$
(496
)
 
$
245,341







The amortized cost and estimated fair value of investment securities carried at fair value at June 30, 2019, 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.
 
June 30, 2019
 
Amortized Cost
 
Estimated Fair Value
Due in 1 year or less
$
24,891

 
$
24,889

Due in 1 to 5 years
45,463

 
45,685

Due in 5 to 10 years
72,708

 
74,659

Due after 10 years
199,668

 
205,171

Total debt securities
342,730

 
350,404

Mortgage and asset-backed securities
2,191,327

 
2,193,326

Equity securities with a readily determinable fair value
18,157

 
18,157

Total investment securities
$
2,552,214

 
$
2,561,887


The amortized cost and estimated fair value of debt securities held to maturity at June 30, 2019, 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.
 
June 30, 2019
 
Amortized Cost
 
Estimated Fair Value
Due in 1 year or less
$
1,531

 
$
1,567

Due in 1 to 5 years
11,634

 
11,863

Due in 5 to 10 years
58,200

 
61,679

Due after 10 years
16,801

 
21,510

Total investment securities
$
88,166

 
$
96,619



As of June 30, 2019, and December 31, 2018, securities with a fair value of $569.7 million and $524.8 million, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.

Gross gains and losses realized related to the sales of securities carried at fair value for the three- and six-month periods ended June 30, 2019 and 2018, are summarized as follows, in thousands:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Proceeds from sales
$
760,743

 
$
243,489

 
$
1,194,897

 
$
635,735

Gross security gains
5,522

 
457

 
7,930

 
3,470

Gross security losses
1,942

 
716

 
2,775

 
2,288



The following tables summarize, in thousands, the amount of unrealized losses, defined as the amount by which cost or amortized cost exceeds fair value, and the related fair value of investments with unrealized losses in Heartland's securities portfolio as of June 30, 2019, and December 31, 2018. 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 June 30, 2018, and December 31, 2017, respectively. Securities for which Heartland has taken credit-related other-than-temporary impairment ("OTTI") write-downs are categorized as being "less than 12 months" or "12 months or longer" in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.





Debt securities available for sale
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
4,631

 
$
(87
)
 
$

 
$

 
$
4,631

 
$
(87
)
Mortgage and asset-backed securities
544,795

 
(5,265
)
 
448,159

 
(10,208
)
 
992,954

 
(15,473
)
Obligations of states and political subdivisions
10,975

 
(11
)
 
48,748

 
(373
)
 
59,723

 
(384
)
Total temporarily impaired securities
$
560,401

 
$
(5,363
)
 
$
496,907

 
$
(10,581
)
 
$
1,057,308

 
$
(15,944
)
December 31, 2018
U.S. government corporations and agencies
$
24,902

 
$
(83
)
 
$
4,577

 
$
(44
)
 
$
29,479

 
$
(127
)
Mortgage and asset-backed securities
733,826

 
(9,060
)
 
805,089

 
(29,340
)
 
1,538,915

 
(38,400
)
Obligations of states and political subdivisions
34,990

 
(390
)
 
258,143

 
(7,656
)
 
293,133

 
(8,046
)
Total temporarily impaired securities
$
793,718

 
$
(9,533
)
 
$
1,067,809

 
$
(37,040
)
 
$
1,861,527

 
$
(46,573
)


Securities held to maturity
Less than 12 months
 
12 months or longer
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$

 
$

 
$

 
$

 
$

 
$

Total temporarily impaired securities
$

 
$

 
$

 
$

 
$

 
$

December 31, 2018
Obligations of states and political subdivisions
$
10,802

 
$
(17
)
 
$
19,508

 
$
(479
)
 
$
30,310

 
$
(496
)
Total temporarily impaired securities
$
10,802

 
$
(17
)
 
$
19,508

 
$
(479
)
 
$
30,310

 
$
(496
)


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

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

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






There were no gross realized gains or losses on the sale of securities carried at fair value or held to maturity securities with OTTI write-downs for the six-month periods ended June 30, 2019, and June 30, 2018, respectively.

Other investments, at cost, include equity securities without a readily determinable fair value. Equity securities without a readily determinable fair value totaled $18.2 million and $17.1 million at June 30, 2019, and December 31, 2018, respectively. At June 30, 2019, and December 31, 2018, other investments at cost included shares of stock in the Federal Home Loan Banks (the "FHLBs") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of $14.9 million and $16.6 million, respectively.

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

NOTE 4: LOANS

Loans as of June 30, 2019, and December 31, 2018, were as follows, in thousands:
 
June 30, 2019
 
December 31, 2018
Loans receivable held to maturity:
 
 
 
Commercial
$
2,238,453

 
$
2,020,231

Commercial real estate
3,991,919

 
3,711,481

Agricultural and agricultural real estate
549,404

 
565,408

Residential real estate
613,707

 
673,603

Consumer
461,802

 
440,158

Gross loans receivable held to maturity
7,855,285

 
7,410,881

Unearned discount
(942
)
 
(1,624
)
Deferred loan fees
(1,292
)
 
(1,560
)
Total net loans receivable held to maturity
7,853,051

 
7,407,697

Allowance for loan losses
(63,850
)
 
(61,963
)
Loans receivable, net
$
7,789,201

 
$
7,345,734



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

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

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






The following table shows the balance in the allowance for loan losses at June 30, 2019, and December 31, 2018, and the related loan balances, disaggregated on the basis of impairment methodology, in thousands. Loans evaluated under ASC 310-10-35 include loans on nonaccrual status and troubled debt restructurings, which are individually evaluated for impairment, and other impaired loans deemed to have similar risk characteristics. All other loans are collectively evaluated for impairment under ASC 450-20. Heartland has made no significant changes to the accounting for the allowance for loan losses during the quarter ended March 31, 2019.
 
Allowance For
Loan Losses
 
Gross Loans Receivable
Held to Maturity
 
Ending Balance
Under ASC
310-10-35
 
Ending Balance
Under ASC
450-20
 
Total
 
Ending Balance Evaluated for Impairment
Under ASC
310-10-35
 
Ending Balance Evaluated for Impairment
Under ASC
450-20
 
 Total
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
5,685

 
$
18,397

 
$
24,082

 
$
26,881

 
$
2,211,572

 
$
2,238,453

Commercial real estate
377

 
26,923

 
27,300

 
22,141

 
3,969,778

 
3,991,919

Agricultural and agricultural real estate
1,557

 
4,492

 
6,049

 
21,729

 
527,675

 
549,404

Residential real estate
197

 
1,375

 
1,572

 
18,556

 
595,151

 
613,707

Consumer
546

 
4,301

 
4,847

 
5,411

 
456,391

 
461,802

Total
$
8,362

 
$
55,488

 
$
63,850

 
$
94,718

 
$
7,760,567

 
$
7,855,285

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
5,733

 
$
18,772

 
$
24,505

 
$
24,202

 
$
1,996,029

 
$
2,020,231

Commercial real estate
218

 
25,320

 
25,538

 
14,388

 
3,697,093

 
3,711,481

Agricultural and agricultural real estate
686

 
4,267

 
4,953

 
15,951

 
549,457

 
565,408

Residential real estate
168

 
1,617

 
1,785

 
20,251

 
653,352

 
673,603

Consumer
749

 
4,433

 
5,182

 
7,004

 
433,154

 
440,158

Total
$
7,554

 
$
54,409

 
$
61,963

 
$
81,796

 
$
7,329,085

 
$
7,410,881



The following table presents nonaccrual loans, accruing loans past due 90 days or more and performing troubled debt restructured loans at June 30, 2019, and December 31, 2018, in thousands:
 
June 30, 2019
 
December 31, 2018
Nonaccrual loans
$
74,963

 
$
67,833

Nonaccrual troubled debt restructured loans
4,656

 
4,110

Total nonaccrual loans
$
79,619

 
$
71,943

Accruing loans past due 90 days or more
$
285

 
$
726

Performing troubled debt restructured loans
$
3,539

 
$
4,026








The following tables provide information on troubled debt restructured loans that were modified during the three- and six-month periods ended June 30, 2019, and June 30, 2018, dollars in thousands:
 
Three Months Ended
June 30,
 
2019
 
2018
 
Number
of Loans
 
Pre-
Modification
Recorded
Investment
 
Post-
Modification
Recorded
Investment
 
Number
of Loans
 
Pre-
Modification
Recorded
Investment
 
Post-
Modification
Recorded
Investment
Commercial

 
$

 
$

 

 
$

 
$

Commercial real estate

 

 

 

 

 

Total commercial and commercial real estate

 

 

 

 

 

Agricultural and agricultural real estate

 

 

 

 

 

Residential real estate
3

 
240

 
246

 
6

 
1,292

 
1,125

Consumer

 

 

 

 

 

Total
3

 
$
240

 
$
246

 
6

 
$
1,292

 
$
1,125

 
Six Months Ended
June 30,
 
2019
 
2018
 
Number
of Loans
 
Pre-
Modification
Recorded
Investment
 
Post-
Modification
Recorded
Investment
 
Number
of Loans
 
Pre-
Modification
Recorded
Investment
 
Post-
Modification
Recorded
Investment
Commercial

 
$

 
$

 

 
$

 
$

Commercial real estate

 

 

 

 

 

Total commercial and commercial real estate

 

 

 

 

 

Agricultural and agricultural real estate

 

 

 

 

 

Residential real estate
4

 
276

 
288

 
11

 
2,169

 
1,877

Consumer

 

 

 

 

 

Total
4

 
$
276

 
$
288

 
11

 
$
2,169

 
$
1,877



The pre-modification and post-modification recorded investment represents amounts as of the date of loan modification. The difference between the pre-modification investment and post-modification investment amounts on Heartland's residential real estate troubled debt restructured loans for the three- and six-months ended June 30, 2019, is due to principal deferment collected from government guarantees and capitalized interest and escrow. At June 30, 2019, there were no commitments to extend credit to any of the borrowers with an existing troubled debt restructured loan.






The following table shows troubled debt restructured loans for which there was a payment default during the three- and six-month periods ended June 30, 2019, and June 30, 2018, that had been modified during the twelve-month period prior to default, in thousands:
 
With Payment Defaults During the
Three Months Ended
June 30,
 
2019
 
2018
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
Commercial

 
$

 

 
$

Commercial real estate

 

 

 

  Total commercial and commercial real estate

 

 

 

Agricultural and agricultural real estate

 

 

 

Residential real estate
1

 
61

 
3

 
667

Consumer

 

 

 

  Total
1

 
$
61

 
3

 
$
667

 
With Payment Defaults During the
Six Months Ended
June 30,
 
2019
 
2018
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
Commercial

 
$




$

Commercial real estate

 





  Total commercial and commercial real estate

 

 

 

Agricultural and agricultural real estate

 





Residential real estate
3

 
253


6


1,184

Consumer

 





  Total
3

 
$
253

 
6

 
$
1,184



Heartland's internal rating system is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category, categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration. The "nonpass" category consists of special mention, substandard, doubtful and loss loans. The "special mention" rating is attached to loans where the borrower exhibits negative trends in financial circumstances due to borrower specific or systemic conditions that, if left uncorrected, threaten the borrower's capacity to meet its debt obligations. The borrower is believed to have sufficient financial flexibility to react to and resolve its negative financial situation. These credits are closely monitored for improvement or deterioration. The "substandard" rating is assigned to loans that are inadequately protected by the current net worth and paying capacity of the borrower and that may be further at risk due to deterioration in the value of collateral pledged. Well-defined weaknesses jeopardize liquidation of the debt. These loans are still considered collectible; however, a distinct possibility exists that Heartland will sustain some loss if deficiencies are not corrected. Substandard loans may exhibit some or all of the following weaknesses: deteriorating financial trends, lack of earnings, inadequate debt service capacity, excessive debt and/or lack of liquidity. The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring the rating of the loan as "loss" until the exact status of the loan can be determined. The loss rating is assigned to loans considered uncollectible. Heartland had no loans classified as loss or doubtful as of June 30, 2019. Loans are placed on "nonaccrual" when management does not expect to collect payments of principal and interest in full or when principal or interest has been in default for a period of 90 days or more, unless the loan is both well secured and in the process of collection.






The following table presents loans by credit quality indicator at June 30, 2019, and December 31, 2018, in thousands:
 
Pass
 
Nonpass
 
Total
June 30, 2019
 
 
 
 
 
Commercial
$
2,095,930

 
$
142,523

 
$
2,238,453

Commercial real estate
3,755,285

 
236,634

 
3,991,919

  Total commercial and commercial real estate
5,851,215

 
379,157

 
6,230,372

Agricultural and agricultural real estate
441,598

 
107,806

 
549,404

Residential real estate
586,121

 
27,586

 
613,707

Consumer
446,569

 
15,233

 
461,802

  Total gross loans receivable held to maturity
$
7,325,503

 
$
529,782

 
$
7,855,285

December 31, 2018
 
 
 
 
 
Commercial
$
1,880,579

 
$
139,652

 
$
2,020,231

Commercial real estate
3,524,344

 
187,137

 
3,711,481

  Total commercial and commercial real estate
5,404,923

 
326,789

 
5,731,712

Agricultural and agricultural real estate
471,642

 
93,766

 
565,408

Residential real estate
645,478

 
28,125

 
673,603

Consumer
425,451

 
14,707

 
440,158

  Total gross loans receivable held to maturity
$
6,947,494

 
$
463,387

 
$
7,410,881


The nonpass category in the table above is comprised of approximately 57% special mention loans and 43% substandard loans as of June 30, 2019. The percent of nonpass loans on nonaccrual status as of June 30, 2019, was 15%. As of December 31, 2018, the nonpass category in the table above was comprised of approximately 52% special mention loans and 48% substandard loans. The percent of nonpass loans on nonaccrual status as of December 31, 2018, was 16%. Loans delinquent 30 to 89 days as a percent of total loans were 0.31% at June 30, 2019, compared to 0.21% at December 31, 2018. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified. All impaired loans are reviewed at least annually.

As of June 30, 2019, Heartland had $3.1 million of loans secured by residential real estate property that were in the process of foreclosure.

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







The following table sets forth information regarding Heartland's accruing and nonaccrual loans at June 30, 2019, and December 31, 2018, in thousands:
 
Accruing Loans
 
 
 
 
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90 Days or
More
Past Due
 
Total
Past Due
 
Current
 
Nonaccrual
 
Total Loans
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
6,030

 
$
1,281

 
$

 
$
7,311

 
$
2,205,913

 
$
25,229

 
$
2,238,453

Commercial real estate
4,931

 
1,006

 

 
5,937

 
3,969,426

 
16,556

 
3,991,919

Total commercial and commercial real estate
10,961

 
2,287

 

 
13,248

 
6,175,339

 
41,785

 
6,230,372

Agricultural and agricultural real estate
2,664

 
386

 
285

 
3,335

 
524,655

 
21,414

 
549,404

Residential real estate
2,744

 
653

 

 
3,397

 
598,120

 
12,190

 
613,707

Consumer
3,850

 
578

 

 
4,428

 
453,144

 
4,230

 
461,802

Total gross loans receivable held to maturity
$
20,219

 
$
3,904

 
$
285

 
$
24,408

 
$
7,751,258

 
$
79,619

 
$
7,855,285

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
2,574

 
$
205

 
$

 
$
2,779

 
$
1,991,525

 
$
25,927

 
$
2,020,231

Commercial real estate
4,819

 

 
726

 
5,545

 
3,694,259

 
11,677

 
3,711,481

Total commercial and commercial real estate
7,393

 
205

 
726

 
8,324

 
5,685,784

 
37,604

 
5,731,712

Agricultural and agricultural real estate
99

 

 

 
99

 
549,376

 
15,933

 
565,408

Residential real estate
5,147

 
49

 

 
5,196

 
655,329

 
13,078

 
673,603

Consumer
2,724

 
307

 

 
3,031

 
431,799

 
5,328

 
440,158

Total gross loans receivable held to maturity
$
15,363

 
$
561

 
$
726

 
$
16,650

 
$
7,322,288

 
$
71,943

 
$
7,410,881








The majority of Heartland's impaired loans are those that are nonaccrual, are past due 90 days or more and still accruing or have had their terms restructured in a troubled debt restructuring. The following tables present the unpaid principal balance that was contractually due at June 30, 2019, and December 31, 2018, the outstanding loan balance recorded on the consolidated balance sheets at June 30, 2019, and December 31, 2018, any related allowance recorded for those loans as of June 30, 2019, and December 31, 2018, the average outstanding loan balances recorded on the consolidated balance sheets during the three- and six- months ended June 30, 2019, and year ended December 31, 2018, and the interest income recognized on the impaired loans during the three- and six-month period ended June 30, 2019, and year ended December 31, 2018, in thousands:
 
Unpaid
Principal
Balance
 
Loan
Balance
 
Related
Allowance
Recorded
 
Quarter-
to-
Date
Avg.
Loan
Balance
 
Quarter-
to-
Date
Interest
Income
Recognized
 
Year-
to-
Date
Avg.
Loan
Balance
 
Year-
to-
Date
Interest
Income
Recognized
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with a related allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
11,152

 
$
11,142

 
$
5,685

 
$
11,442

 
$
9

 
$
11,747

 
$
16

Commercial real estate
1,541

 
1,541

 
377

 
1,357

 
5

 
1,280

 
11

Total commercial and commercial real estate
12,693

 
12,683

 
6,062

 
12,799

 
14

 
13,027

 
27

Agricultural and agricultural real estate
3,916

 
3,916

 
1,557

 
3,314

 

 
2,772

 

Residential real estate
1,273

 
1,273

 
197

 
1,378

 

 
1,194

 

Consumer
1,175

 
1,173

 
546

 
1,200

 
1

 
1,237

 
7

Total loans held to maturity
$
19,057

 
$
19,045

 
$
8,362

 
$
18,691

 
$
15

 
$
18,230

 
$
34

Impaired loans without a related allowance:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
20,542

 
$
15,739

 
$

 
$
13,519

 
$
111

 
$
12,726

 
$
441

Commercial real estate
20,680

 
20,600

 

 
17,785

 
73

 
15,900

 
127

Total commercial and commercial real estate
41,222

 
36,339

 

 
31,304

 
184

 
28,626

 
568

Agricultural and agricultural real estate
20,220

 
17,813

 

 
17,739

 
17

 
16,056

 
33

Residential real estate
17,283

 
17,283

 

 
17,198

 
121

 
17,566

 
151

Consumer
4,238

 
4,238

 

 
4,222

 
18

 
4,522

 
43

Total loans held to maturity
$
82,963

 
$
75,673

 
$

 
$
70,463

 
$
340

 
$
66,770

 
$
795

Total impaired loans held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
31,694

 
$
26,881

 
$
5,685

 
$
24,961

 
$
120

 
$
24,473

 
$
457

Commercial real estate
22,221

 
22,141

 
377

 
19,142

 
78

 
17,180

 
138

Total commercial and commercial real estate
53,915

 
49,022

 
6,062

 
44,103

 
198

 
41,653

 
595

Agricultural and agricultural real estate
24,136

 
21,729

 
1,557

 
21,053

 
17

 
18,828

 
33

Residential real estate
18,556

 
18,556

 
197

 
18,576

 
121

 
18,760

 
151

Consumer
5,413

 
5,411

 
546

 
5,422

 
19

 
5,759

 
50

Total impaired loans held to maturity
$
102,020

 
$
94,718

 
$
8,362

 
$
89,154

 
$
355

 
$
85,000

 
$
829







 
Unpaid
Principal
Balance
 
Loan
Balance
 
Related
Allowance
Recorded
 
Year-to-
Date
Avg.
Loan
Balance
 
Year-to-
Date
Interest
Income
Recognized
December 31, 2018
 
 
 
 
 
 
 
 
 
Impaired loans with a related allowance:
 
 
 
 
 
 
 
 
 
Commercial
$
12,376

 
$
12,366

 
$
5,733

 
$
4,741

 
$
33

Commercial real estate
891

 
891

 
218

 
4,421

 
25

Total commercial and commercial real estate
13,267

 
13,257

 
5,951

 
9,162

 
58

Agricultural and agricultural real estate
1,718

 
1,718

 
686

 
2,165

 
2

Residential real estate
647

 
647

 
168

 
1,138

 
12

Consumer
1,373

 
1,373

 
749

 
2,934

 
29

Total loans held to maturity
$
17,005

 
$
16,995

 
$
7,554

 
$
15,399

 
$
101

Impaired loans without a related allowance:
 
 
 
 
 
 
 
 
 
Commercial
$
13,616

 
$
11,836

 
$

 
$
10,052

 
$
299

Commercial real estate
13,578

 
13,497

 

 
13,000

 
249

Total commercial and commercial real estate
27,194

 
25,333

 

 
23,052

 
548

Agricultural and agricultural real estate
16,836

 
14,233

 

 
14,781

 
5

Residential real estate
19,604

 
19,604

 

 
23,950

 
308

Consumer
5,631

 
5,631

 

 
5,117

 
97

Total loans held to maturity
$
69,265

 
$
64,801

 
$

 
$
66,900

 
$
958

Total impaired loans held to maturity:
 
 
 
 
 
 
 
 
 
Commercial
$
25,992

 
$
24,202

 
$
5,733

 
$
14,793

 
$
332

Commercial real estate
14,469

 
14,388

 
218

 
17,421

 
274

Total commercial and commercial real estate
40,461

 
38,590

 
5,951

 
32,214

 
606

Agricultural and agricultural real estate
18,554

 
15,951

 
686

 
16,946

 
7

Residential real estate
20,251

 
20,251

 
168

 
25,088

 
320

Consumer
7,004

 
7,004

 
749

 
8,051

 
126

Total impaired loans held to maturity
$
86,270

 
$
81,796

 
$
7,554

 
$
82,299

 
$
1,059



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

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

On February 23, 2018, Heartland acquired Signature Bancshares, Inc., parent company of Signature Bank, based in Minnetonka, Minnesota. As of February 23, 2018, Signature Bancshares, Inc. had gross loans of $335.1 million and the estimated fair value of the loans acquired was $324.5 million.

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





to as the accretable yield and is recognized into interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

At June 30, 2019, and December 31, 2018, the carrying amount of loans acquired since 2015 consist of purchased impaired and nonimpaired purchased loans as summarized in the following table, in thousands:
 
June 30, 2019
 
December 31, 2018
 
Impaired
Purchased
Loans
 
Non
Impaired
Purchased
Loans
 
Total
Purchased
Loans
 
Impaired
Purchased
Loans
 
Non
Impaired
Purchased
Loans
 
Total
Purchased
Loans
Commercial
$
7,109

 
$
336,256

 
$
343,365

 
$
3,801

 
$
243,693

 
$
247,494

Commercial real estate
3,337

 
1,169,970

 
1,173,307

 
158

 
1,098,171

 
1,098,329

Agricultural and agricultural real estate

 
10,054

 
10,054

 

 
27,115

 
27,115

Residential real estate

 
171,327

 
171,327

 
231

 
184,389

 
184,620

Consumer loans

 
97,824

 
97,824

 

 
75,773

 
75,773

Total covered loans
$
10,446

 
$
1,785,431

 
$
1,795,877

 
$
4,190

 
$
1,629,141

 
$
1,633,331



Changes in accretable yield on acquired loans with evidence of credit deterioration at the date of acquisition for the three- and six-month periods ended June 30, 2019, and June 30, 2018, were as follows, in thousands:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
$
188

 
$

 
$
227

 
$
57

Original yield discount, net, at date of acquisition
27

 
564

 
27

 
508

Accretion
(851
)
 
(651
)
 
(1,108
)
 
(850
)
Reclassification from nonaccretable difference(1)
452

 
550

 
670

 
748

Balance at period end
$
(184
)
 
$
463

 
$
(184
)
 
$
463

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

For loans acquired since January 2015, on the acquisition dates the preliminary estimate of the contractually required payments receivable for all loans with evidence of credit deterioration since origination was $44.6 million, and the estimated fair value of these loans was $28.2 million. At June 30, 2019, a majority of these loans were valued based upon the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of such collateral, and the timing and amount of the cash flows could not be reasonably estimated. At June 30, 2019, there was $0 of allowance recorded and $57,000 of allowance recorded at December 31, 2018, related to these ASC 310-30 loans. Provision benefit of $64,000 and provision expense of $672,000 was recorded for the six-month periods ended June 30, 2019, and 2018, respectively.

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

NOTE 5: ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses for the three- and six-month periods ended June 30, 2019, and June 30, 2018, were as follows, in thousands:
 
Commercial
 
Commercial
Real Estate
 
Agricultural and Agricultural Real Estate
 
Residential
Real Estate
 
Consumer
 
Total
Balance at March 31, 2019
$
23,821

 
$
26,787

 
$
5,598

 
$
1,605

 
$
4,828

 
$
62,639

Charge-offs
(3,687
)
 
(121
)
 
(49
)
 
(150
)
 
(773
)
 
(4,780
)
Recoveries
194

 
26

 
5

 
34

 
814

 
1,073

Provision
3,754

 
608

 
495

 
83

 
(22
)
 
4,918

Balance at June 30, 2019
$
24,082

 
$
27,300

 
$
6,049

 
$
1,572

 
$
4,847

 
$
63,850

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Commercial
Real Estate
 
Agricultural and Agricultural
Real Estate
 
Residential
Real Estate
 
Consumer
 
Total
Balance at December 31, 2018
$
24,505

 
$
25,538

 
$
4,953

 
$
1,785

 
$
5,182

 
$
61,963

Charge-offs
(4,331
)
 
(160
)
 
(428
)
 
(313
)
 
(1,498
)
 
(6,730
)
Recoveries
369

 
177

 
335

 
47

 
1,136

 
2,064

Provision
3,539

 
1,745

 
1,189

 
53

 
27

 
6,553

Balance at June 30, 2019
$
24,082

 
$
27,300

 
$
6,049

 
$
1,572

 
$
4,847

 
$
63,850

 
Commercial
 
Commercial
Real Estate
 
Agricultural and Agricultural Real Estate
 
Residential
Real Estate
 
Consumer
 
Total
Balance at March 31, 2018
$
19,395

 
$
23,469

 
$
4,716

 
$
2,141

 
$
8,935

 
$
58,656

Charge-offs
(978
)
 
(437
)
 
(212
)
 
(195
)
 
(1,342
)
 
(3,164
)
Recoveries
300

 
323

 

 
1

 
377

 
1,001

Provision
1,992

 
372

 
1,205

 
(90
)
 
1,352

 
4,831

Balance at June 30, 2018
$
20,709

 
$
23,727

 
$
5,709

 
$
1,857

 
$
9,322

 
$
61,324

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
 
Commercial
Real Estate
 
Agricultural and Agricultural
Real Estate
 
Residential
Real Estate
 
Consumer
 
Total
Balance at December 31, 2017
$
18,098

 
$
21,950

 
$
4,258

 
$
2,224

 
$
9,156

 
$
55,686

Charge-offs
(1,772
)
 
(562
)
 
(212
)
 
(211
)
 
(2,631
)
 
(5,388
)
Recoveries
404

 
771

 
14

 
76

 
667

 
1,932

Provision
3,979

 
1,568

 
1,649

 
(232
)
 
2,130

 
9,094

Balance at June 30, 2018
$
20,709

 
$
23,727

 
$
5,709

 
$
1,857

 
$
9,322

 
$
61,324



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

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

Heartland had goodwill of $427.1 million at June 30, 2019, and $391.7 million at December 31, 2018. Heartland conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries as of September 30. There was no goodwill impairment as of the most recent assessment.

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






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

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

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

The core deposit intangibles recorded with the Blue Valley Ban Corp. acquisition are not deductible for tax purposes and are expected to be amortized over a period of 9 years on an accelerated basis.

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

Heartland's intangible assets consist of core deposit intangibles, mortgage servicing rights, customer relationship intangibles, and commercial servicing rights. The gross carrying amount of these intangible assets and the associated accumulated amortization at June 30, 2019, and December 31, 2018, are presented in the table below, in thousands:
 
June 30, 2019
 
December 31, 2018
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizing intangible assets:
 
 
 
 
 
 
 
 
 
 
 
Core deposit intangibles
$
95,033

 
$
42,539

 
$
52,494

 
$
83,640

 
$
36,403

 
$
47,237

Customer relationship intangibles
1,177

 
953

 
224

 
1,177

 
935

 
242

Mortgage servicing rights
7,112

 
1,311

 
5,801

 
42,228

 
12,865

 
29,363

Commercial servicing rights
6,907

 
5,528

 
1,379

 
6,834

 
5,125

 
1,709

Total
$
110,229

 
$
50,331

 
$
59,898

 
$
133,879

 
$
55,328

 
$
78,551



On April 30, 2019, Dubuque Bank and Trust Company closed on the sale of substantially all its servicing rights portfolio, which contained loans with an unpaid principal balance of $3.31 billion to PNC Bank, N.A. The transaction qualified as a sale, and $20.6 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of June 30, 2019. Cash of approximately $34.8 million was received during the second quarter, and Heartland recorded an estimated gain on the sale of this portfolio of approximately $13.3 million. A payable of approximately $334,000 was recorded as of June 30, 2019, due to the timing of the servicing transfer per the terms of the sale agreement. In the agreement, which includes customary terms and conditions, Dubuque Bank and Trust Company provided interim servicing of the loans until the transfer date, which was August 1, 2019.

The following table shows the estimated future amortization expense for amortizable intangible assets, in thousands:
 
Core
Deposit
Intangibles
 
Customer
Relationship
Intangibles
 
Mortgage
Servicing
Rights
 
Commercial
Servicing
Rights
 
 
 
Total
Six months ending December 31, 2019
$
5,869

 
$
19

 
$
876

 
$
195

 
$
6,959

Year ending December 31,
 
 
 
 
 
 
 
 
 
2020
10,238

 
36

 
1,231

 
329

 
11,834

2021
8,520

 
35

 
1,055

 
293

 
9,903

2022
6,947

 
35

 
879

 
246

 
8,107

2023
6,061

 
34

 
704

 
159

 
6,958

2024
4,981

 
33

 
528

 
86

 
5,628

Thereafter
9,878

 
32

 
528

 
71

 
10,509

Total
$
52,494

 
$
224

 
$
5,801

 
$
1,379

 
$
59,898








Projections of amortization expense for mortgage servicing rights are based on existing asset balances and the existing interest rate environment as of June 30, 2019. Heartland's actual experience may be significantly different depending upon changes in mortgage interest rates and market conditions. Mortgage loans serviced for others at First Bank & Trust were approximately $630.7 million at June 30, 2019 compared to $648.9 million at December 31, 2018. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio at First Bank & Trust were approximately $12.5 million at June 30, 2019 and $5.9 million at December 31, 2018.

Custodial escrow balances maintained at Dubuque Bank and Trust Company in connection with the interim servicing of the mortgage loan servicing portfolio sold to PNC Bank, N.A. totaled $19.8 million at June 30, 2019. Heartland transferred custodial escrow balances totaling $22.9 million to PNC Bank, N.A. in conjunction with the transfer of the mortgage servicing rights portfolio on August 1, 2019. Custodial escrow balances maintained in connection with the mortgage loan servicing portfolio at Dubuque Bank and Trust Company totaled $17.7 million at December 31, 2018.

At June 30, 2019, the fair value of the mortgage servicing rights at First Bank & Trust was estimated at $5.8 million compared to $7.1 million at December 31, 2018.

The fair value of mortgage servicing rights is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds, servicing costs and escrow earnings of First Bank & Trust's mortgage servicing rights are considered in the calculation. The average constant prepayment rate was 14.10% for the June 30, 2019 valuation compared to 10.30% for the December 31, 2018 valuation. The discount rate was 9.03% for both June 30, 2019 and December 31, 2018 valuations. The average capitalization rate for the first six months of 2019 ranged from 81 to 98 basis points compared to a range of 93 to 117 basis points for 2018 since acquisition on May 18, 2018. Fees collected for the servicing of mortgage loans for others were $427,000 and $174,000 for the quarters ended June 30, 2019 and June 30, 2018, respectively, and $854,000 and $174,000 for the six-months ended June 30, 2019 and June 30, 2018.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the six months ended June 30, 2019, and June 30, 2018:
 
2019
 
2018
Balance at January 1,
$
29,363

 
$
23,248

Originations
342

 
2,673

Amortization
(2,395
)
 
(2,752
)
Valuation allowance on mortgage servicing rights

 
(209
)
Sale of mortgage servicing rights
(20,556
)
 

Acquired mortgage servicing rights

 
6,995

Valuation adjustment
(953
)
 

Balance at period end
$
5,801

 
$
29,955

Mortgage servicing rights, net to servicing portfolio
0.92
%
 
0.72
%


Heartland's commercial servicing portfolio is comprised of loans guaranteed by the Small Business Administration and United States Department of Agriculture that have been sold with servicing retained by Heartland, which totaled $90.9 million at June 30, 2019 and $107.4 million at December 31, 2018. The commercial servicing rights portfolio is separated into two tranches at the respective Heartland subsidiary, loans with a term of less than 20 years and loans with a term of more than 20 years. Fees collected for the servicing of commercial loans for others were $230,000 and $425,000 for the quarter ended June 30, 2019 and June 30, 2018, respectively, and $610,000 and $845,000 for the six-months ended June 30, 2019, and June 30, 2018, respectively.

The fair value of each commercial servicing rights portfolio is calculated based upon a discounted cash flow analysis. Cash flow assumptions, including prepayment speeds and servicing costs, are considered in the calculation. The range of average constant prepayment rates for the valuations was 11.26% to 15.50% as of June 30, 2019, compared to 11.01% to 13.50% as of December 31, 2018. The discount rate range was 12.25% to 14.66% for the June 30, 2019, valuations compared to 13.44% to 16.96% for the December 31, 2018, valuations. The capitalization rate for both 2019 and 2018 ranged from 310 to 445 basis points. The total fair value of Heartland's commercial servicing rights was estimated at $1.9 million as of June 30, 2019, and $2.1 million as of December 31, 2018.






The following table summarizes, in thousands, the changes in capitalized commercial servicing rights for the six-months ended June 30, 2019, and June 30, 2018:
 
2019
 
2018
Balance at January 1,
$
1,709

 
$
2,609

Originations
73

 
21

Amortization
(403
)
 
(580
)
Valuation allowance on commercial servicing rights

 
(9
)
Balance at period end
$
1,379

 
$
2,041

Fair value of commercial servicing rights
$
1,851

 
$
2,502

Commercial servicing rights, net to servicing portfolio
1.52
%
 
1.75
%


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

Mortgage and commercial servicing rights are subsequently measured using the amortization method, which requires the asset to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment at each Heartland subsidiary based upon the fair value of the assets as compared to the carrying amount. Impairment is recognized through a valuation allowance for specific tranches to the extent that fair value is less than carrying amount at each Heartland subsidiary. At June 30, 2019, a $1.0 million valuation allowance was required on mortgage servicing rights and at December 31, 2018, a $58,000 valuation allowance was required on mortgage servicing rights. At June 30, 2019, no valuation allowance was required on commercial servicing rights with a term less than 20 years and no valuation allowance was required on commercial servicing rights with a term greater than 20 years. At December 31, 2018, no valuation allowance was required on commercial servicing rights with a term less than 20 years and no valuation allowance was required on commercial servicing rights with a term greater than 20 years.

The following table summarizes, in thousands, the book value, the fair value of each tranche of the mortgage servicing rights and any recorded valuation allowance at each respective subsidiary at June 30, 2019, and December 31, 2018:
June 30, 2019
Book Value 15-Year Tranche
 
Fair Value 15-Year Tranche
 
Impairment 15-Year Tranche
 
Book Value 30-Year Tranche
 
Fair Value 30-Year Tranche
 
Impairment 30-Year Tranche
Dubuque Bank and Trust Company
$

 
$

 
$

 
$

 
$

 
$

First Bank & Trust
1,541

 
1,389

 
152

 
5,271

 
4,412

 
859

Total
$
1,541

 
$
1,389

 
$
152

 
$
5,271

 
$
4,412

 
$
859

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Dubuque Bank and Trust Company
$
2,195

 
$
4,636

 
$

 
$
20,025

 
$
36,901

 
$

First Bank & Trust
1,685

 
1,665

 
20

 
5,516

 
5,478

 
38

Total
$
3,880

 
$
6,301

 
$
20

 
$
25,541

 
$
42,379

 
$
38








The following table summarizes, in thousands, the book value, the fair value of each tranche of the commercial servicing rights and any recorded valuation allowance at each respective subsidiary at June 30, 2019, and December 31, 2018:
June 30, 2019
Book Value
Less than
20 Years
 
Fair Value
Less than
20 Years
 
Impairment
Less than
20 Years
 
Book Value
More than
20 Years
 
Fair Value
More than
20 Years
 
Impairment
More than
20 Years
Citywide Banks
$

 
$

 
$

 
$

 
$

 
$

Premier Valley Bank
33

 
62

 

 
159

 
176

 

Wisconsin Bank & Trust
178

 
346

 

 
1,009

 
1,267

 

Total
$
211

 
$
408

 
$

 
$
1,168

 
$
1,443

 
$

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Citywide Banks
$
1

 
$
6

 
$

 
$
18

 
$
20

 
$

Premier Valley Bank
45

 
74

 

 
178

 
184

 

Wisconsin Bank & Trust
249

 
411

 

 
1,218

 
1,439

 

Total
$
295

 
$
491

 
$

 
$
1,414

 
$
1,643

 
$



NOTE 7: DERIVATIVE FINANCIAL INSTRUMENTS

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

In addition, interest rate-related derivative instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by credit ratings of each counterparty. Heartland was required to pledge $1.8 million cash as collateral at June 30, 2019 compared to no collateral at December 31, 2018. At June 30, 2019, no collateral was required to be pledged by Heartland's counterparties, compared to $770,000 collateral at December 31, 2018.

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

Cash Flow Hedges
Heartland has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates. To manage the interest rate risk related to the variability of interest payments, Heartland has entered into various interest rate swap agreements. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received or made on Heartland's variable-rate liabilities. For the six months ended June 30, 2019, the change in net unrealized losses on cash flow hedges reflects changes in the fair value of the swaps and reclassification from accumulated other comprehensive income to interest expense totaling $265,000. For the next twelve months, Heartland estimates that cash receipts and reclassification from accumulated other comprehensive income to reduce interest expense will total $402,000.

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






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

The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as cash flow hedges at June 30, 2019, and December 31, 2018, in thousands:
 
Notional
Amount
 
Fair
Value
 
Balance
Sheet
Category
 
Receive
Rate
 
Weighted
Average
Pay Rate
 
Maturity
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
$
25,000

 
$
(184
)
 
Other liabilities
 
2.410
%
 
2.255
%
 
03/17/2021
Interest rate swap
20,000

 
(162
)
 
Other liabilities
 
2.589

 
3.355

 
01/07/2020
Interest rate swap
27,667

 
251

 
Other assets
 
4.912

 
3.674

 
05/10/2021
Interest rate swap
27,250

 
(1,452
)
 
Other liabilities
 
4.904

 
5.425

 
07/24/2028
Interest rate swap
20,000

 
(623
)
 
Other liabilities
 
2.410

 
2.390

 
06/15/2024
Interest rate swap
20,000

 
(563
)
 
Other liabilities
 
2.520

 
2.352

 
03/01/2024
Interest rate swap
6,000

 
(8
)
 
Other liabilities
 
2.410

 
1.866

 
06/15/2021
Interest rate swap
3,000

 
(2
)
 
Other liabilities
 
2.597

 
1.878

 
06/30/2021
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap
$
25,000

 
$
191

 
Other assets
 
2.788
%
 
2.255
%
 
03/17/2021
Interest rate swap
20,000

 
(177
)
 
Other liabilities
 
2.408

 
3.355

 
01/07/2020
Interest rate swap
10,000

 
29

 
Other assets
 
2.822

 
1.674

 
03/26/2019
Interest rate swap
10,000

 
28

 
Other assets
 
2.788

 
1.658

 
03/18/2019
Interest rate swap
29,667

 
763

 
Other assets
 
4.887

 
3.674

 
05/10/2021
Interest rate swap
28,750

 
(572
)
 
Other liabilities
 
5.004

 
5.425

 
07/24/2028
Interest rate swap
20,000

 
157

 
Other assets
 
2.788

 
2.390

 
06/15/2024
Interest rate swap
20,000

 
185

 
Other assets
 
2.738

 
2.352

 
03/01/2024
Interest rate swap
6,000

 
105

 
Other Assets
 
2.788

 
1.866

 
06/15/2021
Interest rate swap
3,000

 
51

 
Other assets
 
2.787

 
1.878

 
06/30/2021


The table below identifies the gains and losses recognized on Heartland's derivative instruments designated as cash flow hedges for the three- and six-month periods ended June 30, 2019, and June 30, 2018, in thousands:
 
Effective Portion
 
Ineffective Portion
 
Recognized in OCI
 
Reclassified from AOCI into Income
 
Recognized in Income on Derivatives
 
Amount of
Gain (Loss)
 
Category
 
Amount of
Gain (Loss)
 
Category
 
Amount of
Gain (Loss)
Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
(2,163
)
 
Interest expense
 
$
(100
)
 
Other income
 
$

Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
(3,503
)
 
Interest expense
 
$
(265
)
 
Other income
 
$

Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
927

 
Interest expense
 
$
(30
)
 
Other income
 
$

Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Interest rate swaps
$
2,823

 
Interest expense
 
$
(227
)
 
Other income
 
$








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

Heartland was required to pledge $3.2 million and $2.5 million of cash as collateral for these fair value hedges at June 30, 2019, and December 31, 2018, respectively.

The table below identifies the notional amount, fair value and balance sheet category of Heartland's fair value hedges at June 30, 2019, and December 31, 2018, in thousands:
 
Notional Amount
 
Fair Value
 
Balance Sheet Category
June 30, 2019
 
 
 
 
 
Fair value hedges
$

 
$

 
Other assets
Fair value hedges
29,262

 
(1,555
)
 
Other liabilities
December 31, 2018
 
 
 
 
 
Fair value hedges
$
19,820

 
$
74

 
Other assets
Fair value hedges
15,064

 
$
(339
)
 
Other liabilities


The table below identifies the gains and losses recognized on Heartland's fair value hedges for the three- and six-month periods ended June 30, 2019, and June 30, 2018, in thousands:
 
 
Amount of Gain (Loss)
 
Income Statement Category
Three Months Ended June 30, 2019
 
 
 
 
Fair value hedges
 
$
(660
)
 
Interest income
Six Months Ended June 30, 2019
 
 
 
 
Fair value hedges
 
$
(1,290
)
 
Interest income
Three Months Ended June 30, 2018
 
 
 
 
Fair value hedges
 
$
350

 
Interest income
Six Months Ended June 30, 2018
 
 
 
 
Fair value hedges
 
$
1,244

 
Interest income


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

 
$

 
Other assets
Embedded derivatives
11,874

 
(672
)
 
Other liabilities
December 31, 2018
 
 
 
 
 
Embedded derivatives
$
11,266

 
$
453

 
Other assets
Embedded derivatives
2,231

 
(54
)
 
Other liabilities







The table below identifies the gains and losses recognized on Heartland's embedded derivatives for the three- and six-month periods ended June 30, 2019, and June 30, 2018, in thousands:
 
 
Amount of Gain (Loss)
 
Income Statement Category
Three Months Ended June 30, 2019
 
 
 
 
Embedded derivatives
 
$
182

 
Other noninterest income
Six Months Ended June 30, 2019
 
 
 
 
Embedded derivatives
 
$
1,071

 
Other noninterest income
Three Months Ended June 30, 2018
 
 
 
 
Embedded derivatives
 
$
138

 
Other noninterest income
Six Months Ended June 30, 2018
 
 
 
 
Embedded derivatives
 
$
415

 
Other noninterest income

Back-to-Back Loan Swaps
Heartland has interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan swaps, Heartland enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the consolidated balance sheets. Heartland was required to post $13.5 million and $2.0 million as of June 30, 2019, and December 31, 2018, respectively, as collateral related to these back-to-back swaps. Heartland's counterparties were required to pledge $0 at June 30, 2019, and $680,000 at December 31, 2018. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the six months ended June 30, 2019 and June 30, 2018, no gain or loss was recognized. The table below identifies the balance sheet category and fair values of Heartland's derivative instruments designated as loan swaps at June 30, 2019, and December 31, 2018, in thousands:
 
 
Notional
Amount
 
Fair
Value
 
Balance Sheet
Category
 
Weighted
Average
Receive
Rate
 
Weighted
Average
Pay
Rate
June 30, 2019
 
 
 
 
 
 
 
 
 
 
Customer interest rate swaps
 
$
228,934

 
$
14,162

 
Other assets
 
5.16
%
 
4.77
%
Customer interest rate swaps
 
228,934

 
(14,162
)
 
Other liabilities
 
4.77

 
5.16

December 31, 2018
 
 
 
 
 
 
 
 
 
 
Customer interest rate swaps
 
$
211,246

 
$
4,449

 
Other assets
 
5.10
%
 
4.96
%
Customer interest rate swaps
 
211,246

 
(4,449
)
 
Other liabilities
 
4.96

 
5.10



Other Free Standing Derivatives
Heartland has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments. Heartland enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on the commitments to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on the consolidated balance sheets, with the changes in fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting treatment. Heartland was required to pledge collateral of $0 at June 30, 2019, and $35,000 at December 31, 2018. Heartland's counterparties were required to pledge no collateral at both June 30, 2019 and December 31, 2018, as collateral for these forward commitments.

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






The table below identifies the balance sheet category and fair values of Heartland's other free standing derivative instruments not designated as hedging instruments at June 30, 2019, and December 31, 2018, in thousands:
 
Balance Sheet Category
 
Notional Amount
 
Fair Value
June 30, 2019
 
 
 
 
 
Interest rate lock commitments (mortgage)
Other assets
 
$
32,016

 
$
1,072

Forward commitments
Other assets
 
5,000

 
2

Forward commitments
Other liabilities
 
65,000

 
(430
)
Undesignated interest rate swaps
Other liabilities
 
11,874

 
(672
)
Undesignated interest rate swaps
Other assets
 

 

December 31, 2018
 
 


 


Interest rate lock commitments (mortgage)
Other assets
 
$
22,451

 
$
725

Forward commitments
Other assets
 

 

Forward commitments
Other liabilities
 
51,500

 
(399
)
Undesignated interest rate swaps
Other liabilities
 
11,266

 
(453
)
Undesignated interest rate swaps
Other assets
 
2,231

 
54


The table below identifies the income statement category of the gains and losses recognized in income on Heartland's other free standing derivative instruments not designated as hedging instruments for the three- and six-month periods ended June 30, 2019, and June 30, 2018, in thousands:
 
Income Statement Category
 
Gain (Loss) Recognized
Three Months Ended June 30, 2019
 
 
 
Interest rate lock commitments (mortgage)
Net gains on sale of loans held for sale
 
$
552

Forward commitments
Net gains on sale of loans held for sale
 
(145
)
Undesignated interest rate swaps
Other noninterest income
 
182

Six Months Ended June 30, 2019
 
 
 
Interest rate lock commitments (mortgage)
Net gains on sale of loans held for sale
 
$
816

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

Three Months Ended June 30, 2018
 
 
 
Interest rate lock commitments (mortgage)
Net gains on sale of loans held for sale
 
$
2,604

Forward commitments
Net gains on sale of loans held for sale
 
(407
)
Undesignated interest rate swaps
Other noninterest income
 
138

Six Months Ended June 30, 2018
 
 
 
Interest rate lock commitments (mortgage)
Net gains on sale of loans held for sale
 
$
2,621

Forward commitments
Net gains on sale of loans held for sale
 
(292
)
Undesignated interest rate swaps
Other noninterest income
 
415



NOTE 8: FAIR VALUE

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






Fair Value Hierarchy

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

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

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

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

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

Assets

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

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

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

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

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






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

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

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

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

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

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

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






The table below presents Heartland's assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2019, and December 31, 2018, 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
June 30, 2019
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Securities available for sale
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
18,621

 
$
12,480

 
$
6,141

 
$

Mortgage and asset-backed securities
2,193,326

 

 
2,193,326

 

Obligations of states and political subdivisions
331,783

 

 
331,783

 

Equity securities with a readily determinable fair value
18,157

 

 
18,157

 

Derivative financial instruments(1)
14,413

 

 
14,413

 

Interest rate lock commitments
1,072

 

 

 
1,072

Forward commitments
2

 

 
2

 

Total assets at fair value
$
2,577,374

 
$
12,480

 
$
2,563,822

 
$
1,072

Liabilities
 
 
 
 
 
 
 
Derivative financial instruments(2)
$
19,383

 
$

 
$
19,383

 
$

Forward commitments
430

 

 
430

 

Total liabilities at fair value
$
19,813

 
$

 
$
19,813

 
$

December 31, 2018
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Securities available for sale
 
 
 
 
 
 
 
U.S. government corporations and agencies
$
31,951

 
$
25,414

 
$
6,537

 
$

Mortgage and asset-backed securities
2,026,698

 

 
2,026,698

 

Obligations of states and political subdivisions
374,974

 

 
374,974

 

Equity securities
17,086

 

 
17,086

 

Derivative financial instruments(1)
6,539

 

 
6,539

 

Interest rate lock commitments
725

 

 

 
725

Total assets at fair value
$
2,457,973

 
$
25,414

 
$
2,431,834

 
$
725

Liabilities
 
 
 
 
 
 
 
Derivative financial instruments(2)
$
6,044

 
$

 
$
6,044

 
$

Forward commitments
399

 

 
399

 

Total liabilities at fair value
$
6,443

 
$

 
$
6,443

 
$

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







The tables below present Heartland's assets that are measured at fair value on a nonrecurring basis, in thousands:
 
Fair Value Measurements at
June 30, 2019
 
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
 Inputs
(Level 3)
 
Year-to-
Date (Gains)
Losses
Collateral dependent impaired loans:
 
 
 
 
 
 
 
 
 
Commercial
$
13,337

 
$

 
$

 
$
13,337

 
$
3,070

Commercial real estate
808

 

 

 
808

 
72

Agricultural and agricultural real estate
9,032

 

 

 
9,032

 
379

Residential real estate
1,076

 

 

 
1,076

 

Consumer
627

 

 

 
627

 
2

Total collateral dependent impaired loans
$
24,880

 
$

 
$

 
$
24,880

 
$
3,523

Loans held for sale
$
34,575

 
$

 
$
34,575

 
$

 
$
(1,386
)
Other real estate owned
$
6,646

 
$

 
$

 
$
6,646

 
$
936

Premises, furniture and equipment held for sale
$
3,701

 
$

 
$

 
$
3,701

 
$
954

Mortgage servicing rights
$
5,801

 
$

 
$

 
$
5,801

 
$
953

 
Fair Value Measurements at
December 31, 2018
 
Total
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
 Inputs
(Level 3)
 
Year-to-
Date (Gains)
Losses
Collateral dependent impaired loans:
 
 
 
 
 
 
 
 
 
Commercial
$
12,932

 
$

 
$

 
$
12,932

 
$
660

Commercial real estate
405

 

 

 
405

 
72

Agricultural and agricultural real estate
11,070

 

 

 
11,070

 
575

Residential real estate
478

 

 

 
478

 

Consumer
624

 

 

 
624

 

Total collateral dependent impaired loans
$
25,509

 
$

 
$


$
25,509

 
$
1,307

Loans held for sale
$
119,801

 
$

 
$
52,577

 
$
67,224

 
$
(1,870
)
Other real estate owned
$
6,153

 
$

 
$

 
$
6,153

 
$
2,647

Premises, furniture and equipment held for sale
$
7,258

 
$

 
$

 
$
7,258

 
$
59

Mortgage servicing rights
$
7,143

 
$

 
$

 
$
7,143

 
$
58







The following tables present additional quantitative information about assets measured at fair value on a recurring and nonrecurring basis and for which Heartland has utilized Level 3 inputs to determine fair value, in thousands:
 
Fair Value at
6/30/2019
 
Valuation
Technique
 
Unobservable
Input
 
Range
(Weighted Average)
Interest rate lock commitments
$
1,072

 
Discounted cash flows
 
Closing ratio
 
0-99% (90%)(1)
Other real estate owned
6,646

 
Modified appraised value
 
Third party appraisal
 
(2)
 
 
 
 
Appraisal discount
 
0-10%(3)
Mortgage servicing rights
5,801

 
Discounted cash flows
 
Third party valuation
 
(4)
Premises, furniture and equipment held for sale
3,701

 
Modified appraised value
 
Third party appraisal
 
(2)
 
 
 
 
Appraisal discount
 
0-10%(3)
Collateral dependent impaired loans:
 
 
 
 
 
 
 
Commercial
13,337

 
Modified appraised value
 
Third party appraisal
 
(2)
 
 
 
 
Appraisal discount
 
0-20%(3)
Commercial real estate
808

 
Modified appraised value
 
Third party appraisal
 
(2)
 
 
 
 
Appraisal discount
 
0-20%(3)
Agricultural and agricultural real estate
9,032

 
Modified appraised value
 
Third party appraisal
 
(2)
 
 
 
 
Appraisal discount
 
0-15%(3)
Residential real estate
1,076

 
Modified appraised value
 
Third party appraisal
 
(2)
 
 
 
 
Appraisal discount
 
0-12%(3)
Consumer
627

 
Modified appraised value
 
Third party valuation
 
(2)
 
 
 
 
Valuation discount
 
0-12%(3)
 
 
 
 
 
 
 
 
(1) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data. The weighted average closing ratio for PrimeWest Mortgage Corporation is 90%.
(2) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal.
(3) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral.
(4) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups.






 
Fair Value at
12/31/2018
 
Valuation
Technique
 
Unobservable
Input
 
Range
(Weighted Average)
Loans held for sale
$
67,224

 
Discounted cash flows
 
Sales contract
 
(1) 
Interest rate lock commitments
725

 
Discounted cash flows
 
Closing ratio
 
0-99% (91%)(2)
Other real estate owned
6,153

 
Modified appraised value
 
Third party appraisal
 
(3)
 
 
 
 
Appraisal discount
 
0-10%(4)
Servicing rights
7,143

 
Discounted cash flows
 
Third party valuation
 
(5) 
Premises, furniture and equipment held for sale
7,258

 
Modified appraised value
 
Third party appraisal
 
(3)
 
 
 
 
Appraisal discount
 
0-10%(4)
Other real estate owned
6,153

 
Modified appraised value
 
Third party appraisal
 
(3)
 
 
 
 
Appraisal discount
 
0-10%(4)
Collateral dependent impaired loans:
 
 
 
 
 
 
 
Commercial
12,932

 
Modified appraised value
 
Third party appraisal
 
(3)
 
 
 
 
 
Appraisal discount
 
0-8%(4)
Commercial real estate
405

 
Modified appraised value
 
Third party appraisal
 
(3)
 
 
 
 
 
Appraisal discount
 
0-19%(4)
Agricultural and agricultural real estate
11,070

 
Modified appraised value
 
Third party appraisal
 
(3)
 
 
 
 
Appraisal discount
 
0-24%(4)
Residential real estate
478

 
Modified appraised value
 
Third party appraisal
 
(3)
 
 
 
 
Appraisal discount
 
0-24%(4)
Consumer
624

 
Modified appraised value
 
Third party valuation
 
(3)
 
 
 
 
Valuation discount
 
0-14%(4)
 
 
 
 
 
 
 
 
(1) The significant unobservable input related to the loans held for sale was the third party sales contract Heartland entered into prior to December 31, 2018. The sale of these consumer loans closed on January 11, 2019.
(2) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data.
(3) Third party appraisals are obtained and updated at least annually to establish the value of the underlying asset, but the disclosure of the unobservable inputs used by the appraisers would not be meaningful because the range will vary widely from appraisal to appraisal.
(4) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral.
(5) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups.


The changes in fair value of the interest rate lock commitments, which are Level 3 financial instruments measured on a recurring basis, are summarized in the following table, in thousands:
 
For the Six Months Ended
June 30, 2019
 
For the Year Ended
December 31, 2018
Balance at January 1,
$
725

 
$
1,738

Acquired interest rate lock commitments

 
1,383

Total gains (losses) included in earnings
816

 
(3,269
)
Issuances
4,661

 
2,962

Settlements
(5,130
)
 
(2,089
)
Balance at period end
$
1,072

 
$
725



Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at June 30, 2019, and December 31, 2018, were $1.1 million and $725,000, respectively.

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





are not included in the disclosure, including the value of the commercial and mortgage servicing rights, premises, furniture and equipment, premises, furniture and equipment held for sale, OREO, goodwill, and other intangibles and other liabilities.

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





 
 
 
 
 
Fair Value Measurements at
June 30, 2019
 
Carrying
Amount
 
Estimated
Fair
Value
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
 Inputs
(Level 3)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
642,139

 
$
642,139

 
$
642,139

 
$

 
$

Time deposits in other financial institutions
4,430

 
4,430

 
4,430

 

 

Securities:
 
 
 
 
 
 
 
 
 
Carried at fair value
2,561,887

 
2,561,887

 
12,480

 
2,549,407

 

Held to maturity
88,166

 
96,619

 

 
96,619

 

Other investments
31,366

 
31,366

 

 
31,366

 

Loans held for sale
34,575

 
34,575

 

 
34,575

 

Loans, net:
 
 
 
 
 
 
 
 
 
Commercial
2,213,691

 
2,185,030

 

 
2,171,693

 
13,337

Commercial real estate
3,963,406

 
3,948,274

 

 
3,947,466

 
808

Agricultural and agricultural real estate
544,109

 
535,926

 

 
526,894

 
9,032

Residential real estate
611,025

 
597,534

 

 
596,458

 
1,076

Consumer
456,970

 
455,559

 

 
454,932

 
627

Total Loans, net
7,789,201

 
7,722,323

 

 
7,697,443

 
24,880

Cash surrender value on life insurance
170,421

 
170,421

 

 
170,421

 

Derivative financial instruments(1)
14,413

 
14,413

 

 
14,413

 

Interest rate lock commitments
1,072

 
1,072

 

 

 
1,072

Forward commitments
2

 
2

 

 
2

 

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
Demand deposits
3,426,758

 
3,426,758

 

 
3,426,758

 

Savings deposits
5,533,503

 
5,533,503

 

 
5,533,503

 

Time deposits
1,148,296

 
1,148,296

 

 
1,148,296

 

Deposits held for sale

 

 

 

 

Short term borrowings
107,260

 
107,260

 

 
107,260

 

Other borrowings
282,863

 
283,695

 

 
283,695

 

Derivative financial instruments(2)
19,383

 
19,383

 

 
19,383

 

Forward commitments
430

 
430

 

 
430

 

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






 
 
 
 
 
Fair Value Measurements at
December 31, 2018
 
Carrying
Amount
 
Estimated
Fair
Value
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
 Inputs
(Level 3)
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
273,630

 
$
273,630

 
$
273,630

 
$

 
$

Time deposits in other financial institutions
4,672

 
4,672

 
4,672

 

 

Securities:
 
 
 
 
 
 
 
 
 
Carried at fair value
2,450,709

 
2,450,709

 
25,414

 
2,425,295

 

Held to maturity
236,283

 
245,341

 

 
245,341

 

Other investments
28,396

 
28,396

 

 
28,396

 

Loans held for sale
119,801

 
119,801

 

 
52,577

 
67,224

Loans, net:
 
 
 
 
 
 
 
 
 
Commercial
1,994,785

 
1,955,607

 

 
1,942,675

 
12,932

Commercial real estate
3,684,213

 
3,667,138

 

 
3,666,733

 
405

Agricultural and agricultural real estate
561,265

 
553,112

 

 
542,042

 
11,070

Residential real estate
670,473

 
654,596

 

 
654,118

 
478

Consumer
434,998

 
432,016

 

 
431,392

 
624

Total Loans, net
7,345,734

 
7,262,469

 

 
7,236,960

 
25,509

Cash surrender value on life insurance
162,892

 
162,892

 

 
162,892

 

Derivative financial instruments(1)
6,539

 
6,539

 

 
6,539

 

Interest rate lock commitments
725

 
725

 

 

 
725

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
 
 
 
 
 
 
 
 
 
Demand deposits
3,264,737

 
3,264,737

 

 
3,264,737

 

Savings deposits
5,107,962

 
5,107,962

 

 
5,107,962

 

Time deposits
1,023,730

 
1,023,730

 

 
1,023,730

 

Deposits held for sale
106,409

 
100,241

 

 

 
100,241

Short term borrowings
227,010

 
227,010

 

 
227,010

 

Other borrowings
274,905

 
276,966

 

 
276,966

 

Derivative financial instruments(2)
6,044

 
6,044

 

 
6,044

 

Forward commitments
399

 
399

 

 
399

 

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


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

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

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





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

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

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

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

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

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

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

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

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

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

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

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

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

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






NOTE 9: REVENUE

On January 1, 2018, Heartland adopted ASU 2014-09, "Revenue from Contracts with Customers" (Topic 606), and all subsequent ASUs that modified Topic 606.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with loan servicing income, bank owned life insurance, derivatives and certain credit card fees are also not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as service charges and fees, trust fees, and brokerage and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of Heartland's revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

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

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

Customer service fees and other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. Heartland's performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

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

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

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






The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three- and six-months ended June 30, 2019, and 2018, in thousands:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
In-scope of Topic 606
 
 
 
 
 
 
 
Service charges and fees
 
 
 
 
 
 
 
Service charges and fees on deposit accounts
$
3,186

 
$
2,794

 
$
6,163

 
$
5,412

Overdraft fees
2,876

 
2,518

 
5,619

 
4,726

Customer service and other service fees
84

 
88

 
166

 
166

Credit card fee income
4,270

 
3,114

 
7,619

 
5,381

Debit card income
4,213

 
3,558

 
7,856

 
6,466

Total service charges and fees
$
14,629

 
$
12,072

 
$
27,423

 
$
22,151

Trust fees
4,825

 
4,615

 
9,299

 
9,295

Brokerage and insurance commissions
1,028

 
877

 
1,762

 
1,784

Total noninterest income in-scope of Topic 606
$
20,482

 
$
17,564

 
$
38,484

 
$
33,230

 
 
 
 
 
 
 
 
Out-of-scope of Topic 606
 
 
 
 
 
 
 
Loan servicing income
$
1,338

 
$
1,807

 
$
3,067

 
$
3,561

Securities gains/(losses), net
3,580

 
(259
)
 
5,155

 
1,182

Unrealized gain on equity securities, net
112

 
71

 
370

 
43

Net gains on sale of loans held for sale
4,343

 
6,800

 
7,519

 
10,851

Valuation adjustment on servicing rights
(364
)
 
(216
)
 
(953
)
 
(218
)
Income on bank owned life insurance
888

 
700

 
1,787

 
1,314

Other noninterest income
1,682

 
1,167

 
3,349

 
2,387

Total noninterest income out-of-scope of Topic 606
11,579

 
10,070

 
20,294

 
19,120

Total noninterest income
$
32,061

 
$
27,634

 
$
58,778

 
$
52,350



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

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

NOTE 10: STOCK COMPENSATION

Heartland may grant, through its Nominating and Compensation Committee (the "Compensation Committee"), non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and cash incentive awards, under its 2012 Long-Term Incentive Plan (the "Plan"). The Plan was originally approved by stockholders in May 2012 and was
amended effective March 8, 2016, to increase the number of shares of common stock authorized for issuance and make certain other changes to the Plan. As of June 30, 2019, 341,552 shares of common stock were available for issuance under future awards that may be granted under the Plan to employees and directors of, and service providers to, Heartland or its subsidiaries.

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

The amount of tax benefit related to the exercise, vesting and forfeiture of equity-based awards reflected as a tax benefit in Heartland's income tax expense was $272,000 and $660,000 during the six months ended June 30, 2019 and 2018, respectively.

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

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

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

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

The Compensation Committee may grant RSUs under the Plan to directors as part of their compensation, to new management level employees at commencement of employment, and to other employees and service providers as incentives. During the six months ended June 30, 2019, and June 30, 2018, 32,662 and 26,489 time-based RSUs, respectively, were granted to directors and new employees.

A summary of the RSUs outstanding as of June 30, 2019, and 2018, and changes during the six months ended June 30, 2019 and 2018, follows:
 
2019
 
2018
 
Shares
 
Weighted-Average Grant Date
Fair Value
 
Shares
 
Weighted-Average Grant Date
Fair Value
Outstanding at January 1,
266,995

 
$
43.89

 
301,578

 
$
34.74

Granted
157,583

 
45.00

 
113,738

 
55.16

Vested
(139,623
)
 
38.82

 
(124,764
)
 
32.64

Forfeited
(18,015
)
 
49.31

 
(25,011
)
 
45.50

Outstanding at June 30,
266,940

 
$
46.97

 
265,541

 
$
43.49








Total compensation costs recorded for RSUs were $3.6 million and $2.8 million for the six-month periods ended June 30, 2019 and 2018. As of June 30, 2019, there were $7.4 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2022.

NOTE 11: LEASES

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

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

Heartland elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated balance sheet. The table below presents Heartland's ROU assets and lease liabilities as of June 30, 2019, (in thousands):
Assets
 
Classification
 
June 30, 2019
Operating lease assets
 
Other assets
 
$
21,076

Total lease right-of-use assets
 
 
 
$
21,076

 
 
 
 
 
Liabilities
 
 
 
 
Operating lease liabilities
 
Accrued expenses and other liabilities
 
$
22,673

Total lease liabilities
 
 
 
$
22,673



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





 
 
Income Statement Category
 
Three Months Ended
June 30, 2019
 
Six Months Ended
June 30, 2019
Lease Cost
 
 
 
 
 
 
Operating lease cost
 
Occupancy expense
 
$
1,462

 
$
2,867

Variable lease cost
 
Occupancy expense
 
32


67

Total lease cost
 
 
 
$
1,494

 
$
2,934

Supplemental Information
 
 
 
 
 
 
Noncash reduction of ROU assets arising from lease modifications
 
Occupancy expense
 
$
2,464

 
$
2,464

Noncash reduction lease liabilities arising from lease modifications
 
Occupancy expense
 
2,487

 
2,487

 
 
 
 
 
 
 
Supplemental balance sheet information
 
 
 
As of June 30, 2019
Weighted-average remaining operating lease term (in years)
 
 
 
5.92
 
 
Weighted-average discount rate for operating leases
 
 
 
3.00
%


A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities as of June 30, 2019 is as follows:
Six months ending December 31, 2019
$
2,976

Year ending December 31,
 
2020
5,793

2021
5,312

2022
3,343

2023
1,883

Thereafter
5,502

Total lease payments
$
24,809

Less interest
(2,136
)
Present value of lease liabilities
$
22,673



As defined by Topic 840, Heartland's minimum future rental commitments at December 31, 2018, for all non-cancelable leases were as follows, in thousands:
2019
$
5,776

2020
5,493

2021
5,102

2022
3,241

2023
2,297

Thereafter
12,419

 
$
34,328



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

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (including any information incorporated herein by reference) contains, and future oral and written statements of Heartland Financial USA, Inc. ("Heartland") and its management may contain, forward-looking statements within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the business, financial condition, results of operations, plans, objectives and future performance of Heartland. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of Heartland's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions. Although Heartland has made these statements based on management's experience and best estimate of future events, there may be events or factors that management has not anticipated, and the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2018. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and Heartland undertakes no obligation to update any statement in light of new information or future events.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances. Among other things, the estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on Heartland's reported financial position and results of operations are described as critical accounting policies in Heartland's Annual Report on Form 10-K for the year ended December 31, 2018. There have been no significant changes in the critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2018.

OVERVIEW

Heartland is a multi-bank holding company providing banking, mortgage, wealth management, investments and insurance services to individuals and businesses. As of the date of this Quarterly Report on Form 10-Q, Heartland has eleven banking subsidiaries with 116 locations in Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota, Kansas, Missouri, Texas and California. Heartland's primary objectives are to increase profitability and diversify its market area and asset base by expanding through acquisitions and to grow organically by increasing its customer base in the markets it serves.

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

Net income available to common stockholders for the quarter ended June 30, 2019, was $45.2 million, or $1.26 per diluted common share, compared to $27.9 million, or $0.85 per diluted common share, for the quarter ended June 30, 2018. Return on average common equity was 12.56% and return on average assets was 1.55% for the second quarter of 2019, compared to 9.81% and 1.05%, respectively, for the same quarter in 2018.

Net income available to common stockholders for the six months ended June 30, 2019, was $76.7 million or $2.17 per diluted common share, compared to $51.1 million or $1.61 per diluted common share for the six months ended June 30, 2018. Return on average common equity was 11.13% and return on average assets was 1.35% for the first six months of 2019, compared to 9.58% and 1.01% for the same period in 2018.

For the second quarter of 2019, Heartland's net interest margin was 4.06% (4.10% on a fully tax-equivalent basis) compared to 4.23% (4.30% on a fully tax-equivalent basis) for the same quarter in 2018, and the efficiency ratio was 64.81% and 64.94% for the second quarter of 2019 and 2018, respectively. For the six-month period ended June 30, 2019, Heartland's net interest margin
was 4.09% (4.14% on a fully tax-equivalent basis) compared to 4.21% (4.28% on a fully tax-equivalent basis) for the same period in 2018. The efficiency ratio for the first six months of 2019 was 65.01% compared to 66.48% for the same period in 2018.

Total assets of Heartland were $12.16 billion at June 30, 2019, an increase of $752.3 million or 7% since year-end 2018. Securities represented 22% of total assets at June 30, 2019, and 24% of total assets at December 31, 2018.

Total loans held to maturity were $7.85 billion at June 30, 2019, compared to $7.41 billion at year-end 2018, an increase of $445.4 million or 6%. This change includes $542.0 million of total loans held to maturity acquired at fair value in the Blue Valley Ban Corp. ("BVBC") transaction. During the first quarter of 2019, Heartland classified $32.1 million of loans as held for sale in conjunction with the branch sales described below in "Recent Developments". Excluding the reclassification of loans to held for sale and the BVBC transaction, total loans held to maturity decreased $64.6 million or 1% since December 31, 2018.

Total deposits were $10.11 billion as of June 30, 2019, compared to $9.40 billion at year-end 2018, an increase of $712.1 million or 8%. This increase includes $617.1 million of deposits acquired at fair value in the BVBC transaction. During the first quarter of 2019, Heartland classified $77.0 million of deposits as held for sale in conjunction with the branch sales. Exclusive of the reclassification of deposits to held for sale and the deposits acquired at fair value in the BVBC transaction, total deposits increased $172.0 million or 2% since December 31, 2018.

Total equity was $1.52 billion at June 30, 2019, compared to $1.33 billion at year-end 2018. Book value per common share was $41.48 at June 30, 2019, compared to $38.44 at year-end 2018. Heartland's unrealized gain on securities available for sale, net of applicable taxes, was $7.1 million at June 30, 2019, compared to an unrealized loss of $32.5 million, net of applicable taxes, at December 31, 2018.

RECENT DEVELOPMENTS

Regulatory Developments

Enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act in May 2018 significantly altered several provisions of the Dodd-Frank Act, including how stress tests are run. Bank holding companies with assets of less than $100 billion, such as Heartland, are no longer subject to company-run stress testing requirements in accordance with the Dodd-Frank Act, which included publishing a summary of results. In response to the initial provisions of the Dodd-Frank Act, Heartland has added staff, enhanced risk management processes and invested in upgraded information systems and technology. In addition, management continues to run internal stress tests as a component of the comprehensive risk management and capital planning process.

Other provisions of the Dodd-Frank Act, such as the Durbin Amendment, which restricts interchange fees, remain in place. The Durbin Amendment, which was effective for Heartland on July 1, 2019, restricts interchange fees to those which are "reasonable and proportionate" for certain debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing. In the final rules, interchange fees for debit card transactions were capped at $0.21 plus five basis points in order to be eligible for a safe harbor such that the fee is conclusively determined to be reasonable and proportionate. Based on calculations using 2018 debit card volume, the negative impact of the Durbin Amendment will be approximately $6.0 million annually to Heartland's noninterest income.

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

Blue Valley Ban Corp. Acquisition

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






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

Branch Sales and Other Divestitures

On January 11, 2019, Heartland completed the sale of the loan portfolios of its consumer finance subsidiaries, Citizens Finance Co. and Citizens Finance of Illinois Co. (collectively, "Citizens"). The loan portfolios had a fair value of $67.2 million.
On February 22, 2019, Heartland completed the sale of two branch locations of Wisconsin Bank & Trust. The sale included loans of $11.7 million and deposits of $48.6 million. Heartland recorded a net gain of $3.2 million in the first quarter of 2019, which consisted of a gain of $3.5 million and write-off $329,000 of core deposit intangibles.
On April 30, 2019, Dubuque Bank and Trust Company closed on the sale of substantially all its mortgage servicing rights portfolio, which contained loans with an unpaid principal balance of approximately $3.31 billion to PNC Bank, N.A. The transaction qualified as a sale, and $20.6 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of June 30, 2019. Cash of approximately $34.8 million was received during the second quarter, and Heartland recorded an estimated gain on the sale of this portfolio of approximately $13.3 million. A payable of approximately $334,000 was recorded as of June 30, 2019, due to the timing of the servicing transfer per the terms of the sale agreement. In the agreement, which includes customary terms and conditions, Dubuque Bank and Trust Company provided interim servicing of the loans until the transfer date, which was August 1, 2019.
On May 3, 2019, Heartland completed the sale of two branches of Illinois Bank & Trust. The sale included loans of $1.2 million and deposits of $11.4 million. Heartland recorded a net gain of $340,000 in the second quarter of 2019, which consisted of a gain of $519,000 and write-off of $179,000 of core deposit intangibles.
On May 17, 2019, Heartland completed the sale of one branch of Citywide Banks. The sale included loans of $8.4 million and deposits of $24.4 million. Heartland recorded a net gain of $1.6 million in the second quarter of 2019, which consisted of a gain of $1.8 million and write-off of $174,000 of core deposit intangibles.
On May 31, 2019, Heartland completed the sale of two branch locations of Dubuque Bank and Trust Company, which operated as First Community Bank, in Keokuk, Iowa. The sale included loans of $17.5 million and deposits of $72.0 million. Heartland recorded a gain of $4.2 million in the second quarter of 2019.

Heartland has been working on company-wide strategic initiatives since the end of 2018. Management expects approximately $8 million to $10 million of the net gains on the sale of the branches and mortgage servicing rights previously discussed will be invested in talent, process improvement, and technology upgrades that management believes are necessary to support future organic and acquired growth, improve efficiency and ultimately provide a superior customer experience and enhance profitability.

Three of the most significant investments in technology and process improvement are:
a project called Operation Customer Compass, which is focused on streamlining and automating processes. This project is intended to create back-office capacity for growth and enhance the customer experience. Expense reductions of over $10 million annually are expected to be realized once the project is completed, which is anticipated to be the end of 2019;
an upgrade to the existing customer relationship management system to the Salesforce Platform, which is an industry leader for relationship management, and,
the implementation of nCino, a premiere commercial loan origination system.

The upgrade to Salesforce and the implementation of nCino is expected to significantly improve the sales management process and improve the effectiveness of the commercial sales teams. The integration between nCino and Salesforce is expected to improve back office efficiencies and shorten the sales cycle. These two projects are currently underway and will be ongoing into mid-2020.
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
STATEMENT OF INCOME DATA
 
 
 
 
 
 
 
Interest income
$
127,003

 
$
113,409

 
$
247,724

 
$
214,623

Interest expense
20,295

 
12,000

 
38,061

 
21,630

Net interest income
106,708

 
101,409

 
209,663

 
192,993

Provision for loan losses
4,918

 
4,831

 
6,553

 
9,094

Net interest income after provision for loan losses
101,790

 
96,578

 
203,110

 
183,899






FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Noninterest income
32,061

 
27,634

 
58,778

 
52,350

Noninterest expenses
75,098

 
88,882

 
163,328

 
172,528

Income taxes
13,584

 
7,451

 
21,894

 
12,574

Net income
45,169

 
27,879

 
76,666

 
51,147

Preferred dividends

 
(13
)
 

 
(26
)
Net income available to common stockholders
$
45,169

 
$
27,866

 
$
76,666

 
$
51,121

 
 
 
 
 
 
 
 
Key Performance Ratios
 
 
 
 
 
 
 
Annualized return on average assets
1.55
%
 
1.05
%
 
1.35
%
 
1.01
%
Annualized return on average common equity (GAAP)
12.56
%
 
9.81
%
 
11.13
%
 
9.58
%
Annualized return on average tangible common equity (non-GAAP)(1)
19.52
%
 
15.50
%
 
17.49
%
 
14.70
%
Annualized ratio of net charge-offs to average loans
0.19
%
 
0.12
%
 
0.12
%
 
0.10
%
Annualized net interest margin (GAAP)
4.06
%
 
4.23
%
 
4.09
%
 
4.21
%
Annualized net interest margin, fully tax-equivalent (non-GAAP)(1)
4.10
%
 
4.30
%
 
4.14
%
 
4.28
%
Efficiency ratio, fully tax-equivalent (non-GAAP)(1)
64.81
%
 
64.94
%
 
65.01
%
 
66.48
%
 
 
 
 
 
 
 
 
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
 
 
 
 
 
 
 
Net income available to common shareholders (GAAP)
$
45,169

 
$
27,866

 
$
76,666

 
$
51,121

Plus core deposit and customer relationship intangibles amortization, net of tax(2)
2,617

 
1,796

 
4,862

 
3,268

Adjusted net income available to common shareholders (non-GAAP)
$
47,786

 
$
29,662

 
$
81,528

 
$
54,389

 
 
 
 
 
 
 
 
Average common stockholders' equity (GAAP)
$
1,442,388

 
$
1,139,876

 
$
1,389,612

 
$
1,076,083

    Less average goodwill
410,642

 
325,781

 
401,207

 
288,185

    Less average other intangibles, net
49,868

 
46,363

 
48,188

 
41,961

Average tangible common equity (non-GAAP)
$
981,878

 
$
767,732

 
$
940,217

 
$
745,937

Annualized return on average common equity (GAAP)
12.56
%
 
9.81
%
 
11.13
%
 
9.58
%
Annualized return on average tangible common equity (non-GAAP)
19.52
%
 
15.50
%
 
17.49
%
 
14.70
%
Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
 
 
 
 
 
 
 
Net Interest Income (GAAP)
$
106,708

 
$
101,409

 
$
209,663

 
$
192,993

    Plus tax-equivalent adjustment(2)
1,268

 
1,575

 
2,680

 
3,119

Net interest income - tax-equivalent (non-GAAP)
$
107,976

 
$
102,984

 
$
212,343

 
$
196,112

 
 
 
 
 
 
 
 
Average earning assets
$
10,552,166

 
$
9,614,800

 
$
10,342,229

 
$
9,238,391

Net interest margin (GAAP)
4.06
%
 
4.23
%
 
4.09
%
 
4.21
%
Net interest margin, fully tax-equivalent (non-GAAP)
4.10
%
 
4.30
%
 
4.14
%
 
4.28
%
 
 
 
 
 
 
 
 





FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Reconciliation of Efficiency Ratio (non-GAAP)
 
 
 
 
 
 
 
Net interest income (GAAP)
$
106,708

 
$
101,409

 
$
209,663

 
$
192,993

    Plus tax-equivalent adjustment(2)
1,268

 
1,575

 
2,680

 
3,119

Fully tax-equivalent net interest income
107,976

 
102,984

 
212,343

 
196,112

Noninterest income
32,061

 
27,634

 
58,778

 
52,350

Securities (gains)/losses, net
(3,580
)
 
259

 
(5,155
)
 
(1,182
)
Unrealized gain on equity securities, net
(112
)
 
(71
)
 
(370
)
 
(43
)
Valuation adjustment on servicing rights
364

 
216

 
953

 
218

Adjusted income (non-GAAP)
$
136,709

 
$
131,022

 
$
266,549

 
$
247,455

 
 
 
 
 
 
 
 
Total noninterest expenses (GAAP)
$
75,098

 
$
88,882

 
$
163,328

 
$
172,528

Less:
 
 
 
 
 
 
 
Core deposit and customer relationship intangibles amortization
3,313

 
2,274

 
6,155

 
4,137

Partnership investment in tax credit projects
1,465

 

 
1,940

 

(Gain)/loss on sales/valuations of assets, net

(18,286
)
 
1,528

 
(21,290
)
 
1,331

   Restructuring expenses

 

 
3,227

 
2,564

Adjusted noninterest expenses (non-GAAP)
$
88,606

 
$
85,080

 
$
173,296

 
$
164,496

 
 
 
 
 
 
 
 
Efficiency ratio, fully tax-equivalent (non-GAAP)
64.81
%
 
64.94
%
 
65.01
%
 
66.48
%
 
 
 
 
 
 
 
 
(1) Refer to the "Non-GAAP Financial Measures" section after these financial tables for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.
(2) Computed on a tax-equivalent basis using an effective tax rate of 21%.





FINANCIAL HIGHLIGHTS, continued
(Dollars in thousands, except per share data)
As Of and For the Quarter Ended
 
6/30/2019
 
3/31/2019
 
12/31/2018
 
9/30/2018
 
6/30/2018
BALANCE SHEET DATA
 
 
 
 
 
 
 
 
 
Investments
$
2,681,419

 
$
2,516,055

 
$
2,715,388

 
$
2,540,779

 
$
2,468,113

Loans held for sale
34,575

 
69,716

 
119,801

 
77,727

 
55,684

Total loans receivable(1)
7,853,051

 
7,331,544

 
7,407,697

 
7,365,493

 
7,477,697

Allowance for loan losses
63,850

 
62,639

 
61,963

 
61,221

 
61,324

Total assets
12,160,290

 
11,312,495

 
11,408,006

 
11,335,132

 
11,301,920

Total deposits(2)
10,108,557

 
9,352,942

 
9,396,429

 
9,512,163

 
9,489,144

Long-term obligations
282,863

 
268,312

 
274,905

 
277,563

 
258,708

Preferred equity

 

 

 

 
938

Common stockholders’ equity
1,521,787

 
1,372,102

 
1,325,175

 
1,280,393

 
1,254,809

 
 
 
 
 
 
 
 
 
 
Common Share Data
 
 
 
 
 
 
 
 
 
Book value per common share (GAAP)
$
41.48

 
$
39.65

 
$
38.44

 
$
37.14

 
$
36.44

Tangible book value per common share (non-GAAP)(3)
$
28.40

 
$
27.04

 
$
25.70

 
$
24.33

 
$
23.53

Common shares outstanding, net of treasury stock
36,690,061

 
34,603,611

 
34,477,499

 
34,473,029

 
34,438,445

Tangible common equity ratio (non-GAAP)(3)
8.92
%
 
8.60
%
 
8.08
%
 
7.70
%
 
7.46
%
 
 
 
 
 
 
 
 
 
 
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)
 
 
 
 
 
 
 
 
 
Common stockholders' equity (GAAP)
$
1,521,787

 
$
1,372,102

 
$
1,325,175

 
$
1,280,393

 
$
1,254,809

  Less goodwill
427,097

 
391,668

 
391,668

 
391,668

 
391,668

  Less core deposit and customer relationship intangibles, net
52,718

 
44,637

 
47,479

 
50,071

 
52,698

Tangible common stockholders' equity (non-GAAP)
$
1,041,972

 
$
935,797

 
$
886,028

 
$
838,654

 
$
810,443

 
 
 
 
 
 
 
 
 
 
Common shares outstanding, net of treasury stock
36,690,061

 
34,603,611

 
34,477,499

 
34,473,029

 
34,438,445

Common stockholders' equity (book value) per share (GAAP)
$
41.48

 
$
39.65

 
$
38.44

 
$
37.14

 
$
36.44

Tangible book value per common share (non-GAAP)
$
28.40

 
$
27.04

 
$
25.70

 
$
24.33

 
$
23.53

 
 
 
 
 
 
 
 
 
 
Reconciliation of Tangible Common Equity Ratio (non-GAAP)
 
 
 
 
 
 
 
 
 
Tangible common stockholders' equity (non-GAAP)
$
1,041,972

 
$
935,797

 
$
886,028

 
$
838,654

 
$
810,443

 
 
 
 
 
 
 
 
 
 
Total assets (GAAP)
$
12,160,290

 
$
11,312,495

 
$
11,408,006

 
$
11,335,132

 
$
11,301,920

    Less goodwill
427,097

 
391,668

 
391,668

 
391,668

 
391,668

    Less core deposit and customer relationship intangibles, net
52,718

 
44,637

 
47,479

 
50,071

 
52,698

Total tangible assets (non-GAAP)
$
11,680,475

 
$
10,876,190

 
$
10,968,859

 
$
10,893,393

 
$
10,857,554

Tangible common equity ratio (non-GAAP)
8.92
%
 
8.60
%
 
8.08
%
 
7.70
%
 
7.46
%
 
(1) Excludes loans held for sale.
(2) Excludes deposits held for sale.
(3) Refer to the "Non-GAAP Financial Measures" section after these financial tables for additional information on the usage and presentation of these non-GAAP measures, and refer to these financial tables for the reconciliations to the most directly comparable GAAP measures.

Non-GAAP Financial Measures

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





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

Annualized return on average tangible common equity is net income available to common stockholders plus core deposit and customer relationship intangibles amortization, net of tax, divided by average common stockholders' equity less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate financial condition and capital strength.
Annualized net interest margin, fully tax-equivalent, adjusts net interest income for the tax-favored status of certain loans and securities. Management believes this measure enhances the comparability of net interest income arising from taxable and tax-exempt sources.
Efficiency ratio, fully tax equivalent, expresses noninterest expenses as a percentage of fully tax-equivalent net interest income and noninterest income. This efficiency ratio is presented on a tax-equivalent basis which adjusts net interest income and noninterest expenses for the tax favored status of certain loans, securities, and tax credit projects. Management believes the presentation of this non-GAAP measure provides supplemental useful information for proper understanding of the financial results as it enhances the comparability of income and expenses arising from taxable and nontaxable sources and excludes specific items as noted in reconciliation contained in this Quarterly Report on Form 10-Q.
Tangible book value per common share is total common stockholders' equity less goodwill and core deposit and customer relationship intangibles, net, divided by common shares outstanding, net of treasury. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.
Tangible common equity ratio is total common stockholders' equity less goodwill and core deposit and customer relationship intangibles, net, divided by total assets less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate use of equity, financial condition and capital strength.

RESULTS OF OPERATIONS

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

For the Quarters ended June 30, 2019 and 2018
Net interest margin, expressed as a percentage of average earning assets, was 4.06% (4.10% on a fully tax-equivalent basis) during the second quarter of 2019, compared to 4.23% (4.30% on a fully tax-equivalent basis) during the second quarter of 2018. For the second quarter of 2019, Heartland's net interest margin included 18 basis points of purchase accounting discount amortization compared to 17 basis points in the same quarter of 2018.

Total interest income for the second quarter of 2019 was $127.0 million, an increase of $13.6 million or 12%, compared to $113.4 million recorded in the second quarter of 2018. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were $1.3 million for the second quarter of 2019 and $1.6 million for the second quarter of 2018. With these adjustments, total interest income on a tax-equivalent basis was $128.3 million for the second quarter of 2019, an increase of $13.3 million or 12%, compared to $115.0 million for the second quarter of 2018.

Average earning assets increased $937.4 million or 10% to $10.55 billion from $9.61 billion the second quarter of 2018. The average interest rate on earning assets increased 8 basis points to 4.88% for the second quarter of 2019 compared to 4.80% for the same quarter in 2018.

Total interest expense for the second quarter of 2019 was $20.3 million, an increase of $8.3 million or 69% from $12.0 million in the second quarter of 2018. The average interest rate paid on savings deposits was 0.89% during the second quarter of 2019 compared to 0.47% for the second quarter of 2018, and the average interest rate paid on time deposits was 1.49% for the second quarter of 2019 compared to 0.94% for the second quarter of 2018. The average interest rate paid on Heartland's borrowings was 4.52% for the second quarter of 2019 compared to 3.88% in the second quarter of 2018.






For the quarter ended June 30, 2019, average interest bearing liabilities were $6.87 billion, an increase of $667.3 million or 11%, from $6.21 billion for the quarter ended June 30, 2018. Average interest bearing deposits increased $713.3 million or 12% to $6.50 billion for the quarter ended June 30, 2019, from $5.79 billion in the same quarter in 2018. Average borrowings decreased $46.0 million or 11% to $369.3 million during the second quarter of 2019 from $415.3 million during the same quarter in 2018. The increase in Heartland's average interest bearing liabilities is primarily attributable to recent acquisitions.

Net interest income increased $5.3 million or 5% to $106.7 million in the second quarter of 2019 from $101.4 million in the second quarter of 2018. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $108.0 million during the second quarter of 2019, an increase of $5.0 million or 5% from $103.0 million during the second quarter of 2018.

For the Six Months Ended June 30, 2019 and 2018
Net interest margin, expressed as a percentage of average earning assets, was 4.09% (4.14% on a fully tax-equivalent basis) during the six-month period ended June 30, 2019, compared to 4.21% (4.28% on a fully tax-equivalent basis) during the same period of 2018. For the six months ended June 30, 2019, Heartland's net interest margin included 17 basis points of purchase accounting discount amortization compared to 19 basis points for the same period of 2018.

Total interest income for the first six months of 2019 was $247.7 million, an increase of $33.1 million or 15%, compared to $214.6 million recorded in the first six months of 2018. The tax-equivalent adjustments for income taxes saved on the interest earned on nontaxable securities and loans were $2.7 million for the first six months of 2019 and $3.1 million for the same period of 2018. With these adjustments, total interest income on a tax-equivalent basis was $250.4 million for the first six months of 2019, an increase of $32.7 million or 15%, compared to $217.7 million for the first six months of 2018.

Average earning assets increased $1.10 billion or 12% to $10.34 billion for the first six months of 2019 from $9.24 billion for the first six months of 2018. The average interest rate on earning assets increased 13 basis points to 4.88% for the first six months quarter 2019 compared to 4.75% for the same period in 2018.

Total interest expense for the six-month period ended June 30, 2019 was $38.1 million, an increase of $16.4 million or 76% from $21.6 million in the six-month period ended June 30, 2018. The average interest rate paid on savings deposits was 0.85%, and the average interest rate paid on time deposits was 1.37% during the first six months of 2019 compared to 0.41% and 0.91%, respectively, for the first six months of 2018. The average interest rate paid on Heartland's borrowings for the six months ended June 30, 2019 and 2018, was 4.21% and 3.77%, respectively.

For the first six months of 2019, average interest bearing liabilities were $6.75 billion, an increase of $796.8 million or 13%, from $5.95 billion for the same period of 2018. Average interest bearing deposits increased $800.9 million or 14% to $6.33 billion for the six months ended June 30, 2019, from $5.53 billion in the first six months of 2018. Average borrowings decreased $4.1 million or 1% to $417.5 million during the first six months of 2019 from $421.6 million during the same period in 2018.

Net interest income increased $16.7 million or 9% to $209.7 million in the first six months of 2019 from $193.0 million recorded in the first six months of 2018. After the tax-equivalent adjustment discussed above, net interest income on a tax-equivalent basis totaled $212.3 million during the first six months of 2019, an increase of $16.2 million or 8% from $196.1 million during the same period of 2018.

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

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





savings to the interest earned on tax favored assets and dividing this amount by the average balance of the tax favorable assets.
ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1)
(DOLLARS IN THOUSANDS)
 
 
For the Quarter Ended
 
June 30, 2019
 
March 31, 2019
 
June 30, 2018
 
Average
Balance
 
Interest
 
Rate
 
Average Balance
 
Interest
 
Rate
 
Average
Balance
 
Interest
 
Rate
Earning Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
$
2,217,863

 
$
16,123

 
2.92
%
 
$
2,169,016

 
$
15,876

 
2.97
%
 
$
1,890,468

 
$
12,270

 
2.60
%
Nontaxable(1)
324,164

 
3,233

 
4.00

 
391,724

 
3,915

 
4.05

 
448,844

 
4,537

 
4.05

Total securities
2,542,027

 
19,356

 
3.05

 
2,560,740

 
19,791

 
3.13

 
2,339,312

 
16,807

 
2.88

Interest on deposits with other banks and other short-term investments
424,262

 
2,299

 
2.17

 
218,445

 
1,292

 
2.40

 
211,414

 
768

 
1.46

Federal funds sold

 

 

 
560

 
4

 
2.90

 

 

 

Loans:(2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and commercial real estate(1)
5,968,424

 
82,328

 
5.53

 
5,745,180

 
78,083

 
5.51

 
5,403,447

 
71,301

 
5.29

Residential mortgage
676,465

 
8,238

 
4.88

 
673,682

 
7,179

 
4.32

 
685,005

 
7,562

 
4.43

Agricultural and agricultural real estate(1)
558,128

 
7,581

 
5.45

 
554,506

 
7,301

 
5.34

 
542,249

 
6,850

 
5.07

Consumer
445,545

 
6,517

 
5.87

 
439,487

 
6,479

 
5.98

 
492,481

 
9,192

 
7.49

Fees on loans
 
 
1,952

 

 

 
2,004

 

 
 
 
2,504

 

Less: allowance for loan losses
(62,685
)
 

 

 
(62,643
)
 

 

 
(59,108
)
 

 

Net loans
7,585,877

 
106,616

 
5.64

 
7,350,212

 
101,046

 
5.58

 
7,064,074

 
97,409

 
5.53

Total earning assets
10,552,166

 
128,271

 
4.88
%
 
10,129,957

 
122,133

 
4.89
%
 
9,614,800

 
114,984

 
4.80
%
Nonearning Assets
1,156,372

 
 
 
 
 
1,137,257

 


 
 
 
1,028,506

 
 
 
 
Total Assets
$
11,708,538

 
 
 
 
 
$
11,267,214

 
 
 
 
 
$
10,643,306

 
 
 
 
Interest Bearing Liabilities(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Savings
$
5,360,355

 
$
11,895

 
0.89
%
 
$
5,121,179

 
$
10,083

 
0.80
%
 
$
4,748,306

 
$
5,535

 
0.47
%
Time deposits
1,142,842

 
4,243

 
1.49

 
1,034,744

 
3,130

 
1.23

 
1,041,590

 
2,448

 
0.94

Short-term borrowings
92,977

 
338

 
1.46

 
195,390

 
889

 
1.85

 
152,576

 
547

 
1.44

Other borrowings
276,275

 
3,819

 
5.54

 
270,836

 
3,664

 
5.49

 
262,715

 
3,470

 
5.30

Total interest bearing liabilities
6,872,449

 
20,295

 
1.18
%
 
6,622,149

 
17,766

 
1.09
%
 
6,205,187

 
12,000

 
0.78
%
Noninterest Bearing Liabilities(3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing deposits
3,287,559

 
 
 
 
 
3,200,281

 
 
 
 
 
3,229,049

 
 
 
 
Accrued interest and other liabilities
106,142

 
 
 
 
 
108,534

 
 
 
 
 
68,256

 
 
 
 
Total noninterest bearing liabilities
3,393,701

 
 
 
 
 
3,308,815

 
 
 
 
 
3,297,305

 
 
 
 
Stockholders' Equity
1,442,388

 
 
 
 
 
1,336,250

 
 
 
 
 
1,140,814

 
 
 
 
Total Liabilities and Stockholders' Equity
$
11,708,538

 
 
 
 
 
$
11,267,214

 
 
 
 
 
$
10,643,306

 
 
 
 
Net interest income, fully tax-equivalent (non-GAAP)(1)
 
 
$
107,976

 
 
 
 
 
$
104,367

 
 
 
 
 
$
102,984

 
 
Net interest spread(1)
 
 
 
 
3.70
%
 
 
 
 
 
3.80
%
 
 
 
 
 
4.02
%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets
 
 
 
 
4.10
%
 
 
 
 
 
4.18
%
 
 
 
 
 
4.30
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.
(3) Includes deposits held for sale.






ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1)
DOLLARS IN THOUSANDS
 
 
 
For the Six Months Ended
 
June 30, 2019
 
June 30, 2018
 
Average
Balance
 
Interest
 
Rate
 
Average
Balance
 
Interest
 
Rate
Earning Assets
 
 
 
 
 
 
 
 
 
 
 
Securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable
$
2,193,576

 
$
31,999

 
2.94
%
 
$
1,847,858


$
23,847

 
2.60
%
Nontaxable(1)
357,757

 
7,148

 
4.03

 
448,743


9,067

 
4.07

Total securities
2,551,333

 
39,147

 
3.09

 
2,296,601

 
32,914

 
2.89

Interest bearing deposits with other banks and other short-term investments
321,922


3,591

 
2.25

 
173,349


1,175

 
1.37

Federal funds sold
278


4

 
2.90

 



 

Loans:(2)
 
 
 
 
 
 
 
 
 
 
 
Commercial and commercial real estate(1)
5,857,419


160,411

 
5.52

 
5,158,483


134,114

 
5.24

Residential mortgage
675,081


15,417

 
4.61

 
663,711


14,413

 
4.38

Agricultural and agricultural real estate(1)
556,327


14,882

 
5.39

 
528,093


12,854

 
4.91

Consumer
442,533


12,996

 
5.92

 
475,731


17,852

 
7.57

Fees on loans


3,956

 

 


4,420

 

Less: allowance for loan losses
(62,664
)


 

 
(57,577
)


 

Net loans
7,468,696

 
207,662

 
5.61

 
6,768,441

 
183,653

 
5.47

Total earning assets
10,342,229

 
250,404

 
4.88
%
 
9,238,391

 
217,742

 
4.75
%
Nonearning Assets
1,146,866

 
 
 
 
 
965,670

 
 
 
 
Total Assets
$
11,489,095

 
 
 
 
 
$
10,204,061

 
 
 
 
Interest Bearing Liabilities(3)
 
 
 
 
 
 
 
 
 
 
 
Savings
$
5,241,428


$
21,978

 
0.85
%
 
$
4,554,484


$
9,326

 
0.41
%
Time deposits
1,089,091


7,373

 
1.37

 
975,129


4,423

 
0.91

Short-term borrowings
143,901


1,227

 
1.72

 
150,171


815

 
1.09

Other borrowings
273,570


7,483

 
5.52

 
271,391


7,066

 
5.25

Total interest bearing liabilities
6,747,990

 
38,061

 
1.14
%
 
5,951,175

 
21,630

 
0.73
%
Noninterest Bearing Liabilities(3)
 
 
 
 
 
 
 
 
 
 
 
Noninterest bearing deposits
3,244,161

 
 
 
 
 
3,107,552

 
 
 
 
Accrued interest and other liabilities
107,332

 
 
 
 
 
68,313

 
 
 
 
Total noninterest bearing liabilities
3,351,493

 
 
 
 
 
3,175,865

 
 
 
 
Stockholders' Equity
1,389,612

 
 
 
 
 
1,077,021

 
 
 
 
Total Liabilities and Stockholders' Equity
$
11,489,095

 
 
 
 
 
$
10,204,061

 
 
 
 
Net interest income, fully tax-equivalent (non-GAAP)(1)
 
 
$
212,343

 
 
 
 
 
$
196,112

 
 
Net interest spread(1)
 
 
 
 
3.74
%
 
 
 
 
 
4.02
%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets
 
 
 
 
4.14
%
 
 
 
 
 
4.28
%
 
 
 
 
 
 
 
 
 
 
 
 
(1) Computed on a tax-equivalent basis using an effective tax rate of 21%.
(2) Nonaccrual loans and loans held for sale are included in the average loans outstanding.
(3) Includes deposits held for sale.

Provision For Loan Losses

The allowance for loan losses is established through provision expense to provide, in Heartland management's opinion, an appropriate allowance for loan losses. The provision for loan losses increased $87,000 to $4.9 million for the second quarter of 2019 compared to $4.8 million for the second quarter of 2018. For the six months ended June 30, 2019, provision expense totaled $6.6 million compared to $9.1 million for the same period of 2018.

The impact of the Citizen's Finance loan portfolios resulted in net recoveries of $535,000 in the second quarter of 2019 and $628,000 of net recoveries for the first six months of 2019, compared to net charge-offs of $769,000 in the second quarter of 2018





and $1.5 million for the first six months of 2018. As a result of the sale of the Citizen's Finance loan portfolios, Heartland recorded negative provision expense of $535,000 and $628,000 for the second quarter of 2019 and first six months of 2019, respectively, Provision expense related to the Citizen's Finance loan portfolios of $738,000 and $1.5 million, respectively, was recorded for the same periods of 2018. This was a change to provision expense of $1.3 million and $2.2 million for the three- and six-months ended June 30, 2019, respectively, for the Citizen's Finance loan portfolios.

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

Heartland believes the allowance for loan losses as of June 30, 2019, was at a level commensurate with the overall risk exposure of the loan portfolio. However, if economic conditions should deteriorate, certain borrowers may experience difficulty and the level of nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses.

Noninterest Income
The tables below show Heartland's noninterest income for the three- and six-month periods ended June 30, 2019, and 2018, in thousands:
 
Three Months Ended
June 30,
 
 
 
2019
 
2018
 
Change
 
% Change
Service charges and fees
$
14,629

 
$
12,072

 
$
2,557

 
21
 %
Loan servicing income
1,338

 
1,807

 
(469
)
 
(26
)
Trust fees
4,825

 
4,615

 
210

 
5

Brokerage and insurance commissions
1,028

 
877

 
151

 
17

Securities gains/(losses), net
3,580

 
(259
)
 
3,839

 
1,482

Unrealized gain on equity securities, net
112

 
71

 
41

 
58

Net gains on sale of loans held for sale
4,343

 
6,800

 
(2,457
)
 
(36
)
Valuation adjustment on servicing rights
(364
)
 
(216
)
 
(148
)
 
69

Income on bank owned life insurance
888

 
700

 
188

 
27

Other noninterest income
1,682

 
1,167

 
515

 
44

  Total noninterest income
$
32,061

 
$
27,634

 
$
4,427

 
16
 %
 
 
Six Months Ended
June 30,
 
 
 
2019
 
2018
 
Change
 
% Change
Service charges and fees
$
27,423

 
$
22,151

 
$
5,272

 
24
 %
Loan servicing income
3,067

 
3,561

 
(494
)
 
(14
)
Trust fees
9,299

 
9,295

 
4

 

Brokerage and insurance commissions
1,762

 
1,784

 
(22
)
 
(1
)
Securities gains, net
5,155

 
1,182

 
3,973

 
336

Unrealized gain on equity securities, net
370

 
43

 
327

 
760

Net gains on sale of loans held for sale
7,519

 
10,851

 
(3,332
)
 
(31
)
Valuation adjustment on servicing rights
(953
)
 
(218
)
 
(735
)
 
(337
)
Income on bank owned life insurance
1,787

 
1,314

 
473

 
36

Other noninterest income
3,349

 
2,387

 
962

 
40

  Total noninterest income
$
58,778

 
$
52,350

 
$
6,428

 
12
 %






Total noninterest income totaled $32.1 million during the second quarter of 2019 compared to $27.6 million during the second quarter of 2018, an increase of $4.4 million or 16%. For the six months ended June 30, 2019, total noninterest income totaled $58.8 million compared to $52.4 million for the first six months of 2018, which was an increase of $6.4 million or 12%. These increases reflected higher service charges and fees, net securities gains and other noninterest income, which were partially offset by decreased net gains on sale of loans held for sale and an increased valuation adjustment on servicing rights.

Service Charges and Fees
The following tables summarize the changes in service charges and fees for the three- and six-month periods ended June 30, 2019, and 2018, in thousands:
 
Three Months Ended
June 30,
 
 
 
 
 
2019
 
2018
 
Change
 
% Change
Service charges and fees on deposit accounts
$
3,186

 
$
2,794

 
$
392

 
14
 %
Overdraft fees
2,876

 
2,518

 
358

 
14

Customer service and other service fees
84

 
88

 
(4
)
 
(5
)
Credit card fee income
4,270

 
3,114

 
1,156

 
37

Debit card income
4,213

 
3,558

 
655

 
18

Total service charges and fees
$
14,629

 
$
12,072

 
$
2,557

 
21
 %
 
 
 
 
 
 
 
 
 
Six Months Ended
June 30,
 
 
 
 
 
2019
 
2018
 
Change
 
% Change
Service charges and fees on deposit accounts
$
6,163

 
$
5,412

 
$
751

 
14
 %
Overdraft fees
5,619

 
4,726

 
893

 
19

Customer service and other service fees
166

 
166

 

 

Credit card fee income
7,619

 
5,381

 
2,238

 
42

Debit card income
7,856

 
6,466

 
1,390

 
21

Total service charges and fees
$
27,423

 
$
22,151

 
$
5,272

 
24
 %

Total service charges and fees increased $2.6 million or 21% to $14.6 million during the second quarter of 2019 compared to $12.1 million during the second quarter of 2018. Total service charges and fees increased $5.3 million or 24% to $27.4 million during the first six months of 2019 compared to $22.2 million for the same period of 2018. Service charges and fees on deposit accounts increased $392,000 or 14% to $3.2 million for the second quarter of 2019 compared to $2.8 million for the second quarter of 2018. For the first six months of 2019, service charges and fees on deposit accounts totaled $6.2 million compared to $5.4 million for the first six months of 2018, which was an increase of $751,000 or 14%. Overdraft fees increased $358,000 or 14% to $2.9 million for the second quarter of 2019 compared to $2.5 million for the second quarter of 2018, and overdraft fees increased $893,000 or 19% during the first six months of 2019 to $5.6 million compared to $4.7 million for the first six months of 2018. These increases were primarily attributable to a larger demand deposit customer base, a portion of which is attributable to the acquisitions completed in 2018 and the first half of 2019.

Fees associated with credit card services were $4.3 million during the second quarter of 2019 compared to $3.1 million during the second quarter of 2018, an increase of $1.2 million or 37%. For the six months ended June 30, 2019, credit card fee income totaled $7.6 million, which was an increase of $2.2 million or 42% from $5.4 million recorded in the same period of 2018. These increases resulted primarily from efforts to increase the level of commercial credit card services provided at Heartland's subsidiary banks, including at the recently acquired banks. Heartland has focused on expanding its card payment solutions for businesses. In particular, Heartland has introduced an expense management service that provides business customers the ability to more efficiently manage their card-based spending.

Debit card income increased $655,000 or 18% to $4.2 million for the second quarter of 2019 compared to $3.6 million for the second quarter of 2018. For the six months ended June 30, 2019, debit card income increased $1.4 million or 21% to $7.9 million from $6.5 million for the six months ended June 30, 2018. These increases are primarily attributable to a larger demand deposit customer base, a portion of which is attributable to recent acquisitions. Based on estimated calculations using 2018 debit card





income, Heartland estimates the impact of the Durbin Amendment, which Heartland was subject to effective July 1, 2019, will reduce debit card income by approximately $6.0 million on an annualized basis.

Loan Servicing Income
The following tables show the changes in loan servicing income for the three- and six-month periods ended June 30, 2019, and 2018, in thousands:
 
Three Months Ended
June 30,
 
 
 
 
 
2019
 
2018
 
Change
 
% Change
Commercial and agricultural loan servicing fees(1)
$
735

 
$
924

 
$
(189
)
 
(20
)%
Residential mortgage servicing fees
1,355

 
2,390

 
(1,035
)
 
(43
)
Mortgage servicing rights amortization
(752
)
 
(1,507
)
 
755

 
50

Total loan servicing income
$
1,338

 
$
1,807

 
$
(469
)
 
(26
)%
 
 
Six Months Ended
June 30,
 
 
 
 
 
2019
 
2018
 
Change
 
% Change
Commercial and agricultural loan servicing fees(1)
$
1,496

 
$
1,673

 
$
(177
)
 
(11
)%
Residential mortgage servicing fees
3,965

 
4,640

 
(675
)
 
(15
)
Mortgage servicing rights amortization
(2,394
)
 
(2,752
)
 
358

 
13

Total loan servicing income
$
3,067

 
$
3,561

 
$
(494
)
 
(14
)%
 
 
 
 
 

 

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

Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which are dependent upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. Loan servicing income totaled $1.3 million during the second quarter of 2019 compared to $1.8 million during the second quarter of 2018, a decrease of $469,000 or 26%. For the six months ended June 30, 2019, loan servicing income totaled $3.1 million, which was a decrease of $494,000 or 14% from $3.6 million recorded in the same period of 2018. Due to the sale of the mortgage servicing rights portfolio of Dubuque Bank and Trust Company, which occurred on April 30, 2019, net loan servicing income related to residential mortgage loans is expected to decrease by approximately $100,000 per quarter in future quarters. This transaction does not impact the residential mortgage servicing portfolio of Heartland's PrimeWest Mortgage Corporation subsidiary.

Securities Gains, Net
Securities gains, net, totaled $3.6 million for the second quarter of 2019 compared to net securities losses of $259,000 for the second quarter of 2018, which was an increase of $3.8 million. Securities gains, net, totaled $5.2 million and $1.2 million for the six months ended June 30, 2019 and 2018, respectively, which was an increase of $4.0 million. Heartland's net unrealized gain on securities available for sale totaled $9.7 million at June 30, 2019, compared to net unrealized losses of $60.9 million at June 30, 2018.

Net Gains on Sale of Loans Held for Sale
During the second quarter of 2019, net gains on sale of loans held for sale totaled $4.3 million compared to $6.8 million during the same period in 2018, a decrease of $2.5 million or 36%. For the six months ended June 30, 2019, net gains on sales of loans held for sale totaled $7.5 million compared to $10.9 million for the six months ended June 30, 2018, which was a decrease of $3.3 million or 31%. These decreases were primarily due to the outsourcing of Heartland's legacy residential mortgage lending operations in the fourth quarter of 2018.

Other Noninterest Income
Other noninterest income totaled $1.7 million and $1.2 million for the quarters ended June 30, 2019 and 2018, respectively. The increase of $515,000 or 44% was primarily attributable to a recovery of $266,000 on an acquired loan that was charged off prior to acquisition, reimbursement of $97,000 on loan collection expenses incurred in a prior period, and a write-up of $102,000 on a property transferred to other real estate at its appraised value. For the six months ended June 30, 2019, other noninterest income totaled $3.3 million compared to $2.4 million for the same period of 2018. This increase of $962,000 or 40% was primarily attributable to $368,000 from a death benefit on bank owned life insurance in the first quarter of 2019, as well as the items impacting the second quarter of 2019.






Noninterest Expense
The tables below show Heartland's noninterest expenses for the three- and six-month periods ended June 30, 2019, and 2018, in thousands:
 
Three Months Ended
June 30,
 
 
 
2019
 
2018
 
Change
 
% Change
Salaries and employee benefits
$
49,995

 
$
50,758

 
$
(763
)
 
(2
)%
Occupancy
6,436

 
6,315

 
121

 
2

Furniture and equipment
3,220

 
3,184

 
36

 
1

Professional fees
14,968

 
10,632

 
4,336

 
41

Advertising
2,661

 
2,145

 
516

 
24

Core deposit and customer relationship intangibles amortization
3,313

 
2,274

 
1,039

 
46

Other real estate and loan collection expenses
162

 
948

 
(786
)
 
(83
)
(Gain)/loss on sales/valuations of assets, net
(18,286
)
 
1,528

 
(19,814
)
 
(1,297
)
Restructuring expenses

 

 

 

Other noninterest expenses
12,629

 
11,098

 
1,531

 
14

Total noninterest expenses
$
75,098

 
$
88,882

 
$
(13,784
)
 
(16
)%
 
Six Months Ended
June 30,
 
 
 
2019
 
2018
 
Change
 
% Change
Salaries and employee benefits
$
100,280

 
$
99,468

 
$
812

 
1
 %
Occupancy
13,043

 
12,358

 
685

 
6

Furniture and equipment
5,912

 
5,933

 
(21
)
 

Professional fees
26,347

 
20,080

 
6,267

 
31

Advertising
4,986

 
4,085

 
901

 
22

Core deposit and customer relationship intangibles amortization
6,155

 
4,137

 
2,018

 
49

Other real estate and loan collection expenses
863

 
1,680

 
(817
)
 
(49
)
Gain/(loss) on sales/valuations of assets, net
(21,290
)
 
1,331

 
(22,621
)
 
(1,700
)
Restructuring expenses
3,227

 
2,564

 
663

 
26

Other noninterest expenses
23,805

 
20,892

 
2,913

 
14

Total noninterest expenses
$
163,328

 
$
172,528

 
$
(9,200
)
 
(5
)%

For the second quarter of 2019, noninterest expenses totaled $75.1 million compared to $88.9 million during the second quarter of 2018, a decrease of $13.8 million or 16%. For the six months ended June 30, 2019, total noninterest expenses were $163.3 million compared to $172.5 million for the same period of 2018, which was a decrease of $9.2 million or 5%. The most significant increases were related to professional fees, core deposit and customer relationship intangibles amortization, which were offset by net gain on sales/valuations of assets. The increases in occupancy expense and advertising for the three- and six-month periods were primarily attributable to recent acquisitions.

Professional Fees
Professional fees for the second quarter of 2019 totaled $15.0 million compared to $10.6 million for the same quarter of 2018, which was an increase of $4.3 million or 41%. For the six months ended June 30, 2019, professional fees totaled $26.3 million compared to $20.1 million for the six months ended June 30, 2018, which was an increase of $6.3 million or 31%. The increase for the three- and six-month periods was primarily attributable to professional fees incurred with the strategic initiative projects previously discussed. Professional fees related to these projects totaled $2.9 million for the second quarter and $3.0 million for the six months ended June 30, 2019. The remainder of the increase for both the quarterly and year-to-date comparisons was primarily attributable to professional fees incurred at recently acquired entities, model validation expenses, and increased advisory services associated with the higher level of regulation resulting from Heartland having assets over $10 billion.






Core Deposit and Customer Relationship Intangibles Amortization
Core deposit and customer relationship intangibles amortization was $3.3 million for the second quarter of 2019 compared to $2.3 million for the same quarter of 2018, which was an increase of $1.0 million or 46%. For the six months ended June 30, 2019, core deposit and customer relationship intangibles amortization was $6.2 million compared to $4.1 million for the same period of 2018, which was an increase of $2.0 million or 49%. Included in the increase for the second quarter of 2019 were core deposit intangible write-offs totaling $353,000 related to the branch sales at Illinois Bank & Trust and Citywide Banks. For the first six months of 2019, in addition to the write-offs of core deposit intangibles in the second quarter, a write-off of $329,000 of core deposit intangibles was recorded related to the branch sales at Wisconsin Bank & Trust during the first quarter of 2019. The remainder of the increase was due to recent acquisitions.

Gain/Loss on Sales/Valuations of Assets, Net
Net gain on sales/valuations of assets totaled $18.3 million during the second quarter of 2019 compared to net losses on sales/valuations of assets of $1.5 million for the second quarter of 2018, which was change of $19.8 million. For the six months ended June 30, 2019, net gains on sales/valuations of assets totaled $21.3 million compared to net losses on sales/valuations of assets, net, of $1.3 million, which was a change of $22.6 million. In the second quarter of 2019, gains of $19.8 million were recorded in conjunction with the branch sales at Illinois Bank & Trust, Citywide Banks, and Dubuque Bank and Trust Company, and the sale of Dubuque Bank and Trust Company's mortgage servicing rights portfolio. Additionally, a gain of $3.5 million was recorded related to the sale of two branches at Wisconsin Bank & Trust in the first quarter of 2019.
 
Other noninterest expenses
Other noninterest expenses totaled $12.6 million for the second quarter of 2019 compared to $11.1 million for the second quarter of 2018, which was an increase of $1.5 million or 14%. For the six months ended June 30, 2019 and 2018, other noninterest expenses totaled $23.8 million and $20.9 million, respectively, which was an increase of $2.9 million or 14%. Write-downs on partnership investments which qualified for tax credits totaled $1.5 million and $1.9 million for the quarter and the six months ended June 30, 2019, respectively. There were no partnership investments in tax credit projects for the same periods of 2018.

Efficiency Ratio

One of Heartland's top priorities is to improve its efficiency ratio, on a fully tax-equivalent basis, by reducing it to the 55-60% range over the next twelve to eighteen months. During the second quarter of 2019, Heartland's efficiency ratio on a fully tax-equivalent basis decreased by 13 basis points to 64.81% in comparison with 64.94% for the quarter ended June 30, 2018. For the six months ended June 30, 2019, Heartland's efficiency ratio was 65.01%, which was an improvement of 147 basis points from 66.48% for the same period of 2018.

Management has taken actions to improve its efficiency ratio, including restructuring its mortgage lending operations, optimizing bank branch locations, and strategic initiative projects. Operation Customer Compass is anticipated to be complete by the end of 2019, and this project is focused on streamlining and automating processes. Expense reductions of over $10 million annually are expected to be realized once the Operation Customer Compass project is completed. Other process improvement projects will continue into mid-2020. Additionally, systems conversions of newly acquired entities are completed as soon as possible after the closing of the transaction in order to optimize cost savings. Heartland's efficiency ratio will also vary from quarter to quarter as a result of merger and acquisition activities.

Income Taxes

Heartland's effective tax rate was 23.12% for the second quarter of 2019 compared to 21.09% for the second quarter of 2018. Included in Heartland's second quarter 2019 tax calculation were solar energy credits of $911,000. Federal low-income housing tax credits included in the determination of Heartland's income taxes totaled $281,000 for the second quarter of 2019 compared to $307,000 for the second quarter of 2018. The tax-exempt interest income as a percentage of pre-tax income declined to 8.09% during the second quarter of 2019 from 16.77% during the second quarter of 2018.

Heartland's effective tax rate was 22.21% and 19.73% for the six months ended June 30, 2019 and 2018, respectively. Included in Heartland's tax calculation for the first six months of 2019 were solar energy credits of $1.2 million. Federal low-income housing tax credits include in the determination of Heartland's income taxes were $562,000 and $614,000 for the six months ended June 30, 2019 and 2018, respectively. The tax-exempt interest income as a percentage of pre-tax income declined to 10.23% during the first six months of 2019 from 18.41% during the first six months of 2018.

Heartland's income taxes included a tax benefit of $272,000 and $660,000 for the six-month periods ended June 30, 2019, and 2018, respectively, resulting from the vesting of outstanding restricted stock unit awards and options. The majority of Heartland's restricted stock unit awards vest in the first quarter of each year.






FINANCIAL CONDITION

Total assets of Heartland were $12.16 billion at June 30, 2019, an increase of $752.3 million or 7% since December 31, 2018. Excluding $766.2 million of assets acquired at fair value in the BVBC transaction, total assets decreased $13.9 million or less than 1% since year-end 2018. Securities represented 22% and 24% of total assets at June 30, 2019, and December 31, 2018, respectively.

Lending Activities

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

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

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

During the fourth quarter of 2018, Heartland entered into arrangements with third parties to offer residential mortgage loans to customers in many of its markets. In addition, the acquisition in 2018 of First Bank & Trust in Lubbock, Texas, included its wholly owned mortgage subsidiary, PrimeWest Mortgage Corporation. PrimeWest Mortgage Corporation provides mortgage loans to customers in Texas and has expanded to also serve the mortgage needs of customers in several of Heartland's southwestern markets. PrimeWest Mortgage Corporation services the loans it sells into the secondary market.

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

Total loans held to maturity were $7.85 billion at June 30, 2019, compared to $7.41 billion at December 31, 2018, an increase of $445.4 million or 6%. This change includes $542.0 million of total loans held to maturity acquired in the BVBC transaction. During the first quarter of 2019, Heartland classified $32.1 million of loans as held for sale in conjunction with the branch sales. Excluding the reclassification of loans to held for sale and the BVBC transaction, total loans held to maturity decreased $64.6 million or 1% since December 31, 2018. Loan changes by category were:






Commercial and commercial real estate loans totaled $6.23 billion at June 30, 2019, compared to $5.73 billion at December 31, 2018, which was an increase of $498.7 million or 9%. Excluding $14.9 million of commercial and commercial real estate loans classified as held for sale during the first quarter and $480.1 million of loans acquired in the BVBC transaction, commercial and commercial real estate loans increased $33.4 million or 1% since year-end.
Agricultural and agricultural real estate loans totaled $549.4 million at June 30, 2019, compared to $565.4 million at December 31, 2018, which was a decrease of $16.0 million or 3%. Excluding $6.6 million of agricultural and agricultural real estate loans classified as held for sale during the first quarter of 2019 and $1.8 million of loans acquired in the BVBC transaction, agricultural and agricultural real estate loans decreased $11.2 million or 2% since December 31, 2018.
Residential mortgage loans decreased $59.9 million or 9% to $613.7 million at June 30, 2019, from $673.6 million at December 31, 2018. Excluding $2.0 million of residential mortgage loans classified as held for sale during the first quarter of 2019 and $17.2 million of loans acquired in the BVBC transaction, residential mortgage loans decreased $75.1 million or 11% since year-end.
Consumer loans increased $21.6 million or 5% to $461.8 million at June 30, 2019, compared to $440.2 million at December 31, 2018. Excluding $8.6 million of loans classified as held for sale during the first quarter of 2019 and $42.9 million of loans acquired in the BVBC transaction, consumer loans decreased $12.6 million or 3% since year-end.

The declines in the residential and consumer loan portfolios have primarily been the result of customers refinancing loans due to the recent decreases in mortgage interest rates.

The table below presents the composition of the loan portfolio as of June 30, 2019, and December 31, 2018, in thousands:
LOAN PORTFOLIO
June 30, 2019
 
December 31, 2018
 
Amount
 
Percent
 
Amount
 
Percent
Loans receivable held to maturity:
 
 
 
 
 
 
 
Commercial
$
2,238,453

 
28.50
%
 
$
2,020,231

 
27.26
%
Commercial real estate
3,991,919

 
50.82

 
3,711,481

 
50.08

Agricultural and agricultural real estate
549,404

 
6.99

 
565,408

 
7.63

Residential mortgage
613,707

 
7.81

 
673,603

 
9.09

Consumer
461,802

 
5.88

 
440,158

 
5.94

Gross loans receivable held to maturity
7,855,285

 
100.00
%
 
7,410,881

 
100.00
%
Unearned discount
(942
)
 
 
 
(1,624
)
 
 
Deferred loan fees
(1,292
)
 
 
 
(1,560
)
 
 
Total net loans receivable held to maturity
7,853,051

 
 
 
7,407,697

 
 
Allowance for loan losses
(63,850
)
 
 
 
(61,963
)
 
 
Loans receivable, net
$
7,789,201

 
 
 
$
7,345,734

 








Loans secured by real estate, either fully or partially, totaled $5.05 billion or 64% of gross loans at June 30, 2019. Exclusive of purchase accounting valuations and the loans acquired in the second quarter of 2019, at June 30, 2019, approximately 51% of the properties securing non-farm, nonresidential real estate loans are owner occupied. The largest categories of Heartland's loans secured by real estate at June 30, 2019, and December 31, 2018, are listed below, in thousands:
LOANS SECURED BY REAL ESTATE
 
June 30, 2019
 
December 31, 2018
Residential real estate, excluding residential construction and residential lot loans
$
1,036,564

 
$
1,119,942

Industrial, manufacturing, business and commercial
644,914

 
805,265

Agriculture
266,341

 
270,023

Retail
454,437

 
435,680

Office
485,121

 
485,262

Land development and lots
213,923

 
216,665

Hotel, resort and hospitality
293,626

 
233,735

Multi-family
332,148

 
311,319

Food and beverage
143,638

 
130,981

Warehousing
199,733

 
186,436

Health services
206,942

 
182,882

Residential construction
147,932

 
171,116

All other
273,710

 
255,145

Loans acquired in the quarter
355,305

 

Total loans secured by real estate
$
5,054,334

 
$
4,804,451


Allowance For Loan Losses

The process utilized by Heartland to determine the appropriateness of the allowance for loan losses is considered a critical accounting practice for Heartland and has remained consistent over the past several years. The allowance for loan losses represents management's estimate of identified and unidentified probable losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for loan losses, refer to the critical accounting policies section of Heartland's Annual Report on Form 10-K for the year ended December 31, 2018.

Nonperforming loans were $79.9 million or 1.02% of total loans at June 30, 2019, compared to $72.7 million or 0.98% of total loans at December 31, 2018. The increase was primarily related to two agribusiness relationships that were originated in Heartland's Midwestern markets and one commercial relationship that was originated in one of Heartland's Western markets. At June 30, 2019, approximately $46.9 million or 59% of Heartland's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to eighteen borrowers. At June 30, 2019, and December 31, 2018, Heartland had $7.2 million and $7.7 million, respectively, of nonperforming residential real estate loans that were repurchased under various Government National Mortgage Association ("GNMA") or other guaranteed loan programs. The portion of Heartland's nonperforming nonresidential real estate loans covered by government guarantees totaled $15.4 million at June 30, 2019, compared to $7.7 million at December 31, 2018.
 
The allowance for loan losses was 0.81% and 0.84% of loans at June 30, 2019 and December 31, 2018, respectively, and 79.91% and 85.27% of nonperforming loans at June 30, 2019, and December 31, 2018, respectively. Excluding the acquired loans covered by the valuation reserves, the ratio of the allowance for loan losses to outstanding loans was 1.00% and 1.03% at June 30, 2019, and December 31, 2018, respectively. At June 30, 2019, valuation reserves totaled $48.3 million and covered $1.84 billion of acquired loans. At December 31, 2018, valuation reserves totaled $40.9 million and covered $1.63 billion of acquired loans. Loans delinquent 30-89 days as a percent of total loans was 0.31% at June 30, 2019, in comparison with 0.21% at December 31, 2018. At June 30, Heartland had two commercial credits totaling $2.7 million from a recently acquired portfolio that were 30-59 days past due. Management believes the increase in delinquencies in the acquired portfolios is due to the implementation of Heartland's underwriting and closing processes at the new entities and is not indicative of the underlying credit quality.






The table below presents the changes in the allowance for loan losses during the three- and six-month periods ended June 30, 2019 and 2018, in thousands:
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Three Months Ended
June 30,
 
2019
 
2018
Balance at beginning of period
$
62,639

 
$
58,656

Provision for loan losses
4,918

 
4,831

Recoveries on loans previously charged off
(4,780
)
 
(3,164
)
Charge-offs on loans
1,073

 
1,001

Balance at end of period
$
63,850

 
$
61,324

Annualized ratio of net charge offs to average loans
0.19
%
 
0.12
%
 
 
 
 
 
Six Months Ended
June 30,
 
2019
 
2018
Balance at beginning of period
$
61,963

 
$
55,686

Provision for loan losses
6,553

 
9,094

Recoveries on loans previously charged off
2,064

 
1,932

Charge-offs on loans
(6,730
)
 
(5,388
)
Balance at end of period
$
63,850

 
$
61,324

Annualized ratio of net charge offs to average loans
0.12
%
 
0.10
%

The table below presents the amounts of nonperforming loans and other nonperforming assets on the dates indicated, in thousands:
NONPERFORMING ASSETS
June 30,
 
December 31,
 
2019
 
2018
 
2018
 
2017
Nonaccrual loans
$
79,619

 
$
69,376

 
$
71,943

 
$
62,581

Loans contractually past due 90 days or more
285

 
54

 
726

 
830

Total nonperforming loans
79,904

 
69,430

 
72,669

 
63,411

Other real estate
6,646

 
11,074

 
6,153

 
10,777

Other repossessed assets
39

 
499

 
459

 
411

Total nonperforming assets
$
86,589

 
$
81,003

 
$
79,281

 
$
74,599

Performing troubled debt restructured loans(1)
$
3,539

 
$
4,012

 
$
4,026

 
$
6,617

Nonperforming loans to total loans
1.02
%
 
0.93
%
 
0.98
%
 
0.99
%
Nonperforming assets to total loans plus repossessed property
1.10
%
 
1.08
%
 
1.07
%
 
1.17
%
Nonperforming assets to total assets
0.71
%
 
0.72
%
 
0.69
%
 
0.76
%
 
 
 
 
 
 
 
 
(1) Represents accruing troubled debt restructured loans performing according to their restructured terms.





The schedules below summarize the changes in Heartland's nonperforming assets during the three- and six-month periods of 2019, in thousands:
 
Nonperforming
Loans
 
Other
Real Estate
Owned
 
Other
Repossessed
Assets
 
Total
Nonperforming
Assets
March 31, 2019
$
79,000

 
$
5,391

 
$
8

 
$
84,399

Loan foreclosures
(3,061
)
 
2,961

 
100

 

Net loan charge-offs
(3,707
)
 

 

 
(3,707
)
Acquired nonperforming assets
230

 

 

 
230

New nonperforming loans
13,688

 

 

 
13,688

Reduction of nonperforming loans(1)
(6,246
)
 

 

 
(6,246
)
OREO/Repossessed assets sales proceeds

 
(1,221
)
 
(67
)
 
(1,288
)
OREO/Repossessed assets writedowns, net

 
(485
)
 
(2
)
 
(487
)
Net activity at Citizens Finance Co.

 

 

 

June 30, 2019
$
79,904

 
$
6,646

 
$
39

 
$
86,589

(1) Includes principal reductions and transfers to performing status.
 
 
Nonperforming
Loans
 
Other
Real Estate
Owned
 
Other
Repossessed
Assets
 
Total
Nonperforming
Assets
December 31, 2018
$
72,669

 
$
6,153

 
$
459

 
$
79,281

Loan foreclosures
(4,847
)
 
4,655

 
192

 

Net loan charge-offs
(4,666
)
 

 

 
(4,666
)
Acquired nonperforming assets
230

 

 

 
230

New nonperforming loans
29,002

 

 

 
29,002

Reduction of nonperforming loans(1)
(12,484
)
 

 

 
(12,484
)
OREO/Repossessed assets sales proceeds

 
(3,225
)
 
(155
)
 
(3,380
)
OREO/Repossessed assets writedowns, net

 
(937
)
 
(12
)
 
(949
)
Net activity at Citizens Finance Co.

 

 
(445
)
 
(445
)
June 30, 2019
$
79,904

 
$
6,646

 
$
39

 
$
86,589

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

Securities

The composition of Heartland's securities portfolio is managed to maximize the return on the portfolio while considering the impact it has on Heartland's asset/liability position and liquidity needs. Securities represented 22% and 24% of total assets at June 30, 2019, and December 31, 2018, respectively. Total securities carried at fair value as of June 30, 2019, were $2.56 billion, an increase of $111.2 million or 5% from $2.45 billion at December 31, 2018.

The table below presents the composition of the securities portfolio, including securities carried at fair value, held to maturity securities and other, by major category, as of June 30, 2019, and December 31, 2018, in thousands:
SECURITIES PORTFOLIO COMPOSITION
June 30, 2019
 
December 31, 2018
 
Amount
 
Percent
 
Amount
 
Percent
U.S. government corporations and agencies
$
18,621

 
0.69
%
 
$
31,951

 
1.18
%
Mortgage and asset-backed securities
2,193,326

 
81.80

 
2,026,698

 
74.64

Obligation of states and political subdivisions
419,949

 
15.66

 
611,257

 
22.50

Equity securities
18,157

 
0.68

 
17,086

 
0.63

Other securities
31,366

 
1.17

 
28,396

 
1.05

Total securities
$
2,681,419

 
100.00
%
 
$
2,715,388

 
100.00
%






The percentage of Heartland's securities portfolio comprised of mortgage and asset-backed securities was 82% at June 30, 2019, compared to 75% at December 31, 2018. Heartland's securities portfolio had an expected modified duration of 4.71 years as of June 30, 2019, compared to 4.01 years as of year-end 2018.

At June 30, 2019, Heartland had $31.4 million of other securities, including capital stock in each Federal Home Loan Bank ("FHLB") of which each of its bank subsidiaries is a member. All of these securities were classified as other securities held at cost.

Deposits

Total deposits were $10.11 billion as of June 30, 2019, compared to $9.40 billion at December 31, 2018, an increase of $712.1 million or 8%. This increase includes $617.1 million of deposits acquired at fair value in the BVBC transaction. During the first quarter of 2019, Heartland classified $77.0 million of deposits as held for sale in conjunction with the branch sales. Exclusive of the reclassification of deposits to held for sale and the deposits acquired at fair value in the BVBC transaction, total deposits increased $172.0 million or 2% since December 31, 2018. Deposit changes by category were:

Demand deposits increased $162.0 million or 5% to $3.43 billion at June 30, 2019, compared to $3.26 billion at December 31, 2018. Excluding $164.9 million of demand deposits acquired in the BVBC transaction and $17.3 million of demand deposits classified as held for sale in the first quarter of 2019, demand deposits increased $14.4 million or less than 1% since year-end 2018.
Savings deposits increased $425.5 million or 8% to $5.53 billion at June 30, 2019, from $5.11 billion at December 31, 2018. Excluding savings deposits of $346.2 million acquired in the BVBC transaction and $47.8 million of savings deposits classified as held for sale in the first quarter of 2019, savings deposits increased $127.2 million or 2% since year-end 2018.
Time deposits increased $124.6 million or 12% to $1.15 billion at June 30, 2019 from $1.02 billion at December 31, 2018. Excluding time deposits of $106.0 million acquired in the BVBC transaction and $11.9 million of time deposits classified as held for sale in the first quarter of 2019, time deposits increased $30.4 million or 3% since year-end 2018. The increase in time deposits was primarily due to an increase in brokered time deposits of $30.9 million.

The table below presents the composition of Heartland's deposits by category as of June 30, 2019, and December 31, 2018, in thousands:
DEPOSITS
June 30, 2019
 
December 31, 2018
 
Amount
 
Percent
 
Amount
 
Percent
Demand
$
3,426,758

 
33.90
%
 
$
3,264,737

 
34.74
%
Savings
5,533,503

 
54.74

 
5,107,962

 
54.37

Time
1,148,296

 
11.36

 
1,023,730

 
10.89

Total
$
10,108,557

 
100.00
%
 
$
9,396,429

 
100.00
%

Short-Term Borrowings

Short-term borrowings, which Heartland defines as borrowings with an original maturity of one year or less, were as follows as of June 30, 2019, and December 31, 2018, in thousands:
 
June 30, 2019
 
December 31, 2018
Securities sold under agreement to repurchase
$
90,184

 
$
80,124

Federal funds purchased
4,600

 
35,400

Advances from the FHLB

 
100,838

Other short-term borrowings
12,476

 
10,648

Total
$
107,260


$
227,010


Short-term borrowings generally include federal funds purchased, securities sold under agreements to repurchase, short-term FHLB advances and discount window borrowings from the Federal Reserve Bank. These funding alternatives are utilized in varying degrees depending on their pricing and availability. All of Heartland's bank subsidiaries own FHLB stock in one of the Chicago, Dallas, Des Moines, San Francisco or Topeka FHLBs, enabling them to borrow funds from their respective FHLB for





short-term or long-term purposes under a variety of programs. The amount of short-term borrowings of Heartland was $107.3 million at June 30, 2019, compared to $227.0 million at year-end 2018, a decrease of $119.8 million or 53%.

All of the Heartland bank subsidiaries provide retail repurchase agreements to their customers as a cash management tool, which sweep excess funds from demand deposit accounts into these agreements. Although the aggregate balance of these retail repurchase agreements is subject to variation, the account relationships represented by these balances are principally local. The balances of retail repurchase agreements were $90.2 million at June 30, 2019, compared to $80.1 million at December 31, 2018, an increase of $10.1 million or 13%.

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

Other Borrowings

The outstanding balances of other borrowings, which Heartland defines as borrowings with an original maturity date of more than one year, are shown in the table below, net of discount and issuance costs amortization as of June 30, 2019, and December 31, 2018, in thousands:
 
June 30, 2019
 
December 31, 2018
Advances from the FHLB
$
3,305

 
$
3,399

Trust preferred securities
147,430

 
130,913

Senior notes

 
5,000

Note payable to unaffiliated bank
54,917

 
58,417

Contracts payable for purchase of real estate and other assets
1,917

 
1,953

Subordinated notes
74,214

 
74,143

Other borrowings
1,080

 
1,080

Total
$
282,863


$
274,905


As of June 30, 2019, the amount of other borrowings was $282.9 million, an increase of $8.0 million or 3% since year-end 2018. Heartland acquired $6.9 million of subordinated debt in the BVBC transaction that was simultaneously paid off with the closing of the transaction. Trust preferred securities with a fair value of $16.1 million were also acquired in the BVBC transaction.
 
Heartland has a non-revolving credit facility with an unaffiliated bank, which provides a borrowing capacity of up to $70.0 million. At June 30, 2019, $54.9 million was outstanding on this non-revolving credit line compared to $58.4 million outstanding at December 31, 2018. At June 30, 2019, Heartland had $14.8 million available on this non-revolving credit facility, of which no balance was drawn.





A schedule of Heartland's trust preferred securities outstanding excluding deferred issuance costs, as of June 30, 2019, is as follows, in thousands:
 
Amount
Issued
 
Issuance
Date
 
Interest
Rate
 
Interest
Rate as of 6/30/19(1)
 
 
Maturity
Date
 
Callable
Date
Heartland Financial Statutory Trust IV
$
10,310

 
03/17/2004
 
2.75% over LIBOR
 
5.16%
(2) 
 
03/17/2034
 
09/17/2019
Heartland Financial Statutory Trust V
20,619

 
01/27/2006
 
1.33% over LIBOR
 
3.93%
(3) 
 
04/07/2036
 
10/07/2019
Heartland Financial Statutory Trust VI
20,619

 
06/21/2007
 
1.48% over LIBOR
 
3.89%
(4) 
 
09/15/2037
 
09/15/2019
Heartland Financial Statutory Trust VII
20,619

 
06/26/2007
 
1.48% over LIBOR
 
4.00%
(5) 
 
09/01/2037
 
09/01/2019
Morrill Statutory Trust I
9,041

 
12/19/2002
 
3.25% over LIBOR
 
5.58%
 
 
12/26/2032
 
09/26/2019
Morrill Statutory Trust II
8,698

 
12/17/2003
 
2.85% over LIBOR
 
5.26%
 
 
12/17/2033
 
09/17/2019
Sheboygan Statutory Trust I
6,484

 
09/17/2003
 
2.95% over LIBOR
 
5.36%
 
 
09/17/2033
 
09/17/2019
CBNM Capital Trust I
4,384

 
09/10/2004
 
3.25% over LIBOR
 
5.66%
 
 
12/15/2034
 
09/15/2019
Citywide Capital Trust III
6,410

 
12/19/2003
 
2.80% over LIBOR
 
5.38%
 
 
12/19/2033
 
10/23/2019
Citywide Capital Trust IV
4,267

 
09/30/2004
 
2.20% over LIBOR
 
4.72%
 
 
09/30/2034
 
08/23/2019
Citywide Capital Trust V
11,635

 
05/31/2006
 
1.54% over LIBOR
 
3.95%
 
 
07/25/2036
 
09/15/2019
OCGI Statutory Trust III
2,993

 
06/27/2002
 
3.65% over LIBOR
 
6.25%
(6) 
 
09/30/2032
 
09/30/2019
OCGI Capital Trust IV
5,314

 
09/23/2004
 
2.50% over LIBOR
 
4.91%
(7) 
 
12/15/2034
 
09/15/2019
BVBC Capital Trust II
7,167

 
04/10/2003
 
3.25% over LIBOR
 
5.83%
 
 
04/24/2033
 
10/24/2019
BVBC Capital Trust III
8,958

 
07/29/2005
 
1.60% over LIBOR
 
3.92%
 
 
09/30/2035
 
09/30/2019
 
$
147,518

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Effective weighted average interest rate as of June 30, 2019, was 5.08% due to interest rate swap transactions on the variable rate securities as discussed in Note 7 to Heartland's consolidated financial statements included herein.
(2) Effective interest rate as of June 30, 2019, was 5.01% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.
(3) Effective interest rate as of June 30, 2019, was 4.69% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.
(4) Effective interest rate as of June 30, 2019, was 3.87% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.
(5) Effective interest rate as of June 30, 2019, was 3.83% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.
(6) Effective interest rate as of June 30, 2019, was 5.53% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.
(7) Effective interest rate as of June 30, 2019, was 4.37% due to an interest rate swap transaction as discussed in Note 7 to Heartland's consolidated financial statements included herein.

CAPITAL REQUIREMENTS

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

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






Heartland's capital ratios are calculated in accordance with Federal Reserve Board instructions and are required regulatory financial measures. The following table illustrates Heartland's capital ratios and the Federal Reserve Board's current capital adequacy guidelines for the dates indicated, in thousands. The table also indicates the fully-phased in capital conservation buffer, but the requirements to comply have been extended indefinitely.
 
Total
Capital
(to Risk-
Weighted
Assets)
 
Tier 1
Capital
(to Risk-
Weighted
Assets)
 
Common
Equity
Tier 1
(to Risk-
Weighted
Assets)
 
Tier 1
Capital
(to Average Assets)
June 30, 2019
14.76
%
 
13.24
%
 
11.61
%
 
10.66
%
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
$
9,056,123

 
$
9,056,123

 
$
9,056,123

 
N/A

Average Assets
N/A

 
N/A

 
N/A

 
$
11,243,148

 
 
 
 
 
 
 
 
December 31, 2018
13.72
%
 
12.16
%
 
10.66
%
 
9.73
%
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 (2019)
10.50
%
 
8.50
%
 
7.00
%
 
N/A

Risk-weighted assets
$
8,756,130

 
$
8,756,130

 
$
8,756,130

 
N/A

Average Assets
N/A

 
N/A

 
N/A

 
$
10,946,440


Retained earnings that could be available for the payment of dividends to Heartland from its banks totaled approximately $384.5 million and $311.3 million at June 30, 2019, and December 31, 2018, respectively, under the capital requirements to remain well capitalized. At June 30, 2019, and December 31, 2018, retained earnings that could be available for the payment of dividends under the most restrictive minimum capital requirements totaled $566.5 million and $486.5 million, respectively.

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

On July 22, 2019, Heartland's Board of Directors voted to increase its quarterly dividend payment to $0.18 per common share, which was a $0.02 or 13% increase from $0.16 per common share.

OFF-BALANCE SHEET ARRANGEMENTS

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

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






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

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

Commitments and Contractual Obligations
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Heartland's bank subsidiaries evaluate the creditworthiness of customers to which they extend a credit commitment on a case-by-case basis and may require collateral to secure any credit extended. The amount of collateral obtained is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees are conditional commitments issued by Heartland's bank subsidiaries to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At June 30, 2019, and December 31, 2018, commitments to extend credit aggregated $2.53 billion and $2.47 billion, respectively. Standby letters of credit aggregated $76.3 million at June 30, 2019, and $71.9 million at December 31, 2018.

Contractual obligations and other commitments were disclosed in Heartland's Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to Heartland's contractual obligations and other commitments since that report was filed.

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

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

LIQUIDITY

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

At June 30, 2019, Heartland had $642.1 million of cash and cash equivalents, time deposits in other financial institutions of $4.4 million and securities carried at fair value of $2.56 billion.

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

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

Additional funding is provided by long-term debt and short-term borrowings. In the event of short-term liquidity needs, Heartland's banks may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank. As of June 30, 2019, Heartland had $107.3 million of short-term borrowings outstanding. As of June 30, 2019, Heartland had $282.9 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure. Additionally, the banks' FHLB memberships give them the ability to borrow funds for short-term and long-term purposes under a variety of programs. At June 30, 2019, Heartland had $1.66 billion of borrowing capacity under these programs.

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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






The core interest rate risk analysis utilized by Heartland examines the balance sheet under increasing and decreasing interest rate scenarios that are neither too modest nor too extreme. All rate changes are ramped over a 12-month horizon based upon a parallel shift in the yield curve and then maintained at those levels over the remainder of the simulation horizon. Using this approach, management is able to see the effect that both a gradual change of rates (year one) and a rate shock (year two and beyond) could have on Heartland's net interest income. Starting balances in the model reflect actual balances on the "as of" date, adjusted for material transactions. Pro-forma balances remain static. This methodology enables interest rate risk embedded within the existing balance sheet structure to be isolated from the interest rate risk often caused by growth in assets and liabilities. Due to the low interest rate environment, the simulations under a decreasing interest rate scenario were prepared using a 100 basis point shift in rates. The most recent reviews at June 30, 2019, and June 30, 2018, provided the following results, in thousands:
 
2019
 
2018
 
Net Interest
Margin
 
% Change
From Base
 
Net Interest
Margin
 
% Change
From Base
Year 1
 
 
 
 
 
 
 
Down 100 Basis Points
$
414,461

 
(3.28
)%
 
$
368,974

 
(7.85
)%
Base
$
428,520

 
 
 
$
400,387

 
 
Up 200 Basis Points
$
455,185

 
6.22
 %
 
$
403,254

 
0.72
 %
Year 2
 
 
 
 
 
 
 

Down 100 Basis Points
$
385,037

 
(10.15
)%
 
$
366,246

 
(8.53
)%
Base
$
425,238

 
(0.77
)%
 
$
409,788

 
2.35
 %
Up 200 Basis Points
$
483,672

 
12.87
 %
 
$
436,963

 
9.14
 %

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

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

ITEM 4. CONTROLS AND PROCEDURES

Based on an evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of Heartland's management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that:
Heartland's disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended) were effective.
During the quarter ended June 30, 2019, there have been no changes in Heartland's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, Heartland's internal control over financial reporting.





PART II

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors applicable to Heartland from those disclosed in Part I, Item 1A. “Risk Factors” in Heartland's 2018 Annual Report on Form 10-K. Please refer to that section of Heartland's Form 10-K report for disclosures regarding the risks and uncertainties related to Heartland's business.

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

Heartland's board of directors has authorized management to acquire and hold up to 500,000 shares of common stock as treasury shares at any one time. Heartland and its affiliated purchasers made no purchases of its common stock during the quarter ended June 30, 2019.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None





ITEM 6. EXHIBITS

Exhibits
3.1
(2) 
 
 
 
3.2
(2) 
 
 
 
(1)(2) 
 
 
 
(1)(2) 
 
 
 
(1)(2) 
 
 
 
(1)(2) 
 
 
 
(1)(2) 
 
 
 
(1) 
 
 
 
(2) 
 
 
 
(2) 
 
 
 
(2) 
 
 
 
(2) 
 
 
 
101
 
Financial statement formatted in Inline Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, and (vi) the Notes to Consolidated Financial Statements.
104
 
Cover page formatted in Inline Extensible Business Reporting Language
______________
(1) Management contracts or compensatory plans or arrangements
(2) Filed or furnished herewith








SIGNATURES

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



HEARTLAND FINANCIAL USA, INC.
(Registrant)
 
 
/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: August 7, 2019









EXHIBIT 3.1


CERTIFICATE OF AMENDMENT
OF 
CERTIFICATE OF INCORPORATION 
OF 
HEARTLAND FINANCIAL USA, INC.

 
The undersigned hereby certifies that at a meeting of the stockholders of Heartland Financial USA, Inc., a Delaware corporation (the “Company”), duly called and held on May 22, 2019, the amendment to the Company’s certificate of incorporation set forth below was duly adopted in accordance with the provisions of section 242 of the Delaware General Corporation Law, and that such amendment has not been subsequently modified or rescinded:
 
RESOLVED, that the first paragraph of Article XII of the certificate of incorporation of Heartland Financial USA, Inc., was amended and restated to provide as follows:
 
Article XII
 
BOARD OF DIRECTORS

 The number of directors constituting the entire board of directors shall not be less than three nor more than thirteen as fixed from time to time by resolution of not less than 66 2/3% of the number of directors which immediately prior to such proposed change has been fixed, in the manner prescribed herein, by the board of directors of the corporation, provided, however, that the number of directors shall not be reduced as to shorten the term of any director at the time in office."
 
IN WITNESS WHEREOF, I have executed this certificate this 23rd day of May, 2019
 
 
/s/ Angela W. Kelley
 
Angela W. Kelley
Senior Vice President and Corporate Secretary










EXHIBIT 3.2


CERTIFICATE OF AMENDMENT
OF 
CERTIFICATE OF INCORPORATION 
OF 
HEARTLAND FINANCIAL USA, INC.

 
The undersigned hereby certifies that at a meeting of the stockholders of Heartland Financial USA, Inc., a Delaware corporation (the “Company”), duly called and held on May 22, 2019, the amendment to the Company’s certificate of incorporation set forth below was duly adopted in accordance with the provisions of section 242 of the Delaware General Corporation Law, and that such amendment has not been subsequently modified or rescinded:
 
RESOLVED, that the first paragraph of Article IV of the certificate of incorporation of Heartland Financial USA, Inc., was amended and restated to provide as follows:
 
Article IV
 
AUTHORIZED STOCK

The total number of shares of stock which the corporation shall authority to issue is 60,000,000 shares of Common Stock, par value of $1.00 per share, and 200,000 shares of Preferred Stock, par value of $1.00 per share."
 
IN WITNESS WHEREOF, I have executed this certificate this 23rd day of May, 2019
 
 
/s/ Angela W. Kelley
 
Angela W. Kelley
Senior Vice President and Corporate Secretary







Exhibit 10.1
BUSINESS LOAN AGREEMENT
Principal
Loan Date
Maturity
Loan No
Call/Coll
Account
Officer
Initials
$30,000,000.00
06-14-2019
06-14-2020
55120-0201
9A00 / AA
00000160370
00229
 
References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing "***" has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800)362-1688
 
 
 
 
 

THIS BUSINESS LOAN AGREEMENT dated June 14, 2019, is made and executed between Heartland Financial USA, Inc. ("Borrower") and Banker's Trust Company ("Lender") on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements as set forth in this Agreement; (B) the grating, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (C) all such Loans shall be and remain subject to the terms and conditions of this Agreement.
TERM. This agreement shall be effective as of June 14, 2019, and shall continue in full force and effect until such time as all of Borrower's Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys' fees, and other fees and charges, or until such time as the parties may agree in writing to terminate this Agreement.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender's counsel.
Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require.
Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document.
Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct.
No Event of Default. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any indebtedness exists:
Organization. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Delaware. Borrower is duly authorized to transact business in the State of Iowa and all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 1398 Central Avenue, Dubuque, Iowa 52001. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps it books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower's state of organization or any change in Borrower's name. Borrower shall do all things necessary to preserve and to keep in full force and effect its





existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower's business activities.
Assumed Business Names. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None.
Authorization. Borrower's execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of (a) Borrower's articles of incorporation or organization, or bylaws, or (b) any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower's properties.
Financial Information. Each of Borrower's financial statements supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years.
Hazardous Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower's ownership of the Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify, defend, and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify and defend, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all of Borrower's tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.





Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms.
Federal Reserve Regulations; Use of Loan Proceeds. Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended. No part of the proceeds of the Loan will be used, directly or indirectly, for a purpose which violates any law, rule or regulation of any governmental body, including, without limitation, the provisions of Regulations G, U or X of the Board of Governors of the Federal Reserve System, as amended.
Unregistered Securities. Borrower has not: (a) issued any unregistered securities in violation of the registration requirements of Section 5 of the Securities Act of 1933, as amended, or any other law; or (b) violated any rule, regulation or requirement under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, in either case.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:
Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower's financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times.
Financial Statements. Furnish Lender with the following:
Annual Statements. As soon as available, but in no event later than one-hundred-twenty (120) days after the end of each fiscal year, Borrower's balance sheet and income statement for the year ended, audited by a certified public accountant satisfactory to Lender.
Additional Requirements.
Interim Statements. As soon as available, but in no event later than ninety (90) days after the end of each quarter, Borrower's FR Y9-C statement.
All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.
Additional Information. Furnish such additional information and statements, as Lender may request from time to time.
Additional Requirements.
Regulatory Capital. Borrower shall maintain, on a consolidated basis, the greater of the regulatory definition for a well-capitalized bank or any other ratios deemed appropriate by Borrower's regulatory agent, or the following ratios: (a) 'leverage ratio' (Tier One Capital to Average Total Assets) of at least 7.0%; and (b) 'total risk based capital ratio' (the sum of Tier One Capital and Tier Two Capital to Risk-Weighted Assets) of at least 11.0%. This covenant will be evaluated at all times.
Minimum ROA. Borrower shall maintain, on a consolidated-basis, a minimum ROA of at least 0.50%, tested quarterly on a rolling four (4) quarter basis.
Asset Quality. Non-Performing assets to Tier One Capital and Allowance for Loan and Lease Losses for Borrower shall not exceed 25%, measured on a consolidated basis and evaluated on a quarterly basis.
Reserves for Gross Loans. Borrower shall maintain, on a consolidated basis, a minimum Allowance for Loan and Lease Losses to Gross Loans ratio of 1.00%. For this purpose, Borrower may include the Discount on Loans Acquired within the Allowance for Loan and Lease Losses. This covenant will be evaluated quarterly.
Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be canceled or diminished without at least fifteen (15) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all





policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender's loss payable or other endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower.
Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing.
Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (1) the legality of the same shall be contested in good faith by appropriate proceedings, and (2) Borrower shall have established on Borrower's books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with GAAP.
Performance. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement.
Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner.
Environmental Studies. Promptly conduct and complete, at Borrower's expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower.
Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower's properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender's sole opinion, Lender's interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender's interest.
Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense.
Environmental Compliance and Reports. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower's part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests.





RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law, rule, regulation or guideline, or the interpretation or application of any thereof by any court or administrative or governmental authority, or standard-setting organization (including any request or policy not having the force of law) shall impose, modify or make applicable any taxes (except federal, state or local income or Franchise taxes imposed on Lender), reserve requirements, capital adequacy requirements or other obligations which would (A) increase the cost to Agreement of Lender for extending or maintaining the credit facilities to which this Agreement relates, (B) reduce the amounts payable to Lender under this Agreement or the Related Documents, or (C) reduce the rate of return on Lender's capital as a consequence of Lender's obligations with respect to the credit facilities to which this Agreement relates, then Borrower agrees to pay Lender such additional amounts as will compensate Lender therefor, within five (5) days after Lender's written demand for such payment, which demand shall be accompanied by an explanation of such imposition or charge and a calculation in reasonable detail of the additional amounts payable by Borrower, which explanation and calculations shall be conclusive in the absence of manifest error.
LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower's failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender:
Additional Financial Restrictions.
Indebtedness and Liens. (1) No additional Indebtedness including capital leases. No additional indebtedness in excess of $5,000,000.00, without prior consent of Bankers Trust Company. Any amount in excess of $5,000,000.00 shall require a commensurate reduction of used or unused loans from Bankers Trust Company. Additional Indebtedness shall exclude trade debt incurred in the normal course of business, indebtedness to Lender contemplated by this Agreement, and any subordinated debt instrument(s) assumed by Borrower as related to an acquisition, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower's accounts, except to Lender.
Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate substantially all assets of Borrower, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) make any distribution with respect to any capital account, whether by reduction of capital or otherwise.
Loans, Acquisitions and Guaranties. Borrower shall not pay or redeem any principal amount owing under the Subordinated Debt if the Loan(s) are in default, or if said payment will result in an event of default, without lender's prior consent.
Change in Status. WIthout the Bank's prior written consent, will not permit any transfer or change (whether by operation of law or otherwise) of Borrower's present management or twenty-five percent (25%) or more in the stock, ownership, and control of Borrower or of any organization or entity owning an interest in Borrower.
Agreements. Enter into any agreement containing any provisions which would be violated or breached by the performance of Borrower's obligations under this Agreement or in connection herewith.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred.
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with





someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the debt against any and all such accounts.
DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:
Payment Default. Borrower fails to make any payment when due under the Loan.
Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.
False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.
Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness.
Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired.
Insecurity. Lender in good faith believes itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies.
ADDITIONAL PROVISION - HEDGING AGREEMENT. Notwithstanding any other provision herein to the contrary, the word "indebtedness" as used in this Agreement includes, without limitation, each and every liability and obligation of every type and description which Borrower may now or at any time hereafter owe to Lender pursuant to any agreement relating to any interest rate hedge, exchange swap, cap, floor, collar, option, forward, cross right or obligation, or combination thereof or similar transaction, with respect to interest rate, foreign exchange, currency, commodity, credit or equity risk including, without limitation, Borrower's liability to Lender pursuant to that certain ISDA Confirmation letter with a trade date of May 6, 2016 and July 13, 2018 and any related ISDA Master Agreement either executed or incorporated therein by reference (collectively, the "Hedging Agreements"). The security interest granted hereby in the Collateral secures payment of such indebtedness. The words "Related Documents" as used in this Agreement, include, without limitation, all Hedging Agreements.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:
Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be





effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.
Attorneys' Fees; Expenses. Borrower agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.
Governing Law. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Iowa without regard to its conflicts of law provisions. This Agreement has been accepted by Lender in the State of Iowa.
Choice of Venue. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Polk County, State of Iowa.
No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any of Borrower's or any Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.
Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers.
Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.
Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used in this Agreement shall include all of Borrower's subsidiaries and affiliates. Notwithstanding the foregoing however, under no





circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower's subsidiaries or affiliates.
Successors and Assigns. All covenants and agreements by or on behalf of Borrower contained in this Agreement or any Related Documents shall bind Borrower's successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower's rights under this Agreement or any interest therein, without the prior written consent of Lender.
Survival of Representations and Warranties. Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.
Time is of the Essence. Time is of the essence in the performance of this Agreement.
Waive Jury. All parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party.
DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement:
Advance. The word "Advance" means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower's behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement.
Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time.
Borrower. The word "Borrower" means Heartland Financial USA, Inc. and includes all co-signers and co-makers signing the Note and all their successors and assigns.
Collateral. The word "Collateral" means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise.
Environmental Laws. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.
Event of Default. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement.
GAAP. The word "GAAP" means generally accepted accounting principles.
Grantor. The word "Grantor" means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest.
Guarantor. The word "Guarantor'' means any guarantor, surety, or accommodation party of any or all of the Loan.
Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.
Hazardous Substances. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and





all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.
Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.The Indebtedness constitutes "Senior Indebtedness" as such term is defined in various indentures or other debt securities, Instruments or documents issued on behalf of the Borrower (collectively the "Subordinated Debt Documents") pertaining to the issuance of various subordinated promissory notes, debentures or other debt securities (collectively the "Subordinated Debt") issued in connection therewith. As Senior Indebtedness, the Loan has priority in payment and in the liquidation and distribution of Borrower's assets over, among other creditors, all holders of the Subordinated Debt Documents.
Lender. The word "Lender" means Bankers Trust Company, its successors and assigns.
Loan. The word "Loan" means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.
Note. The word "Note" means the Note dated June 14, 2019 and executed by Heartland Financial USA, Inc. in the principal amount of $30,000,000.00; Note dated June 14, 2019 and executed by Heartland Financial USA, Inc. in the principal of amount of $14,833,333.21; Note dated May 10, 2016, and executed by Heartland Financial USA, Inc. in the principal of amount of $40,000,000.00 and Note dated July 24, 2018 and executed by Heartland Financial USA, Inc. in the principal of amount of $30,000,000.00, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.
Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan.
Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest.
Security Interest. The words "Security Interest" mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise.






BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS DATED JUNE 14, 2019.

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS BUSINESS LOAN AGREEMENT AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.

BORROWER:


HEARTLAND FINANCIAL USA, INC.
By:
/s/ Bryan R. McKeag
 
Bryan R. McKeag, CFO of Heartland Financial USA, Inc.

LENDER:


BANKERS TRUST COMPANY
By:
/s/ Ben A. Miller
 
Ben A. Miller, Asst. Vice President






Exhibit 10.2

PROMISSORY NOTE
Principal
$30,000,000.00
Loan Date
06-14-2019
Maturity
06-14-2020
Loan No
55120-0201
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688
Principal Amount: $30,000,000.00
Date of Note: June 14, 2019
PROMISE TO PAY. Heartland Financial USA, Inc. ("Borrower") promises to pay to Bankers Trust Company ("lender"), or order, in lawful money of the United States of America, the principal amount of Thirty Million & 00/100 Dollars ($30,000,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on June 14, 2020. In addition, Borrower will pay regular quarterly payments of all accrued unpaid interest due as of each payment date, beginning September 30, 2019, with all subsequent interest payments to be due on the last day of each quarter after that. Unless otherwise agreed or required by applicable law, payments will be applied first t o any unpaid collection costs; then to any late charges; then to any accrued unpaid interest; and then to principal. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing.
VARIABLE INTEREST RATE. The interest rate on this loan is subject to change from time to time based on changes in an independent index which is the 30-Day London Interbank Offered Rate (LIBOR) as published in the Wall Street Journal which may or may not necessarily reflect the rate Lender charges to its other customers which may be lower (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each first day of the month. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 2.483% per annum. Interest on the unpaid principal balance of this Note will be calculated as described in the "INTEREST CALCULATION METHOD" paragraph using a rate of 2.750 percentage points over the Index, resulting in an initial rate of 5.233% per annum based on a year of 360 days. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law.
INTEREST CALCULATION METHOD. Interest on this Note is computed on a 365/360 basis; that is, by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance. multiplied by the actual number of days the principal balance is outstanding. All interest payable under this Note is computed using this method.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes " payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Bankers Trust Company, 453 7th Street, P.O. Box 897, Des Moines, lA 50304-0897.
LATE CHARGE. If a payment is 11 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $50.00, whichever is greater.
INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, the interest rate on this Note shall be increased to 21 .000% per annum based on a year of 360 days. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law.
DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note:
Payment Default. Borrower fails to make any payment when due under this Note.
Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.





False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors. any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note.
Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired.
Insecurity. Lender in good faith believes itself insecure.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance under this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount.
ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including without limitation all attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law.
JURY WAIVER. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other.
GOVERNING LAW. This Note will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Iowa without regard to its conflicts of law provisions. This Note has been accepted by Lender in the State of Iowa.
CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Polk County, State of Iowa.
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the debt against any and all such accounts.
COLLATERAL. This loan is unsecured.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either: (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs.
PURPOSE OF LOAN. The specific purpose of this loan is: General Corporate Needs.
LOAN AGREEMENT. This Note is subject to the terms and conditions of a Business Loan Agreement dated June 14, 2019, and as may be amended from time to time.
NON-USE FEE. This Loan is subject to a quarterly Non-Use Fee Rate of 10 basis points. The Borrower agrees to pay to Lender for the Revolving Commitment a non-use fee, for the period from the Loan Date to the Maturity Date, in an amount equal to (i} the Revolving Commitment less (ii) the average daily amount (for the period of measurement} of all Revolving Outstandings, multiplied by the Non-Use Fee Rate in effect from time to time. Such non-use fee shall be payable in arrears on the last day of each calendar quarter and on the Maturity Date for any period then ending for which such non-use fee shall not have previously been paid. The Non-Use Fee shall be computed per the Interest Calculation Method described in the Promissory Note.
PRIOR NOTE. This Note replaces that certain Promissory Note dated June 14, 2018 in the amount of $30,000,000.00 between Borrower and Lender to mature on June 14, 2019.
SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and· upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.
NOTIFY US OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES. Borrower may notify Lender if Lender reports any inaccurate information about Borrower's account(s) to a consumer reporting agency. Borrower's written notice





describing the specific inaccuracy(ies) should be sent to Lender at the following address: Bankers Trust Company 453 7th Street Des Moines, lA 50309.
GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE.
BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.


BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag, CFO of Heartland Financial USA, Inc.






NOTICE OF FINAL AGREEMENT
Principal
$30,000,000.00
Loan Date
06-14-2019
Maturity
06-14-2020
Loan No
55120-0201
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688
 
 
 
 
 
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THE LOAN AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THE WRITTEN LOAN AGREEMENT MAY BE LEGALLY ENFORCED. BORROWER MAY CHANGE THE TERMS OF THE LOAN AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.
 
 
 
 
 
As used in this Notice, the following terms have the following meanings:
 
 
 
 
 
Loan. The term "Loan" means the following described loan: a Variable Rate Nondisclosable Revolving Line of Credit Loan to a Corporation for $30,000,000.00 due on June 14, 2020. This is an unsecured renewal of the following described indebtedness: This Note replaces that certain Promissory Note dated June 14, 2018 in the amount of $30,000,000.00 between Borrower and Lender to mature on June 14, 2019.
 
 
 
 
 
Loan Agreement. The term "Loan Agreement" means one or more promises, promissory notes, agreements, undertakings, security agreements, deeds of trust or other documents, or commitments, or any combination of those actions or documents, relating to the Loan, including without limitation the following:
 
LOAN DOCUMENTS
 
 
 
 
 
ŸBusiness Loan Agreement
ŸPromissory Note
 
 
ŸDisbursement Request and Authorization
ŸNotice of Final Agreement
 
Parties. The term "Parties" means Bankers Trust Company and any and all entities or individuals who are obligated to repay the loan or have pledged property as security for the Loan, including without limitation the following:
 
 
 
 
Borrower:
Heartland Financial USA, Inc.
 
 

Each Party who signs below, other than Bankers Trust Company, acknowledges, represents, and warrants to Bankers Trust Company that it has received, read and understood this Notice of Final Agreement. This Notice is dated June 14, 2019.

BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag, CFO of Heartland Financial USA, Inc.
LENDER:

BANKERS TRUST COMPANY
By: /s/ Ben A. Miller
Ben A. Miller, Assistant Vice President





DISBURSEMENT REQUEST AND AUTHRORIZATION
Principal
$30,000,000.00
Loan Date
06-14-2019
Maturity
06-14-2020
Loan No
55120-0201
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688

LOAN TYPE. This is a Variable Rate Nondisclosable Revolving line of Credit Loan to a Corporation for $30,000,000.00 due on June 14, 2020. This is an unsecured renewal of the following described indebtedness: The Note replaces that certain Promissory Note dated June 14. 2018 in the amount of $30,000,000.00 to mature on June 14, 2019.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
¨
Personal, Family, or Household Purposes or Personal Investment.
x
Business (Including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan is: General Corporate Needs.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Lender's conditions for making the loan have been satisfied. Please disburse the loan proceeds of $30,000,000.00 as follows:
Undisbursed Funds:
 
$
30,000,000.00

 
 
Note Principal:
 
$
30,000,000.00


AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender automatically to deduct from Borrower's Checking account, numbered 714125, the amount of any loan payment. If the funds in the account are insufficient to cover any payment, Lender shall not be obligated to advance funds to cover the payment. At any time and for any reason, Borrower or Lender may voluntarily terminate Automatic Payments.
BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS DISBURSEMENT REQUEST AND AUTHORIZATION AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.

FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS AUTHORIZATION IS DATED JUNE 14, 2019.


BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag EVP, CFO of Heartland Financial USA, Inc.





CHANGE IN TERMS AGREEMENT
Principal
$30,000,000.00
Loan Date
07-15-2019
Maturity
06-14-2020
Loan No
55120-0201
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688

Principal Amount:
$
30,000,000

 
Date of Agreement:
July 15 ,2019
DESCRIPTION OPF EXISTING INDEBTEDNESS. A Promissory Note dated June14, 2019 in the amount of $30,000,000.00 to mature on June 14, 2020.
DESCRIPTION OF CHANGE IN TERMS.
VARIABLE INTEREST RATE. Borrower acknowledges a change in the Variable Interest Rate as outlined in the Variable Interest Rate Paragraph below.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on June 14, 2020. In addition, Borrower will pay regular quarterly payments of all accrued unpaid interest due as of each payment date, beginning September 30, 2019, with all subsequent interest payments to be due on the last day of each quarter after that.
VARIABLE INTEREST RATE. The interest rate on this loan is subject to change from time to time based on changes in an independent index which is the 30-Day London Interbank Offered Rate (LIBOR) as published in the Wall Street Journal which may or may not necessarily reflect the rate Lender charges to its other customers which may be lower (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each first day of the month. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 2.388% per annum. Interest on the unpaid principal balance of this Note will be calculated as described in the "INTEREST CALCULATION METHOD" paragraph using a rate of 2.250 percentage points over the Index, resulting in an initial rate of 4.638% per annum based on a year of 360 days. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law.
INTEREST CALCULATION METHOD. Interest on this Note is computed on a 365/360 basis; that is, by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance. multiplied by the actual number of days the principal balance is outstanding. All interest payable under this Note is computed using this method.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, not obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the Intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accomodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions.

IMPORTANT. READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN AGREEMENT MAY BE LEGALLY ENFORCED. THE PARTIES MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.

PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THIS AGREEMENT.

BORROWER ACKNOWLEDGES RECIEPT OF A COMPLETED COPY OF THIS CHANGE IN TERMS AGREEMENT AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.






BORROWER:
HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag, CFO of Heartland Financial USA, Inc.


LENDER:

BANKERS TRUST COMPANY
By: /s/ Ben A. Miller
Ben A. Miller, Asst. Vice President





EXHIBIT 10.3

PROMISSORY NOTE
Principal
$14,833,333.21
Loan Date
06-14-2019
Maturity
06-14-2020
Loan No
55120-0301
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688
Principal Amount: $14,833,333.21
Date of Note: June 14, 2019
PROMISE TO PAY. Heartland Financial USA, Inc. ("Borrower") promises to pay to Bankers Trust Company ("lender"), or order, in lawful money of the United States of America, the principal amount of Fourteen Million Eight Hundred Thirty-Three Thousand Three Hundred Thirty-Three & 21/100 Dollars ($14,833,333.21) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on June 14, 2020. In addition, Borrower will pay regular quarterly payments of all accrued unpaid interest due as of each payment date, beginning September 30, 2019, with all subsequent interest payments to be due on the last day of each quarter after that. Unless otherwise agreed or required by applicable law, payments will be applied first t o any unpaid collection costs; then to any late charges; then to any accrued unpaid interest; and then to principal. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing.
VARIABLE INTEREST RATE. The interest rate on this loan is subject to change from time to time based on changes in an independent index which is the 30-Day London Interbank Offered Rate (LIBOR) as published in the Wall Street Journal which may or may not necessarily reflect the rate Lender charges to its other customers which may be lower (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each first day of the month. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 2.483% per annum. Interest on the unpaid principal balance of this Note will be calculated as described in the "INTEREST CALCULATION METHOD" paragraph using a rate of 2.750 percentage points over the Index, resulting in an initial rate of 5.233% per annum based on a year of 360 days. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law.
INTEREST CALCULATION METHOD. Interest on this Note is computed on a 365/360 basis; that is, by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance. multiplied by the actual number of days the principal balance is outstanding. All interest payable under this Note is computed using this method.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes " payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Bankers Trust Company, 453 7th Street, P.O. Box 897, Des Moines, lA 50304-0897.
LATE CHARGE. If a payment is 11 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $50.00, whichever is greater.
INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, the interest rate on this Note shall be increased to 21.000% per annum based on a year of 360 days. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law.
DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note:
Payment Default. Borrower fails to make any payment when due under this Note.
Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.





False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors. any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note.
Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired.
Insecurity. Lender in good faith believes itself insecure.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance under this Note and all accrued unpaid interest
immediately due, and then Borrower will pay that amount.
ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including without limitation all attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law.
JURY WAIVER. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other.
GOVERNING LAW. This Note will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Iowa without regard to its conflicts of law provisions. This Note has been accepted by Lender in the State of Iowa.
CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Polk County, State of Iowa.
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the debt against any and all such accounts.
COLLATERAL. This loan is unsecured.
LINE OF CREDIT. This Note evidences a straight line of credit. Once the total amount of principal has been advanced, Borrower is not entitled to further loan advances. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either: (A) advanced in accordance with the instructions of an authorized person or (B) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (A) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (B) Borrower or any guarantor ceases doing business or is insolvent; (C) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (D) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (E) Lender in good faith believes itself insecure.
PURPOSE OF LOAN. The specific purpose of this loan is: Acquisitions.
LOAN AGREEMENT. This Note is subject to the terms and conditions of a Business Loan Agreement dated June 14, 2019, and as may be amended from time to time.
NON-USE FEE. This Loan is subject to a quarterly Non-Use Fee Rate of 10 basis points. The Borrower agrees to pay to Lender for the Revolving Commitment a non-use fee, for the period from the Loan Date to the Maturity Date, in an amount equal to (i} the Revolving Commitment less (ii)the average daily amount (for the period of measurement} of all Revolving Outstandings, multiplied by the Non-Use Fee Rate in effect from time to time. Such non-use fee shall be payable in arrears on the last day of each calendar quaarter and on the





Maturity Date for any period then ending for which such non-use fee shall not have previously been paid. The Non-Use Fee shall be computed per the Interest Calculation Method described in the Promissory Note.
PRIOR NOTE. This Note replaces that certain Promissory Note dated June 14, 2018 in the amount of $38,333,333.25 between Borrower and Lender to mature on June 14, 2019.
SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and· upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.
NOTIFY US OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES. Borrower may notify Lender if Lender reports any inaccurate information about Borrower's account(s) to a consumer reporting agency. Borrower's written notice describing the specific inaccuracy(ies) should be sent to Lender at the following address: Bankers Trust Company 453 7th Street Des Moines, lA 50309.
GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time} this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE.
BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.


BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag EVP, CFO of Heartland Financial USA, Inc.






NOTICE OF FINAL AGREEMENT
Principal
$14,833,333.21
Loan Date
06-14-2019
Maturity
06-14-2020
Loan No
55120-0301
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688
 
 
 
 
 
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THE LOAN AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THE WRITTEN LOAN AGREEMENT MAY BE LEGALLY ENFORCED. BORROWER MAY CHANGE THE TERMS OF THE LOAN AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.
 
 
 
 
 
As used in this Notice, the following terms have the following meanings:
 
 
 
 
 
Loan. The term "Loan" means the following described loan: a Variable Rate Nondisclosable Draw Down Line of Credit Loan to a Corporation for $14,833,333.21 due on June 14, 2020. This is an unsecured renewal of the following described indebtedness: This Note replaces that certain Promissory Note dated June 14, 2018 in the amount of $38,333,333.25 between Borrower and Lender to mature on June 14, 2019.
 
 
 
 
 
Loan Agreement. The term "Loan Agreement" means one or more promises, promissory notes, agreements, undertakings, security agreements, deeds of trust or other documents, or commitments, or any combination of those actions or documents, relating to the Loan, including without limitation the following:
 
LOAN DOCUMENTS
 
 
 
 
 
ŸPromissory Note
 
Ÿ Disbursement Request and Authorization
ŸNotice of Final Agreement
Parties. The term "Parties" means Bankers Trust Company and any and all entities or individuals who are obligated to repay the loan or have pledged property as security for the Loan, including without limitation the following:
 
 
 
 
Borrower:
Heartland Financial USA, Inc.
 
 

Each Party who signs below, other than Bankers Trust Company, acknowledges, represents, and warrants to Bankers Trust Company that it has received, read and understood this Notice of Final Agreement. This Notice is dated June 14, 2019.

BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag EVP, CFO of Heartland Financial USA, Inc.
LENDER:

BANKERS TRUST COMPANY
By: /s/ Ben A. Miller
Ben A. Miller, Assistant Vice President





DISBURSEMENT REQUEST AND AUTHRORIZATION
Principal
$14,833,333.21
Loan Date
06-14-2019
Maturity
06-14-2020
Loan No
55120-0301
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688

LOAN TYPE. This is a Variable Rate Nondisclosable Draw Down Line of Credit Loan to a Corporation for $14,833,333.21 due on June 14, 2020. This is an unsecured renewal of the following described indebtedness: The Note replaces that certain Promissory Note dated June 14. 2018 in the amount of $38,333,333.25 to mature on June 14, 2019.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
¨
Personal, Family, or Household Purposes or Personal Investment.
x
Business (Including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan is: Acquisitions.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Lender's conditions for making the loan have been satisfied. Please disburse the loan proceeds of $14,833,333.21 as follows:
Undisbursed Funds:
 
$
14,833,333.21

 
 
Note Principal:
 
$
14,833,333.21


AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender automatically to deduct from Borrower's Checking account, numbered 714125, the amount of any loan payment. If the funds in the account are insufficient to cover any payment, Lender shall not be obligated to advance funds to cover the payment. At any time and for any reason, Borrower or Lender may voluntarily terminate Automatic Payments.
BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS DISBURSEMENT REQUEST AND AUTHORIZATION AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.

FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS AUTHORIZATION IS DATED JUNE 14, 2019.


BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag EVP, CFO of Heartland Financial USA, Inc.





CHANGE IN TERMS AGREEMENT
Principal
14,833,333.21
Loan Date
07-15-2019
Maturity
06-14-2020
Loan No
55120-0301
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688

Principal Amount:
$14,833,333.21
 
Date of Agreement:
July 15 ,2019
DESCRIPTION OPF EXISTING INDEBTEDNESS. A Promissory Note dated June14, 2019 in the amount of $14,833,333.21 to mature on June 14, 2020.
DESCRIPTION OF CHANGE IN TERMS.
VARIABLE INTEREST RATE. Borrower acknowledges a change in the Variable Interest Rate as outlined in the Variable Interest Rate Paragraph below.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on June 14, 2020. In addition, Borrower will pay regular quarterly payments of all accrued unpaid interest due as of each payment date, beginning September 30, 2019, with all subsequent interest payments to be due on the last day of each quarter after that.
VARIABLE INTEREST RATE. The interest rate on this loan is subject to change from time to time based on changes in an independent index which is the 30-Day London Interbank Offered Rate (LIBOR) as published in the Wall Street Journal which may or may not necessarily reflect the rate Lender charges to its other customers which may be lower (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each first day of the month. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 2.388% per annum. Interest on the unpaid principal balance of this Note will be calculated as described in the "INTEREST CALCULATION METHOD" paragraph using a rate of 2.250 percentage points over the Index, resulting in an initial rate of 4.638% per annum based on a year of 360 days. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law.
INTEREST CALCULATION METHOD. Interest on this Note is computed on a 365/360 basis; that is, by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance. multiplied by the actual number of days the principal balance is outstanding. All interest payable under this Note is computed using this method.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, not obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the Intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accomodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions.

IMPORTANT. READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN AGREEMENT MAY BE LEGALLY ENFORCED. THE PARTIES MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.

PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THIS AGREEMENT.

BORROWER ACKNOWLEDGES RECIEPT OF A COMPLETED COPY OF THIS CHANGE IN TERMS AGREEMENT AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.






BORROWER:
HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag, CFO of Heartland Financial USA, Inc.


LENDER:

BANKERS TRUST COMPANY
By: /s/ Ben A. Miller
Ben A. Miller, Asst. Vice President





Exhibit 10.4
PROMISSORY NOTE
Principal
$40,000,000.00
Loan Date
05-10-2016
Maturity
05-10-2021
Loan No
55120-9002
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800)362-1688
Principal Amount: $40,000,000.00
Date of Note: May 10, 2016
PROMISE TO PAY. Heartland Financial USA, Inc. ("Borrower") promises to pay to Bankers Trust Company ("lender"), or order, in lawful money of the United States of America, the principal amount of Forty Million & 00/100 Dollars ($40,000,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance from May 10, 2016, until paid in full.
PAYMENT. Subject to any payment changes resulting from changes in the Index, Borrower will pay this loan in accordance wit the following payment schedule:
Borrower will pay this loan in 59 monthly payments of a principal amount due as indicated by the amortization schedule attached as Attachment I, plus accrued interest beginning June 10, 2016 and each month after that. Borrower's final payment will be due on May 10, 2021 and will be for all principal and all accrued interest not yet paid.
Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs; then to any late charges; then to any accrued unpaid interest; and then to principal. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the LIBOR Rate which means the London Inter-Bank Offered Rate for United States Dollars for a term of one month which appears on Reuters Screen LIBOR01 Page (or any generally recognized successor method or means of publication) as of 11:00 a.m., London time, two (2) London business days before the relevant Reset Date (the "Index"). Such adjustments shall be determined and become effective on the 10th day of each month (the "Reset Date"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each first day of the month. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 0.438% per annum. Interest on the unpaid principal balance of this Note will be calculated as described in the "INTEREST CALCULATION METHOD" paragraph using a rate o 2.500 percentage points over the Index, resulting in an initial rate of 2.938% per annum based on a year of 360 days. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (A) increase Borrower's payments to ensure Borrower's loan will pay off by its original final maturity date, (B) increase Borrower's payments to cover accruing interest, (C) increase the number of Borrower's payments, and (D) continue Borrower's payments at the same amount and increase the Borrower's final payment.
INTEREST CALCULATION METHOD. Interest on this Note is computed on a 365/360 basis; that is, by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. All interest payable under this Note is computed using this method.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, early payments will reduce the principal balance due and may result in Borrower's making fewer payments. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Bankers Trust Company, 453 7th Street, P.O. Box 897, Des Moines, lA 50304-0897.
LATE CHARGE. If a payment is 11 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $50.00, whichever is greater.
INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, the interest rate on this Note shall be increased to 21.000% per annum based on a year of 360 days. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law.





DEFAULT. Each of the following shall constitute an event of default (“Event of Default”) under this Note:
Payment Default. Borrower fails to make any payment when due under this Note.
Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.
False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note.
Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired.
Insecurity. Lender in good faith believe itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance under this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount.
ATTORNEY'S FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including without limitation all attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law.
JURY WAIVER. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding. or counterclaim brought by either Lender or Borrower against the other.
GOVERNING LAW. This Note will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Iowa without regard to its conflicts of law provisions. This Note has been accepted by Lender in the State of Iowa.
CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Polk County, State of Iowa.






Loan No: 55120-9002
 
PROMISSORY NOTE
(Continued)
 
Page 2
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the debt against any and all such accounts.
COLLATERAL. This loan is unsecured.
PURPOSE OF LOAN. The specific purpose of this loan is: M&A
LOAN AGREEMENT. This credit is subject to the terms and conditions of a Business Loan Agreement dated June 14, 2013, and as may be amended from time to time.
SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.
NOTIFY US OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES. Borrower may notify Lender if Lender reports any inaccurate information about Borrower's account(s) to a consumer reporting agency. Borrower's written notice describing the specific inaccuracy(ies) should be sent to Lender at the following address: Bankers Trust Company 453 7th Street Des Moines, IA 50309.
GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE.
BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.

BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag EVP, CFO of Heartland Financial USA, Inc.









NOTICE OF FINAL AGREEMENT
Principal
$40,000,000.00
Loan Date
05-10-2016
Maturity
05-10-2021
Loan No
55120-9002
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688
 
 
 
 
 
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THE LOAN AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THE WRITTEN LOAN AGREEMENT MAY BE LEGALLY ENFORCED. BORROWER MAY CHANGE THE TERMS OF THE LOAN AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.
 
 
 
 
 
As used in this Notice, the following terms have the following meanings:
 
 
 
 
 
Loan. The term "Loan: means the following described loan: a Variable Rate Nondisclosable Loan to a Corporation for $40,000,000.00.
 
 
 
 
 
Loan Agreement. The term "Loan Agreement" means one or more promises, promissory notes, agreements, undertakings, security agreements, deeds of trust or other documents, or commitments, or any combination of those actions or documents, relating to the Loan, including without limitation the following:
 
LOAN DOCUMENTS
 
 
 
 
 
ŸPromissory Note
 
 
Ÿ THIRD AMENDMENT TO BUSINESS LOAN AGREEMENT DATED JUNE 14, 2013 - THIRD AMENDMENT TO BUSINESS LOAN AGREEMENT DATED JUNE 14, 2013
ŸDisbursement Request and Authorization
 
ŸNotice of Final Agreement
 
Parties. The term "Parties" means Bankers Trust Company and any and all entities or individuals who are obligated to repay the loan or have pledged property as security for the Loan, including without limitation the following:
 
 
 
 
Borrower:
Heartland Financial USA, Inc.
 
 

Each Party who signs below, other than Bankers Trust Company, acknowledges, represents, and warrants to Bankers Trust Company that it has received, read and understood this Notice of Final Agreement. This Notice is dated May 10, 2016.

BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag EVP, CFO of Heartland Financial USA, Inc.
LENDER:

BANKERS TRUST COMPANY
By: /s/ Ben A. Miller
Ben A. Miller, Loan Officer






CHANGE IN TERMS AGREEMENT
Principal
$27,666,666.79
Loan Date
06-14-2019
Maturity
05-10-2021
Loan No
55120-9002
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688

Principal Amount:
$
27,666,666.79

 
Date of Agreement:
June 14, 2019
DESCRIPTION OPF EXISTING INDEBTEDNESS. A Promissory Note dated May 10, 2016 in the amount of $40,000,000.00 to mature on May 10, 2021.
DESCRIPTION OF CHANGE IN TERMS.
Loan Agreement. This requirement will be deleted in its entirety and replaced with the following:
Loan Agreement. This Note is now subject to the terms and conditions of a Business Loan Agreement dated June 14, 2019, and as may be amended from time to time.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, not obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the Intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accomodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions.

IMPORTANT. READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN AGREEMENT MAY BE LEGALLY ENFORCED. THE PARTIES MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.

PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THIS AGREEMENT.

BORROWER ACKNOWLEDGES RECIEPT OF A COMPLETED COPY OF THIS CHANGE IN TERMS AGREEMENT AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.

BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag, CFO of Heartland Financial USA, Inc.
LENDER:

BANKERS TRUST COMPANY
By: /s/ Ben A. Miller
Ben A. Miller, Asst. Vice President




Exhibit 10.5
PROMISSORY NOTE
Principal
$30,000,000.00
Loan Date
07-24-2018
Maturity
07-24-2028
Loan No
55120-9003
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688
Principal Amount: $30,000,000.00
Date of Note: July 28, 2018
PROMISE TO PAY. Heartland Financial USA, Inc. ("Borrower") promises to pay to Bankers Trust Company ("lender"), or order, in lawful money of the United States of America, the principal amount of Thirty Million & 00/100 Dollars ($30,000,000.00), together with interest on the unpaid outstanding principal balance from July 24, 2018, until paid in full.
PAYMENT. Subject to any payment changes resulting from changes in the Index, Borrower will pay this loan in accordance with the following payment schedule:
Borrower will pay this loan in 119 monthly payments of a principal amount due as indicated by the amortization schedule attached as Attachment I, plus accrued interest beginning August 24, 2018 and each month after that. Borrower's final payment will be due on July 24, 2028 and will be for all principal and all accrued interest not yet paid.
Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs; then to any late charges; then to any accrued unpaid interest; and then to principal. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an independent index which is the LIBOR Rate which means the London Inter-Bank Offered Rate for United States Dollars for a term of one month which appears on Reuters Screen LIBOR01 Page (or any generally recognized successor method or means of publication) as of 11:00 a.m., London time, two (2) London business days before the relevant Reset Date (the "Index"). Such adjustments shall be determined and become effective on the 10th day of each month (the "Reset Date"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each month. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 2.090% per annum. Interest on the unpaid principal balance of this Note will be calculated as described in the "INTEREST CALCULATION METHOD" paragraph using a rate o 2.500 percentage points over the Index, resulting in an initial rate of 4.590% per annum based on a year of 360 days. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (A) increase Borrower's payments to ensure Borrower's loan will pay off by its original final maturity date, (B) increase Borrower's payments to cover accruing interest, (C) increase the number of Borrower's payments, and (D) continue Borrower's payments at the same amount and increase the Borrower's final payment.
INTEREST CALCULATION METHOD. Interest on this Note is computed on a 365/360 basis; that is, by applying the ratio of the interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. All interest payable under this Note is computed using this method.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, early payments will reduce the principal balance due and may result in Borrower's making fewer payments. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Bankers Trust Company, 453 7th Street, P.O. Box 897, Des Moines, lA 50304-0897.
LATE CHARGE. If a payment is 11 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment or $50.00, whichever is greater.
INTEREST AFTER DEFAULT. Upon default, including failure to pay upon final maturity, the interest rate on this Note shall be increased to 21.000% per annum based on a year of 360 days. However, in no event will the interest rate exceed the maximum interest rate limitations under applicable law.





DEFAULT. Each of the following shall constitute an event of default (“Event of Default”) under this Note:
Payment Default. Borrower fails to make any payment when due under this Note.
Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.
False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note.
Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired.
Insecurity. Lender in good faith believe itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance under this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount.
ATTORNEY'S FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including without limitation all attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law.
JURY WAIVER. Lender and Borrower hereby waive the right to any jury trial in any action, proceeding. or counterclaim brought by either Lender or Borrower against the other.
GOVERNING LAW. This Note will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of Iowa without regard to its conflicts of law provisions. This Note has been accepted by Lender in the State of Iowa.
CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Polk County, State of Iowa.
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower's accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the debt against any and all such accounts.
COLLATERAL. This loan is unsecured.
PURPOSE OF LOAN. The specific purpose of this loan is: Acquisitions.
LOAN AGREEMENT. This credit is subject to the terms and conditions of a Business Loan Agreement dated June 14, 2013, and as may be amended from time to time.
SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.
NOTIFY US OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES. Borrower may notify Lender if Lender reports any inaccurate information about Borrower's account(s) to a consumer reporting agency. Borrower's written notice describing the specific inaccuracy(ies) should be sent to Lender at the following address: Bankers Trust Company 453 7th Street Des Moines, IA 50309.
GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor,





accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE.
BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.

BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag, CFO of Heartland Financial USA, Inc.









DISBURSEMENT REQUEST AND AUTHRORIZATION
Principal
$30,000,000.00
Loan Date
07-24-2018
Maturity
07-24-2028
Loan No
55120-9003
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688

LOAN TYPE. This is a Variable Rate Nondisclosable Loan to a Corporation for $30,000,000.00.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
¨
Personal, Family, or Household Purposes or Personal Investment.
x
Business (Including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan is: Acquisitions.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be disbursed until all of Lender's conditions for making the loan have been satisfied. Please disburse the loan proceeds of $30,000,000.00 as follows:
Other Disbursements:
 
$
30,000,000.00

$30,000,000.00 to Borrower
 
 
 
 
Note Principal:
 
$
30,000,000.00


AUTOMATIC PAYMENTS. Borrower hereby authorizes Lender automatically to deduct from Borrower's Checking account, numbered 714125, the amount of any loan payment. If the funds in the account are insufficient to cover any payment, Lender shall not be obligated to advance funds to cover the payment. At any time and for any reason, Borrower or Lender may voluntarily terminate Automatic Payments.
BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS DISBURSEMENT REQUEST AND AUTHORIZATION AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.

FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS AUTHORIZATION IS DATED JULY 24, 2018.


BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag, CFO of Heartland Financial USA, Inc.





NOTICE OF FINAL AGREEMENT
Principal
$30,000,000.00
Loan Date
07-24-2018
Maturity
07-24-2028
Loan No
55120-9003
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688
 
 
 
 
 
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THE LOAN AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THE WRITTEN LOAN AGREEMENT MAY BE LEGALLY ENFORCED. BORROWER MAY CHANGE THE TERMS OF THE LOAN AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.
 
 
 
 
 
As used in this Notice, the following terms have the following meanings:
 
 
 
 
 
Loan. The term "Loan: means the following described loan: a Variable Rate Nondisclosable Loan to a Corporation for $30,000,000.00.
 
 
 
 
 
Loan Agreement. The term "Loan Agreement" means one or more promises, promissory notes, agreements, undertakings, security agreements, deeds of trust or other documents, or commitments, or any combination of those actions or documents, relating to the Loan, including without limitation the following:
 
LOAN DOCUMENTS
 
 
 
 
 
ŸPromissory Note
 
 
 
ŸDisbursement Request and Authorization
 
ŸNotice of Final Agreement
 
Parties. The term "Parties" means Bankers Trust Company and any and all entities or individuals who are obligated to repay the loan or have pledged property as security for the Loan, including without limitation the following:
 
 
 
 
Borrower:
Heartland Financial USA, Inc.
 
 

Each Party who signs below, other than Bankers Trust Company, acknowledges, represents, and warrants to Bankers Trust Company that it has received, read and understood this Notice of Final Agreement. This Notice is dated July 24, 2018.

BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag, CFO of Heartland Financial USA, Inc.
LENDER:

BANKERS TRUST COMPANY
By: /s/ Ben A. Miller
Ben A. Miller, Asst. Vice President






CHANGE IN TERMS AGREEMENT
Principal
$27,500,000.00
Loan Date
06-14-2019
Maturity
07-24-2028
Loan No
55120-9003
Call / Coll
9A00 / AA
Account
00000160370
Officer
00229
Initials

References in the boxes above are for Lender's use only and do not limit the applicability of this document to any particular loan or item.
Any item above containing “***” has been omitted due to text length limitations.
Borrower:
Heartland Financial USA, Inc.
 
Lender:
Bankers Trust Company
 
1398 Central Avenue
 
 
453 7th Street
 
Dubuque, IA 52001
 
 
P.O. Box 897
 
 
 
 
Des Moines, IA 50304-0897
 
 
 
 
(800) 362-1688

Principal Amount:
$
27,500,000

 
Date of Agreement:
June 14, 2019
DESCRIPTION OPF EXISTING INDEBTEDNESS. A Promissory Note dated July 24, 2018 in the amount of $30,000,000.00 to mature on July 24, 2028.
DESCRIPTION OF CHANGE IN TERMS.
Loan Agreement. This requirement will be deleted in its entirety and replaced with the following:
Loan Agreement. This Note is now subject to the terms and conditions of a Business Loan Agreement dated June 14, 2019, and as may be amended from time to time.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, not obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the Intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accomodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions.

IMPORTANT. READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN AGREEMENT MAY BE LEGALLY ENFORCED. THE PARTIES MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT.

PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THIS AGREEMENT.

BORROWER ACKNOWLEDGES RECIEPT OF A COMPLETED COPY OF THIS CHANGE IN TERMS AGREEMENT AND ALL OTHER DOCUMENTS RELATING TO THIS DEBT.

BORROWER:

HEARTLAND FINANCIAL USA, INC.
By: /s/ Bryan R. McKeag
Bryan R. McKeag, CFO of Heartland Financial USA, Inc.
LENDER:

BANKERS TRUST COMPANY
By: /s/ Ben A. Miller
Ben A. Miller, Asst. Vice President





EXHIBIT 31.1

 
I, Bruce K. Lee, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Heartland Financial USA, Inc.;
 
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
 
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) for the registrant and have:
 
 
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
 
 
 
 
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting, and;
 
 
 
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
 
 
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
 
 
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 

Date:
August 7, 2019
 
 
/s/ Bruce K. Lee
Bruce K. Lee
President and Chief Executive Officer




EXHIBIT 31.2

I, Bryan R. McKeag, certify that:
 
1.
I have reviewed this quarterly report on Form 10-Q of Heartland Financial USA, Inc.;
 
 
 
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
 
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
 
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) for the registrant and have:
 
 
 
 
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
 
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
 
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
 
 
 
 
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting, and;
 
 
 
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
 
 
 
 
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
 
 
 
 
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date:
August 7, 2019
 
 
/s/ Bryan R. McKeag
Bryan R. McKeag
Executive Vice President
Chief Financial Officer




EXHIBIT 32.1


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Heartland Financial USA, Inc. (the “Company”) on Form 10-Q for the quarter ending June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report), I, Bruce K. Lee, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



/s/ Bruce K. Lee
Bruce K. Lee
President and Chief Executive Officer
 
 
Date:
August 7, 2019
                 




EXHIBIT 32.2


CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Heartland Financial USA, Inc. (the “Company”) on Form 10-Q for the quarter ending June 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report), I, Bryan R. McKeag, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Bryan R. McKeag
Bryan R. McKeag
Executive Vice President
Chief Financial Officer
 
 
Date:
August 7, 2019