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Published: 2023-08-04 00:00:00 ET

<<< go to HTLFP company page

htlf-20230630

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, 2023


☐			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)

1800 Larimer Street, Suite 1800, Denver, Colorado 80202

(Address of principal executive offices)(Zip Code)

(303) 285-9200

(Registrant's telephone number, including area code)

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


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

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

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

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

Large accelerated filer

☒

Accelerated Filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date: As of August 3, 2023, the Registrant had outstanding 42,650,343 shares of common stock, $1.00 par value per share.

HEARTLAND FINANCIAL USA, INC.

Form 10-Q Quarterly Report

Table of Contents


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

PART I

ITEM 1. FINANCIAL STATEMENTS


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
	June 30, 2023 (Unaudited)		December 31, 2022
ASSETS
Cash and due from banks	$	317,303	$	309,045
Interest bearing deposits with other banks and other short-term investments	82,884		54,042
Cash and cash equivalents	400,187		363,087
Time deposits in other financial institutions	1,490		1,740
Securities:

Carried at fair value (cost of $6,415,588 at June 30, 2023, and $6,788,729 at December 31, 2022)	5,798,041		6,147,144
Held to maturity, net of allowance for credit losses of $0 at both June 30, 2023, and December 31, 2022 (fair value of $806,942 at June 30, 2023, and $776,557 at December 31, 2022)	834,673		829,403
Other investments, at cost	72,291		74,567
Loans held for sale	14,353		5,277
Loans receivable:
Held to maturity	11,717,974		11,428,352

Allowance for credit losses	(111,198)		(109,483)
Loans receivable, net	11,606,776		11,318,869
Premises, furniture and equipment, net	186,679		190,479
Premises, furniture and equipment held for sale	3,741		6,851
Other real estate, net	2,677		8,401
Goodwill	576,005		576,005
Core deposit intangibles and customer relationship intangibles, net	21,651		25,154
Servicing rights, net	—		7,840
Cash surrender value on life insurance	195,793		193,403

Other assets	510,359		496,008
TOTAL ASSETS	$	20,224,716	$	20,244,228
LIABILITIES AND EQUITY
LIABILITIES:
Deposits:
Demand	$	4,897,858	$	5,701,340
Savings	8,772,596		9,994,391
Time	3,993,089		1,817,278
Total deposits	17,663,543		17,513,009

Short-term borrowings	44,364		376,117
Other borrowings	372,403		371,753
Accrued expenses and other liabilities	285,416		248,294
TOTAL LIABILITIES	18,365,726		18,509,173
STOCKHOLDERS' EQUITY:


Preferred stock (par value $1 per share; authorized 188,500 and 6,104 shares at June 30, 2023, and December 31, 2022; none issued or outstanding at both June 30, 2023, and December 31, 2022)	—		—




Series E Fixed-Rate Reset Non-Cumulative Perpetual Preferred Stock (par value $1 per share; 11,500 shares authorized at both June 30, 2023, and December 31, 2022; 11,500 shares issued and outstanding at both June 30, 2023 and December 31, 2022)	110,705		110,705
Common stock (par value $1 per share; 60,000,000 shares authorized at both June 30, 2023, and December 31, 2022; issued 42,644,544 shares at June 30, 2023, and 42,467,394 shares at December 31, 2022)	42,645		42,467
Capital surplus	1,087,358		1,080,964
Retained earnings	1,193,522		1,120,925
Accumulated other comprehensive loss	(575,240)		(620,006)



TOTAL STOCKHOLDERS' EQUITY	1,858,990		1,735,055
TOTAL LIABILITIES AND EQUITY	$	20,224,716	$	20,244,228

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,
	2023		2022		2023		2022
INTEREST INCOME:
Interest and fees on loans	$	168,899	$	108,718	$	322,742	$	211,087
Interest on securities:
Taxable	58,172		38,098		114,148		70,718
Nontaxable	6,378		5,508		12,406		11,710

Interest on interest bearing deposits in other financial institutions	2,051		563		3,182		634
TOTAL INTEREST INCOME	235,500		152,887		452,478		294,149
INTEREST EXPENSE:
Interest on deposits	81,975		6,530		138,873		9,507
Interest on short-term borrowings	848		88		3,270		134
Interest on other borrowings (includes $(63) and $182 of interest (income) expense related to derivatives reclassified from accumulated other comprehensive income (loss) for the three months ended June 30, 2023 and 2022, respectively, and $701 and $363 of interest expense related to derivatives reclassified from accumulated other comprehensive income (loss) for the six months ended June 30, 2023 and 2022, respectively)	5,545		3,808		10,991		7,368
TOTAL INTEREST EXPENSE	88,368		10,426		153,134		17,009
NET INTEREST INCOME	147,132		142,461		299,344		277,140
Provision for credit losses	5,379		3,246		8,453		6,491
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	141,753		139,215		290,891		270,649
NONINTEREST INCOME:
Service charges and fees	19,627		18,066		36,763		33,317
Loan servicing income	411		834		1,125		1,120
Trust fees	5,419		5,679		11,076		11,758
Brokerage and insurance commissions	677		839		1,373		1,708
Capital markets fees	4,037		4,871		6,486		7,910
Securities (losses) gains, net (includes $325 and $2,641 of net security losses reclassified from accumulated other comprehensive income (loss) for the three months ended June 30, 2023 and 2022, respectively, and $1,429 and $650 of net security losses reclassified from accumulated other comprehensive income (loss) for the six months ended June 30, 2023 and 2022, respectively)	(314)		(2,089)		(1,418)		783


Unrealized gain (loss) on equity securities, net	(41)		(121)		152		(404)
Net gains on sale of loans held for sale	1,050		2,901		2,881		6,312
Valuation adjustment on servicing rights	—		—		—		1,658
Income on bank owned life insurance	1,220		523		2,184		1,047
Other noninterest income	407		3,036		1,870		3,899
TOTAL NONINTEREST INCOME	32,493		34,539		62,492		69,108
NONINTEREST EXPENSES:
Salaries and employee benefits	62,099		64,032		124,248		130,206
Occupancy	6,691		7,094		13,900		14,456
Furniture and equipment	3,063		3,033		5,978		6,552
Professional fees	15,194		14,457		27,991		27,997
FDIC insurance assessments	3,035		1,530		6,314		3,146
Advertising	3,052		1,283		5,037		2,838
Core deposit and customer relationship intangibles amortization	1,715		2,083		3,503		4,137
Other real estate and loan collection expenses	348		78		503		273
Gain on sales/valuations of assets, net	(3,372)		(3,230)		(2,257)		(3,184)
Acquisition, integration and restructuring costs	1,892		2,412		3,565		2,988
Partnership investment in tax credit projects	154		737		692		814
Other noninterest expenses	15,575		12,970		31,015		27,053
TOTAL NONINTEREST EXPENSES	109,446		106,479		220,489		217,276
INCOME BEFORE INCOME TAXES	64,800		67,275		132,894		122,481
Income taxes (includes $63 and $667 of income tax benefit reclassified from accumulated other comprehensive income (loss) for the three months ended June 30, 2023 and 2022, respectively, and $535 and $164 of income tax benefit reclassified from accumulated other comprehensive income (loss) for the six months ended June 30, 2023 and 2022, respectively)	15,384		15,402		30,702		27,519
NET INCOME	49,416		51,873		102,192		94,962


Preferred dividends	(2,012)		(2,012)		(4,025)		(4,025)

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	47,404	$	49,861	$	98,167	$	90,937
EARNINGS PER COMMON SHARE - BASIC	$	1.11	$	1.17	$	2.30	$	2.14
EARNINGS PER COMMON SHARE - DILUTED	$	1.11	$	1.17	$	2.30	$	2.14
CASH DIVIDENDS DECLARED PER COMMON SHARE	$	0.30	$	0.27	$	0.60	$	0.54

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,
	2023		2022		2023		2022
NET INCOME	$	49,416	$	51,873	$	102,192	$	94,962
OTHER COMPREHENSIVE INCOME (LOSS)
Changes in available for sale ("AFS") securities:
Net change in unrealized gain (loss) on securities	(43,558)		(263,212)		22,609		(641,902)
Reclassification adjustment for net losses on hedged AFS securities	29,510		—		29,510		—
Reclassification adjustment for net losses realized in net income	325		2,641		1,429		650
Income tax (expense) benefit	3,366		60,429		(14,555)		159,799
Other comprehensive income (loss) on available for sale securities	(10,357)		(200,142)		38,993		(481,453)
Changes in securities held to maturity:

Net amortization of unrealized losses on securities transferred from AFS	2,768		—		5,508		—
Income tax expense	(693)		—		(1,753)		—
Other comprehensive income on held to maturity securities	2,075		—		3,755		—
Change in cash flow hedges:
Net change in unrealized gain on derivatives	—		—		1,952		—
Reclassification adjustment for net losses (gains) on derivatives realized in net income	(63)		182		701		363
Income taxes	24		(37)		(635)		(76)
Other comprehensive income (loss) on cash flow hedges	(39)		145		2,018		287
Other comprehensive income (loss)	(8,321)		(199,997)		44,766		(481,166)
TOTAL COMPREHENSIVE INCOME (LOSS)	$	41,095	$	(148,124)	$	146,958	$	(386,204)

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,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	102,192	$	94,962
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	10,519		12,964
Provision for credit losses	8,453		6,491
Net amortization of premium on securities	14,848		38,332
Securities losses (gains), net	1,418		(783)

Unrealized (gain) loss on equity securities, net	(152)		404
Stock based compensation	6,893		5,090

Loans originated for sale	(86,860)		(180,072)
Proceeds on sales of loans held for sale	80,641		188,317
Net gains on sale of loans held for sale	(2,857)		(5,408)
Increase in accrued interest receivable	(2,135)		(280)
Decrease (increase) in prepaid expenses	2,647		(2,194)
Increase (decrease) in accrued interest payable	30,446		(91)

Capitalization of servicing rights	(24)		(904)
Valuation adjustment on servicing rights	—		(1,658)
Gain on sales/valuations of assets, net	(2,257)		(139)
Net excess tax benefit (expense) from stock based compensation	(75)		129
Other, net	21,028		33,327
NET CASH PROVIDED BY OPERATING ACTIVITIES	184,725		188,487
CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from the sale of securities available for sale	286,738		973,911
Proceeds from the sale of securities held to maturity	—		2,337


Proceeds from the maturity of and principal paydowns on securities available for sale	336,175		565,196
Proceeds from the maturity of and principal paydowns on securities held to maturity	298		1,286
Proceeds from the maturity of time deposits in other financial institutions	250		1,039
Proceeds from the sale, maturity of, redemption of and principal paydowns on other investments	6,761		6,715
Purchase of securities available for sale	(265,959)		(1,788,922)

Purchase of other investments	(4,474)		(8,714)
Net increase in loans	(307,920)		(752,767)
Purchase of bank owned life insurance policies	(206)		(201)
Proceeds from bank owned life insurance policies	—		502
Proceeds from sale of mortgage servicing rights	6,714		—
Capital expenditures	(3,043)		(8,181)

Proceeds from the sale of equipment	1,321		4,264
Net cash expended in divestitures	—		(50,616)
Proceeds on sale of OREO and other repossessed assets	5,077		1,927
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES	$	61,732	$	(1,052,224)


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (Unaudited) (Dollars in thousands)
	Six Months Ended June 30,
	2023		2022
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits	$	(803,482)	$	(392,811)
Net (decrease) increase in savings deposits	(1,221,795)		1,203,729
Net increase in time deposit accounts	2,175,811		61,228


Net decrease in short-term borrowings	(281,753)		(33,848)
Proceeds from short term advances	51,000		141,000
Repayments of short term advances	(101,000)		(141,000)

Repayments of other borrowings	(60)		(168)





Proceeds from issuance of common stock	1,456		1,682
Dividends paid	(29,534)		(26,880)
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES	(209,357)		812,932
Net increase (decrease) in cash and cash equivalents	37,100		(50,805)
Cash and cash equivalents at beginning of year	363,087		435,599
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	400,187	$	384,794
Supplemental disclosures:
Cash paid for income/franchise taxes	$	40,303	$	17,457
Cash paid for interest	122,688		17,100
Loans transferred to OREO	239		4,684
Transfer of premises from premises, furniture and equipment, net, to premises, furniture and equipment held for sale	3,741		4,061
Transfer of premises from premises, furniture and equipment held for sale to premises, furniture and equipment, net	5,825		—


Dividends declared, not paid	2,074		2,013
Purchases of securities available for sale, accrued, not settled	—		7,420






See accompanying notes to consolidated financial statements.


HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Unaudited) (Dollars in thousands, except per share data)
	Heartland Financial USA, Inc. Stockholders' Equity
	Preferred Stock		Common Stock		Capital Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Equity
Balance at March 31, 2022	$	110,705	$	42,370	$	1,073,048	$	992,655	$	(286,921)	$	1,931,857
Comprehensive income (loss)							51,873		(199,997)		(148,124)

Cash dividends declared:
Preferred, $175.00 per share							(2,012)				(2,012)
Common, $0.27 per share							(11,440)				(11,440)


Issuance of 69,531 shares of common stock			69		1,332						1,401
Stock based compensation					2,386						2,386
Balance at June 30, 2022	$	110,705	$	42,439	$	1,076,766	$	1,031,076	$	(486,918)	$	1,774,068

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


Comprehensive income (loss)							94,962		(481,166)		(386,204)



Cash dividends declared:
Preferred, $350.00 per share							(4,025)				(4,025)

Common, $0.54 per share							(22,855)				(22,855)




Issuance of 164,175 shares of common stock			164		(280)						(116)
Stock based compensation					5,090						5,090
Balance at June 30, 2022	$	110,705	$	42,439	$	1,076,766	$	1,031,076	$	(486,918)	$	1,774,068

Balance at March 31, 2023	$	110,705	$	42,559	$	1,084,112	$	1,158,948	$	(566,919)	$	1,829,405
Comprehensive income (loss)							49,416		(8,321)		41,095

Cash dividends declared:
Preferred, $175.00 per share							(2,012)				(2,012)
Common, $0.30 per share							(12,830)				(12,830)

Issuance of 85,818 shares of common stock			86		1,072						1,158
Stock based compensation					2,174						2,174
Balance at June 30, 2023	$	110,705	$	42,645	$	1,087,358	$	1,193,522	$	(575,240)	$	1,858,990

Balance at January 1, 2023	$	110,705	$	42,467	$	1,080,964	$	1,120,925	$	(620,006)	$	1,735,055


Comprehensive income (loss)							102,192		44,766		146,958

Cash dividends declared:

Preferred, $350.00 per share							(4,025)				(4,025)
Common, $0.60 per share							(25,570)				(25,570)




Issuance of 177,150 shares of common stock			178		(499)						(321)
Stock based compensation					6,893						6,893
Balance at June 30, 2023	$	110,705	$	42,645	$	1,087,358	$	1,193,522	$	(575,240)	$	1,858,990

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, 2022, included in the Annual Report on Form 10-K of Heartland Financial USA, Inc. ("HTLF") filed with the Securities and Exchange Commission ("SEC") on February 23, 2023. Footnote disclosures to the interim unaudited consolidated financial statements which would substantially duplicate the disclosure contained in the footnotes to the audited consolidated financial statements have been omitted.

The financial information included herein has been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments), that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the interim period ended June 30, 2023, are not necessarily indicative of the results expected for the year ending December 31, 2023.

During the first quarter of 2023, HTLF reclassified swap and loan syndication income (collectively, "capital markets fees") to capital markets fees from other noninterest income on the consolidated statements of income, and all prior periods have been adjusted.

During the second quarter of 2023, HTLF reclassified Federal Deposit Insurance Corporation ("FDIC") insurance premiums to FDIC insurance assessments from professional fees on the consolidated statements of income, and all prior periods have been adjusted.

In the second quarter of 2023, HTLF amended and restated its Certificate of Incorporation and filed Certificates of Elimination with the state of Delaware with respect to Series A, B, C, and D preferred stock issuances, which returned these previously designated shares to authorized but unissued. The following shows the details of Series A, B, C and D preferred stock at December 31, 2022:

•Series A Junior Participating preferred stock-par value $1 per share; authorized 16,000 shares; none issued or outstanding at December 31, 2022

•Series B Fixed Rate Cumulative Perpetual Preferred Stock-par value $1 per share; 81,698 shares authorized at December 31, 2022; none issued or outstanding at December 31, 2022

•Series C Senior Non-Cumulative Perpetual Preferred Stock-par value $1 per share; 81,698 shares authorized at December 31, 2022; none issued or outstanding at December 31, 2022

•Series D Senior Non-Cumulative Perpetual Convertible Preferred Stock-par value $1 per share; 3,000 shares authorized at December 31, 2022; none issued or outstanding at December 31, 2022

After the cancellation of Series A, B, C and D preferred shares, total preferred shares authorized increased to 188,500 from 6,104 at December 31, 2022, of which none were issued or outstanding at both June 30, 2023 and December 31, 2022.

Earnings Per Share

Basic earnings per share is determined using net income available to common stockholders and weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average common shares and assumed incremental common shares issued. Amounts used in the determination of basic and diluted earnings per share for the three- and six- months ended June 30, 2023 and 2022, are shown in the table below, dollars and number of shares in thousands, except per share data:


	Three Months Ended June 30,
	2023		2022
Net income	$	49,416	$	51,873
Preferred dividends	(2,012)		(2,012)


Net income available to common stockholders	$	47,404	$	49,861

Weighted average common shares outstanding for basic earnings per share	42,696		42,475
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	62		91
Weighted average common shares for diluted earnings per share	42,758		42,566
Earnings per common share — basic	$	1.11	$	1.17
Earnings per common share — diluted	$	1.11	$	1.17
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	59		172
Number of antidilutive stock options excluded from diluted earnings per share computation	221		—

	Six Months Ended June 30,
	2023		2022
Net income	$	102,192	$	94,962
Preferred dividends	(4,025)		(4,025)

Net income available to stockholders	$	98,167	$	90,937

Weighted average common shares outstanding for basic earnings per share	42,655		42,418
Assumed incremental common shares issued upon vesting of outstanding restricted stock units	98		145
Weighted average common shares for diluted earnings per share	42,753		42,563
Earnings per common share — basic	$	2.30	$	2.14
Earnings per common share — diluted	$	2.30	$	2.14
Number of antidilutive common stock equivalents excluded from diluted earnings per share computation	95		76
Number of antidilutive stock options excluded from diluted earnings per share computation	62		—

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

Effect of New Financial Accounting Standards

ASU 2022-01

In March 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-01, "Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method," which expands the current last-of-layer method by allowing multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. HTLF adopted this ASU on January 1, 2023, and these amendments were applied prospectively.

ASU 2022-02

In March 2022, the FASB issued ASU 2022-02, "Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." These amendments eliminate the troubled debt restructurings ("TDR") recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made

to borrowers experiencing financial difficulty. Additionally, these amendments require that an entity disclose current-period gross charge-offs by year of origination for loans receivable within the scope of Subtopic 326-20. The guidance was effective for entities that have adopted ASU 2016-13 for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. HTLF adopted this ASU on January 1, 2023, as required, and these amendments were applied prospectively.

ASU 2023-02

In March 2023, the FASB issued ASU 2023-02 "Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force)." ASU 2023-02 expands the permitted use of the proportional amortization method, which is currently only available to low-income housing tax credit investments, to other tax equity investments if certain conditions are met. Under the proportional amortization method, the initial cost of an investment is amortized in proportion to the income tax benefits received and both the amortization of the investment and the income tax benefits received are recognized as a component of income tax expense. This ASU is effective on January 1, 2024 and may be applied on either a modified retrospective or retrospective basis or, for certain changes, on a prospective basis, and early adoption is permitted. The amendments in this ASU are not expected to have a material impact on the results of operations or financial position.

NOTE 2: SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of debt securities available for sale and equity securities with a readily determinable fair value that are carried at fair value as of June 30, 2023, and December 31, 2022, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2023
U.S. treasuries	$	32,413	$	—	$	(734)	$	31,679
U.S. agencies	48,944		—		(5,908)		43,036
Obligations of states and political subdivisions	985,387		5		(136,153)		849,239
Mortgage-backed securities - agency	1,958,157		51		(271,562)		1,686,646
Mortgage-backed securities - non-agency	2,150,547		39		(154,777)		1,995,809
Commercial mortgage-backed securities - agency	99,072		—		(15,247)		83,825
Commercial mortgage-backed securities - non-agency	635,549		—		(17,557)		617,992
Asset-backed securities	425,632		—		(12,916)		412,716
Corporate bonds	59,199		—		(2,788)		56,411
Total debt securities	6,394,900		95		(617,642)		5,777,353
Equity securities with a readily determinable fair value	20,688		—		—		20,688
Total	$	6,415,588	$	95	$	(617,642)	$	5,798,041
December 31, 2022
U.S. treasuries	$	32,369	$	8	$	(678)	$	31,699
U.S. agencies	49,437		—		(6,302)		43,135
Obligations of states and political subdivisions	1,049,578		14		(170,155)		879,437
Mortgage-backed securities - agency	2,042,092		56		(270,043)		1,772,105
Mortgage-backed securities - non-agency	2,327,308		1,417		(146,849)		2,181,876
Commercial mortgage-backed securities - agency	100,518		—		(15,395)		85,123
Commercial mortgage-backed securities - non-agency	679,511		—		(20,052)		659,459
Asset-backed securities	428,397		—		(12,343)		416,054
Corporate bonds	59,205		—		(1,263)		57,942
Total debt securities	6,768,415		1,495		(643,080)		6,126,830
Equity securities with a readily determinable fair value	20,314		—		—		20,314
Total	$	6,788,729	$	1,495	$	(643,080)	$	6,147,144

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of June 30,

2023, and December 31, 2022, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
June 30, 2023

Obligations of states and political subdivisions	$	834,673	$	2,775	(30,506)		$	806,942
Total	$	834,673	$	2,775	$	(30,506)	$	806,942
December 31, 2022

Obligations of states and political subdivisions	$	829,403	$	3,096	$	(55,942)	$	776,557
Total	$	829,403	$	3,096	$	(55,942)	$	776,557

As of June 30, 2023, and December 31, 2022, HTLF had $32.2 million and $33.0 million, respectively, of accrued interest receivable, which is included in other assets on the consolidated balance sheets. HTLF does not consider accrued interest receivable in the carrying amount of financial assets held at amortized cost basis or in the allowance for credit losses calculation.

The amortized cost and estimated fair value of investment securities carried at fair value at June 30, 2023, 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, 2023
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	17,299	$	16,935
Due in 1 to 5 years	70,602		68,532
Due in 5 to 10 years	48,317		40,477
Due after 10 years	989,725		854,421
Total debt securities	1,125,943		980,365
Mortgage and asset-backed securities	5,268,957		4,796,988
Equity securities with a readily determinable fair value	20,688		20,688
Total investment securities	$	6,415,588	$	5,798,041

The amortized cost and estimated fair value of debt securities held to maturity at June 30, 2023, 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, 2023
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	1,459	$	1,460
Due in 1 to 5 years	70,913		70,453
Due in 5 to 10 years	159,786		157,595
Due after 10 years	602,515		577,434
Total debt securities	$	834,673	$	806,942

As of June 30, 2023, and December 31, 2022, securities with a carrying value of $2.88 billion and $1.49 billion, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.

Gross gains and losses realized related to the sales of securities carried at fair value for the three and six months ended June 30, 2023 and 2022, are summarized as follows, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Proceeds from sales	$	140,290	$	149,840	$	286,738	$	973,911
Gross security gains	483		357		483		7,298
Gross security losses	808		2,998		1,912		7,948

The following table summarizes, in thousands, the amount of unrealized losses, defined as the amount by which cost or amortized cost exceeds fair value, and the related fair value of investments with unrealized losses in the securities portfolio as of June 30, 2023, and December 31, 2022. 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, 2022, and December 31, 2021, respectively.


Debt securities available for sale	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count
June 30, 2023
U.S. treasuries	$	28,270	$	(652)	5	$	3,409	$	(82)	1	$	31,679	$	(734)	6
U.S. agencies	—		—		—	43,036		(5,908)		6	43,036		(5,908)		6
Obligations of states and political subdivisions	2,698		(118)		3	844,628		(136,035)		162	847,326		(136,153)		165
Mortgage-backed securities - agency	27,450		(1,774)		30	1,657,307		(269,788)		191	1,684,757		(271,562)		221
Mortgage-backed securities - non-agency	393,712		(33,619)		16	1,205,116		(121,158)		43	1,598,828		(154,777)		59
Commercial mortgage-backed securities - agency	1,795		(96)		1	82,030		(15,151)		19	83,825		(15,247)		20
Commercial mortgage-backed securities - non-agency	7,254		(262)		2	588,183		(17,295)		16	595,437		(17,557)		18
Asset-backed securities	31,941		(1,997)		1	121,281		(10,919)		10	153,222		(12,916)		11
Corporate bonds	48,966		(1,532)		2	7,445		(1,256)		6	56,411		(2,788)		8


Total temporarily impaired securities	$	542,086	$	(40,050)	60	$	4,552,435	$	(577,592)	454	$	5,094,521	$	(617,642)	514
December 31, 2022
U.S. treasuries	$	28,699	$	(678)	4	$	—	$	—	—	$	28,699	$	(678)	4
U.S. agencies	16,487		(222)		5	26,648		(6,080)		2	43,135		(6,302)		7
Obligations of states and political subdivisions	288,457		(28,378)		69	589,641		(141,777)		113	878,098		(170,155)		182
Mortgage-backed securities - agency	241,288		(21,420)		99	1,528,951		(248,623)		126	1,770,239		(270,043)		225
Mortgage-backed securities - non-agency	950,054		(70,213)		25	693,531		(76,636)		25	1,643,585		(146,849)		50
Commercial mortgage-backed securities - agency	27,732		(2,291)		12	57,392		(13,104)		7	85,124		(15,395)		19
Commercial mortgage-backed securities - non-agency	530,541		(16,830)		15	84,619		(3,222)		4	615,160		(20,052)		19
Asset-backed securities	118,613		(6,107)		7	56,621		(6,236)		6	175,234		(12,343)		13
Corporate bonds	57,544		(1,257)		7	398		(6)		1	57,942		(1,263)		8


Total temporarily impaired securities	$	2,259,415	$	(147,396)	243	$	3,037,801	$	(495,684)	284	$	5,297,216	$	(643,080)	527



Securities held to maturity	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count
June 30, 2023

Obligations of states and political subdivisions	$	727,436	$	(30,464)	155	$	1,522	$	(42)	1	$	728,958	$	(30,506)	156
Total temporarily impaired securities	$	727,436	(30,464)		155	$	1,522	$	(42)	1	$	728,958	(30,506)		156
December 31, 2022

Obligations of states and political subdivisions	$	697,424	$	(55,942)	155	$	—	$	—	—	$	697,424	$	(55,942)	155
Total temporarily impaired securities	$	697,424	$	(55,942)	155	$	—	$	—	—	$	697,424	$	(55,942)	155

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

The unrealized losses on HTLF's commercial mortgage, mortgage and asset-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to HTLF's purchase of the securities. The losses are not related to concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that the securities will not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because HTLF has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the three and six months ended June 30, 2023 and 2022.

The unrealized losses on HTLF's obligations of states and political subdivisions available for sale are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors the published credit ratings of these securities and the stability of the underlying municipalities. Because the declines in fair value are attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because HTLF has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, no credit losses were recognized on these securities during the three and six months ended June 30, 2023 and 2022.

Based on HTLF's credit loss methodology applicable to held to maturity debt securities, no allowance for credit losses was required at both June 30, 2023, and December 31, 2022.

The following table summarizes, in thousands, the carrying amount of HTLF's held to maturity debt securities by investment rating as of June 30, 2023, and December 31, 2022, which are updated quarterly and used to monitor the credit quality of the securities:


	June 30, 2023		December 31, 2022
Rating
AAA	$	83,190	$	79,598
AA, AA+, AA-	588,448		588,354
A+, A, A-	138,122		136,624
BBB	20,618		20,623
Not Rated	4,295		4,204
Total	$	834,673	$	829,403

Included in other investments were shares of stock in each Federal Home Loan Bank (the "FHLB") of which each of its Banks is a member at an amortized cost of $8.1 million at June 30, 2023, and $12.3 million at December 31, 2022.

The HTLF banks are required by federal law to maintain FHLB stock as members of the various FHLBs. These equity securities are "restricted" in that they can only be sold back to the respective institutions from which they were acquired or another member institution at par. Therefore, the FHLB stock is less liquid than other marketable equity securities, and the fair value approximates amortized cost. HTLF considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. HTLF evaluates impairment in these investments based on the ultimate recoverability of the par value and, at June 30, 2023, and December 31, 2022, did not consider the investments to be impaired.

NOTE 3: LOANS

Loans as of June 30, 2023, and December 31, 2022, were as follows, in thousands:


	June 30, 2023		December 31, 2022
Loans receivable held to maturity:
Commercial and industrial	$	3,590,680	$	3,464,414
Paycheck Protection Program ("PPP")	4,139		11,025
Owner occupied commercial real estate	2,398,698		2,265,307
Non-owner occupied commercial real estate	2,530,736		2,330,940
Real estate construction	1,013,134		1,076,082
Agricultural and agricultural real estate	839,817		920,510
Residential real estate	828,437		853,361
Consumer	512,333		506,713
Total loans receivable held to maturity	11,717,974		11,428,352






Allowance for credit losses	(111,198)		(109,483)
Loans receivable, net	$	11,606,776	$	11,318,869

As of June 30, 2023, and December 31, 2022, HTLF had $52.1 million and $49.1 million, respectively, of accrued interest receivable, which is included in other assets on the consolidated balance sheets. HTLF does not consider accrued interest receivable in the allowance for credit losses calculation.

The following table shows the balance in the allowance for credit losses at June 30, 2023, and December 31, 2022, and the related loan balances, disaggregated on the basis of measurement methodology, in thousands. If a loan no longer shares similar risk characteristics with other loans in the pool, it is evaluated on an individual basis and is not included in the collective evaluation. Lending relationships on nonaccrual with $500,000 or more of total exposure are individually assessed using a collateral dependency calculation. All other loans are collectively evaluated for losses.


	Allowance For Credit Losses						Gross Loans Receivable Held to Maturity
	Individually Evaluated for Credit Losses		Collectively Evaluated for Credit Losses		Total		Loans Individually Evaluated for Credit Losses		Loans Collectively Evaluated for Credit Losses		Total
June 30, 2023
Commercial and industrial	$	6,817	$	22,579	$	29,396	$	16,051	$	3,574,629	$	3,590,680
PPP	—		—		—		—		4,139		4,139
Owner occupied commercial real estate	290		14,419		14,709		7,629		2,391,069		2,398,698
Non-owner occupied commercial real estate	257		17,719		17,976		14,018		2,516,718		2,530,736
Real estate construction	—		28,246		28,246		910		1,012,224		1,013,134
Agricultural and agricultural real estate	1,000		2,511		3,511		7,147		832,670		839,817
Residential real estate	—		7,644		7,644		2,254		826,183		828,437
Consumer	—		9,716		9,716		—		512,333		512,333

Total	$	8,364	$	102,834	$	111,198	$	48,009	$	11,669,965	$	11,717,974

December 31, 2022
Commercial and industrial	$	6,670	$	22,401	$	29,071	$	18,712	$	3,445,702	$	3,464,414
PPP	—		—		—		—		11,025		11,025
Owner occupied commercial real estate	376		13,572		13,948		7,932		2,257,375		2,265,307
Non-owner occupied commercial real estate	—		16,539		16,539		11,371		2,319,569		2,330,940
Real estate construction	—		29,998		29,998		1,518		1,074,564		1,076,082
Agricultural and agricultural real estate	63		2,571		2,634		3,851		916,659		920,510
Residential real estate	—		7,711		7,711		1,607		851,754		853,361
Consumer	—		9,582		9,582		—		506,713		506,713

Total	$	7,109	$	102,374	$	109,483	$	44,991	$	11,383,361	$	11,428,352

The following tables show the amortized cost basis as of June 30, 2023, of the loans modified during the three- and six-months ended June 30, 2023, to borrowers experiencing financial difficulty by loan category and type of concession granted, dollars in thousands.


For the Three Months Ended June 30, 2023	Loan Modifications Made to Borrowers Experiencing Financial Difficulty
	Term Extension				Term Extension and Interest Only Payments
	Amortized Cost Basis		% of Loan Category		Amortized Cost Basis		% of Loan Category
Commercial	$	1,411	0.04	%	$	—	—	%

Owner occupied commercial real estate	—		—		—		—

Real estate construction	—		—		—		—
Agricultural and agricultural real estate	1,354		0.16		—		—
Residential real estate	—		—		—		—

Total	$	2,765	0.02	%	$	—	—	%


For the Six Months Ended June 23, 2023	Loan Modifications Made to Borrowers Experiencing Financial Difficulty
	Term Extension				Term Extension and Interest Only Payments
	Amortized Cost Basis		% of Loan Category		Amortized Cost Basis		% of Loan Category
Commercial	$	5,073	0.14	%	$	—	—	%

Owner occupied commercial real estate	—		—		5,043		0.21

Real estate construction	1,477		0.15		—		—
Agricultural and agricultural real estate	1,354		0.16		—		—
Residential real estate	752		0.09		—		—

Total	$	8,656	0.07	%	$	5,043	0.04	%

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty in the six months ending June 30, 2023.


Loan Type	Weighted Average Term Extension (months)	Weighted Average Term Extension and Interest Only Payments (months)
Commercial and industrial	9	0

Owner occupied commercial real estate	0	12

Real estate construction	6	0
Agricultural and agricultural real estate	9	0
Residential real estate	12	0

At June 30, 2023, there were $2.7 million in unfunded commitments to extend credit to the borrowers experiencing financial difficulty.

HTLF had no loans to borrowers experiencing financial difficulty that had a payment default during the three months and six months ended June 30, 2023, that had been modified in the twelve-month period prior to the default.

HTLF closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table shows the performance of loans that have been modified in the six months ended June 30, 2023, dollars 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
June 30, 2023
Commercial and industrial	$	—	$	—	$	—	$	—	$	5,073	$	—

Owner occupied commercial real estate	—		—		—		—		5,043		—

Real estate construction	—		—		—		—		—		1,477
Agricultural and agricultural real estate	—		—		—		—		1,354		—
Residential real estate	—		—		—		—		—		752

Total	$	—	$	—	$	—	$	—	$	11,470	$	2,229

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

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

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

The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring the rating of the loan as "loss" until the exact status of the loan can be determined. The "loss" rating is assigned to loans considered uncollectible. HTLF had no loans classified as "loss" or "doubtful" as of June 30, 2023, and December 31, 2022.

The following table shows the risk category of loans by loan category, year of origination and charge-offs as of June 30, 2023, in thousands:


As of June 30, 2023	Amortized Cost Basis of Term Loans by Year of Origination
	2023		2022		2021		2020		2019		2018 and Prior		Revolving		Total
Commercial and industrial
Pass	$	347,091	$	891,309	$	375,623	$	221,147	$	88,352	$	340,468	$	1,139,264	$	3,403,254
Watch	5,500		16,536		1,431		1,764		6,012		11,266		46,907		89,416
Substandard	20,127		7,012		5,520		9,008		20,299		10,765		25,279		98,010
Commercial and industrial total	$	372,718	$	914,857	$	382,574	$	231,919	$	114,663	$	362,499	$	1,211,450	$	3,590,680
Commercial and industrial charge-offs	$	—	$	290	$	101	$	1,414	$	554	$	1,386	$	1,392	$	5,137

PPP
Pass	$	—	$	—	$	3,944	$	69	$	—	$	—	$	—	$	4,013
Watch	—		—		6		—		—		—		—		6
Substandard	—		—		120		—		—		—		—		120
PPP total	$	—	$	—	$	4,070	$	69	$	—	$	—	$	—	$	4,139
PPP charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Owner occupied commercial real estate


As of June 30, 2023	Amortized Cost Basis of Term Loans by Year of Origination
	2023		2022		2021		2020		2019		2018 and Prior		Revolving		Total
Pass	$	223,815	$	500,240	$	768,837	$	228,536	$	246,327	$	242,129	$	40,683	$	2,250,567
Watch	19,888		15,187		15,238		4,013		8,418		11,065		321		74,130
Substandard	23,518		9,897		3,665		22,093		5,154		9,322		352		74,001
Owner occupied commercial real estate total	$	267,221	$	525,324	$	787,740	$	254,642	$	259,899	$	262,516	$	41,356	$	2,398,698
Owner occupied commercial real estate charge-offs	$	—	$	—	$	—	$	5	$	—	$	14	$	—	$	19

Non-owner occupied commercial real estate
Pass	$	282,886	$	742,328	$	518,555	$	219,439	$	245,083	$	302,523	$	63,131	$	2,373,945
Watch	—		4,448		1,355		3,222		27,118		40,103		—		76,246
Substandard	—		6,873		3,757		942		26,916		42,057		—		80,545
Non-owner occupied commercial real estate total	$	282,886	$	753,649	$	523,667	$	223,603	$	299,117	$	384,683	$	63,131	$	2,530,736
Non-owner occupied commercial real estate charge-offs	$	—	$	—	$	—	$	29	$	—	$	—	$	—	$	29


Real estate construction
Pass	$	114,193	$	557,657	$	262,600	$	41,632	$	12,094	$	4,591	$	7,906	$	1,000,673
Watch	—		6,546		—		76		—		102		—		6,724
Substandard	406		4,239		665		340		17		70		—		5,737
Real estate construction total	$	114,599	$	568,442	$	263,265	$	42,048	$	12,111	$	4,763	$	7,906	$	1,013,134
Real estate construction charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


Agricultural and agricultural real estate
Pass	$	109,375	$	233,885	$	120,638	$	69,406	$	30,000	$	51,715	$	187,766	$	802,785
Watch	780		240		750		2,901		418		607		764		6,460
Substandard	1,366		9,832		3,374		54		911		14,117		918		30,572
Agricultural and agricultural real estate total	$	111,521	$	243,957	$	124,762	$	72,361	$	31,329	$	66,439	$	189,448	$	839,817
Agricultural and agricultural real estate charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	5,309	$	5,309

Residential real estate
Pass	$	41,579	$	189,390	$	256,355	$	80,165	$	44,278	$	177,741	$	19,838	$	809,346
Watch	—		2,045		3,006		48		1,441		4,632		34		11,206
Substandard	799		203		1,512		827		219		3,926		399		7,885
Residential real estate total	$	42,378	$	191,638	$	260,873	$	81,040	$	45,938	$	186,299	$	20,271	$	828,437


Residential real estate charge-offs	$	—	$	59	$	—	$	—	$	—	$	—	$	—	$	59

Consumer
Pass	$	30,129	$	70,624	$	41,217	$	9,952	$	4,700	$	15,735	$	332,789	$	505,146
Watch	625		69		829		35		44		801		1,491		3,894
Substandard	8		264		222		95		185		1,938		581		3,293
Consumer total	$	30,762	$	70,957	$	42,268	$	10,082	$	4,929	$	18,474	$	334,861	$	512,333
Consumer charge-offs	$	—	$	87	$	71	$	23	$	18	$	8	$	1,004	$	1,211

Total Pass	$	1,149,068	$	3,185,433	$	2,347,769	$	870,346	$	670,834	$	1,134,902	$	1,791,377	$	11,149,729
Total Watch	26,793		45,071		22,615		12,059		43,451		68,576		49,517		268,082
Total Substandard	46,224		38,320		18,835		33,359		53,701		82,195		27,529		300,163
Total Loans	$	1,222,085	$	3,268,824	$	2,389,219	$	915,764	$	767,986	$	1,285,673	$	1,868,423	$	11,717,974

Total Charge-offs	$	—	$	436	$	172	$	1,471	$	572	$	1,408	$	7,705	$	11,764

The following table shows the risk category of loans by loan category and year of origination as of December 31, 2022, in thousands.


As of December 31, 2022	Amortized Cost Basis of Term Loans by Year of Origination
	2022		2021		2020		2019		2018		2017 and Prior		Revolving		Total
Commercial and industrial
Pass	$	967,103	$	442,001	$	260,021	$	101,998	$	57,776	$	421,312	$	1,064,333	$	3,314,544
Watch	12,638		1,370		685		5,487		2,882		3,315		21,984		48,361
Substandard	6,691		14,366		9,369		22,171		5,546		6,758		36,608		101,509
Commercial and industrial total	$	986,432	$	457,737	$	270,075	$	129,656	$	66,204	$	431,385	$	1,122,925	$	3,464,414
PPP
Pass	$	—	$	7,807	$	526	$	—	$	—	$	—	$	—	$	8,333
Watch	—		7		—		—		—		—		—		7
Substandard	—		2,685		—		—		—		—		—		2,685
PPP total	$	—	$	10,499	$	526	$	—	$	—	$	—	$	—	$	11,025
Owner occupied commercial real estate
Pass	$	511,547	$	781,946	$	255,476	$	266,228	$	103,943	$	179,503	$	34,117	$	2,132,760
Watch	22,079		3,410		12,346		8,520		3,645		11,899		—		61,899
Substandard	2,971		23,802		26,490		6,358		2,574		7,353		1,100		70,648
Owner occupied commercial real estate total	$	536,597	$	809,158	$	294,312	$	281,106	$	110,162	$	198,755	$	35,217	$	2,265,307
Non-owner occupied commercial real estate
Pass	$	756,059	$	515,075	$	227,383	$	261,964	$	127,400	$	210,289	$	70,398	$	2,168,568
Watch	8,131		792		2,849		38,218		38,510		16,180		547		105,227
Substandard	202		6,784		1,838		16,019		22,332		9,970		—		57,145
Non-owner occupied commercial real estate total	$	764,392	$	522,651	$	232,070	$	316,201	$	188,242	$	236,439	$	70,945	$	2,330,940
Real estate construction
Pass	$	597,370	$	328,391	$	88,660	$	21,221	$	2,568	$	6,274	$	8,252	$	1,052,736
Watch	665		16,218		1,257		—		—		122		—		18,262
Substandard	2,587		356		173		446		1,478		44		—		5,084
Real estate construction total	$	600,622	$	344,965	$	90,090	$	21,667	$	4,046	$	6,440	$	8,252	$	1,076,082

Agricultural and agricultural real estate
Pass	$	324,791	$	140,252	$	79,307	$	34,447	$	22,600	$	38,672	$	239,686	$	879,755
Watch	3,795		515		3,865		641		444		672		902		10,834
Substandard	8,674		3,224		204		1,859		12,323		2,682		955		29,921
Agricultural and agricultural real estate total	$	337,260	$	143,991	$	83,376	$	36,947	$	35,367	$	42,026	$	241,543	$	920,510

Residential real estate
Pass	$	189,133	$	268,561	$	64,627	$	39,468	$	34,863	$	217,489	$	23,331	$	837,472
Watch	706		1,095		88		957		2,296		2,237		399		7,778
Substandard	28		1,273		1,024		99		792		4,895		—		8,111
Residential real estate total	$	189,867	$	270,929	$	65,739	$	40,524	$	37,951	$	224,621	$	23,730	$	853,361

Consumer
Pass	$	80,592	$	47,787	$	11,722	$	6,022	$	4,840	$	24,655	$	325,247	$	500,865
Watch	20		191		35		119		74		1,584		953		2,976
Substandard	188		331		242		303		75		1,539		194		2,872
Consumer total	$	80,800	$	48,309	$	11,999	$	6,444	$	4,989	$	27,778	$	326,394	$	506,713

Total Pass	$	3,426,595	$	2,531,820	$	987,722	$	731,348	$	353,990	$	1,098,194	$	1,765,364	$	10,895,033
Total Watch	48,034		23,598		21,125		53,942		47,851		36,009		24,785		255,344
Total Substandard	21,341		52,821		39,340		47,255		45,120		33,241		38,857		277,975
Total Loans	$	3,495,970	$	2,608,239	$	1,048,187	$	832,545	$	446,961	$	1,167,444	$	1,829,006	$	11,428,352

Included in the nonpass loans at June 30, 2023, and December 31, 2022, were $126,000 and $2.7 million, respectively, of nonpass PPP loans as a result of risk ratings on non-PPP related credits. HTLF's risk rating methodology assigns a risk rating to the whole lending relationship. HTLF has no allowance recorded related to the PPP loans because of the 100% government guarantee through the United States Small Business Administration ("SBA").

As of June 30, 2023, HTLF had $176,000 of loans secured by residential real estate property that were in the process of foreclosure.

The following table sets forth information regarding accruing and nonaccrual loans at June 30, 2023, and December 31, 2022, 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, 2023
Commercial and industrial	$	6,646	$	1,202	$	517	$	8,365	$	3,561,379	$	20,936	$	3,590,680
PPP	19		—		109		128		4,011		—		4,139
Owner occupied commercial real estate	137		2,290		—		2,427		2,387,931		8,340		2,398,698
Non-owner occupied commercial real estate	—		—		—		—		2,516,515		14,221		2,530,736
Real estate construction	36		—		—		36		1,010,274		2,824		1,013,134
Agricultural and agricultural real estate	108		360		1		469		829,814		9,534		839,817
Residential real estate	673		321		780		1,774		821,925		4,738		828,437
Consumer	1,499		371		52		1,922		509,048		1,363		512,333
Total gross loans receivable held to maturity	$	9,118	$	4,544	$	1,459	$	15,121	$	11,640,897	$	61,956	$	11,717,974
December 31, 2022
Commercial and industrial	$	1,099	$	356	$	131	$	1,586	$	3,440,062	$	22,766	$	3,464,414
PPP	—		—		—		—		11,006		19		11,025
Owner occupied commercial real estate	12		127		—		139		2,256,365		8,803		2,265,307
Non-owner occupied commercial real estate	—		—		—		—		2,319,282		11,658		2,330,940
Real estate construction	16		28		—		44		1,073,687		2,351		1,076,082
Agricultural and agricultural real estate	48		—		142		190		914,088		6,232		920,510
Residential real estate	1,206		152		—		1,358		846,739		5,264		853,361
Consumer	1,526		196		—		1,722		503,853		1,138		506,713
Total gross loans receivable held to maturity	$	3,907	$	859	$	273	$	5,039	$	11,365,082	$	58,231	$	11,428,352

Loans delinquent 30 to 89 days as a percent of total loans were 0.12% at June 30, 2023, compared to 0.04% at December 31, 2022. Changes in credit risk are monitored on a continuous basis as part of relationship management, and changes in risk ratings are made when credit quality improves or deteriorates in accordance with HTLF's credit risk rating framework. All individually assessed loans are reviewed at least annually.

HTLF recognized $0 of interest income on nonaccrual loans during the three and six months ended June 30, 2023 and June 30, 2022. As of June 30, 2023, and December 31, 2022, HTLF had $28.7 million and $26.7 million of nonaccrual loans with no related allowance, respectively.

NOTE 4: ALLOWANCE FOR CREDIT LOSSES

Changes in the allowance for credit losses on loans for the three- and six- months ended June 30, 2023, and June 30, 2022, were as follows, in thousands:


	Commercial and Industrial		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at March 31, 2023	$	31,823	$	14,151	$	17,062	$	30,138	$	2,546	$	7,564	$	9,423	$	112,707
Charge-offs	(3,686)		(5)		(29)		—		(5,309)		(59)		(525)		(9,613)
Recoveries	118		—		—		2		1		—		154		275
Provision (benefit)	1,141		563		943		(1,894)		6,273		139		664		7,829
Balance at June 30, 2023	$	29,396	$	14,709	$	17,976	$	28,246	$	3,511	$	7,644	$	9,716	$	111,198

	Commercial and Industrial		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at December 31, 2022	$	29,071	$	13,948	$	16,539	$	29,998	$	2,634	$	7,711	$	9,582	$	109,483


Charge-offs	(5,137)		(19)		(29)		—		(5,309)		(59)		(1,211)		(11,764)
Recoveries	1,840		112		—		19		11		19		1,465		3,466
Provision (benefit)	3,622		668		1,466		(1,771)		6,175		(27)		(120)		10,013
Balance at June 30, 2023	$	29,396	$	14,709	$	17,976	$	28,246	$	3,511	$	7,644	$	9,716	$	111,198


	Commercial and Industrial		Owner Occupied Commercial Real Estate		Non-Owner Occupied Commercial Real Estate		Real Estate Construction		Agricultural and Agricultural Real Estate		Residential Real Estate		Consumer		Total
Balance at March 31, 2022	$	25,800	$	17,975	$	16,013	$	21,397	$	2,667	$	7,875	$	8,795	$	100,522
Charge-offs	(643)		—		(193)		—		(25)		(49)		(563)		(1,473)
Recoveries	445		—		—		2		124		—		188		759
Provision (benefit)	2,066		(317)		(82)		(2,008)		182		745		959		1,545
Balance at June 30, 2022	$	27,668	$	17,658	$	15,738	$	19,391	$	2,948	$	8,571	$	9,379	$	101,353

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


Charge-offs	(5,143)		—		(322)		—		(3,129)		(137)		(5,959)		(14,690)
Recoveries	651		40		33		9		577		—		472		1,782
Provision (benefit)	4,422		(1,596)		(1,881)		(3,156)		287		281		5,816		4,173
Balance at June 30, 2022	$	27,668	$	17,658	$	15,738	$	19,391	$	2,948	$	8,571	$	9,379	$	101,353

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

Changes in the allowance for credit losses for unfunded commitments for the three- and six-months ended June 30, 2023, and June 30, 2022, were as follows:


	For the Three Months Ended June 30,
	2023		2022
Balance at March 31,	$	21,086	$	16,079
Provision (benefit)	(2,450)		1,701
Balance at June 30,	$	18,636	$	17,780


	For the Six Months Ended June 30,
	2023		2022
Balance at December 31,	$	20,196	$	15,462


Provision (benefit)	(1,560)		2,318
Balance at June 30,	$	18,636	$	17,780

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

HTLF had goodwill of $576.0 million at both June 30, 2023, and December 31, 2022. HTLF conducts its annual internal assessment of the goodwill both at the consolidated level and at its subsidiaries in the fourth quarter of every year as of September 30.

The sustained decline in HTLF's stock price, which management deemed to be a triggering event, caused management to perform a quantitative impairment test on its goodwill in the second quarter of 2023. Management concluded that none of the goodwill at any of HTLF's reporting units was impaired.

The gross carrying amount of other intangible assets, which consists of core deposit intangibles and mortgage servicing rights, and the associated accumulated amortization at June 30, 2023, and December 31, 2022, are presented in the table below, in thousands:


	June 30, 2023						December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Amortizing intangible assets:
Core deposit intangibles	$	101,185	$	79,534	$	21,651	$	101,185	$	76,031	$	25,154

Mortgage servicing rights	—		—		—		13,700		5,860		7,840

Total	$	101,185	$	79,534	$	21,651	$	114,885	$	81,891	$	32,994

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


	Core Deposit Intangibles
Six months ending December 31, 2023	$	3,236
Year ending December 31,
2024	5,591
2025	4,700
2026	3,533
2027	2,601
2028	1,287
Thereafter	703
Total	$	21,651

On March 31, 2023, First Bank & Trust, a division of HTLF Bank, closed on the sale of its mortgage servicing rights portfolio, which contained loans with an unpaid principal balance of $698.5 million, to two unrelated third-parties. The transaction qualified as a sale, and $7.7 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of March 31, 2023. Cash of approximately $6.7 million was received on March 31, 2023, and an estimated loss of $193,000 was recorded. A receivable of approximately $746,000 was recorded in other assets on the consolidated balance sheet as of March 31, 2023, due to the timing of the servicing transfer per the terms of the sale agreement. Pursuant to the agreement, which includes customary terms and conditions, First Bank & Trust provided interim servicing of the loans until the transfer date, which was May 1, 2023.

The following table summarizes, in thousands, the changes in capitalized mortgage servicing rights for the six months ended June 30, 2023, and June 30, 2022:


	2023			2022
Balance at January 1,	$	7,840		$	6,412
Originations	24			904
Amortization	(210)			(686)

Sale of mortgage servicing rights	(7,654)			—

Valuation adjustment	—			1,658
Balance at period end	$	—		$	8,288

Mortgage servicing rights, net to servicing portfolio	—		%	1.13		%

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 December 31, 2022.


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





December 31, 2022	$	1,388	$	1,388	$	—	$	6,452	$	6,452	$	—

NOTE 6: DERIVATIVE FINANCIAL INSTRUMENTS

HTLF considers and uses derivative financial instruments as part of its interest rate risk management strategy, which may include interest rate swaps, fair value hedges, risk participation agreements, caps, floors, collars, and certain interest rate lock commitments and forward sales of securities related to mortgage banking activities. HTLF's current strategy includes the use of interest rate swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, HTLF facilitates back-to-back loan swaps to assist customers in managing their interest rate risk while executing offsetting interest rate swaps with dealer counterparties.

HTLF's objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. HTLF is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. HTLF minimizes this risk by entering into derivative contracts with counterparties that meet HTLF’s credit standards, and the contracts contain collateral provisions protecting the at-risk party. HTLF has not experienced any losses from nonperformance by these counterparties. HTLF monitors counterparty risk in accordance with the provisions of ASC 815. HTLF was required to post $586,000 of collateral at June 30, 2023, compared to $793,000 as of December 31, 2022, related to derivative financial instruments. HTLF's counterparties were required to pledge $75.2 million at June 30, 2023, compared to $45.1 million at December 31, 2022.

HTLF's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 7, "Fair Value," for additional fair value information and disclosures.

Cash Flow Hedges

In 2021, two interest rate swap transactions were terminated, and the debt was converted to variable rate subordinated debentures. For the next twelve months, HTLF estimates cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense related to the terminated swaps will total $596,000.

In the first quarter of 2023, HTLF terminated its interest rate swap agreement, which effectively converted $500.0 million of variable rate loans to fixed rate loans. For the next twelve months, HTLF estimates cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense will total $985,000.

HTLF had no derivative instruments designated as cash flow hedges at June 30, 2023. The table below identifies the balance sheet category and fair value of HTLF's derivative instrument designated as a cash flow hedge at December 31, 2022, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category


December 31, 2022
Interest rate swap	$	500,000	$	13	Other Assets

The table below identifies the gains and losses recognized on HTLF's terminated derivative instruments designated as cash flow hedges for the three and six months ended June 30, 2023, and June 30, 2022, in thousands:



	Recognized in OCI		Reclassified from AOCI into Income
	Amount of Gain (Loss)		Category	Amount of Gain (Loss)
Three Months Ended June 30, 2023
Interest rate swap	$	—	Interest income	$	63
Six Months Ended June 30, 2023
Interest rate swap	$	1,952	Interest income	$	(701)
Three Months Ended June 30, 2022
Interest rate swap	$	—	Interest income	$	—
Six Months Ended June 30, 2022
Interest rate swap	$	—	Interest income	$	—

Fair Value Hedges

HTLF uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. HTLF also uses interest rate swaps to mitigate the risk of changes in the fair market value of certain municipal and mortgage-backed securities. The changes in the fair values of derivatives that have been designated and qualify for fair value hedge accounting are recorded in the same line item in the consolidated statements of income as the changes in the fair value of the hedged items attributable to the risk being hedged.

HTLF uses statistical regression to assess hedge effectiveness, both at the inception of the hedge as well as on a continual basis. The regression analysis involves regressing the periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.

During the second quarter of 2023, HTLF entered into interest rate swaps designated as fair value hedges with initial notional amounts totaling $838.1 million primarily designed to provide protection for unrealized securities losses against the impact of higher mid-to-long term interest rates using the portfolio layer method. HTLF also executed an interest rate swap designated as a fair value hedge with an original notional amount of $500.0 million to convert certain long-term fixed rate loans to floating rates to hedge interest rate risk exposure using the portfolio layer method.

The portfolio layer method allows HTLF to designate as the hedged item a stated amount of the assets that are not expected to be affected by prepayments, defaults and other factors that would affect the timing and amount of cash flow. The fair value portfolio level basis adjustment on the hedged securities has not been attributed to the individual available for sale security on the consolidated balance sheet.

The table below identifies the fair value of the interest rate swaps designated as fair value hedges and the balance sheet category of the interest rate swaps as of June 30, 2023 and December 31, 2022, in thousands:


	Fair Value		Balance Sheet Category
June 30, 2023
Interest rate swaps-loans receivable held to maturity	$	13,643	Other assets
Interest rate swaps-securities carried at fair value	31,052		Other assets
December 31, 2022
Interest rate swaps-loans receivable held to maturity	54		Other assets

The table below identifies the carrying amount of the hedged assets and cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets that are designated as a fair value hedge accounting relationship at June 30, 2023, and December 31, 2022, in thousands:


	Location in the consolidated balance sheet	Carrying Amount of the Hedged Assets		Cumulative Amount of Fair Value Hedging Adjustment Included in Carrying Amount of Hedged Assets
June 30, 2023

Interest rate swap	Loans receivable held to maturity	$	501,080	$	(12,938)
Interest rate swap	Securities carried at fair value	826,545		(29,584)
December 31, 2022

Interest rate swap	Loans receivable held to maturity	$	1,185	$	(54)

The table below identifies the gains and losses recognized on HTLF's fair value hedges and the income statement classification for the three- and six- months ended June 30, 2023, and June 30, 2022, in thousands. For the three- and six-months ended June 30, 2023, HTLF recorded $74,000 of interest income on taxable securities related to ineffectiveness.


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Gain recognized in interest income and fees on loans	$	13,604	$	42	$	13,589	$	1,225
Gain recognized in interest income on securities-taxable	31,052		—		31,052		—

Embedded Derivatives

HTLF has fixed rate loans with embedded derivatives. These loans contain terms that affect the cash flows or value of the loan similar to a derivative instrument, and therefore are considered to contain an embedded derivative. The embedded derivatives are bifurcated from the loans because the terms of the derivative instrument are not clearly and closely related to the loans. The embedded derivatives are recorded at fair value on the consolidated balance sheets as a part of other assets, and changes in the fair value are a component of noninterest income. The table below identifies the notional amount, fair value and balance sheet category of the embedded derivatives at June 30, 2023, and December 31, 2022, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category
June 30, 2023
Embedded derivatives	$	5,843	$	118	Other assets

December 31, 2022
Embedded derivatives	$	6,028	$	135	Other assets

The table below identifies the gains and losses recognized on HTLF's embedded derivatives for the three- and six- months ended June 30, 2023, and June 30, 2022, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Gain (loss) recognized in other noninterest income on embedded derivatives	$	20	$	100	$	(17)	$	325

Back-to-Back Loan Swaps

HTLF has loan interest rate swap relationships with customers to assist them in managing their interest rate risk. Upon entering into these loan swaps, HTLF enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the consolidated balance sheets. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the three and six months ended June 30, 2023, and June 30, 2022, no gain or loss was recognized. The table below identifies the balance sheet category and fair values of the derivative instruments designated as loan swaps at June 30, 2023, and December 31, 2022, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
June 30, 2023
Customer interest rate swaps	$	1,325,478	$	51,876	Other assets	4.08	%	7.16	%
Customer interest rate swaps	1,325,478		(51,876)		Other liabilities	7.16		4.08
December 31, 2022
Customer interest rate swaps	$	819,662	$	46,091	Other assets	4.23	%	6.76	%
Customer interest rate swaps	819,662		(46,091)		Other liabilities	6.76		4.23

Other Free Standing Derivatives

HTLF has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments. HTLF enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into and to economically hedge the effect of future changes in interest rates on the commitments to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on the consolidated balance sheets, with the changes in fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting treatment. HTLF was required to pledge no collateral at both June 30, 2023, and December 31, 2022. HTLF's counterparties were required to pledge no collateral at both June 30, 2023, and December 31, 2022, as collateral for these forward commitments.

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

The table below identifies the balance sheet category and fair values of HTLF's other free standing derivative instruments not designated as hedging instruments at June 30, 2023, and December 31, 2022, in thousands:


	Balance Sheet Category	Notional Amount		Fair Value
June 30, 2023
Interest rate lock commitments (mortgage)	Other assets	$	12,329	$	306

Forward commitments	Other assets	18,500		43
Forward commitments	Other liabilities	1,500		(4)
Undesignated interest rate swaps	Other liabilities	5,843		(118)

December 31, 2022
Interest rate lock commitments (mortgage)	Other assets	$	9,340	$	174

Forward commitments	Other assets	6,400		47
Forward commitments	Other liabilities	5,750		(99)
Undesignated interest rate swaps	Other liabilities	6,028		(135)

HTLF recognizes gains and losses on other free standing derivatives in two separate income statement categories. Interest rate lock commitments and forward commitments are recognized in net gains on sale of loans held for sale and undesignated interest rate swaps are recognized in other noninterest income. The table below identifies the gains and losses recognized in income on HTLF's other free standing derivative instruments not designated as hedging instruments for the three- and six- months ended June 30, 2023, and June 30, 2022, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Interest rate lock commitments (mortgage)	$	(128)	$	523	$	282	$	(672)

Forward commitments	(181)		(967)		91		68
Undesignated interest rate swaps	20		(100)		17		(325)

NOTE 7: FAIR VALUE

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

Fair Value Hierarchy

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

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

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

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

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

Securities Available for Sale and Held to Maturity

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

Equity Securities with a Readily Determinable Fair Value

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

Loans Held for Sale

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

Loans Held to Maturity

HTLF does not record loans held to maturity at fair value on a recurring basis. However, from time to time, certain loans are considered collateral dependent and an allowance for credit losses is established. The fair value of individually assessed loans is measured using the fair value of the collateral. In accordance with ASC 820, individually assessed loans measured at fair value are classified as nonrecurring Level 3 in the fair value hierarchy.

Premises, Furniture and Equipment Held for Sale

HTLF considers third party appraisals less estimated disposal costs, 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 held for sale. Accordingly, the valuation of premises, furniture and equipment held for sale is subject to significant external and internal judgment. HTLF periodically reviews premises, furniture and equipment held for sale to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. Premises, furniture and equipment held for sale are classified as nonrecurring Level 3 in the fair value hierarchy.

Mortgage Servicing Rights

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

On March 31, 2023, HTLF sold its mortgage servicing rights portfolio. The transaction qualified as a sale, and $7.7 million of mortgage servicing rights were de-recognized on the consolidated balance sheet as of March 31, 2023. The book value and fair value were both $0 as of March 31, 2023.

Derivative Financial Instruments

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

Although HTLF has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2023, and December 31, 2022, HTLF has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, HTLF has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Interest rate lock commitments

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

Forward commitments

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

Other Real Estate Owned

Other real estate owned ("OREO") represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the fair value of the property at the time of acquisition (representing the property's cost basis), plus any acquisition costs, or the estimated fair value of the property, less disposal costs. HTLF considers third party appraisals, as well

as independent fair value assessments from realtors or persons involved in selling OREO, in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. HTLF periodically reviews OREO to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. OREO is classified as nonrecurring Level 3 of the fair value hierarchy.

The table below presents HTLF's assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2023, and December 31, 2022, 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, 2023
Assets

Securities available for sale
U.S. treasuries	$	31,679	$	31,679	$	—	$	—
U.S. agencies	43,036		—		43,036		—
Obligations of states and political subdivisions	849,239		—		849,239		—
Mortgage-backed securities - agency	1,686,646		—		1,686,646		—
Mortgage-backed securities - non-agency	1,995,809		—		1,995,809		—
Commercial mortgage-backed securities - agency	83,825		—		83,825		—
Commercial mortgage-backed securities - non-agency	617,992		—		617,992		—
Asset-backed securities	412,716		—		412,716		—
Corporate bonds	56,411		—		56,411		—
Equity securities with a readily determinable fair value	20,688		—		20,688		—
Derivative financial instruments(1)	96,689		—		96,689		—
Interest rate lock commitments	306		—		—		306
Forward commitments	43		—		43		—
Total assets at fair value	$	5,895,079	$	31,679	$	5,863,094	$	306
Liabilities
Derivative financial instruments(2)	$	51,994	$	—	$	51,994	$	—
Forward commitments	4		—		4		—

Total liabilities at fair value	$	51,998	$	—	$	51,998	$	—
December 31, 2022
Assets

Securities available for sale
U.S. treasuries	$	31,699	$	31,699	$	—	$	—
U.S. agencies	43,135		—		43,135		—
Obligations of states and political subdivisions	879,437		—		879,437		—
Mortgage-backed securities - agency	1,772,105		—		1,772,105		—
Mortgage-backed securities - non-agency	2,181,876		—		2,181,876		—
Commercial mortgage-backed securities - agency	85,123		—		85,123		—
Commercial mortgage-backed securities - non-agency	659,459		—		659,459		—
Asset-backed securities	416,054		—		416,054		—
Corporate bonds	57,942		—		57,942		—
Equity securities with a readily determinable fair value	20,314		—		20,314		—
Derivative financial instruments(2)	46,293		—		46,293		—
Interest rate lock commitments	174		—		—		174
Forward commitments	47		—		47		—
Total assets at fair value	$	6,193,658	$	31,699	$	6,161,785	$	174
Liabilities
Derivative financial instruments(1)	$	46,226	$	—	$	46,226	$	—
Forward commitments	99		—		99		—

Total liabilities at fair value	$	46,325	$	—	$	46,325	$	—

(1) Includes interest rate swaps, embedded derivatives and back-to-back loan swaps.
(2) Includes back-to-back loan swaps and free standing derivatives.

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


	Fair Value Measurements at June 30, 2023
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses
Collateral dependent individually assessed loans:
Commercial and industrial	$	9,234	$	—	$	—	$	9,234	$	799
Owner occupied commercial real estate	7,339		—		—		7,339		—
Non-owner occupied commercial real estate	13,761		—		—		13,761		—
Real estate construction	910		—		—		910		—
Agricultural and agricultural real estate	6,147		—		—		6,147		5,309
Residential real estate	2,254		—		—		2,254		—

Total collateral dependent individually assessed loans	$	39,645	$	—	$	—	$	39,645	$	6,108
Loans held for sale	$	14,353	$	—	$	14,353	$	—	$	(266)
Other real estate owned	2,677		—		—		2,677		737
Premises, furniture and equipment held for sale	3,741		—		—		3,741		759


	Fair Value Measurements at December 31, 2022
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses
Collateral dependent individually assessed loans:
Commercial and industrial	$	12,042	$	—	$	—	$	12,042	$	4,186
Owner occupied commercial real estate	7,556		—		—		7,556		—
Non-owner occupied commercial real estate	11,371		—		—		11,371		—
Real estate construction	1,518		—		—		1,518		—
Agricultural and agricultural real estate	3,788		—		—		3,788		—
Residential real estate	1,607		—		—		1,607		—

Total collateral dependent individually assessed loans	$	37,882	$	—	$	—	$	37,882	$	4,186
Loans held for sale	$	5,277	$	—	$	5,277	$	—	$	(116)

Other real estate owned	8,401		—		—		8,401		180
Premises, furniture and equipment held for sale	6,851		—		—		6,851		1,562
Servicing rights	7,840		—		—		7,840		516

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

Fair Value at
6/30/2023

Valuation
Technique

Unobservable
Input

Range (Weighted
Average)

Interest rate lock commitments

306

Discounted cash flows

Closing ratio

0-99% (89%)(1)

Other real estate owned

2,677

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Premises, furniture and equipment held for sale

3,741

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Collateral dependent individually assessed loans:

Commercial

9,234

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Owner occupied commercial real estate

7,339

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-13%(3)

Non-owner occupied commercial real estate

13,761

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-9%(3)

Real estate construction

910

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Agricultural and agricultural real estate

6,147

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%(3)

Residential real estate

2,254

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

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

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

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

Fair Value at 12/31/2022

Valuation
Technique

Unobservable
Input

Range (Weighted Average)

Interest rate lock commitments

174

Discounted cash flows

Closing ratio

0-99% (88%)(1)

Other real estate owned

8,401

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Servicing rights

7,840

Discounted cash flows

Discount rate

9.98 - 11.72% (10.02%)(4)

Constant prepayment rate

7.8 - 14.2% (7.9%)(4)

Premises, furniture and equipment held for sale

6,851

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Collateral dependent individually assessed loans:

Commercial and industrial

12,042

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Owner occupied commercial real estate

7,556

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Non-owner occupied commercial real estate

11,371

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Real estate construction

1,518

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

Agricultural and agricultural real estate

3,788

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%(3)

Residential real estate

1,607

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%(3)

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

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


	For the Six Months Ended June 30, 2023		For the Year Ended December 31, 2022
Balance at January 1,	$	174	$	1,306

Total net gains included in earnings	282		(1,828)
Issuances	1,110		3,683
Settlements	(1,260)		(2,987)
Balance at period end	$	306	$	174

Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at June 30, 2023, and December 31, 2022, were $306,000 and $174,000, respectively.

The table below is a summary of the estimated fair value of HTLF's financial instruments (as defined by ASC 825) as of June 30, 2023, and December 31, 2022, in thousands. The carrying amounts in the following tables are recorded in the consolidated balance sheets under the indicated captions. In accordance with ASC 825, the assets and liabilities that are not financial instruments are not included in the disclosure, including the value of the commercial and mortgage servicing rights, premises, furniture and equipment, premises, furniture and equipment held for sale, OREO, goodwill, and other intangibles and other liabilities.

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


					Fair Value Measurements at June 30, 2023
	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	$	400,187	$	400,187	$	400,187	$	—	$	—
Time deposits in other financial institutions	1,490		1,490		1,490		—		—
Securities:

Carried at fair value	5,798,041		5,798,041		31,679		5,766,362		—
Held to maturity	834,673		806,942		—		806,942		—
Other investments	72,291		72,291		—		72,291		—
Loans held for sale	14,353		14,353		—		14,353		—
Loans, net:
Commercial and industrial	3,561,284		3,380,572		—		3,371,338		9,234
PPP	4,139		4,139		—		4,139		—
Owner occupied commercial real estate	2,383,989		2,196,424		—		2,189,085		7,339
Non-owner occupied commercial real estate	2,512,760		2,370,988		—		2,357,227		13,761
Real estate construction	984,888		979,326		—		978,416		910
Agricultural and agricultural real estate	836,306		760,910		—		754,763		6,147
Residential real estate	820,793		708,992		—		706,738		2,254
Consumer	502,617		483,574		—		483,574		—
Total Loans, net	11,606,776		10,884,925		—		10,845,280		39,645
Cash surrender value on life insurance	195,793		195,793		—		195,793		—
Derivative financial instruments(1)	96,689		96,689		—		96,689		—
Interest rate lock commitments	306		306		—		—		306
Forward commitments	43		43		—		43		—
Financial liabilities:
Deposits
Demand deposits	4,897,858		4,897,858		—		4,897,858		—
Savings deposits	8,772,596		8,772,596		—		8,772,596		—
Time deposits	3,993,089		3,993,089		—		3,993,089		—

Short term borrowings	44,364		44,364		—		44,364		—
Other borrowings	372,403		374,127		—		374,127		—
Derivative financial instruments(2)	51,994		51,994		—		51,994		—
Forward commitments	4		4		—		4		—

(1) Includes interest rate swaps, embedded derivatives and back-to-back loan swaps.
(2) Includes back-to-back loan swaps and free standing derivative instruments.


					Fair Value Measurements at December 31, 2022
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	363,087	$	363,087	$	363,087	$	—	$	—
Time deposits in other financial institutions	1,740		1,740		1,740		—		—
Securities:

Carried at fair value	6,147,144		6,147,144		31,699		6,115,445		—
Held to maturity	829,403		776,557		—		776,557		—
Other investments	74,567		74,567		—		74,567		—
Loans held for sale	5,277		5,277		—		5,277		—
Loans, net:
Commercial and industrial	3,435,343		3,270,127		—		3,258,085		12,042
PPP	11,025		11,025		—		11,025		—
Owner occupied commercial real estate	2,251,359		2,084,665		—		2,077,109		7,556
Non-owner occupied commercial real estate	2,314,401		2,184,796		—		2,173,425		11,371
Real estate construction	1,046,084		1,039,244		—		1,037,726		1,518
Agricultural and agricultural real estate	917,876		842,637		—		838,849		3,788
Residential real estate	845,650		741,325		—		739,718		1,607
Consumer	497,131		480,018		—		480,018		—
Total Loans, net	11,318,869		10,653,837		—		10,615,955		37,882
Cash surrender value on life insurance	193,403		193,403		—		193,403		—
Derivative financial instruments(1)	46,293		46,293		—		46,293		—
Interest rate lock commitments	174		174		—		—		174
Forward commitments	47		47		—		47		—
Financial liabilities:
Deposits
Demand deposits	5,701,340		5,701,340		—		5,701,340		—
Savings deposits	9,994,391		9,994,391		—		9,994,391		—
Time deposits	1,817,278		1,817,278		—		1,817,278		—

Short term borrowings	376,117		376,117		—		376,117		—
Other borrowings	371,753		372,473		—		372,473		—
Derivative financial instruments(1)	46,226		46,226		—		46,226		—
Forward commitments	99		99		—		99		—

(1) Includes interest rate swaps, fair value hedges, embedded derivatives and back-to-back loan swaps.
(2) Includes back-to-back loan swaps and undesignated interest rate swaps.

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

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

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

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

Loans — The fair value of loans is determined using an exit price methodology. The exit price estimation of fair value is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and a discount rate based on the relative risk of the cash flows. Other considerations include the loan type, remaining life of the loan and credit risk.

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

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

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

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

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

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

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

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

NOTE 8: STOCK COMPENSATION

Under its 2020 Long-Term Incentive Plan (the "Plan"), HTLF's Compensation and Human Capital Committee, (the "Compensation Committee"), may grant non-qualified and incentive stock options, stock appreciation rights, stock awards, restricted stock, restricted stock units and cash incentive awards, . The Plan has 1,460,000 shares of common stock authorized for issuance. As of June 30, 2023, 757,105 shares of common stock were available for issuance under future awards that may be granted under the Plan to employees and directors of, and service providers to, HTLF or its subsidiaries.

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

HTLF's income tax expense included $75,000 of tax expense during the six months ended June 30, 2023, and a tax benefit of $129,000 during the six months ended June 30, 2022, related to the exercise, vesting and forfeiture of equity-based awards.

Restricted Stock Units

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

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

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

All of HTLF's RSUs will be settled in common stock upon vesting. Most RSUs granted after March 2023 accrue dividends, which are paid without interest only upon vesting. Dividend equivalents with respect to RSUs forfeited are also forfeited. RSUs granted prior to 2023 are not entitled to dividend equivalents.

A summary of the RSUs outstanding as of June 30, 2023, and June 30, 2022, and changes during the six months ended June 30, 2023 and 2022, follows:


	2023			2022
	Shares	Weighted-Average Grant Date Fair Value		Shares	Weighted-Average Grant Date Fair Value
Outstanding at January 1,	424,086	$	46.15	389,885	$	44.19
Granted	241,347	47.30		236,120	48.47
Vested	(166,845)	42.22		(158,519)	45.03
Forfeited	(28,612)	44.27		(25,500)	46.60
Outstanding at June 30,	469,976	$	48.25	441,986	$	46.03

Total compensation costs recorded for RSUs were $6.7 million and $5.1 million for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, there were $12.9 million of total unrecognized compensation costs related to the Plan for RSUs that are expected to be recognized through 2026.

Stock Options

The Plan provides the Compensation Committee the authority to grant stock options. During the year ended December 31, 2022, 64,518 options were granted, and the fair value of the options granted was determined using the Black-Scholes valuation model. The options granted generally vest over the first four years in equal installments on the anniversary date of the grant. The options may also vest upon death, disability, upon a change in control or upon a "qualified retirement" as defined in the stock option agreement.

The exercise price of the stock options was established by the Compensation Committee, but the exercise price may not be less than the fair market value of the shares on the date the options are granted.

A summary of the status of stock options as of June 30, 2023, and changes during the six months ended June 30, 2023, is shown in the table below. There were no options outstanding at June 30, 2022.


	2023
	Shares	Weighted Average Exercise Price
Outstanding January 1,	64,518	$	48.79
Granted	—	—
Exercised	—	—
Forfeited	(6,452)	48.79
Outstanding at June 30,	58,066	48.79
Options exercisable at June 30,	—	$	—

At June 30, 2023, the options had a weighted average remaining contractual life of 9.42 years. The intrinsic value of the vested options as of June 30, 2023 was $0. The intrinsic value of the options exercised during the six months ended June 30, 2023, was $0. The total fair value of the shares that vested during the six months ended June 30, 2023, was $0. Total compensation costs recorded for stock options during the six months ended June 30, 2023 and 2022 were $109,000 and $0, respectively. As of June 30, 2023, there were $602,000 of total unrecognized compensation costs related to the Plan for options that are expected to be recognized through 2026.

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

SAFE HARBOR STATEMENT

This Quarterly Report on Form 10-Q (including any information incorporated herein by reference) contains, and future oral and written statements of Heartland Financial USA, Inc. ("HTLF") and its management may contain, forward-looking statements within the meaning of such term in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") with respect to the business, financial condition, results of operations, plans, objectives and future performance of HTLF. Any statements about HTLF's expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. Forward-looking statements may include information about possible or assumed future results of HTLF's operations or performance, and may be based upon beliefs, expectations and assumptions of HTLF's management. These forward-looking statements are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "project," "may," "will," "would," "could," "should," "view," "opportunity," "potential," or other similar expressions. Although HTLF has made these statements based on management's experience and best estimate of future events, the ability of HTLF to predict results or the actual effect or outcomes of plans or strategies is inherently uncertain, and there may be events or factors that management has not anticipated. Therefore, the accuracy and achievement of such forward-looking statements and estimates are subject to a number of risks, many of which are beyond the ability of management to control or predict, that could cause actual results to differ materially from those in its forward-looking statements. These factors, which HTLF currently believes could have a material adverse effect on its operations and future prospects are detailed in the "Risk Factors" section include, among others, those described below and in the risk factors in HTLF's reports filed with the Securities and Exchange Commission ("SEC"), including the "Risk Factors" section under Item 1A of Part I of the company’s Annual Report on Form 10-K for the year ended December 31, 2022:

•Economic and Market Conditions Risks, including risks related to the deterioration of the U.S. economy in general and in the local economies in which HTLF conducts its operations and future civil unrest, natural disasters, pandemics and governmental measures addressing them, climate change and climate-related regulations, persistent inflation, higher interest rates, recession, supply chain issues, labor shortages, terrorist threats or acts of war;

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

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

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

•Strategic and External Risks, including economic, political, and competitive forces impacting our business;

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

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

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

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses. These estimates are based upon historical experience and on various other assumptions that management believes are reasonable under the circumstances. Among other things, the estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The estimates and judgments that management believes have the most effect on HTLF's reported financial position and results of operations are described as critical accounting policies in the company's Annual Report on Form 10-K for the year ended December 31, 2022. There have

been no significant changes in the critical accounting estimates or the assumptions and judgments utilized in applying these estimates since December 31, 2022.

OVERVIEW

Heartland Financial USA, Inc. is a bank holding company operating under the brand name "HTLF". HTLF's independently branded banks (referred to herein collectively as the "Banks", "Bank Markets") serve communities in Arizona, California, Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, New Mexico, Texas and Wisconsin. HTLF is committed to its core commercial business supported by a strong retail operation and provides a diversified line of financial services and products including treasury management, commercial credit cards, wealth management, investments and residential mortgages. As of June 30, 2023, HTLF had four Banks operating under 11 local bank brands through a total of 117 locations.

HTLF's results of operations depend primarily on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges and fees, loan servicing income, trust fees, brokerage and insurance commissions, capital markets fees, net securities gains/(losses), net gains on sale of loans held for sale, and income on bank owned life insurance, also affects the results of operations. HTLF's principal operating expenses, aside from interest expense, consist of the provision for credit losses, salaries and employee benefits, occupancy, furniture and equipment costs, professional fees, FDIC insurance assessments, advertising, core deposit and customer relationship intangibles amortization, other real estate and loan collection expenses, (gains)/losses on sales/valuation of assets, partnership investment in tax credit projects and acquisition, integration and restructuring costs.

HTLF Response to Recent Banking Industry Disruptions

The banking industry experienced significant disruptions in March 2023, including bank failures, which has since caused industry-wide concerns related to deposit outflows, liquidity, continued interest rate increases and unrealized losses on securities. In response to the concerns, management continues to:

•help customers facilitate additional FDIC insurance through Insured Cash Sweep ("ICS") products and Certificate of Deposit Registry Service ("CDARS") products,

•monitor and adjust deposit pricing to address the highly competitive deposit environment,

•maintain borrowing capacity through various federal programs, including the Federal Reserve's Bank Term Funding Program ("BTFP"), which totaled $3.30 billion as of June 30, 2023, of which no balance was drawn, and

•conduct active commercial and retail deposit campaigns, which resulted in nearly 1,300 net new commercial deposit account and over 1,400 net new retail accounts opened in the second quarter of 2023.

The shift to work-from-home and hybrid work arrangements has caused decreased utilization of and demand for office space. HTLF is actively monitoring its exposure to office space in the non-owner occupied commercial real estate portfolio and securities portfolio. As of June 30, 2023:

•Outstanding loans totaling $408.4 million were collateralized by non-owner occupied office space, which represents 3.5% of the total loans held to maturity, and the average loan size was $1.3 million.

•There were no loans collateralized by office space on nonaccrual.

•The collateral consists primarily of multi-tenant, non-central business district properties.

•The amount of office exposure in the securities portfolio was less than 1% of the total portfolio.

As of June 30, 2023:

•66% of HTLF's deposits were insured or collateralized.

•HTLF's capital ratios substantially exceeded the well-capitalized thresholds, and management believes that HTLF would remain well-capitalized in the event that regulatory rules were adopted requiring that unrealized losses in the total investment portfolio be included in the calculation of regulatory capital ratios.

Overview of Second Quarter and Year to Date results as of June 30, 2023

HTLF reported the following results for the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022:

•net income available to common stockholders of $47.4 million compared to $49.9 million, a decrease of $2.5 million or 5%,

•earnings per diluted common share of $1.11 compared to $1.17, a decrease of $0.06 or 5%,

•net interest income of $147.1 million compared to $142.5 million, an increase of $4.7 million or 3%,

•total revenue growth of $2.6 million or 1% to $179.6 million compared to $177.0 million,

•return on average assets was 0.98% compared to 1.06%,

•return on average common equity was 11.01% compared to 11.55%, and

•return on average tangible common equity (non-GAAP) was 17.33% compared to 18.35%.

HTLF reported the following results for the six months ended June 30, 2023 compared to the six months ended June 30, 2022:

•net income available to common stockholders of $98.2 million compared to $90.9 million, an increase of $7.2 million or 8%.

•earnings per diluted common share of $2.30 compared to $2.14, an increase of $0.16 or 7%,

•net interest income of $299.3 million compared to $277.1 million, an increase of $22.2 million or 8%,

•total revenue of $361.8 million compared to $346.2 million, an increase of $15.6 million or 5%,

•return on average common equity was 11.70% compared to 9.82%,

•return on average assets was 1.02% compared to 0.99%, and

•return on average tangible common equity (non-GAAP) was 18.63% compared to 15.08%.

For the second quarter of 2023, net interest margin was 3.19% (3.24% on a fully tax-equivalent basis, non-GAAP), which compares to 3.36% (3.40% on a fully tax-equivalent basis, non-GAAP) for the first quarter of 2023, and 3.18% (3.22% on a fully tax-equivalent basis, non-GAAP) for the second quarter of 2022. For the first six months of 2023, net interest margin was 3.27% (3.32% on a fully tax-equivalent basis, non-GAAP) which compares to 3.13% (3.17% on a fully tax equivalent basis, non-GAAP) for the first six months of 2022.

The efficiency ratio was 60.93% (59.82% on an adjusted fully tax-equivalent basis, non-GAAP) for the second quarter of 2023 compared to 60.16% (57.66% on an adjusted fully-tax equivalent basis, non-GAAP) for the same quarter of 2022. For the first six months of 2023, the efficiency ratio was 60.94% (58.48% on an adjusted fully tax-equivalent basis, non-GAAP) compared to 62.75% (61.02% on an adjusted fully tax-equivalent basis, non-GAAP) for the first six months of 2022.

Total assets were $20.22 billion at June 30, 2023, a decrease of $19.5 million or less than 1% since December 31, 2022. Securities represented 33% and 35% of total assets at June 30, 2023 and December 31, 2022, respectively. Total loans held to maturity were $11.72 billion at June 30, 2023, compared to $11.43 billion at December 31, 2022, an increase of $289.6 million or 3%.

The total allowance for lending related credit losses was $129.8 million or 1.11% of total loans at June 30, 2023, compared to $129.7 million or 1.13% of total loans at December 31, 2022.

Total deposits were $17.66 billion as of June 30, 2023, compared to $17.51 billion at December 31, 2022, an increase of $150.5 million or 1%.

Total equity was $1.86 billion at June 30, 2023, compared to $1.74 billion at December 31, 2022. Book value per common share was $41.00 at June 30, 2023, compared to $38.25 at year-end 2022. The unrealized loss on securities available for sale, net of applicable taxes, was $576.5 million at June 30, 2023, compared to an unrealized loss of $619.2 million, net of applicable taxes, at December 31, 2022.

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

2023 Developments

HTLF Retirement Plan Services

As of March 29, 2023, HTLF's subsidiary, Dubuque Bank & Trust, entered into an agreement to sell and transfer the recordkeeping and administration services component of HTLF’s Retirement Plan Services business to July Business Services ("July"). Through the new partnership with July, HTLF expects to augment the comprehensive retirement plan solutions offered to clients with enhanced technology and an expanded suite of product offerings that clients expect from a top retirement services provider. The transaction was completed and recordkeeping and administration services were transferred in the second quarter of 2023. The transaction resulted in a gain of $4.3 million.

First Bank & Trust Mortgage Servicing Rights

On March 31, 2023, First Bank & Trust, a division of HTLF Bank, closed on the sale of its mortgage servicing rights portfolio, which consisted of approximately 4,500 loans serviced for others with an unpaid principal balance of $698.5 million. In the agreement, which includes customary terms and conditions, First Bank & Trust provided interim servicing of the loans until the transfer date of May 1, 2023.

Goodwill Impairment Testing

The sustained decline in HTLF's stock price, which management deemed to be a triggering event, caused management to perform impairment testing on its goodwill in the second quarter of 2023. Management concluded that none of the goodwill at any of HTLF's reporting units was impaired.

Fair Value Hedges

During the second quarter of 2023, HTLF entered into interest rate swaps designated as fair value hedges with initial notional amounts of $838.1 million primarily designed to provide protection against unrealized securities losses due to the impact of higher mid-to-long term interest rates. HTLF also executed an interest rate swap designated as a fair value hedge with an original notional amount of $500.0 million to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure.

Charter Consolidation Update

During the second quarter of 2023, Bank of Blue Valley and First Bank & Trust were consolidated into HTLF Bank. Subsequent to June 30, 2023, Rocky Mountain Bank was consolidated into HTLF Bank. Citywide Banks, Premier Valley Bank, Minnesota Bank & Trust, Arizona Bank & Trust, Illinois Bank & Trust, Wisconsin Bank & Trust, Bank of Blue Valley, First Bank & Trust and Rocky Mountain Bank are now operating as divisions of HTLF Bank. The remaining two charters are expected to be consolidated by the end of 2023. Charter consolidation follows a template that retains the current brands, local leadership and local decision making.

Consolidation restructuring costs are projected to be $19-$20 million with approximately $6-$7 million of expenses remaining to be incurred in 2023. Total costs incurred since the project started in the fourth quarter of 2021 through June 30, 2023, were $12.9 million, of which $1.9 million was incurred in the second quarter of 2023. Total charter consolidation costs for the first six months of 2023 totaled $3.6 million. Charter consolidation is designed to eliminate redundancies and improve HTLF’s operating efficiency and capacity to support ongoing product and service enhancements, as well as current and future growth. HTLF has realized some operating efficiencies and financial benefits with the completion of nine charter consolidations. The resulting efficiencies and expansion in capacity are projected to generate benefits of approximately $20 million annually when the project is completed with core operating expenses expected to decline to 2.10% or less of average assets.


FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
STATEMENT OF INCOME DATA
Interest income	$	235,500		$	152,887		$	452,478		$	294,149
Interest expense	88,368			10,426			153,134			17,009
Net interest income	147,132			142,461			299,344			277,140
Provision for credit losses	5,379			3,246			8,453			6,491
Net interest income after provision for credit losses	141,753			139,215			290,891			270,649
Noninterest income	32,493			34,539			62,492			69,108
Noninterest expenses	109,446			106,479			220,489			217,276
Income taxes	15,384			15,402			30,702			27,519
Net income	49,416			51,873			102,192			94,962
Preferred dividends	(2,012)			(2,012)			(4,025)			(4,025)

Net income available to common stockholders	$	47,404		$	49,861		$	98,167		$	90,937

KEY PERFORMANCE RATIOS
Annualized return on average assets	0.98		%	1.06		%	1.02		%	0.99		%
Annualized return on average common equity (GAAP)	11.01			11.55			11.70			9.82
Annualized return on average tangible common equity (non-GAAP)(1)	17.33			18.35			18.63			15.08

Annualized ratio of net charge-offs/(recoveries) to average loans	0.32			0.03			0.15			0.25
Annualized net interest margin (GAAP)	3.19			3.18			3.27			3.13
Annualized net interest margin, fully tax-equivalent (non-GAAP)(1)	3.24			3.22			3.32			3.17
Efficiency ratio (GAAP)	60.93			60.16			60.94			62.75
Adjusted efficiency ratio, fully tax-equivalent (non-GAAP)(1)	59.82			57.66			58.48			61.02
Total noninterest expenses to average assets	2.17			2.18			2.20			2.26
Core noninterest expenses to average assets (non-GAAP)(1)	2.16			2.14			2.15			2.21


Dollars in thousands, expect per share data	As Of and For the Quarter Ended
	6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
BALANCE SHEET DATA
Investments	$	6,705,005		$	7,001,119		$	7,051,114		$	6,970,864		$	7,274,056
Loans held for sale	14,353			10,425			5,277			9,570			18,803
Loans receivable held to maturity	11,717,974			11,495,353			11,428,352			10,923,532			10,678,218
Allowance for credit losses	111,198			112,707			109,483			105,715			101,353
Total assets	20,224,716			20,182,544			20,244,228			19,682,950			19,658,399
Total deposits	17,663,543			17,681,346			17,513,009			17,267,121			17,225,550
Long-term obligations	372,403			372,097			371,753			371,446			372,538

Common equity	1,748,285			1,718,700			1,624,350			1,545,253			1,663,363

COMMON SHARE DATA
Book value per common share (GAAP)	$	41.00		$	40.38		$	38.25		$	36.41		$	39.19
Tangible book value per common share (non-GAAP)(1)	$	26.98		$	26.30		$	24.09		$	22.20		$	24.94
ASC 320 effect on book value per common share	$	(14.04)		$	(13.35)		$	(14.58)		$	(15.31)		$	(11.43)
Common shares outstanding, net of treasury stock	42,644,544			42,558,726			42,467,394			42,444,106			42,439,439
Tangible common equity ratio (non-GAAP)(1)	5.86		%	5.72		%	5.21		%	4.94		%	5.56		%
Adjusted tangible common equity ratio (non-GAAP)(1)	8.79		%	8.61		%	8.37		%	8.35		%	8.11		%

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


Non-GAAP Reconciliations (Dollars in thousands, except per share data)
	As Of and For the Quarter Ended
	6/30/2023			3/31/2023			12/31/2022			9/30/2022			6/30/2022
Reconciliation of Tangible Book Value Per Common Share (non-GAAP)
Common equity (GAAP)	$	1,748,285		$	1,718,700		$	1,624,350		$	1,545,253		$	1,663,363
Less goodwill	576,005			576,005			576,005			576,005			576,005
Less core deposit and customer relationship intangibles, net	21,651			23,366			25,154			26,995			28,851
Tangible common equity (non-GAAP)	$	1,150,629		$	1,119,329		$	1,023,191		$	942,253		$	1,058,507

Common shares outstanding, net of treasury stock	42,644,544			42,558,726			42,467,394			42,444,106			42,439,439
Common equity (book value) per share (GAAP)	$	41.00		$	40.38		$	38.25		$	36.41		$	39.19
Tangible book value per common share (non-GAAP)	$	26.98		$	26.30		$	24.09		$	22.20		$	24.94

Reconciliation of Tangible Common Equity Ratio (non-GAAP)
Tangible common equity (non-GAAP)	$	1,150,629		$	1,119,329		$	1,023,191		$	942,253		$	1,058,507

Total assets (GAAP)	$	20,224,716		$	20,182,544		$	20,244,228		$	19,682,950		$	19,658,399
Less goodwill	576,005			576,005			576,005			576,005			576,005
Less core deposit and customer relationship intangibles, net	21,651			23,366			25,154			26,995			28,851
Total tangible assets (non-GAAP)	$	19,627,060		$	19,583,173		$	19,643,069		$	19,079,950		$	19,053,543
Tangible common equity ratio (non-GAAP)	5.86		%	5.72		%	5.21		%	4.94		%	5.56		%

Reconciliation of Adjusted Tangible Common Equity Ratio (non-GAAP)
Tangible common equity (non-GAAP)	$	1,150,629		$	1,119,329		$	1,023,191		$	942,253		$	1,058,507
Accumulated other comprehensive loss	575,240			566,919			620,006			650,636			486,918
Adjusted tangible common equity (non-GAAP)	$	1,725,869		$	1,686,248		$	1,643,197		$	1,592,889		$	1,545,425

Total tangible assets (non-GAAP)	$	19,627,060		$	19,583,173		$	19,643,069		$	19,079,950		$	19,053,543
Adjusted tangible common equity ratio (non-GAAP)	8.79		%	8.61		%	8.37		%	8.35		%	8.11		%

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


Non-GAAP Reconciliations (Dollars in thousands, except per share data)	For the Quarter Ended June 30,						For the Six Months Ended June 30,
	2023			2022			2023			2022
Reconciliation of Annualized Return on Average Tangible Common Equity (non-GAAP)
Net income available to common stockholders (GAAP)	$	47,404		$	49,861		$	98,167		$	90,937
Plus core deposit and customer relationship intangibles amortization, net of tax(1)	1,354			1,645			2,767			3,268
Net income available to common stockholders excluding intangible amortization (non-GAAP)	$	48,758		$	51,506		$	100,934		$	94,205

Average common equity (GAAP)	$	1,727,013		$	1,731,393		$	1,691,633		$	1,866,657
Less average goodwill	576,005			576,005			576,005			576,005
Less average core deposit and customer relationship intangibles, net	22,481			29,845			23,355			30,883
Average tangible common equity (non-GAAP)	$	1,128,527		$	1,125,543		$	1,092,273		$	1,259,769
Annualized return on average common equity (GAAP)	11.01		%	11.55		%	11.70		%	9.82		%
Annualized return on average tangible common equity (non-GAAP)	17.33		%	18.35		%	18.63		%	15.08		%

Reconciliation of Annualized Net Interest Margin, Fully Tax-Equivalent (non-GAAP)
Net interest income (GAAP)	$	147,132		$	142,461		$	299,344		$	277,140
Plus tax-equivalent adjustment(1)	2,314			1,977			4,523			4,096
Net interest income, fully tax-equivalent (non-GAAP)	$	149,446		$	144,438		$	303,867		$	281,236

Average earning assets	$	18,523,552		$	17,987,734		$	18,458,462		$	17,873,037

Annualized net interest margin (GAAP)	3.19		%	3.18		%	3.27		%	3.13		%
Annualized net interest margin, fully tax-equivalent (non-GAAP)	3.24			3.22			3.32			3.17
Net purchase accounting discount accretion on loans included in annualized net interest margin	0.03			0.07			0.02			0.06





Reconciliation of Adjusted Efficiency Ratio (non-GAAP)
Net interest income (GAAP)	$	147,132		$	142,461		$	299,344		$	277,140
Tax-equivalent adjustment(1)	2,314			1,977			4,523			4,096
Fully tax-equivalent net interest income	149,446			144,438			303,867			281,236
Noninterest income (GAAP)	32,493			34,539			62,492			69,108
Securities (gains)/losses, net	314			2,089			1,418			(783)
Unrealized (gain)/loss on equity securities, net	41			121			(152)			404

Valuation adjustment on servicing rights	—			—			—			(1,658)
Adjusted revenue (non-GAAP)	$	182,294		$	181,187		$	367,625		$	348,307

Total noninterest expenses (GAAP)	$	109,446		$	106,479		$	220,489		$	217,276
Less:
Core deposit and customer relationship intangibles amortization	1,715			2,083			3,503			4,137
Partnership investment in tax credit projects	154			737			692			814
(Gain)/loss on sales/valuation of assets, net	(3,372)			(3,230)			(2,257)			(3,184)
Acquisition, integration and restructuring costs	1,892			2,412			3,565			2,988
Core expenses (non-GAAP)	$	109,057		$	104,477		$	214,986		$	212,521
Efficiency ratio (GAAP)	60.93		%	60.16		%	60.94		%	62.75		%
Adjusted efficiency ratio, fully tax-equivalent (non-GAAP)	59.82		%	57.66		%	58.48		%	61.02		%

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





Non-GAAP Reconciliations (Dollars in thousands, except per share data)	For the Quarter Ended June 30,						For the Six Months Ended June 30,
	2023			2022			2023			2022
Reconciliation of Annualized Ratio of Core Expenses to Average Assets (non-GAAP)
Total noninterest expenses (GAAP)	$	109,446		$	106,479		$	220,489		$	217,276
Core expenses (non-GAAP)	109,057			104,477			214,986			212,521

Average assets	$	20,221,511		$	19,559,091		$	20,170,044		$	19,395,391
Total noninterest expenses to average assets (GAAP)	2.17		%	2.18		%	2.20		%	2.26		%
Core expenses to average assets (non-GAAP)	2.16		%	2.14		%	2.15		%	2.21		%

Acquisition, integration and restructuring costs
Salaries and employee benefits	$	93		$	275		$	167		$	615


Professional fees	1,068			1,779			2,002			2,015
Advertising	222			156			344			156

Other noninterest expenses	509			202			1,052			202
Total acquisition, integration and restructuring costs	$	1,892		$	2,412		$	3,565		$	2,988
After tax impact on diluted earnings per common share(1)	$	0.03		$	0.04		$	0.07		$	0.06
















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

Non-GAAP Financial Measures

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

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

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

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

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

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

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

•Adjusted tangible common equity ratio is total common equity less goodwill, core deposit and customer relationship intangibles, net, and accumulated other comprehensive loss divided by total assets less goodwill and core deposit and customer relationship intangibles, net. This measure is included as it is considered to be a critical metric to analyze and evaluate financial condition and capital strength excluding the variability of accumulated other comprehensive income (loss).

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

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

RESULTS OF OPERATIONS

Net Interest Margin and Net Interest Income

HTLF's management seeks to optimize net interest income and net interest margin through the growth of earning assets and customer deposits while managing asset and liability positions because they are key indicators of HTLF's profitability.

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

For the Quarters ended June 30, 2023 and 2022

Net interest margin, expressed as a percentage of average earning assets, was 3.19% (3.24% on a fully tax-equivalent basis, non-GAAP) during the second quarter of 2023 compared to 3.18% (3.22% on a fully tax-equivalent basis, non-GAAP) during the second quarter of 2022. For the quarters ended June 30, 2023 and 2022, net interest margin included 3 basis points and 7 basis points, respectively, of net purchase accounting discount amortization. HTLF's net interest margin may be impacted in future periods as a result of market pressures to increase deposit pricing. Management anticipates utilizing the cash flow from the investment portfolio to pay down wholesale deposits, which would positively impact net interest margin.

Total interest income and average earning asset changes for the second quarter of 2023 compared to the second quarter of 2022 were:

•Total interest income was $235.5 million compared to $152.9 million, an increase of $82.6 million or 54% and primarily attributable to an increase in average earning assets and higher yields.

•Total interest income on a tax-equivalent basis (non-GAAP) was $237.8 million, an increase of $83.0 million or 54% from $154.9 million.

•Average earning assets increased $535.8 million or 3% to $18.52 billion compared to $17.99 billion.

•The average rate on earning assets increased 170 basis points to 5.15% compared to 3.45%, primarily due to recent interest rate increases.

Total interest expense and average interest bearing liability changes for the second quarter of 2023 compared to the second quarter of 2022 were:

•Total interest expense was $88.4 million, an increase of $77.9 million from $10.4 million, due to increases in the average interest rate paid and average interest bearing liabilities.

•The average interest rate paid on interest bearing liabilities increased 232 basis points to 2.68% compared to 0.36%.

•Average interest bearing deposits increased $1.66 billion or 15% to $12.75 billion from $11.08 billion, including an increase of $1.94 billion in wholesale and institutional deposits.

•The average interest rate paid on interest bearing deposits increased 234 basis points to 2.58% compared to 0.24%.

•Average borrowings decreased $29.4 million or 6% to $461.7 million from $491.1 million, and the average interest rate paid on borrowings was 5.55% compared to 3.18%.

Net interest income changes for the second quarter of 2023 compared to the second quarter of 2022 were:

•Net interest income totaled $147.1 million compared to $142.5 million, an increase of $4.7 million or 3%.

•Net interest income on a tax-equivalent basis (non-GAAP) totaled $149.4 million compared to $144.4 million, which was an increase of $5.0 million or 3%.

For the Six Months ended June 30, 2023 and 2022

Net interest margin, expressed as a percentage of average earning assets, was 3.27% (3.32% on a fully tax-equivalent basis, non-GAAP) during the first six months of 2023, compared to 3.13% (3.17% on a fully tax-equivalent basis, non-GAAP) during the first six months of 2022. For the six months ended June 30, 2023 and 2022, net interest margin included 2 basis points and 6 basis points, respectively, of net purchase accounting discount amortization.

Total interest income and average earning asset changes for the first six months of 2023 compared to the first six months of 2022 were:

•Total interest income was $452.5 million, an increase of $158.3 million or 54% from $294.1 million.

•Total interest income on a tax-equivalent basis (non-GAAP) was $457.0 million, an increase of $158.8 million or 53% from $298.2 million.

•Average earning assets increased $585.4 million or 3% to $18.46 billion compared to $17.87 billion.

Total interest expense and average interest bearing liability changes for the first six months of 2023 compared to the first six months of 2022 were:

•Total interest expense was $153.1 million, an increase of $136.1 million from $17.0 million, due to increases in the average interest rate paid and average interest bearing liabilities.

•The average interest rate paid on interest bearing liabilities increased to 2.39% compared to 0.31%.

•Average interest bearing deposits increased $1.84 billion or 18% to $12.37 billion from $10.53 billion which was primarily attributable to an increase in wholesale and institutional deposits. Average wholesale and institutional deposits totaled $2.78 billion for the first six months of 2023 compared to $826.1 million for the first six months of 2022.

•The average interest rate paid on interest bearing deposits was 2.26% for the first six months of 2023 compared to 0.18% for the first six months of 2022.

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

HTLF attempts to manage its balance sheet to minimize the effect that a change in interest rates has on its net interest income. Management continues to work toward improving both its earning assets and funding mix through targeted organic growth strategies, which management believes will result in additional net interest income. HTLF models and reviews simulations using various improving and deteriorating interest rate scenarios to assist in monitoring its exposure to interest rate risk. Based on these simulations, it is management's opinion that HTLF maintains a well-balanced and manageable interest rate posture. Item 3 of Part I of this Quarterly Report on Form 10-Q contains additional information about the results of the most recent net interest income simulations. Note 6 to the consolidated financial statements included in this Quarterly Report on Form 10-Q contains a detailed discussion of the derivative instruments utilized to manage its interest rate risk.

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


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

	For the Quarter Ended
	June 30, 2023						March 31, 2023						June 30, 2022
	Average Balance		Interest		Rate		Average Balance		Interest		Rate		Average Balance		Interest		Rate
Earning Assets
Securities:
Taxable	$	5,962,207	$	58,172	3.91	%	$	6,096,888	$	55,976	3.72	%	$	6,419,615	$	38,098	2.38	%
Nontaxable(1)	895,458		8,074		3.62		922,676		7,630		3.35		915,880		6,972		3.05
Total securities	6,857,665		66,246		3.87		7,019,564		63,606		3.67		7,335,495		45,070		2.46
Interest on deposits with other banks and short-term investments	153,622		2,051		5.41		105,400		1,131		4.35		277,773		563		0.81
Federal funds sold	—		—		—		—		—		—		—		—		—
Loans:(2)
Commercial and industrial(1)	3,565,449		56,644		6.37		3,459,317		49,907		5.85		3,002,822		30,441		4.07
PPP loans	6,302		24		1.53		9,970		26		1.06		41,370		1,801		17.46
Owner occupied commercial real estate	2,366,107		28,031		4.75		2,289,002		26,769		4.74		2,294,524		22,863		4.00
Non-owner occupied commercial real estate	2,462,098		35,583		5.80		2,331,318		30,749		5.35		2,179,048		22,871		4.21
Real estate construction	1,028,109		18,528		7.23		1,099,026		18,131		6.69		878,555		10,015		4.57
Agricultural and agricultural real estate	848,554		12,256		5.79		835,648		11,353		5.51		782,610		7,933		4.07
Residential mortgage	840,741		9,383		4.48		852,561		9,273		4.41		849,174		8,358		3.95
Consumer	508,082		9,068		7.16		501,236		8,242		6.67		449,265		4,949		4.42
Less: allowance for credit losses-loans	(113,177)		—		—		(110,393)		—		—		(102,902)		—		—
Net loans	11,512,265		169,517		5.91		11,267,685		154,450		5.56		10,374,466		109,231		4.22
Total earning assets	18,523,552		237,814		5.15	%	18,392,649		219,187		4.83	%	17,987,734		154,864		3.45	%
Nonearning Assets	1,697,959						1,725,356						1,571,357
Total Assets	$	20,221,511					$	20,118,005					$	19,559,091
Interest Bearing Liabilities
Savings	$	8,935,775	$	41,284	1.85	%	$	9,730,494	$	37,893	1.58	%	$	9,995,497	$	5,372	0.22	%
Time deposits	3,812,330		40,691		4.28		2,257,047		19,005		3.41		1,088,765		1,158		0.43
Short-term borrowings	89,441		848		3.80		222,772		2,422		4.41		118,646		88		0.30
Other borrowings	372,248		5,545		5.97		371,921		5,446		5.94		372,411		3,808		4.10
Total interest bearing liabilities	13,209,794		88,368		2.68	%	12,582,234		64,766		2.09	%	11,575,319		10,426		0.36	%
Noninterest Bearing Liabilities
Noninterest bearing deposits	4,941,033						5,518,326						5,960,217
Accrued interest and other liabilities	232,966						250,880						181,457
Total noninterest bearing liabilities	5,173,999						5,769,206						6,141,674
Equity	1,837,718						1,766,565						1,842,098
Total Liabilities and Equity	$	20,221,511					$	20,118,005					$	19,559,091
Net interest income, fully tax-equivalent (non-GAAP)(1)(3)			$	149,446					$	154,421					$	144,438
Net interest spread(1)					2.47	%					2.74	%					3.09	%
Net interest income, fully tax-equivalent to total earning assets (non-GAAP)(1)(3)					3.24	%					3.40	%					3.22	%










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



ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1)
	For the Six Months Ended
	June 30, 2023							June 30, 2022
	Average Balance			Interest		Rate		Average Balance			Interest		Rate
Earning Assets
Securities:
Taxable	$	6,029,175		$	114,148	3.82	%	$	6,460,412		$	70,718	2.21	%
Nontaxable(1)	908,992			15,704		3.48		1,010,888			14,823		2.96
Total securities	6,938,167			129,852		3.77		7,471,300			85,541		2.31
Interest bearing deposits with other banks and other short-term investments	129,645			3,182		4.95		247,281			634		0.52
Federal funds sold	—			—		—		6			—		—
Loans:(2)
Commercial and industrial(1)	3,512,807			106,551		6.12		2,874,694			57,494		4.03
PPP loans	8,126			50		1.24		86,460			6,124		14.28
Owner occupied commercial real estate	2,327,702			54,800		4.75		2,268,963			44,141		3.92
Non-owner occupied commercial real estate	2,397,004			66,332		5.58		2,119,925			44,034		4.19
Real estate construction	1,063,372			36,659		6.95		862,989			19,291		4.51
Agricultural and agricultural real estate	842,136			23,609		5.65		764,082			14,939		3.94
Residential mortgage	846,618			18,656		4.44		846,542			16,443		3.92
Consumer	504,678			17,310		6.92		438,024			9,604		4.42

Less: allowance for loan losses	(111,793)			—		—		(107,229)			—		—
Net loans	11,390,650			323,967		5.74		10,154,450			212,070		4.21
Total earning assets	18,458,462			457,001		4.99	%	17,873,037			298,245		3.37	%
Nonearning Assets	1,711,582							1,522,354
Total Assets	$	20,170,044						$	19,395,391
Interest Bearing Liabilities
Savings	$	9,330,939		$	79,177	1.71	%	$	9,445,778		$	7,766	0.17	%
Time deposits	3,038,985			59,696		3.96		1,080,267			1,741		0.32
Short-term borrowings	155,738			3,270		4.23		119,115			134		0.23
Other borrowings	372,085			10,991		5.96		372,299			7,368		3.99
Total interest bearing liabilities	12,897,747			153,134		2.39	%	11,017,459			17,009		0.31	%
Noninterest Bearing Liabilities
Noninterest bearing deposits	5,228,085							6,227,499
Accrued interest and other liabilities	241,874							173,071
Total noninterest bearing liabilities	5,469,959							6,400,570
Equity	1,802,338							1,977,362
Total Liabilities and Equity	$	20,170,044						$	19,395,391
Net interest income, fully tax-equivalent (non-GAAP)(1)(3)				$	303,867						$	281,236
Net interest spread(1)						2.60	%						3.06	%
Net interest income, fully tax-equivalent (non-GAAP) to total earning assets(1)(3)						3.32	%						3.17	%
Interest bearing liabilities to earning assets	69.87		%					61.64		%




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

The following tables present the dollar amount of changes in interest income and interest expense for the major components of interest earning assets and interest bearing liabilities, in thousands, and quantify the changes in interest income and interest expense related to changes in the average outstanding balances (volume) and those changes caused by fluctuating interest rates. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to (i) changes in volume, calculated by multiplying the difference between the average balance for the current period and the average balance for the prior period by the rate for the prior period, and (ii) changes in rate, calculated by multiplying the difference between the rate for the current period and the rate for the prior period by the average balance for the prior period. The unallocated change has been allocated pro rata to volume and rate variances.


	Three Months Ended
	June 30, 2023 Compared to June 30, 2022 Change Due to						June 30, 2023 Compared to March 31, 2023 Changes Due to						June 30, 2022 Compared to June 30, 2021 Change Due to
	Volume		Rate		Net		Volume		Rate		Net		Volume		Rate		Net
Earnings Assets/Interest Income
Investment securities:
Taxable	$	(17,607)	$	37,681	$	20,074	$	(6,336)	$	8,532	$	2,196	$	3,145	$	3,407	$	6,552
Nontaxable(1)	(994)		2,096		1,102		(1,205)		1,649		444		2,078		(879)		1,199
Interest bearing deposits	(1,759)		3,247		1,488		612		308		920		1		502		503
Federal funds sold	—		—		—		—		—		—		—		—		—
Loans(1)(2)	13,011		47,275		60,286		3,889		11,178		15,067		22,722		(25,956)		(3,234)
Total earning assets	(7,349)		90,299		82,950		(3,040)		21,667		18,627		27,946		(22,926)		5,020
Liabilities/Interest Expense
Interest bearing deposits:
Savings	(4,012)		39,924		35,912		(15,977)		19,368		3,391		562		2,577		3,139
Time deposits	8,572		30,961		39,533		15,851		5,835		21,686		(104)		(295)		(399)
Short-term borrowings	(155)		915		760		(1,280)		(294)		(1,574)		(120)		110		(10)
Other borrowings	(12)		1,749		1,737		12		87		99		780		52		832
Total interest bearing liabilities	4,393		73,549		77,942		(1,394)		24,996		23,602		1,118		2,444		3,562
Net interest income	$	(11,742)	$	16,750	$	5,008	$	(1,646)	$	(3,329)	$	(4,975)	$	26,828	$	(25,370)	$	1,458

(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 average loans outstanding.


	Six Months Ended
	June 30, 2023 Compared to June 30, 2022 Change Due to						June 30, 2022 Compared to June 30, 2021 Change Due to
	Volume		Rate		Net		Volume		Rate		Net
Earnings Assets/Interest Income
Investment securities:
Taxable	$	(13,802)	$	57,232	$	43,430	$	7,444	$	1,285	$	8,729
Nontaxable(1)	(3,531)		4,412		881		5,274		(1,924)		3,350
Interest bearing deposits	(1,019)		3,567		2,548		5		503		508
Federal funds sold	—		—		—		—		(1)		(1)
Loans(1)(2)	28,170		83,727		111,897		15,635		(29,033)		(13,398)
Total earning assets	9,818		148,938		158,756		28,358		(29,170)		(812)
Liabilities/Interest Expense
Interest bearing deposits:
Savings	(287)		71,698		71,411		841		2,262		3,103
Time deposits	8,082		49,873		57,955		(328)		(1,453)		(1,781)
Short-term borrowings	54		3,082		3,136		(98)		(18)		(116)
Other borrowings	(13)		3,636		3,623		350		742		1,092
Total interest bearing liabilities	7,836		128,289		136,125		765		1,533		2,298
Net interest income	$	1,982	$	20,649	$	22,631	$	27,593	$	(30,703)	$	(3,110)

(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 average loans outstanding.

Provision For Credit Losses

The allowance for credit losses is established through provision expense to provide, in management's opinion, an appropriate allowance for credit losses. The following table shows the components of provision for credit losses for the three- and six- months ended June 30, 2023 and 2022, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Provision expense for credit losses-loans	$	7,829	$	1,545	$	10,013	$	4,173
Provision (benefit) expense for credit losses-unfunded commitments	(2,450)		1,701		(1,560)		2,318

Total provision expense	$	5,379	$	3,246	$	8,453	$	6,491

The provision expense for credit losses for loans was $7.8 million for the second quarter of 2023, which was an increase of $6.3 million from provision expense of $1.5 million recorded in the second quarter of 2022. The provision expense for the second quarter of 2023 compared to the second quarter of 2022 was impacted by several factors, including:

•a $5.3 million charge-off related to an overdraft, the result of a fraud incident impacting the account of a single long-term customer compared to net charge-offs of $714,000,

•loan growth of $222.6 million compared to $500.8 million, and

•improvement in credit quality as indicated by nonpass loans as a percentage of total loans. Nonpass loans were 4.8% of loans at both June 30, 2023 and March 31, 2023. Nonpass loans were 5.8% of total loans at June 30, 2022 compared to 6.3% of total loans at March 31, 2022.

The provision expense for credit losses for loans was $10.0 million for the first six months of 2023 compared to $4.2 million for the first six months of 2022. The provision expense for the first six months of 2023 and the first six months of 2022 were impacted by several factors, including:

•net charge-offs of $8.3 million, which included a $5.3 million charge-off related to an overdraft of a single long-term customer compared to net charge-offs of $12.9 million, which included two charge-offs due to customer fraud totaling $9.2 million related to two lending relationships that had collateral deficiencies,

•loan growth of $289.6 million compared to $723.6 million, and

•stable credit quality during the first six months of 2023 compared to improved credit quality as indicated by nonpass loans as a percentage of total loans. Nonpass loans were 4.8% of loans at June 30, 2023 compared to 4.7% at December 31, 2022. Nonpass loans were 5.8% of total loans at June 30, 2022 compared to 7.4% of total loans at December 31, 2021.

The size of the loan portfolio, the level of organic loan growth including government guaranteed loans, changes in credit quality and the variability that can occur in the factors, including the impact of economic conditions, are all considered when determining the appropriateness of the allowance for credit losses and will contribute to the variability in the provision for credit losses from quarter to quarter. For additional details on the specific factors considered in establishing the allowance for credit losses, refer to the discussion of critical accounting estimates set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in HTLF's Annual Report on Form 10-K for the year ended December 31, 2022, "Allowance For Credit Losses" and "Provision for Credit Losses" in Item 2 of this Quarterly Report on Form 10-Q and Note 4, "Allowance for Credit Losses," to the consolidated financial statements included herein.

Management believes the allowance for credit losses as of June 30, 2023, was at a level commensurate with the overall risk exposure of the loan portfolio. However, deterioration in economic conditions, including a recession, could cause certain borrowers to experience difficulty and impede their ability to meet debt service. Due to the uncertainty of future economic conditions, including ongoing concerns regarding higher interest rates, supply chain challenges, workforce shortages and wage pressures, the provision for credit losses could be volatile in future quarters.

Noninterest Income

The tables below show noninterest income for the three- and six- months ended June 30, 2023 and 2022, in thousands:



	Three Months Ended June 30,
	2023		2022		Change		% Change
Service charges and fees	$	19,627	$	18,066	$	1,561	9	%
Loan servicing income	411		834		(423)		(51)
Trust fees	5,419		5,679		(260)		(5)
Brokerage and insurance commissions	677		839		(162)		(19)
Capital markets fees	4,037		4,871		(834)		(17)
Securities losses, net	(314)		(2,089)		1,775		85
Unrealized loss on equity securities, net	(41)		(121)		80		66

Net gains on sale of loans held for sale	1,050		2,901		(1,851)		(64)
Valuation adjustment on servicing rights	—		—		—		—
Income on bank owned life insurance	1,220		523		697		133
Other noninterest income	407		3,036		(2,629)		(87)
Total noninterest income	$	32,493	$	34,539	$	(2,046)	(6)	%


	Six Months Ended June 30,
	2023		2022		Change		% Change
Service charges and fees	$	36,763	$	33,317	$	3,446	10	%
Loan servicing income	1,125		1,120		5		—
Trust fees	11,076		11,758		(682)		(6)
Brokerage and insurance commissions	1,373		1,708		(335)		(20)
Capital markets fees	6,486		7,910		(1,424)		(18)
Securities (losses)/gains, net	(1,418)		783		(2,201)		(281)
Unrealized gain/(loss) on equity securities, net	152		(404)		556		138

Net gains on sale of loans held for sale	2,881		6,312		(3,431)		(54)
Valuation adjustment on servicing rights	—		1,658		(1,658)		(100)
Income on bank owned life insurance	2,184		1,047		1,137		109
Other noninterest income	1,870		3,899		(2,029)		(52)
Total noninterest income	$	62,492	$	69,108	$	(6,616)	(10)	%

Total noninterest income was $32.5 million during the second quarter of 2023 compared to $34.5 million during the second quarter of 2022, a decrease of $2.0 million or 6%. Total noninterest income was $62.5 million for the first six months of 2023 compared to $69.1 million for the first six months of 2022, a decrease of $6.6 million or 10%. Notable changes in noninterest income categories for the three- and six- months ended June 30, 2023 and 2022 are as follows:

Service charges and fees

The following tables summarize the changes in service charges and fees for the three- and six- months ended June 30, 2023 and 2022, in thousands:


	Three Months Ended June 30,
	2023		2022		Change		% Change
Service charges and fees on deposit accounts	$	5,229	$	4,672	$	557	12	%
Overdraft fees	3,094		2,982		112		4
Customer service and other service fees	93		106		(13)		(12)
Credit card fee income	8,908		7,885		1,023		13
Debit card income	2,303		2,421		(118)		(5)
Total service charges and fees	$	19,627	$	18,066	$	1,561	9	%

	Six Months Ended June 30,
	2023		2022		Change		% Change
Service charges and fees on deposit accounts	$	10,140	$	9,067	$	1,073	12	%
Overdraft fees	6,063		5,807		256		4
Customer service and other service fees	186		187		(1)		(1)
Credit card fee income	15,911		13,534		2,377		18
Debit card income	4,463		4,722		(259)		(5)
Total service charges and fees	$	36,763	$	33,317	$	3,446	10	%

The increase in service charges and fees on deposit accounts was primarily attributable to a larger customer base. The increase in credit card fee income was primarily the result of a larger commercial credit card customer base and increased utilization.

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

Loan servicing income

Loan servicing income includes the fees collected for the servicing of commercial, agricultural, and mortgage loans, which depend upon the aggregate outstanding balances of these loans, rather than quarterly production and sale of these loans. The following tables show the changes in loan servicing income for the three- and six- months ended June 30, 2023, and 2022, in thousands:


	Three Months Ended June 30,
	2023		2022		Change		% Change
Commercial and agricultural loan servicing fees(1)	$	373	$	649	$	(276)	(43)	%
Residential mortgage servicing fees	38		466		(428)		(92)
Mortgage servicing rights amortization	—		(281)		281		100
Total loan servicing income	$	411	$	834	$	(423)	(51)	%

	Six Months Ended June 30,
	2023		2022		Change		% Change
Commercial and agricultural loan servicing fees(1)	$	846	$	886	$	(40)	(5)	%
Residential mortgage servicing fees	489		920		(431)		(47)
Mortgage servicing rights amortization	(210)		(686)		476		69
Total loan servicing income	$	1,125	$	1,120	$	5	—	%

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

Capital markets fees

For the second quarter of 2023, capital markets fees totaled $4.0 million compared to $4.9 million for the same quarter of 2022, a decrease of $834,000 or 17%. Syndication income decreased $1.3 million or 56% to $976,000 for the second quarter of 2023 from $2.2 million for the second quarter of 2022. Swap fee income increased $430,000 or 16% to $3.1 million in the second quarter of 2023 from $2.6 million for the same quarter in 2022.

For the first six months of 2023, capital markets fees totaled $6.5 million, a decrease of $1.4 million or 18% from $7.9 million for the first six months of 2022. Syndication income decreased $1.9 million or 58% to $1.4 million for the first six months of 2023 compared to $3.3 million for the same period of 2022. Swap fee income increased $526,000 or 12% to $5.1 million for the first six months of 2023 compared to $4.6 million for the first six months of 2022.

Capital markets fees vary, in part, based upon the size of the transaction and are recognized upon the closing of the transaction.

Securities losses/gains, net

For the second quarter of 2023, net security losses totaled $314,000 compared to net losses of $2.1 million for the second quarter of 2022, a decrease of $1.8 million or 85%. For the first six months of 2023, net security losses totaled $1.4 million compared to net gains for $783,000 during the first six months of 2022, a change of $2.2 million. The realized losses in 2023 for both the quarterly and year-to-date results were primarily attributable to the sustained unrealized loss position of the securities portfolio. During the second quarter of 2022, approximately $158.7 million of lower-yielding securities were sold, resulting in a net loss of $2.6 million, and the proceeds from this sale were used to purchase higher-yielding securities.

Net gains on sale of loans held for sale

For the second quarter of 2023, net gains on sale of loans held for sale totaled $1.1 million, a decrease of $1.9 million or 64% from $2.9 million in the same quarter of 2022. For the first six months of 2023, net gains on sale of loans held for sale totaled $2.9 million compared to $6.3 million for the first six months of 2022, a decrease of $3.4 million or 54%.

Loans sold to investors in the second quarter of 2023 totaled $39.7 million compared to $84.6 million during the second quarter of 2022, a decrease of $44.9 million or 53%. Loans sold to investors in the first six months of 2023 totaled $77.8 million compared to $182.9 million during the first six months of 2022, a decrease of $105.1 million or 57%.

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

Valuation adjustment on servicing rights

The valuation adjustment on servicing rights was $0 for both the second quarter of 2023 and 2022. For the first six months of 2023, the valuation adjustment on servicing rights was $0 compared to $1.7 million for the first six months of 2022. HTLF sold its mortgage servicing rights portfolio in the first quarter of 2023. HTLF recovered its valuation allowance in the first quarter of 2022 due to recent increases in residential mortgage loan interest rates.

Income on bank owned life insurance

Income on bank owned life insurance totaled $1.2 million for the second quarter of 2023, an increase of $697,000 from $523,000 recorded in the second quarter of 2022. For the first six months of 2023, income on bank owned life insurance totaled $2.2 million, an increase of $1.1 million from $1.1 million for the first six months of 2022. The increase for both the quarterly and year-to-date comparisons was attributable to market value changes.

Other noninterest income

Other noninterest income totaled $407,000 for the second quarter of 2023 compared to $3.0 million for the same quarter of 2022, a decrease of $2.6 million or 87%. For the first six months of 2023, other noninterest income was $1.9 million compared to $3.9 million for the first six months of 2022, a decrease of $2.0 million or 52%. The decrease for both the quarterly and year-to-date comparisons was primarily attributable to gains of $1.9 million recorded in the second quarter of 2022 on the sale of all VISA Class B shares held by two subsidiary banks.

Noninterest Expenses

The tables below show noninterest expenses for the three- and six- months ended June 30, 2023, and 2022, in thousands:


	Three Months Ended June 30,
	2023		2022		Change		% Change
Salaries and employee benefits	$	62,099	$	64,032	$	(1,933)	(3)	%
Occupancy	6,691		7,094		(403)		(6)
Furniture and equipment	3,063		3,033		30		1
Professional fees	15,194		14,457		737		5
FDIC insurance assessments	3,035		1,530		1,505		98
Advertising	3,052		1,283		1,769		138
Core deposit and customer relationship intangibles amortization	1,715		2,083		(368)		(18)
Other real estate and loan collection expenses	348		78		270		346
Gain on sales/valuations of assets, net	(3,372)		(3,230)		(142)		(4)
Acquisition, integration and restructuring costs	1,892		2,412		(520)		(22)
Partnership investment in tax credit projects	154		737		(583)		(79)
Other noninterest expenses	15,575		12,970		2,605		20
Total noninterest expenses	$	109,446	$	106,479	$	2,967	3	%


	Six Months Ended June 30,
	2023		2022		Change		% Change
Salaries and employee benefits	$	124,248	$	130,206	$	(5,958)	(5)	%
Occupancy	13,900		14,456		(556)		(4)
Furniture and equipment	5,978		6,552		(574)		(9)
Professional fees	27,991		27,997		(6)		—
FDIC insurance assessments	6,314		3,146		3,168		101
Advertising	5,037		2,838		2,199		77
Core deposit and customer relationship intangibles amortization	3,503		4,137		(634)		(15)
Other real estate and loan collection expenses	503		273		230		84
Gain on sales/valuations of assets, net	(2,257)		(3,184)		927		(29)
Acquisition, integration and restructuring costs	3,565		2,988		577		19
Partnership investment in tax credit projects	692		814		(122)		(15)
Other noninterest expenses	31,015		27,053		3,962		15
Total noninterest expenses	$	220,489	$	217,276	$	3,213	1	%

For the second quarter of 2023, total noninterest expenses were $109.4 million compared to $106.5 million for the second quarter of 2022, an increase of $3.0 million or 3%. For the first six months of 2023, noninterest expenses totaled $220.5 million compared to $217.3 million during the first six months of 2022, an increase of $3.2 million or less than 1%.

Notable changes in noninterest expense categories for the three- and six- months ended June 30, 2023 and 2022 are as follows:

Salaries and employee benefits

Salaries and employee benefits totaled $62.1 million for the second quarter of 2023 compared to $64.0 million for the second quarter of 2022, a decrease of $1.9 million or 3%. For the first six months of 2023, salaries and employee benefits totaled $124.2 million compared to $130.2 million for the first six months of 2022, a decrease of $6.0 million or 5%. The decrease for both the quarterly and year-to-date comparisons was primarily attributable to a reduction of full-time equivalent employees and lower incentive compensation expense.

FDIC insurance assessments

FDIC insurance assessments totaled $3.0 million for the second quarter of 2023 compared to $1.5 million for the second quarter of 2022, an increase of $1.5 million or 98%. For the first six months of 2023, FDIC insurance assessments totaled $6.3 million compared to $3.1 million, an increase of $3.2 million. The increase for both the quarterly and year-to-date comparisons was attributable to assessment rate changes that were effective with the first quarter 2023 assessment.

HTLF is expecting an additional FDIC assessment expense associated with the special assessment that was proposed by the FDIC in May 2023. The proposal would assess a 12.5 basis point annual special assessment on the uninsured deposits reported by HTLF at December 31, 2022, which was $7.70 billion. The special assessment excludes the first $5 billion of uninsured deposits and would be in place for two years. The full expense for the two year period would be recognized upon approval of the assessment.

Advertising

Advertising totaled $3.1 million for the second quarter of 2023, an increase of $1.8 million from $1.3 million for the second quarter of 2022. Advertising totaled $5.0 million for the first six months of 2023 compared to $2.8 million for the first six months of 2022, an increase of $2.2 million or 77%. The increase for both the quarterly and year-to-date comparisons was driven by deposit acquisition campaigns launched in 2023.

Gain on sales/valuations of assets, net

Net gains on sales/valuations of assets were $3.4 million for the second quarter of 2023 compared to $3.2 million for the second quarter of 2022. For the first six months of 2023, net gains on sales/valuations of assets totaled $2.3 million compared to $3.2 million for the first six months of 2022.

In the second quarter of 2023, HTLF recorded a gain of $4.3 million associated with the sale of HTLF's Retirement Plan Services recordkeeping and administrative services business, which was partially offset by losses on various other repossessed real estate properties. In the first quarter of 2023, HTLF recorded $813,000 of losses on fixed assets associated with branch optimization activities and a loss of $193,000 associated with the sale of the mortgage servicing rights portfolio.

During the second quarter of 2022, two branches in Illinois were sold for a gain of $3.0 million, and a gain of $413,000 was recorded in conjunction with the sale of an insurance subsidiary.

Acquisition, integration and restructuring costs

Acquisition, integration and restructuring costs totaled $1.9 million in the second quarter of 2023 compared to $2.4 million in the second quarter of 2022, a decrease of $520,000 or 22%. For the first six months of 2023, acquisition, integration and restructuring costs totaled $3.6 million compared to $3.0 million for the same period of 2022, an increase of $577,000 or 19%. The change in expenses is due to the progression of the charter consolidation project which will continue through the end of 2023.

Other noninterest expenses

Other noninterest expenses totaled $15.6 million in the second quarter of 2023 compared to $13.0 million in the second quarter of 2022, an increase of $2.6 million or 20%. Credit card processing expenses increased $909,000 or 27% to $4.3 million from $3.4 million. Fraud losses increased $739,000 to $948,000 from $209,000.

For the first six months of 2023, other noninterest expenses totaled $31.0 million compared to $27.1 million for the first six months of 2022, an increase of $4.0 million or 15%. Credit card processing expenses increased $1.5 million or 22% to $8.4 million from $6.9 million. Fraud losses increased $1.2 million to $2.3 million from $1.2 million.

The increases in credit card processing expenses for both the three- and six-month comparisons are primarily due to higher volumes and increased rebate expense.

Efficiency Ratio

One of HTLF's strategic priorities is to improve its adjusted efficiency ratio, on a fully tax-equivalent basis (non-GAAP), with the goal of maintaining it at or below 57%. During the second quarter of 2023, the efficiency ratio was 60.93% (59.82% on an adjusted fully tax-equivalent basis, non-GAAP) compared to 60.16% (57.66% on an adjusted fully tax-equivalent basis, non-GAAP) for the second quarter of 2022.

During the first six months of 2023, the efficiency ratio was 60.94% (58.48% on an adjusted fully tax-equivalent basis, non-GAAP) compared to 62.75% (61.02% on an adjusted fully tax-equivalent basis, non-GAAP) for the first six months of 2022.

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

Consolidation of its bank charters

Charter consolidation is designed to eliminate redundancies and improve HTLF’s operating efficiency and capacity to support ongoing product and service enhancements and current and future growth. Through the end of the second quarter of 2023, eight charters have been consolidated into HTLF Bank, and subsequent to June 30, 2023, one additional charter was consolidated. The consolidated charters are now operating as divisions of HTLF Bank. The remaining charters are expected to be consolidated by the end of October 2023.

Consolidation restructuring costs are projected to be $19-20 million with approximately $6-$7 million of expenses remaining to be incurred in 2023. Total costs incurred since the project started in the fourth quarter of 2021 through June 30, 2023, were $12.9 million, of which $1.9 million was incurred in the second quarter of 2023. Total charter consolidation costs for the first six months of 2023 totaled $3.6 million. HTLF has realized some operating efficiencies and financial benefits with the completed charter consolidations. The resulting efficiencies and expansion in capacity are projected to generate benefits of approximately $20 million annually when the project is completed with core operating expenses expected to decline to 2.10% or less of average assets.

Branch optimization strategy

HTLF continues to review its branch network and physical facilities as part of its branch optimization strategy, which may result in write-downs of fixed assets in future periods.

Income Taxes

The effective tax rate was 23.74% for the second quarter of 2023, compared to 22.89% for the second quarter of 2022. The following items impacted the second quarter 2023 and 2022 tax calculations:

•Solar energy tax credits of $0 compared to $702,000.

•Federal low-income housing tax credits of $311,000 compared to $135,000.

•New markets tax credits of $90,000 compared to $75,000.

•Historic rehabilitation tax credits of $167,000 compared to $63,000.

•Tax-exempt interest income as a percentage of pre-tax income of 12.40% compared to 11.05%.

•Tax expense of $121,000 compared to $43,000 resulting from the vesting of restricted stock units.

•Tax expense of $1.1 million compared to $109,000 resulting from the disallowed interest expense related to tax-exempt loans and securities, aligning with increases in total interest expense.

The effective tax rate was 23.10% for the six months ended June 30, 2023, compared to 22.47% for the six months ended June 30, 2022. The following items impacted HTLF's tax calculation for the first six months of 2023 and 2022:

•Solar energy tax credits of $310,000 compared to $702,000.

•Federal low-income housing tax credits of $621,000 compared to $269,000.

•New markets tax credits of $180,000 compared to $150,000.

•Historic rehabilitation tax credits of $425,000 compared to $127,000.

•Tax-exempt interest income as a percentage of pre-tax income of 12.30% compared to 12.58%.

•Tax expense of $75,000 compared to a tax benefit of $129,000 resulting from the vesting of restricted stock units.

•Tax expense of $2.0 million compared to $167,000 resulting from the disallowed interest expense related to tax-exempt loans and securities, aligning with increases in total interest expense.

FINANCIAL CONDITION

Total assets were $20.22 billion at June 30, 2023, a decrease of $19.5 million or less than 1% from $20.24 billion at December 31, 2022. Securities represented 33% and 35% of total assets at June 30, 2023, and December 31, 2022, respectively.

LENDING ACTIVITIES

Total loans held to maturity were $11.72 billion at June 30, 2023, and $11.43 billion at December 31, 2022, an increase of $289.6 million or 3%.

The following table shows the changes in loan balances by loan category since December 31, 2022, in thousands:


	June 30, 2023		December 31, 2022		Change		% Change
Commercial and industrial	$	3,590,680	$	3,464,414	$	126,266	4	%
Paycheck Protection Program ("PPP")	4,139		11,025		(6,886)		(62)
Owner occupied commercial real estate	2,398,698		2,265,307		133,391		6
Non-owner occupied commercial real estate	2,530,736		2,330,940		199,796		9
Real estate construction	1,013,134		1,076,082		(62,948)		(6)
Agricultural and agricultural real estate	839,817		920,510		(80,693)		(9)
Residential mortgage	828,437		853,361		(24,924)		(3)
Consumer	512,333		506,713		5,620		1
Total loans held to maturity	$	11,717,974	$	11,428,352	$	289,622	3	%

The loan growth in the first six months of 2023 was primarily in commercial and commercial real estate, which was attributable to an emphasis on organic loan growth and further market penetration in various HTLF growth markets. The growth was offset by decreases in real estate construction, agricultural and agricultural real estate and residential mortgage.

Notable changes in the loan portfolio include:

•Commercial and industrial loans increased $126.3 million or 4% to $3.59 billion at June 30, 2023, compared to $3.46 billion at December 31, 2022.

•Owner occupied commercial real estate loans increased $133.4 million or 6% to $2.40 billion at June 30, 2023, compared to $2.27 billion at December 31, 2022.

•Non-owner occupied commercial real estate loans increased $199.8 million or 9% to $2.53 billion at June 30, 2023, compared to $2.33 billion at December 31, 2022.

•Real estate construction loans decreased $62.9 million or 6% to $1.01 billion at June 30, 2023, compared to $1.08 billion at December 31, 2022.

•Agricultural and agricultural real estate loans decreased $80.7 million or 9% to $839.8 million at June 30, 2023 compared to $920.5 million at December 31, 2022.

The table below presents the composition of the loan portfolio as of June 30, 2023, and December 31, 2022, in thousands:


	June 30, 2023				December 31, 2022
	Amount		Percent		Amount		Percent
Loans receivable held to maturity:
Commercial and industrial	$	3,590,680	30.63	%	$	3,464,414	30.31	%
PPP	4,139		0.04		11,025		0.10
Owner occupied commercial real estate	2,398,698		20.47		2,265,307		19.82
Non-owner occupied commercial real estate	2,530,736		21.60		2,330,940		20.40
Real estate construction	1,013,134		8.65		1,076,082		9.42
Agricultural and agricultural real estate	839,817		7.17		920,510		8.05
Residential mortgage	828,437		7.07		853,361		7.47
Consumer	512,333		4.37		506,713		4.43
Gross loans receivable held to maturity	11,717,974		100.00	%	11,428,352		100.00	%






Allowance for credit losses-loans	(111,198)				(109,483)
Loans receivable, net	$	11,606,776			$	11,318,869

ALLOWANCE FOR CREDIT LOSSES

The process utilized by HTLF to determine the appropriateness of the allowance for credit losses is considered a critical accounting practice. The allowance for credit losses represents management's estimate of lifetime losses in the existing loan portfolio. For additional details on the specific factors considered in determining the allowance for credit losses, refer to the critical accounting estimates section of HTLF's Annual Report on Form 10-K for the year ended December 31, 2022.

Total Allowance for Lending Related Credit Losses

The total allowance for lending related credit losses was $129.8 million at June 30, 2023, which was 1.11% of loans, compared to $129.7 million or 1.13% of loans at December 31, 2022. The following table shows, in thousands, the components of the allowance for lending related credit losses as of June 30, 2023, and December 31, 2022:


	June 30, 2023				December 31, 2022
	Amount		% of Allowance		Amount		% of Allowance
Quantitative	$	82,417	63.48	%	$	84,409	65.09	%
Qualitative/Economic Forecast	47,417		36.52		45,270		34.91

Total	$	129,834	100.00	%	$	129,679	100.00	%

Quantitative Allowance

The quantitative allowance decreased $2.0 million or 2% to $82.4 million or 63% of the total allowance for lending related credit losses at June 30, 2023, compared to $84.4 million or 65% of the total allowance at December 31, 2022. Specific reserves for individually assessed loans totaled $8.4 million at June 30, 2023, an increase of $1.3 million or 18% from $7.1 million at December 31, 2022.

Qualitative Allowance/Economic Forecast

The qualitative allowance totaled $47.4 million or 37% of the total allowance for lending related credit losses at June 30, 2023, compared to $45.3 million or 35% at December 31, 2022.

HTLF has access to various third-party economic forecast scenarios provided by Moody's, which are updated quarterly in HTLF's methodology. HTLF continued to use a one year reasonable and supportable forecast period. At June 30, 2023, Moody's June 5, 2023, baseline forecast scenario was utilized, and management considered other downturn forecast scenarios, which anticipated a moderate recession developing withing the next twelve months, in addition to the baseline forecast to support the macroeconomic outlook used in the allowance for credit losses calculation.

Allowance for Credit Losses-Loans

The tables below present the changes in the allowance for credit losses for loans during the three- and six- months ended June 30, 2023 and 2022, in thousands:


	Three Months Ended June 30,
	2023			2022
Balance at beginning of period	$	112,707		$	100,522

Provision for credit losses	7,829			1,545
Recoveries on loans previously charged off	275			759
Charge-offs on loans	(9,613)			(1,473)
Balance at end of period	$	111,198		$	101,353
Allowance for credit losses for loans as a percent of loans	0.95		%	0.95		%
Annualized ratio of net charge-offs to average loans	0.32		%	0.03		%


	Six Months Ended June 30,
	2023			2022
Balance at beginning of period	$	109,483		$	110,088


Provision for credit losses	10,013			4,173
Recoveries on loans previously charged off	3,466			1,782
Charge-offs on loans	(11,764)			(14,690)
Balance at end of period	$	111,198		$	101,353
Allowance for credit losses for loans as a percent of loans	0.95		%	0.95		%
Annualized ratio of net charge-offs to average loans	0.15		%	0.25		%

The allowance for credit losses for loans totaled $111.2 million at June 30, 2023, compared to $109.5 million at December 31, 2022, and $101.4 million at June 30, 2022. The allowance for credit losses for loans at June 30, 2023, was 0.95% of loans compared to 0.96% of loans at December 31, 2022. The following items impacted the allowance for credit losses for loans for the six months ended June 30, 2023:

•Net charge-offs for the first six months of 2023 totaled $8.3 million compared to net charge-offs of $12.9 million for the first six months of 2022, which was a decrease of $4.6 million. Included in net charge-offs for the first six months of 2023 was a $5.3 million charge-off related to an overdraft, the result of a fraud incident impacting the account of a single long-term customer. Included in net charge-offs for the first six months of 2022 were two charge-offs due to customer fraud totaling $9.2 million related to two lending relationships which had collateral deficiencies.

•Loan growth totaled $289.6 million for the first six months of 2023.

The following tables show, in thousands, the changes in the allowance for unfunded commitments for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended June 30,
	2023		2022
Balance at beginning of period	$	21,086	$	16,079
Provision (benefit) for credit losses	(2,450)		1,701
Balance at end of period	$	18,636	$	17,780

	Six Months Ended June 30,
	2023		2022
Balance at beginning of period	$	20,196	$	15,462


Provision (benefit) for credit losses	(1,560)		2,318
Balance at end of period	$	18,636	$	17,780

The allowance for unfunded commitments totaled $18.6 million as of June 30, 2023, compared to $20.2 million as of December 31, 2022, and $17.8 million as of June 30, 2022. The decrease in the allowance for unfunded commitments in the first six months of 2023 was primarily due to a reduction of $164.2 million in unfunded commitments for construction loans, which carry the highest loss rate. Total unfunded commitments increased $175.5 million or 4% to $4.91 billion at June 30, 2023, compared to $4.73 billion at December 31, 2022.

CREDIT QUALITY AND NONPERFORMING ASSETS

The internal rating system for the credit quality of its loans is a series of grades reflecting management's risk assessment, based on its analysis of the borrower's financial condition. The "pass" category consists of all loans that are not in the "nonpass" category and categorized into a range of loan grades that reflect increasing, though still acceptable, risk. Movement of risk through the various grade levels in the pass category is monitored for early identification of credit deterioration. For more information on this internal rating system, see Note 3, "Loans" of the consolidated financial statements in this Quarterly Report on Form 10-Q.

The nonpass loans totaled $568.2 million or 4.8% of total loans as of June 30, 2023, compared to $533.3 million or 4.7% of total loans as of December 31, 2022. As of June 30, 2023, the nonpass loans consisted of approximately 47% watch loans and 53% substandard loans compared to approximately 48% watch loans and 52% substandard loans as of December 31, 2022. The percent of nonpass loans on nonaccrual status as of June 30, 2023, was 11%.

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


	June 30,						December 31,
	2023			2022			2022			2021
Nonaccrual loans	$	61,956		$	62,909		$	58,231		$	69,369
Loans contractually past due 90 days or more	1,459			95			273			550
Total nonperforming loans	63,415			63,004			58,504			69,919
Other real estate	2,677			4,528			8,401			1,927
Other repossessed assets	5			—			26			43
Total nonperforming assets	$	66,097		$	67,532		$	66,931		$	71,889








Nonperforming loans to total loans	0.54		%	0.59		%	0.51		%	0.70		%
Nonperforming assets to total loans plus repossessed property	0.56			0.63			0.59			0.72
Nonperforming assets to total assets	0.33			0.34			0.33			0.37

The schedules below summarize the changes in nonperforming assets during the three- and six- months ended June 30, 2023, in thousands:


	Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
March 31, 2023	$	58,240	$	7,438	$	24	$	65,702
Loan foreclosures	(39)		28		11		—
Net loan charge-offs	(9,338)		—		—		(9,338)

New nonperforming loans	19,805		—		—		19,805
Reduction of nonperforming loans(1)	(5,253)		—		—		(5,253)
OREO/Repossessed assets sales proceeds	—		(3,915)		(26)		(3,941)
OREO/Repossessed assets writedowns, net	—		(874)		(4)		(878)

June 30, 2023	$	63,415	$	2,677	$	5	$	66,097

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


	Nonperforming Loans		Other Real Estate Owned		Other Repossessed Assets		Total Nonperforming Assets
December 31, 2022	$	58,504	$	8,401	$	26	$	66,931
Loan foreclosures	(258)		239		19		—
Net loan charge-offs	(8,298)		—		—		(8,298)

New nonperforming loans	24,431		—		—		24,431
Reduction of nonperforming loans(1)	(10,964)		—		—		(10,964)
OREO/Repossessed assets sales proceeds	—		(5,047)		(30)		(5,077)
OREO/Repossessed assets writedowns, net	—		(916)		(10)		(926)

June 30, 2023	$	63,415	$	2,677	$	5	$	66,097

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

Total nonperforming assets decreased $834,000 or 1% to $66.1 million or 0.33% of total assets at June 30, 2023, compared to $66.9 million or 0.33% of total assets at December 31, 2022. Nonperforming loans were $63.4 million at June 30, 2023, compared to $58.5 million at December 31, 2022, which represented 0.54% and 0.51% of total loans at June 30, 2023, and December 31, 2022, respectively. At June 30, 2023, approximately $40.8 million or 64% of HTLF's nonperforming loans had individual loan balances exceeding $1.0 million and represented loans to sixteen borrowers. The portion of the nonperforming nonresidential real estate loans covered by government guarantees totaled $10.6 million and $12.5 million at June 30, 2023, and December 31, 2022, respectively.

SECURITIES

The composition of the securities portfolio is managed to meet liquidity needs while maximizing the return on the portfolio within the established HTLF risk appetite parameters and in consideration of the impact it has on HTLF's asset/liability position. Securities represented 33% and 35% of total assets at June 30, 2023, and December 31, 2022, respectively. Total securities carried at fair value as of June 30, 2023, were $5.80 billion, a decrease of $349.1 million or 6% from $6.15 billion at December 31, 2022.

The table below presents the composition of the securities portfolio, including securities carried at fair value, held to maturity securities, net of allowance for credit losses, and other, by major category, as of June 30, 2023, and December 31, 2022, in thousands:


	June 30, 2023				December 31, 2022
	Amount		Percent		Amount		Percent
U.S. treasuries	$	31,679	0.47	%	$	31,699	0.45	%
U.S. agencies	43,036		0.64		43,135		0.61
Obligations of states and political subdivisions	1,683,912		25.11		1,708,840		24.24
Mortgage-backed securities - agency	1,686,646		25.16		1,772,105		25.13
Mortgage-backed securities - non-agency	1,995,809		29.76		2,181,876		30.94
Commercial mortgage-backed securities - agency	83,825		1.25		85,123		1.21
Commercial mortgage-backed securities - non-agency	617,992		9.22		659,459		9.35
Asset-backed securities	412,716		6.16		416,054		5.90
Corporate bonds	56,411		0.84		57,942		0.82

Equity securities with a readily determinable fair value	20,688		0.31		20,314		0.29
Other securities	72,291		1.08		74,567		1.06
Total securities	$	6,705,005	100.00	%	$	7,051,114	100.00	%

HTLF's securities portfolio had an expected modified duration of 6.20 years as of June 30, 2023, and 6.19 years as of December 31, 2022.

At June 30, 2023, HTLF had $72.3 million of other securities, including Federal Home Loan Bank ("FHLB") stock. These securities are recorded on the consolidated balance sheets in other investments held at cost.

DEPOSITS

Total deposits were $17.66 billion as of June 30, 2023, compared to $17.51 billion at December 31, 2022, an increase of $150.5 million or 1%. As of June 30, 2023, 66% of HTLF's deposits were insured or collateralized.

HTLF maintains a granular and diverse deposit base. As of June 30, 2023, no Bank Market represented more than 12% of total customers deposits, and no major industry represented more than 10% of total commercial customer deposits.

The following table shows the changes in deposit balances by deposit type since year-end 2022, in thousands:


	June 30, 2023		December 31, 2022		Change		% Change
Demand-customer	$	4,897,858	$	5,701,340	$	(803,482)	(14)	%
Savings-customer	8,149,596		8,670,898		(521,302)		(6)
Savings-wholesale and institutional	623,000		1,323,493		(700,493)		(53)
Total savings	8,772,596		9,994,391		(1,221,795)		(12)
Time-customer	1,597,849		851,539		746,310		88
Time-wholesale	2,395,240		965,739		1,429,501		148
Total time	3,993,089		1,817,278		2,175,811		120
Total deposits	$	17,663,543	$	17,513,009	$	150,534	1	%

Total customer deposits	$	14,645,303	$	15,223,777	$	(578,474)	(4)	%
Total wholesale and institutional deposits	3,018,240		2,289,232		729,008		32	%
Total deposits	$	17,663,543	$	17,513,009	$	150,534	1	%

At June 30, 2023, HTLF had $3.02 billion of wholesale and institutional deposits, of which $623.0 million was included in savings deposits and $2.40 billion was included in time deposits. HTLF had $1.32 billion of wholesale savings and institutional deposits and $965.7 million of wholesale time deposits at December 31, 2022.

The table below presents the composition of deposits by category as of June 30, 2023, and December 31, 2022, in thousands:


	June 30, 2023				December 31, 2022
	Amount		Percent		Amount		Percent
Demand-customer	$	4,897,858	27.73	%	$	5,701,340	32.55	%
Savings-customer	8,149,596		46.13		8,670,898		49.52
Savings-wholesale and institutional	623,000		3.53		1,323,493		7.56
Time-customer	1,597,849		9.05		851,539		4.86
Time-wholesale	2,395,240		13.56		965,739		5.51
Total	$	17,663,543	100.00	%	$	17,513,009	100.00	%

SHORT-TERM BORROWINGS

Short-term borrowings, which HTLF defines as borrowings with an original maturity of one year or less, were as follows as of June 30, 2023, and December 31, 2022, in thousands:


	June 30, 2023		December 31, 2022		Change		% Change
Securities sold under agreement to repurchase	$	35,913	$	95,303	$	(59,390)	(62)	%

Advances from the FHLB	—		50,000		(50,000)		(100)
Advances from the federal discount window	—		224,000		(224,000)		(100)
Other short-term borrowings	8,451		6,814		1,637		24
Total	$	44,364	$	376,117	$	(331,753)	(88)	%

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 sources are utilized in varying degrees depending on their pricing and availability. The Banks own FHLB stock in either the Dallas or Des Moines FHLB, enabling them to borrow funds from their respective FHLB for short-term or long-term purposes under a variety of programs. Short-term borrowings totaled $44.4 million at June 30, 2023, compared to $376.1 million at December 31, 2022, a decrease of $331.8 million or 88%.

The Banks have pledged securities that provided borrowing capacity totaling $630.4 million as of June 30, 2023, to the BTFP, a Federal Reserve Bank program created in the first quarter of 2023 to assist banks in meeting all the liquidity needs of depositors. There have been no advances from the BTFP since the inception of the program.

The Banks provide retail repurchase agreements to their customers as a cash management tool. 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 $35.9 million at June 30, 2023, compared to $95.3 million at December 31, 2022, a decrease of $59.4 million or 62%.

HTLF renewed its revolving credit line agreement with an unaffiliated bank on June 14, 2022. This revolving credit line agreement, which has $100.0 million of borrowing capacity, is included in short-term borrowings, and the primary purpose of this credit line agreement is to provide liquidity. No advances occurred on this line during the first six months of 2023, and the outstanding balance was $0 at both June 30, 2023, and December 31, 2022.

OTHER BORROWINGS

The outstanding balances of other borrowings, which HTLF defines as borrowings with an original maturity date of more than one year, are shown in the table below, net of discount and issuance costs amortization as of June 30, 2023, and December 31, 2022, in thousands:


	June 30, 2023		December 31, 2022		Change		% Change
Advances from the FHLB	$	680	$	740	$	(60)	(8)	%

Trust preferred securities	148,806		148,284		522		—


Contracts payable	80		82		(2)		(2)
Subordinated notes	222,837		222,647		190		—

Total	$	372,403	$	371,753	$	650	—	%

A schedule of HTLF's trust preferred securities outstanding excluding deferred issuance costs as of June 30, 2023, is as follows, in thousands:

Amount
Issued

Issuance
Date

Interest
Rate

Interest

Rate as of 6/30/2023(1)

Maturity
Date

Callable
Date

Heartland Financial Statutory Trust IV

10,310

03/17/2004

2.75% over LIBOR

8.26%

03/17/2034

09/17/2023

Heartland Financial Statutory Trust V

20,619

01/27/2006

1.33% over LIBOR

6.59

04/07/2036

10/07/2023

Heartland Financial Statutory Trust VI

20,619

06/21/2007

1.48% over LIBOR

7.03

09/15/2037

09/15/2023

Heartland Financial Statutory Trust VII

18,042

06/26/2007

1.48% over LIBOR

6.98

09/01/2037

09/01/2023

Morrill Statutory Trust I

9,416

12/19/2002

3.25% over LIBOR

8.79

12/26/2032

09/26/2023

Morrill Statutory Trust II

9,143

12/17/2003

2.85% over LIBOR

8.36

12/17/2033

09/17/2023

Sheboygan Statutory Trust I

6,834

09/17/2003

2.95% over LIBOR

8.46

09/17/2033

09/17/2023

CBNM Capital Trust I

4,583

09/10/2004

3.25% over LIBOR

8.80

12/15/2034

09/15/2023

Citywide Capital Trust III

6,633

12/19/2003

2.80% over LIBOR

8.10

12/19/2033

10/23/2023

Citywide Capital Trust IV

4,497

09/30/2004

2.20% over LIBOR

7.59

09/30/2034

08/23/2023

Citywide Capital Trust V

12,536

05/31/2006

1.54% over LIBOR

7.09

07/25/2036

09/15/2023

OCGI Statutory Trust III

3,024

06/27/2002

3.65% over LIBOR

8.91

09/30/2032

09/30/2023

OCGI Capital Trust IV

5,539

09/23/2004

2.50% over LIBOR

8.05

12/15/2034

09/15/2023

BVBC Capital Trust II

7,339

04/10/2003

3.25% over LIBOR

8.55

04/24/2033

10/24/2023

BVBC Capital Trust III

9,672

07/29/2005

1.60% over LIBOR

7.14

09/30/2035

09/30/2023

Total trust preferred costs

148,806

(1) Effective weighted average interest rate as of June 30, 2023, was 8.17%.

CAPITAL REQUIREMENTS

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

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

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


	Total Capital (to Risk- Weighted Assets)			Tier 1 Capital (to Risk- Weighted Assets)			Common Equity Tier 1 (to Risk- Weighted Assets)			Tier 1 Capital (to Average Assets)
June 30, 2023	14.93		%	12.05		%	11.33		%	9.40		%
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	$	15,324,421		$	15,324,421		$	15,324,421		N/A
Average assets	N/A			N/A			N/A			$	19,633,800

December 31, 2022	14.76		%	11.81		%	11.07		%	9.13		%
Minimum capital requirement	8.00			6.00			4.50			4.00
Well capitalized requirement	10.00			8.00			6.50			5.00
Minimum capital requirement, including fully-phased in capital conservation buffer	10.50			8.50			7.00			N/A
Risk-weighted assets	$	14,937,128		$	14,937,128		$	14,937,128		N/A
Average assets	N/A			N/A			N/A			$	19,322,778

Retained earnings that could be available for the payment of dividends to HTLF from its banks totaled approximately $788.5 million and $702.2 million at June 30, 2023, and December 31, 2022, respectively, under the most restrictive minimum capital requirements. Retained earnings that could be available for the payment of dividends to HTLF from its banks totaled approximately $482.8 million and $403.9 million at June 30, 2023, and December 31, 2022, respectively, under the capital requirements to remain well capitalized. These dividends are the principal source of funds to pay dividends on HTLF's common and preferred stock and to pay interest and principal on its debt.

As of June 30, 2023, management believes regulatory capital ratio buffers would withstand any changes in regulatory rules that require the inclusion of unrealized losses in the total investment portfolio and remain well capitalized.

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

On August 8, 2022, HTLF filed a universal shelf registration statement with the SEC to register debt or equity securities. This shelf registration statement, which was effective immediately, provides HTLF with the ability to raise capital, subject to market conditions and SEC rules and limitations, if the board of directors decides to do so. This registration statement permits HTLF,

from time to time, in one or more public offerings, to offer debt securities, subordinated notes, common stock, preferred stock, depositary shares, warrants, rights or units of any combination of these securities. The amount of securities that may be offered was not specified in the registration statement, and the terms of any future offerings are to be established at the time of the offering. The registration statement expires on August 8, 2025.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

Commitments and Contractual Obligations

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks 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 customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees are conditional commitments issued by the Banks 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, 2023, and December 31, 2022, commitments to extend credit totaled $4.91 billion and $4.73 billion, respectively. Standby letters of credit totaled $72.8 million at June 30, 2023, and $55.1 million at December 31, 2022.

At June 30, 2023, and December 31, 2022, HTLF's banks had $878.3 million and $682.9 million, respectively, of standby letters of credit with the respective FHLB to secure public funds and municipal deposits.

Contractual obligations and other commitments were disclosed in HTLF's Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to HTLF's contractual obligations and other commitments since the Annual Report on Form 10-K was filed.

There are certain legal proceedings pending against HTLF and its subsidiaries at June 30, 2023, that are ordinary routine litigation incidental to business.

HTLF continues to explore opportunities to expand the size of its banking footprint by opportunistically identifying acquisition targets that complement or supplement its current banking strategy. This includes transactions that increase penetration in existing geographic Bank Markets and expansion into adjacent markets, as well as acquisitions of fee income businesses that complement and build on existing businesses or further meet the needs of customers. Future expenditures relating to expansion efforts, in addition to those identified above, cannot be estimated at this time.

Derivative Financial Instruments

HTLF enters into mortgage banking derivatives, which are classified as free standing derivatives. These derivatives include interest rate lock commitments provided to customers to fund certain mortgage loans to be sold into the secondary market and forward commitments for the future delivery of these loans. HTLF enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future interest rate changes on the commitments to fund these loans and on the residential mortgage loans held as available for sale. See Note 6 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information on derivative financial instruments.

LIQUIDITY

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

At June 30, 2023, HTLF had $400.2 million of cash and cash equivalents, time deposits in other financial institutions of $1.5 million and securities carried at fair value of $5.80 billion. Management expects the securities portfolio to produce cash flows of approximately $1.3 billion over the next twelve months.

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

The Banks' FHLB memberships give them the ability to borrow funds for short- and long-term purposes under a variety of programs. Short-term borrowing balances depend on commercial cash management and smaller correspondent bank relationships and, as a result, will normally fluctuate. Management believes these balances to be stable sources of funds. In the event of short-term liquidity needs, HTLF's banks may purchase federal funds from each other or from correspondent banks and may also borrow from the Federal Reserve Bank, including utilizing the BTFP.

Additional funding is provided by long-term debt and short-term borrowings. As of June 30, 2023, HTLF had $372.4 million of long-term debt outstanding, and it is an important funding source because of its multi-year borrowing structure.

During the first six months of 2023, HTLF shifted out of overnight borrowings and into brokered CDs, which allowed for more immediate funding availability through various federal programs. As of June 30, 2023, pledged securities totaled $2.88 billion. As of June 30, 2023, approximately $3.73 billion of securities remained available to pledge.

The following table shows the source of funding, balance outstanding and available borrowing capacity as of June 30, 2023, dollars in thousands:


	As of June 30, 2023
Source	Outstanding		Available
Federal Reserve Discount Window	$	—	$	1,491,556
Bank Term Funding Program	—		630,400
Federal Home Loan Bank	680		1,178,830
Federal Funds	—		272,500
Wholesale deposits/brokered CDs	2,893,391		1,175,723
Total	$	2,894,071	$	4,749,009

HTLF is focused on loan growth and strives to fund loan growth with the least expensive source of deposits, sales of securities or borrowings. Management believes it is unlikely HTLF would be required to sell securities at a loss for such funding needs. The securities portfolio is expected to produce cash flows of approximately $1.3 billion over the next twelve months, which could be used to fund loan growth. Additionally, growing deposits will continue to be a focus. During the second quarter of 2023, HTLF introduced commercial and retail deposit campaigns, which resulted in the opening of nearly 1,300 net new commercial deposit account and over 1,400 net new retail accounts. HTLF offers the ICS and CDARS products accessed through the Intrafi network of financial institutions, which helps to reduce the amount of pledged securities.

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

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

At June 30, 2023, the parent company had cash of $267.5 million. Additionally, HTLF has a revolving credit agreement with an unaffiliated bank, which was renewed most recently on June 14, 2022. The revolving credit agreement has $100.0 million of maximum borrowing capacity, of which none was outstanding at June 30, 2023. This credit agreement contains specific financial covenants, all of which HTLF complied with as of June 30, 2023.

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

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

Management believes that cash on hand, cash flows from operations and cash availability under existing borrower programs and facilities will be sufficient to meet any recurring and additional operating cash needs in 2023.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a regular basis by the asset/liability committees of the Banks, and, on a consolidated basis, by HTLF's executive management and board of directors. At least quarterly, a detailed review of the balance sheet risk profile is performed for HTLF and each of its Banks. Included in these reviews are interest rate sensitivity analyses, which simulate changes in net interest income in response to various interest rate scenarios. These analyses consider current portfolio rates, existing maturities, repricing opportunities and market interest rates, in addition to prepayments and growth under different interest rate assumptions. Selected strategies are modeled prior to implementation to determine their effect on HTLF's interest rate risk profile and net interest income.

The core interest rate risk analysis utilized examines the balance sheet under increasing and decreasing interest rate scenarios that are neither too modest nor too extreme. All rate changes are ramped over a 12-month horizon based upon a parallel shift in the yield curve and then maintained at those levels over the remainder of the simulation horizon. Using this approach, management is able to see the effect that both a gradual change of rates (year one) and a rate shock (year two and beyond) could have on net interest income. Starting balances in the model reflect actual balances on the "as of" date, adjusted for material transactions. Pro-forma balances remain static. This methodology enables interest rate risk embedded within the existing balance sheet structure to be isolated from the interest rate risk often caused by growth in assets and liabilities. Due to the low interest rate environment, the simulations under a decreasing interest rate scenario were prepared using a 100 basis point shift in rates. The most recent reviews at June 30, 2023, and June 30, 2022, provided the following results, in thousands:


	2023				2022
	Net Interest Margin		% Change From Base		Net Interest Margin		% Change From Base
Year 1
Down 100 Basis Points	$	610,231	(1.00)	%	$	596,846	(2.43)	%
Base	616,421		—		611,715		—
Up 200 Basis Points	627,222		1.75		628,011		2.66
Year 2
Down 100 Basis Points	$	614,571	(0.30)	%	$	590,415	(3.48)	%
Base	637,157		3.36		646,665		5.71
Up 200 Basis Points	650,264		5.49		680,461		11.24

HTLF uses derivative financial instruments to manage the impact of changes in interest rates on its future interest income or interest expense. HTLF is exposed to credit-related losses in the event of nonperformance by the counterparties to these derivative instruments but believes it has minimized the risk of these losses by entering into the contracts with large, stable financial institutions. The estimated fair market values of these derivative instruments are presented in Note 6 to the consolidated financial statements included in this Quarterly Report on Form 10-Q.

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

•During the three months ended June 30, 2023, there have been no changes in internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

There are certain legal proceedings pending against HTLF and its subsidiaries at June 30, 2023, that are ordinary routine litigation incidental to business.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors applicable to HTLF from those disclosed in Part I, Item 1A. "Risk Factors" in HTLF's 2022 Annual Report on Form 10-K.

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

On March 17, 2020, the board of directors authorized management to acquire and hold up to 5% of capital or $87.4 million as of June 30, 2023, as treasury shares at any one time. HTLF and its affiliated purchasers made no purchases of its common stock during the quarter ended June 30, 2023.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

On May 26, 2023 (the "Adoption Date"), Marty Schmitz, a Director of HTLF, entered into a written plan for the sale of securities of HTLF intended to satisfy SEC Rule 10b5-1(c) (a "10b5-1 Plan"). Mr. Schmitz’s 10b5-1 Plan provides for the sale of up to 17,800 shares of HTLF’s common stock commencing no earlier than 90 days after the Adoption Date, and terminating on June 15, 2024.

ITEM 6. EXHIBITS

Exhibits



3.1		Amended and Restated Bylaws of Heartland Financial USA, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 8-K filed on June 20, 2023).

3.2		Amended and Restated Certificate of Incorporation of Heartland Financial USA, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on June 20, 2023).

10.1	(1)	Heartland Financial USA, Inc. Directors Deferred Compensation Plan. (incorporated by reference to Exhibit 99.1 to the Registrant’s Form 8-K filed on June 20, 2023).

10.2	(2)	Amendment 2 to Agreement, dated June 9, 2023, to Master Agreement between Fiserv Solutions LLC and Heartland Financial USA, Inc. dated of July 1, 2021.

31.1	(3)	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

31.2	(3)	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

32.1	(3)	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	(3)	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		Financial statement formatted in Inline Extensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Changes in Equity, and (vi) the Notes to Consolidated Financial Statements.
104		Cover page formatted in Inline Extensible Business Reporting Language

______________

(1) Management contract or compensatory plan or arrangement

(2) Certain confidential information contained in this agreement has been omitted because it is both not material and is the type that the registrant treats as private or confidential.

(3) 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 4, 2023