LOANS

9 Months Ended

Sep. 30, 2020

Receivables [Abstract]

LOANS

LOANS

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

	September 30, 2020		December 31, 2019
Loans receivable held to maturity:
Commercial and industrial	$	2,303,646	$	2,530,809
Paycheck Protection Program ("PPP")	1,128,035		—
Owner occupied commercial real estate	1,494,902		1,472,704
Non-owner occupied commercial real estate	1,659,683		1,495,877
Real estate construction	917,765		1,027,081
Agricultural and agricultural real estate	508,058		565,837
Residential real estate	701,899		832,277
Consumer	385,658		443,332
Total loans receivable held to maturity	9,099,646		8,367,917
Allowance for credit losses	(103,377)		(70,395)
Loans receivable, net	$	8,996,269	$	8,297,522

On January 1, 2020, Heartland adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)," and results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Additionally, Heartland reclassified its loan categories to align more closely with Federal Deposit Insurance Corporation ("FDIC") reporting requirements and classification codes, and all prior periods have been adjusted. As of September 30, 2020, Heartland had $38.0 million of accrued interest receivable, which is included in other assets on the consolidated balance sheet. Heartland does not consider accrued interest receivable in the allowance for credit losses calculation.

The following table shows the balance in the allowance for credit losses at September 30, 2020, and December 31, 2019, and the related loan balances, disaggregated on the basis of measurement methodology, in thousands. As of September 30, 2020, loans individually assessed are collateral dependent and in the process of foreclosure or no longer share the same risk characteristics of the other loans in the pool. All other loans are collectively evaluated for losses. Loans individually evaluated were considered impaired at December 31, 2019.

	Allowance For Credit Losses						Gross Loans Receivable Held to Maturity
	Individually Evaluated for Credit Losses		Collectively Evaluated for Credit Losses		Total		Loans Individually Evaluated for Credit Losses		Loans Collectively Evaluated for Credit Losses		Total
September 30, 2020
Commercial and industrial	$	5,745	$	28,853	$	34,598	$	19,420	$	2,284,226	$	2,303,646
PPP	—		—		—		—		1,128,035		1,128,035
Owner occupied commercial real estate	263		10,966		11,229		11,833		1,483,069		1,494,902
Non-owner occupied commercial real estate	—		12,127		12,127		3,644		1,656,039		1,659,683
Real estate construction	74		20,713		20,787		1,284		916,481		917,765
Agricultural and agricultural real estate	1,847		3,494		5,341		17,906		490,152		508,058
Residential real estate	135		9,536		9,671		4,661		697,238		701,899
Consumer	383		9,241		9,624		1,168		384,490		385,658
Total	$	8,447	$	94,930	$	103,377	$	59,916	$	9,039,730	$	9,099,646

	Allowance For Credit Losses						Gross Loans Receivable Held to Maturity
	Individually Evaluated for Credit Losses		Collectively Evaluated for Credit Losses		Total		Loans Individually Evaluated for Credit Losses		Loans Collectively Evaluated for Credit Losses		Total
December 31, 2019
Commercial and industrial	$	6,276	$	24,511	$	30,787	$	31,814	$	2,498,995	$	2,530,809
Owner occupied commercial real estate	351		7,863		8,214		9,468		1,463,236		1,472,704
Non-owner occupied commercial real estate	33		7,769		7,802		1,730		1,494,147		1,495,877
Real estate construction	—		11,599		11,599		685		1,026,396		1,027,081
Agricultural and agricultural real estate	916		4,757		5,673		18,554		547,283		565,837
Residential real estate	176		1,328		1,504		20,678		811,599		832,277
Consumer	419		4,397		4,816		4,123		439,209		443,332
Total	$	8,171	$	62,224	$	70,395	$	87,052	$	8,280,865	$	8,367,917

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

	Nonaccrual Loans with an Allowance for Credit Losses		Nonaccrual Loans with No Allowance for Credit Losses		Total Nonaccrual Loans		Accruing Loans Past Due 90+ Days
September 30, 2020
Commercial and industrial	$	10,654	$	10,732	$	21,386	$	431
Owner occupied commercial real estate	1,651		11,413		13,064		—
Non-owner occupied commercial real estate	—		3,644		3,644		—
Real estate construction	751		902		1,653		—
Agricultural and agricultural real estate	10,714		7,861		18,575		—
Residential mortgage	8,237		8,289		16,526		1,250
Consumer	3,569		623		4,192		—
Total	$	35,576	$	43,464	$	79,040	$	1,681

Heartland recognized $0 of interest income on nonaccrual loans during the three- and nine months ended September 30, 2020.

Heartland had $15.9 million of troubled debt restructured loans at September 30, 2020, of which $4.1 million were classified as nonaccrual and $11.8 million were accruing according to the restructured terms. Heartland had $7.6 million of troubled debt

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

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

	Three Months Ended September 30,
	2020					2019
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial	1	$	20	$	20	—	$	—	$	—
PPP	—	—		—		—	—		—
Owner occupied commercial real estate	—	—		—		—	—		—
Non-owner occupied commercial real estate	1	9,434		9,434		—	—		—
Real estate construction	—	—		—		—	—		—
Agricultural and agricultural real estate	—	—		—		—	—		—
Residential real estate	—	—		—		—	—		—
Consumer	—	—		—		—	—		—
Total	2	$	9,454	$	9,454	—	$	—	$	—

	Nine Months Ended September 30,
	2020					2019
	Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment		Number of Loans	Pre- Modification Recorded Investment		Post- Modification Recorded Investment
Commercial and industrial	1	$	20	$	20	—	$	—	$	—
PPP	—	—		—		—	—		—
Owner occupied commercial real estate	—	—		—		—	—		—
Non-owner occupied commercial real estate	1	9,434		9,434		—	—		—
Real estate construction	—	—		—		—	—		—
Agricultural and agricultural real estate	—	—		—		—	—		—
Residential real estate	2	92		98		4	276		288
Consumer	—	—		—		—	—		—
Total	4	$	9,546	$	9,552	4	$	276	$	288

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

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

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

	With Payment Defaults During the Nine Months Ended September 30,
	2020			2019
	Number of Loans	Recorded Investment		Number of Loans	Recorded Investment
Commercial and industrial	—	$	—	—	$	—
PPP	—	—		—	—
Owner occupied commercial real estate	—	—		—	—
Non-owner occupied commercial real estate	—	—		—	—
Real estate construction	—	—		—	—
Agricultural and agricultural real estate	—	—		—	—
Residential real estate	1	236		3	253
Consumer	—	—		—	—
Total	1	$	236	3	$	253

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

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

The "doubtful" rating is assigned to loans where identified weaknesses in the borrowers' ability to repay the loan make collection or liquidation in full, on the basis of existing facts, conditions and values, highly questionable and improbable. These borrowers are usually in default, lack liquidity and capital, as well as resources necessary to remain as an operating entity. Specific pending events, such as capital injections, liquidations or perfection of liens on additional collateral, may strengthen the credit, thus deferring the rating of the loan as "loss" until the exact status of the loan can be determined. The loss rating is assigned to loans considered uncollectible. Heartland had no loans classified as loss or doubtful as of September 30, 2020 and December 31, 2019.

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

	Amortized Cost Basis of Term Loans by Year of Origination
	2020		2019		2018		2017		2016		2015 and Prior		Revolving		Total
Commercial and industrial
Pass	$	363,812	$	355,625	$	181,366	$	229,869	$	118,285	$	348,709	$	480,474	$	2,078,140
Watch	32,475		21,178		17,393		17,268		6,597		2,381		35,073		132,365
Substandard	3,996		8,303		21,543		17,789		10,748		14,478		16,284		93,141
Commercial and industrial total	$	400,283	$	385,106	$	220,302	$	264,926	$	135,630	$	365,568	$	531,831	$	2,303,646
PPP
Pass	$	1,063,169	$	—	$	—	$	—	$	—	$	—	$	—	$	1,063,169
Watch	34,691		—		—		—		—		—		—		34,691
Substandard	30,175		—		—		—		—		—		—		30,175
PPP total	$	1,128,035	$	—	$	—	$	—	$	—	$	—	$	—	$	1,128,035
Owner occupied commercial real estate
Pass	$	226,358	$	313,472	$	286,767	$	165,497	$	111,839	$	227,090	$	32,287	$	1,363,310
Watch	8,449		7,692		10,430		19,836		6,255		9,276		2,245		64,183
Substandard	8,923		6,506		14,875		12,576		9,318		14,949		262		67,409
Owner occupied commercial real estate total	$	243,730	$	327,670	$	312,072	$	197,909	$	127,412	$	251,315	$	34,794	$	1,494,902
Non-owner occupied commercial real estate
Pass	$	256,678	$	411,467	$	252,071	$	193,575	$	105,474	$	253,755	$	26,598	$	1,499,618
Watch	14,535		9,949		14,788		20,394		7,648		18,171		475		85,960
Substandard	25,671		4,280		19,889		15,737		3,636		4,892		—		74,105
Non-owner occupied commercial real estate total	$	296,884	$	425,696	$	286,748	$	229,706	$	116,758	$	276,818	$	27,073	$	1,659,683
Real estate construction
Pass	$	188,216	$	351,522	$	235,386	$	34,641	$	14,609	$	23,189	$	16,716	$	864,279
Watch	2,874		24,153		5,931		280		14,744		791		637		49,410
Substandard	199		2,018		353		686		394		426		—		4,076
Real estate construction total	$	191,289	$	377,693	$	241,670	$	35,607	$	29,747	$	24,406	$	17,353	$	917,765
Agricultural and agricultural real estate
Pass	$	86,754	$	76,196	$	45,596	$	29,713	$	15,357	$	33,322	$	114,403	$	401,341
Watch	4,527		9,475		5,127		826		1,772		3,651		9,175		34,553
Substandard	14,563		4,914		18,457		6,419		3,799		12,762		11,250		72,164
Agricultural and agricultural real estate total	$	105,844	$	90,585	$	69,180	$	36,958	$	20,928	$	49,735	$	134,828	$	508,058

	Amortized Cost Basis of Term Loans by Year of Origination
	2020		2019		2018		2017		2016		2015 and Prior		Revolving		Total
Residential real estate
Pass	$	81,558	$	72,198	$	101,789	$	78,394	$	51,293	$	250,936	$	30,370	$	666,538
Watch	81		3,462		825		1,402		338		5,844		346		12,298
Substandard	848		312		1,152		860		1,500		17,291		1,100		23,063
Residential real estate total	$	82,487	$	75,972	$	103,766	$	80,656	$	53,131	$	274,071	$	31,816	$	701,899
Consumer
Pass	$	24,864	$	26,236	$	18,451	$	14,001	$	3,955	$	20,208	$	265,699	$	373,414
Watch	8		370		599		235		236		754		2,218		4,420
Substandard	487		696		2,234		652		762		2,152		841		7,824
Consumer total	$	25,359	$	27,302	$	21,284	$	14,888	$	4,953	$	23,114	$	268,758	$	385,658
Total Pass	$	2,291,409	$	1,606,716	$	1,121,426	$	745,690	$	420,812	$	1,157,209	$	966,547	$	8,309,809
Total Watch	97,640		76,279		55,093		60,241		37,590		40,868		50,169		417,880
Total Substandard	84,862		27,029		78,503		54,719		30,157		66,950		29,737		371,957
Total Loans	$	2,473,911	$	1,710,024	$	1,255,022	$	860,650	$	488,559	$	1,265,027	$	1,046,453	$	9,099,646

Included in Heartland's nonpass loans at September 30, 2020 were $64.9 million of nonpass PPP loans as a result of risk ratings on related credits. Heartland's risk rating methodology assigns a risk rating to the whole lending relationship. Heartland has no allowance recorded related to the PPP loans because of the 100% SBA guarantee.

The following table shows Heartland's loan portfolio by credit quality indicator as of December 31, 2019, in thousands:

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

The nonpass category in the table above is comprised of approximately 60% watch loans and 40% substandard loans as of December 31, 2019. The percent of nonpass loans on nonaccrual status as of December 31, 2019, was 14%. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified.

As of September 30, 2020, Heartland had $1.6 million of loans secured by residential real estate property that were in the process of foreclosure.

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

	Accruing Loans
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Nonaccrual		Total Loans
September 30, 2020
Commercial and industrial	$	3,200	$	2,293	$	431	$	5,924	$	2,276,336	$	21,386	$	2,303,646
PPP	—		—		—		—		1,128,035		—		1,128,035
Owner occupied commercial real estate	1,052		896		—		1,948		1,479,890		13,064		1,494,902
Non-owner occupied commercial real estate	863		1,685		—		2,548		1,653,491		3,644		1,659,683
Real estate construction	310		597		—		907		915,205		1,653		917,765
Agricultural and agricultural real estate	1,308		—		—		1,308		488,175		18,575		508,058
Residential real estate	1,820		86		1,250		3,156		682,217		16,526		701,899
Consumer	980		46		—		1,026		380,440		4,192		385,658
Total gross loans receivable held to maturity	$	9,533	$	5,603	$	1,681	$	16,817	$	9,003,789	$	79,040	$	9,099,646
December 31, 2019
Commercial and industrial	$	5,121	$	904	$	3,899	$	9,924	$	2,491,110	$	29,775	$	2,530,809
Owner occupied commercial real estate	3,487		690		—		4,177		1,461,589		6,938		1,472,704
Non-owner occupied commercial real estate	614		81		—		695		1,493,619		1,563		1,495,877
Real estate construction	5,689		72		—		5,761		1,020,153		1,167		1,027,081
Agricultural and agricultural real estate	3,734		79		26		3,839		541,455		20,543		565,837
Residential real estate	4,166		24		180		4,370		814,840		13,067		832,277
Consumer	2,511		651		—		3,162		436,675		3,495		443,332
Total gross loans receivable held to maturity	$	25,322	$	2,501	$	4,105	$	31,928	$	8,259,441	$	76,548	$	8,367,917

Loans delinquent 30 to 89 days as a percent of total loans were 0.17% at September 30, 2020, compared to 0.33% at December 31, 2019. Changes in credit risk are monitored on a continuous basis and changes in risk ratings are made when identified. All individually assessed loans are reviewed at least annually.

As of December 31, 2019, the majority of Heartland's impaired loans were those that were nonaccrual, were past due 90 days or more and still accruing or have had their terms restructured in a troubled debt restructuring. The following table presents the unpaid principal balance that was contractually due at December 31, 2019, the outstanding loan balance recorded on the consolidated balance sheet at December 31, 2019, any related allowance recorded for those loans as of December 31, 2019, the

average outstanding loan balances recorded on the consolidated balance sheet during the year ended December 31, 2019, and the interest income recognized on the impaired loans during the year ended December 31, 2019, in thousands:

	Unpaid Principal Balance		Loan Balance		Related Allowance Recorded		Year-to- Date Avg. Loan Balance		Year-to- Date Interest Income Recognized
December 31, 2019
Impaired loans with a related allowance:
Commercial	$	11,727	$	11,710	$	6,276	$	11,757	$	6
Owner occupied commercial real estate	712		712		352		1,435		22
Non-owner occupied commercial real estate	138		138		33		—		—
Real estate construction	17		17		—		—		—
Agricultural and agricultural real estate	2,751		2,237		916		2,739		—
Residential real estate	1,378		1,378		176		1,116		—
Consumer	998		997		419		1,170		11
Total loans held to maturity	$	17,721	$	17,189	$	8,172	$	18,217	$	39
Impaired loans without a related allowance:
Commercial	$	22,525	$	20,104	$	—	$	19,141	$	782
Owner occupied commercial real estate	8,756		8,756		—		8,337		341
Non-owner occupied commercial real estate	1,592		1,592		—		1,515		62
Real estate construction	668		668		—		636		26
Agricultural and agricultural real estate	19,113		16,317		—		16,837		60
Residential real estate	19,382		19,300		—		17,073		280
Consumer	3,135		3,126		—		4,182		45
Total loans held to maturity	$	75,171	$	69,863	$	—	$	67,721	$	1,596
Total impaired loans held to maturity:
Commercial	$	34,252	$	31,814	$	6,276	$	30,898	$	788
Owner occupied commercial real estate	9,468		9,468		352		9,772		363
Non-owner occupied commercial real estate	1,730		1,730		33		1,515		62
Real estate construction	685		685		—		636		26
Agricultural and agricultural real estate	21,864		18,554		916		19,576		60
Residential real estate	20,760		20,678		176		18,189		280
Consumer	4,133		4,123		419		5,352		56
Total impaired loans held to maturity	$	92,892	$	87,052	$	8,172	$	85,938	$	1,635

On November 30, 2019, Heartland's Illinois Bank & Trust subsidiary completed the acquisition of substantially all of the assets and substantially all of the deposits and certain other liabilities of Rockford Bank & Trust Company, headquartered in Rockford, Illinois. As of November 30, 2019, Rockford Bank & Trust had gross loans of $366.6 million, and the estimated fair value of the loans acquired was $354.0 million.

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