Fair Value (Tables)

3 Months Ended

Mar. 31, 2014

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis

The table below presents Heartland's assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2014, and December 31, 2013, 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
March 31, 2014
Assets
Trading securities	$	—	$	—	$	—	$	—
Securities available for sale
U.S. government corporations and agencies	146,696		2,555		144,141		—
Mortgage-backed securities	1,049,621		—		1,045,291		4,330
Obligations of states and political subdivisions	199,398		—		199,398		—
Equity securities	5,041		—		5,041		—
Derivative financial instruments	152		—		152		—
Interest rate lock commitments	2,993		—		—		2,993
Forward commitments	238		—		238		—
Total assets at fair value	$	1,404,139	$	2,555	$	1,394,261	$	7,323
Liabilities
Derivative financial instruments	$	3,467	$	—	$	3,467	$	—
Forward commitments	307		—		307		—
Total liabilities at fair value	$	3,774	$	—	$	3,774	$	—
December 31, 2013
Assets
Trading securities	$	1,801	$	1,801	$	—	$	—
Securities available for sale
U.S. government corporations and agencies	218,303		4,084		214,219		—
Mortgage-backed securities	1,143,947		—		1,140,649		3,298
Obligations of states and political subdivisions	266,624		—		266,624		—
Equity securities	5,028		—		5,028		—
Interest rate lock commitments	1,809		—		—		1,809
Forward commitments	1,206		—		1,206		—
Total assets at fair value	$	1,638,718	$	5,885	$	1,627,726	$	5,107
Liabilities
Derivative financial instruments	$	3,697	$	—	$	3,697	$	—
Forward commitments	133		—		133		—
Total liabilities at fair value	$	3,830	$	—	$	3,830	$	—

Fair Value Measurements, Nonrecurring

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



	Fair Value Measurements at March 31, 2014
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Losses
Collateral dependent impaired loans:
Commercial	$	440	$	—	$	—	$	440	$	153
Commercial real estate	6,585		—		—		6,585		583
Agricultural and agricultural real estate	4,926		—		—		4,926		1,510
Residential real estate	2,764		—		—		2,764		—
Consumer	2,613		—		—		2,613		—
Total collateral dependent impaired loans	$	17,328	$	—	$	—	$	17,328	$	2,246
Other real estate owned	$	28,083	$	—	$	—	$	28,083	$	123



	Fair Value Measurements at December 31, 2013
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Losses
Collateral dependent impaired loans:
Commercial	$	7,229	$	—	$	—	$	7,229	$	919
Commercial real estate	7,749		—		—		7,749		1,881
Agricultural and agricultural real estate	13,062		—		—		13,062		—
Residential real estate	3,396		—		—		3,396		—
Consumer	1,763		—		—		1,763		—
Total collateral dependent impaired loans	$	33,199	$	—	$	—	$	33,199	$	2,800
Other real estate owned	$	29,852	$	—	$	—	$	29,852	$	2,799

Fair Value Inputs, Liabilities, Quantitative Information

The following tables present additional quantitative information about assets measured at fair value and for which Heartland has utilized Level 3 inputs to determine fair value, in thousands:



	Quantitative Information About Level 3 Fair Value Measurements
	Fair Value at 3/31/14		Valuation Technique	Unobservable Input	Range (Weighted Average)
Z-TRANCHE Securities	$	4,330	Discounted cash flows	Pretax discount rate	7.00 - 8.50%
				Actual defaults	12.71-20.14% (15.52%)
				Actual deferrals	6.25-22.35% (11.32%)
Interest rate lock commitments	2,993		Discounted cash flows	Closing ratio	⁽¹⁾

Collateral dependent impaired loans:
Commercial	440		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount	⁽²⁾
Commercial real estate	6,585		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount	⁽²⁾
Agricultural and agricultural real estate	4,926		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount	⁽²⁾
Residential real estate	2,764		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount	⁽²⁾
Consumer	2,613		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount	⁽²⁾
Other real estate owned	28,083		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount

(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; therefore providing a range would not be meaningful. The closing ratio at March 31, 2014 was 85%.
(2) Third party appraisals are obtained as to the value of the underlying asset, but disclosure of this information would not provide meaningful information, as the range will vary widely from loan to loan. Types of discounts considered included age of the appraisal, local market conditions, current condition of the property, and estimated sales costs. These discounts will also vary from loan to loan, thus providing range would not be meaningful.



	Quantitative Information About Level 3 Fair Value Measurements
	Fair Value at 12/31/13		Valuation Technique	Unobservable Input	Range (Weighted Average)
Z-TRANCHE Securities	$	3,298	Discounted cash flows	Pretax discount rate	7.00 - 9.00%
				Actual defaults	12.50-28.20% (20.80%)
				Actual deferrals	6.10-16.00% (11.10%)
Interest rate lock commitments	1,809		Discounted cash flows	Closing ratio	⁽¹⁾

Collateral dependent impaired loans:
Commercial	7,229		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount	⁽²⁾
Commercial real estate	7,749		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount	⁽²⁾
Agricultural and agricultural real estate	13,062		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount	⁽²⁾
Residential real estate	3,396		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount	⁽²⁾
Consumer	1,763		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount	⁽²⁾
Other real estate owned	29,852		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount

(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; therefore providing a range would not be meaningful. The closing ratio at December 31, 2013 was 87%.
(2) Third party appraisals are obtained as to the value of the underlying asset, but disclosure of this information would not provide meaningful information, as the range will vary widely from loan to loan. Types of discounts considered included age of the appraisal, local market conditions, current condition of the property, and estimated sales costs. These discounts will also vary from loan to loan, thus providing range would not be meaningful.

Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation

The changes in fair value of the Z-TRANCHE, a Level 3 asset, that is measured on a recurring basis is summarized in the following table, in thousands:



	For the Three Months Ended			For the Year Ended
	March 31, 2014			December 31, 2013
Balance at January 1,	$	3,298		$	4,089
Total gains (losses):
Included in earnings	—			(1,587		)
Included in other comprehensive income	1,062			826
Purchases, issuances, sales and settlements:
Purchases	—			—
Sales	(30		)	(30		)
Settlements	—			—
Balance at period end	$	4,330		$	3,298

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



	For the Three Months Ended			For the Year Ended
	March 31, 2014			December 31, 2013
Balance at January 1,	$	1,809		$	9,353
Total gains (losses) included in earnings	1,882			(10,518		)
Settlements	(698		)	2,974
Balance at period end	$	2,993		$	1,809

Fair Value, by Balance Sheet Grouping

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



					Fair Value Measurements at March 31, 2014
	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	$	88,628	$	88,628	$	88,628	$	—	$	—
Time deposits in other financial institutions	3,355		3,355		3,355		—		—
Securities:
Trading	—		—		—		—		—
Available for sale	1,400,756		1,400,756		2,555		1,393,871		4,330
Held to maturity	257,927		263,169		—		263,169		—
Other investments	18,755		18,755		—		18,520		235
Loans held for sale	54,862		54,862		—		54,862		—
Loans, net:
Commercial	974,144		963,353		—		962,913		440
Commercial real estate	1,548,517		1,548,106		—		1,541,521		6,585
Agricultural and agricultural real estate	368,168		369,517		—		364,591		4,926
Residential real estate	362,769		351,492		—		348,728		2,764
Consumer	291,071		288,898		—		286,285		2,613
Total Loans, net	3,544,669		3,521,366		—		3,504,038		17,328
Derivative financial instruments	152		152		—		152		—
Interest rate lock commitments	2,993		2,993		—		—		2,993
Forward commitments	238		238		—		238		—
Financial liabilities:
Deposits
Demand deposits	1,195,457		1,195,457		—		1,195,457		—
Savings deposits	2,582,166		2,582,166		—		2,582,166		—
Time deposits	885,741		885,741		—		885,741		—
Short term borrowings	256,250		256,250		—		256,250		—
Other borrowings	334,916		339,930		—		339,930		—
Derivative financial instruments	3,467		3,467		—		3,467		—
Forward commitments	307		307		—		307		—



					Fair Value Measurements at December 31, 2013
	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	$	125,270	$	125,270	$	125,270	$	—	$	—
Securities:
Trading	1,801		1,801		1,801		—		—
Available for sale	1,633,902		1,633,902		4,084		1,626,520		3,298
Held to maturity	237,498		237,437		—		237,437		—
Other investments	21,843		21,843		—		21,608		235
Loans held for sale	46,665		46,665		—		46,665		—
Loans, net:
Commercial	936,305		930,501		—		923,272		7,229
Commercial real estate	1,516,352		1,512,773		—		1,505,024		7,749
Agricultural and agricultural real estate	374,203		378,086		—		365,024		13,062
Residential real estate	347,266		335,362		—		331,966		3,396
Consumer	286,890		273,139		—		271,376		1,763
Total Loans, net	3,461,016		3,429,861		—		3,396,662		33,199
Derivative financial instruments	—		—		—		—		—
Interest rate lock commitments	1,809		1,809		—		—		1,809
Forward commitments	1,206		1,206		—		1,206		—
Financial liabilities:
Deposits
Demand deposits	1,238,581		1,238,581		—		1,238,581		—
Savings deposits	2,535,242		2,535,242		—		2,535,242		—
Time deposits	892,676		892,676		—		892,676		—
Short term borrowings	408,756		408,756		—		408,756		—
Other borrowings	350,109		355,923		—		355,923		—
Derivative financial instruments	3,697		3,697		—		3,697		—
Forward commitments	133		133		—		133		—

- Definition

Tabular disclosure of the fair value measurement of assets using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets) and gains or losses recognized in other comprehensive income (loss), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs), by class of asset.

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- Definition

Tabular disclosure of the fair value of financial instruments, including financial assets and financial liabilities, and the measurements of those instruments, assets, and liabilities.

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