Fair Value (Tables)

9 Months Ended

Sep. 30, 2015

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 September 30, 2015, and December 31, 2014, in thousands, aggregated by the level in the fair value hierarchy within which those measurements fall:



	Total Fair Value		Level 1		Level 2		Level 3
September 30, 2015
Assets
Securities available for sale
U.S. government corporations and agencies	$	27,020	$	529	$	26,491	$	—
Mortgage-backed securities	1,006,349		—		1,000,309		6,040
Obligations of states and political subdivisions	214,551		—		214,551		—
Corporate debt securities	580		—		—		580
Equity securities	13,187		—		13,187		—
Interest rate lock commitments	4,903		—		—		4,903
Forward commitments	833		—		833		—
Total assets at fair value	$	1,267,423	$	529	$	1,255,371	$	11,523
Liabilities
Derivative financial instruments	$	4,982	$	—	$	4,982	$	—
Forward commitments	2,841		—		2,841		—
Total liabilities at fair value	$	7,823	$	—	$	7,823	$	—
December 31, 2014
Assets
Securities available for sale
U.S. government corporations and agencies	$	24,093	$	2,529	$	21,564	$	—
Mortgage-backed securities	1,219,266		—		1,214,319		4,947
Obligations of states and political subdivisions	153,426		—		153,426		—
Corporate debt securities	—		—		—		—
Equity securities	5,083		—		5,083		—
Interest rate lock commitments	2,496		—		—		2,496
Forward commitments	275		—		275		—
Total assets at fair value	$	1,404,639	$	2,529	$	1,394,667	$	7,443
Liabilities
Derivative financial instruments	$	3,646	$	—	$	3,646	$	—
Forward commitments	1,619		—		1,619		—
Total liabilities at fair value	$	5,265	$	—	$	5,265	$	—

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 September 30, 2015
	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 Losses
Collateral dependent impaired loans:
Commercial	$	767	$	—	$	—	$	767	$	79
Commercial real estate	4,277		—		—		4,277		57
Agricultural and agricultural real estate	—		—		—		—		—
Residential real estate	2,475		—		—		2,475		5
Consumer	1,970		—		—		1,970		—
Total collateral dependent impaired loans	$	9,489	$	—	$	—	$	9,489	$	141
Other real estate owned	$	17,041	$	—	$	—	$	17,041	$	1,685
Premises, furniture and equipment held for sale	$	3,440	$	—	$	—	$	3,440	$	—



	Fair Value Measurements at December 31, 2014
	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 Losses
Collateral dependent impaired loans:
Commercial	$	1,033	$	—	$	—	$	1,033	$	659
Commercial real estate	12,584		—		—		12,584		492
Agricultural and agricultural real estate	552		—		—		552		2,229
Residential real estate	3,173		—		—		3,173		—
Consumer	2,003		—		—		2,003		22
Total collateral dependent impaired loans	$	19,345	$	—	$	—	$	19,345	$	3,402
Other real estate owned	$	19,016	$	—	$	—	$	19,016	$	1,938
Premises, furniture and equipment held for sale	$	—	$	—	$	—	$	—	$	—

Fair Value Inputs, Assets, 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:



	Fair Value at 9/30/15		Valuation Technique	Unobservable Input	Range (Weighted Average)
Z-TRANCHE Securities	$	6,040	Discounted cash flows	Pretax discount rate	7.00 - 9.50%
				Actual defaults	17.28 - 32.60% (26.32%)
				Actual deferrals	4.91 - 21.20% (16.30%)
Corporate debt securities	580		Discounted cash flows	Bank analysis	⁽¹⁾
Interest rate lock commitments	4,903		Discounted cash flows	Closing ratio	⁽²⁾
Premises, furniture and equipment held for sale	3,440		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Collateral dependent impaired loans:
Commercial	767		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Commercial real estate	4,277		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Agricultural and agricultural real estate	—		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Residential real estate	2,475		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Consumer	1,970		Modified appraised value	Third party valuation	⁽³⁾
				Valuation discount	⁽³⁾
Other real estate owned	17,041		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾

(1) The unobservable input is the bank analysis market using Moody's Global Bank Rating Methodology. The analysis takes into consideration various performance metrics as well as yield on the debt securities and credit risk analysis.
(2) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data; therefore providing a range would not be meaningful. The weighted average closing ratio at September 30, 2015, was 86%.
(3) 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 at 12/31/14		Valuation Technique	Unobservable Input	Range (Weighted Average)
Z-TRANCHE Securities	$	4,947	Discounted cash flows	Pretax discount rate	7.00 - 9.00%
				Actual defaults	15.60 - 30.60% (24.50%)
				Actual deferrals	7.20 - 17.30% (12.90%)
Corporate debt securities	—		Discounted cash flows	Bank analysis	⁽¹⁾
Interest rate lock commitments	2,496		Discounted cash flows	Closing ratio	⁽²⁾
Premises, furniture and equipment held for sale	—		Modified appraised value	Third party appraisal	⁽³⁾
					⁽³⁾
Collateral dependent impaired loans:
Commercial	1,033		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Commercial real estate	12,584		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Agricultural and agricultural real estate	552		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Residential real estate	3,173		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Consumer	2,003		Modified appraised value	Third party valuation	⁽³⁾
				Valuation discount	⁽³⁾
Other real estate owned	19,016		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾

(1) The unobservable input is the bank analysis market using Moody's Global Bank Rating Methodology. The analysis takes into consideration various performance metrics as well as yield on the debt securities and credit risk analysis.
(2) The significant unobservable input used in the fair value measurement is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. The closing ratio calculation takes into consideration historical data and loan-level data; therefore providing a range would not be meaningful. The weighted average closing ratio at December 31, 2014, was 84%.
(3) 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 are summarized in the following table, in thousands:



	For the Nine Months Ended September 30, 2015			For the Year Ended December 31, 2014
Balance at January 1,	$	4,947		$	3,298
Total gains (losses):
Included in earnings	—			—
Included in other comprehensive income	1,209			1,783
Purchases, sales and settlements:
Purchases	6			—
Sales	—			—
Settlements	(122		)	(134		)
Balance at period end	$	6,040		$	4,947

The changes in fair value of the corporate debt securities, Level 3 assets, that are measured on a recurring basis is summarized in the following table, in thousands:



	For the Nine Months Ended September 30, 2015			For the Year Ended December 31, 2014
Balance at January 1,	$	—		$	—
Total gains (losses):
Included in earnings	—			—
Included in other comprehensive income	(160		)	—
Purchases, acquired, sales and settlements:
Purchases	—			—
Acquired	740			—
Sales	—			—
Settlements	—			—
Balance at period end	$	580		$	—

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 Nine Months Ended September 30, 2015			For the Year Ended December 31, 2014
Balance at January 1,	$	2,496		$	1,809
Total gains (losses) included in earnings	3,471			2,422
Issuances	3,851			2,038
Settlements	(4,915		)	(3,773		)
Balance at period end	$	4,903		$	2,496

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 September 30, 2015
	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	$	91,105	$	91,105	$	91,105	$	—	$	—
Time deposits in other financial institutions	2,355		2,355		2,355		—		—
Securities:
Available for sale	1,261,687		1,261,687		529		1,254,538		6,620
Held to maturity	282,200		294,622		—		294,622		—
Other investments	19,292		19,292		—		19,057		235
Loans held for sale	102,569		102,569		—		102,569		—
Loans, net:
Commercial	1,226,694		1,223,493		—		1,222,726		767
Commercial real estate	2,043,473		2,058,649		—		2,054,372		4,277
Agricultural and agricultural real estate	465,961		469,329		—		469,329		—
Residential real estate	486,782		483,793		—		481,318		2,475
Consumer	372,508		375,497		—		373,527		1,970
Total Loans, net	4,595,418		4,610,761		—		4,601,272		9,489
Interest rate lock commitments	4,903		4,903		—		—		4,903
Forward commitments	833		833		—		833		—
Financial liabilities:
Deposits
Demand deposits	1,632,005		1,632,005		—		1,632,005		—
Savings deposits	2,936,611		2,936,611		—		2,936,611		—
Time deposits	938,621		938,621		—		938,621		—
Short term borrowings	335,845		335,845		—		335,845		—
Other borrowings	302,086		305,361		—		305,361		—
Derivative financial instruments	4,982		4,982		—		4,982		—
Forward commitments	2,841		2,841		—		2,841		—



					Fair Value Measurements at December 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	$	73,871	$	73,871	$	73,871	$	—	$	—
Time deposits in other financial institutions	2,605		2,605		2,605		—		—
Securities:
Available for sale	1,401,868		1,401,868		2,529		1,394,392		4,947
Held to maturity	284,587		296,768		—		296,768		—
Other investments	20,498		20,498		—		20,263		235
Loans held for sale	70,514		70,514		—		70,514		—
Loans, net:
Commercial	1,024,065		1,009,802		—		1,008,769		1,033
Commercial real estate	1,690,899		1,699,722		—		1,687,138		12,584
Agricultural and agricultural real estate	420,623		423,968		—		423,416		552
Residential real estate	377,094		370,178		—		367,005		3,173
Consumer	323,873		330,211		—		328,208		2,003
Total Loans, net	3,836,554		3,833,881		—		3,814,536		19,345
Interest rate lock commitments	2,496		2,496		—		—		2,496
Forward commitments	275		275		—		275		—
Financial liabilities:
Deposits
Demand deposits	1,295,193		1,295,193		—		1,295,193		—
Savings deposits	2,687,493		2,687,493		—		2,687,493		—
Time deposits	785,336		785,336		—		785,336		—
Short term borrowings	330,264		330,264		—		330,264		—
Other borrowings	396,255		401,978		—		401,978		—
Derivative financial instruments	3,646		3,646		—		3,646		—
Forward commitments	1,619		1,619		—		1,619		—