Fair Value (Tables)

9 Months Ended

Sep. 30, 2017

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, 2017, and December 31, 2016, 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, 2017
Assets
Securities available for sale
U.S. government corporations and agencies	$	7,415	$	3,505	$	3,910	$	—
Mortgage-backed securities	1,565,400		—		1,565,400		—
Obligations of states and political subdivisions	503,974		—		503,974		—
Corporate debt securities	—		—		—		—
Equity securities	16,596		—		16,596		—
Derivative financial instruments⁽¹⁾	3,386		—		3,386		—
Interest rate lock commitments	2,463		—		—		2,463
Forward commitments	237		—		237		—
Total assets at fair value	$	2,099,471	$	3,505	$	2,093,503	$	2,463
Liabilities
Derivative financial instruments⁽²⁾	$	6,309	$	—	$	6,309	$	—
Forward commitments	261		—		261		—
Total liabilities at fair value	$	6,570	$	—	$	6,570	$	—
December 31, 2016
Assets
Securities available for sale
U.S. government corporations and agencies	$	4,700	$	517	$	4,183	$	—
Mortgage-backed securities	1,290,500		—		1,288,276		2,224
Obligations of states and political subdivisions	536,144		—		536,144		—
Equity securities	14,520		—		14,520		—
Derivative financial instruments⁽¹⁾	3,222		—		3,222		—
Interest rate lock commitments	2,790		—		—		2,790
Forward commitments	2,546		—		2,546		—
Total assets at fair value	$	1,854,422	$	517	$	1,848,891	$	5,014
Liabilities
Derivative financial instruments⁽²⁾	$	7,027	$	—	$	7,027	$	—
Forward commitments	266		—		266		—
Total liabilities at fair value	$	7,293	$	—	$	7,293	$	—

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

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, 2017
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses
Collateral dependent impaired loans:
Commercial	$	3,556	$	—	$	—	$	3,556	$	1,119
Commercial real estate	8,718		—		—		8,718		2,043
Agricultural and agricultural real estate	7,936		—		—		7,936		—
Residential real estate	1,365		—		—		1,365		—
Consumer	912		—		—		912		—
Total collateral dependent impaired loans	$	22,487	$	—	$	—	$	22,487	$	3,162
Other real estate owned	$	13,226	$	—	$	—	$	13,226	$	594
Premises, furniture and equipment held for sale	$	4,428	$	—	$	—	$	4,428	$	404
Commercial servicing rights	$	313	$	—	$	—	$	313	$	(29	)



	Fair Value Measurements at December 31, 2016
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Year-to- Date (Gains) Losses
Collateral dependent impaired loans:
Commercial	$	1,683	$	—	$	—		$	1,683	$	41
Commercial real estate	3,026		—		—			3,026		527
Agricultural and agricultural real estate	1,955		—		—			1,955		—
Residential real estate	3,565		—		—			3,565		85
Consumer	1,193		—		—			1,193		—
Total collateral dependent impaired loans	$	11,422	$	—	$	—	—	$	11,422	$	653
Other real estate owned	$	9,744	$	—	$	—		$	9,744	$	1,341
Premises, furniture and equipment held for sale	$	414	$	—	$	—		$	414	$	35
Commercial servicing rights	$	326	$	—	$	—		$	326	$	33

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 9/30/17		Valuation Technique	Unobservable Input	Range (Weighted Average)
Z-TRANCHE Securities	$	—	Discounted cash flows	Pretax discount rate	—
				Actual defaults	—
				Actual deferrals	—
Interest rate lock commitments	2,463		Discounted cash flows	Closing ratio	0-99% (89%)⁽¹⁾
Premises, furniture and equipment held for sale	4,428		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-10%⁽⁴⁾
Commercial servicing rights	313		Discounted cash flows	Third party valuation	(3)
Other real estate owned	13,226		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-10%
Collateral dependent impaired loans:
Commercial	3,556		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-15%⁽⁴⁾
Commercial real estate	8,718		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-14%⁽⁴⁾
Agricultural and agricultural real estate	7,936		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-6%⁽⁴⁾
Residential real estate	1,365		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-13%⁽⁴⁾
Consumer	912		Modified appraised value	Third party valuation	(2)
				Valuation discount	0-11%⁽⁴⁾

(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) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups.
(4) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral.



	Fair Value at 12/31/16		Valuation Technique	Unobservable Input	Range (Weighted Average)
Z-TRANCHE Securities	$	2,224	Discounted cash flows	Pretax discount rate	7.50 - 9.50%
				Actual defaults	21.77 - 37.62% (33.11%)
				Actual deferrals	10.44 - 26.29% (14.81%)
Interest rate lock commitments	2,790		Discounted cash flows	Closing ratio	0-99% (89%)⁽¹⁾
Premises, furniture and equipment held for sale	414		Modified appraised value	Third party appraisal	(2) 0-8%⁽⁴⁾
Commercial servicing rights	326		Discounted cash flows	Third party valuation	(3)
Other real estate owned	9,744		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-10%
Collateral dependent impaired loans:
Commercial	1,683		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-8%⁽⁴⁾
Commercial real estate	3,026		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-7%⁽⁴⁾
Agricultural and agricultural real estate	1,955		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-10%⁽⁴⁾
Residential real estate	3,565		Modified appraised value	Third party appraisal	(2)
				Appraisal discount	0-8%⁽⁴⁾
Consumer	1,193		Modified appraised value	Third party valuation	(2)
				Valuation discount	0-11%⁽⁴⁾

(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) The significant unobservable input used in the fair value measurement are the value indices, which are weighted-average spreads to LIBOR based on maturity groups.
(4) Discounts applied to the appraised values primarily include estimated sales costs, but also consider the age of the appraisal, changes in local market conditions and changes in the current condition of the collateral.

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

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



	For the Nine Months Ended September 30, 2017			For the Year Ended December 31, 2016
Balance at January 1,	$	2,224		$	2,039
Total gains (losses):
Included in earnings	2,810			—
Included in other comprehensive income	(2,166		)	185
Purchases, sales and settlements:
Purchases	—			—
Sales	(2,868		)	—
Settlements	—			—
Balance at period end	$	—		$	2,224

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 Nine Months Ended September 30, 2017			For the Year Ended December 31, 2016
Balance at January 1,	$	2,790		$	3,168
Total gains (losses) included in earnings	(587		)	(1,564		)
Issuances	1,580			5,373
Settlements	(1,320		)	(4,187		)
Balance at period end	$	2,463		$	2,790

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, 2017
	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	$	251,736	$	251,736	$	251,736	$	—	$	—
Time deposits in other financial institutions	19,793		19,793		19,793		—		—
Securities:
Available for sale	2,093,385		2,093,385		3,505		2,089,880		—
Held to maturity	256,355		270,386		—		270,386		—
Other investments	23,176		23,176		—		22,981		195
Loans held for sale	35,795		35,795		—		35,795		—
Loans, net:
Commercial	1,596,934		1,601,351		—		1,597,795		3,556
Commercial real estate	3,143,414		3,117,829		—		3,109,111		8,718
Agricultural and agricultural real estate	506,388		507,974		—		500,038		7,936
Residential real estate	632,306		622,698		—		621,333		1,365
Consumer	441,079		444,384		—		443,472		912
Total Loans, net	6,320,121		6,294,236		—		6,271,749		22,487
Derivative financial instruments⁽¹⁾	3,386		3,386		—		3,386		—
Interest rate lock commitments	2,463		2,463		—		—		2,463
Forward commitments	237		237		—		237		—
Financial liabilities:
Deposits
Demand deposits	3,009,940		3,009,940		—		3,009,940		—
Savings deposits	4,227,340		4,227,340		—		4,227,340		—
Time deposits	994,604		994,604		—		994,604		—
Short term borrowings	171,871		171,871		—		171,871		—
Other borrowings	301,473		305,741		—		305,741		—
Derivative financial instruments⁽²⁾	6,309		6,309		—		6,309		—
Forward commitments	261		261		—		261		—

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



					Fair Value Measurements at December 31, 2016
	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	$	158,724	$	158,724	$	158,724	$	—	$	—
Time deposits in other financial institutions	2,105		2,105		2,105		—		—
Securities:
Available for sale	1,845,864		1,845,864		517		1,843,123		2,224
Held to maturity	263,662		274,799		—		274,799		—
Other investments	21,560		21,560		—		21,365		195
Loans held for sale	61,261		61,261		—		61,261		—
Loans, net:
Commercial	1,272,089		1,258,754		—		1,257,071		1,683
Commercial real estate	2,513,446		2,506,858		—		2,503,832		3,026
Agricultural and agricultural real estate	485,820		487,001		—		485,046		1,955
Residential real estate	614,207		604,233		—		600,668		3,565
Consumer	411,833		414,266		—		413,073		1,193
Total Loans, net	5,297,395		5,271,112		—		5,259,690		11,422
Derivative financial instruments⁽¹⁾	3,222		3,222		—		3,222		—
Interest rate lock commitments	2,790		2,790		—		—		2,790
Forward commitments	2,546		2,546		—		2,546		—
Financial liabilities:
Deposits
Demand deposits	2,202,036		2,202,036		—		2,202,036		—
Savings deposits	3,788,089		3,788,089		—		3,788,089		—
Time deposits	857,286		857,286		—		857,286		—
Short term borrowings	306,459		306,459		—		306,459		—
Other borrowings	288,534		288,534		—		288,534		—
Derivative financial instruments⁽²⁾	7,027		7,027		—		7,027		—
Forward commitments	266		266		—		266		—

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