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 as of December 31, 2018, and December 31, 2017, are summarized in the table below, in thousands:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2018
U.S. government corporations and agencies	$	32,075	$	3	$	(127	)	$	31,951
Mortgage and asset-backed securities	2,061,358		3,740		(38,400		)	2,026,698
Obligations of states and political subdivisions	382,101		919		(8,046		)	374,974
Total debt securities	2,475,534		4,662		(46,573		)	2,433,623
Equity securities with a readily determinable fair value	17,086		—		—			17,086
Total	$	2,492,620	$	4,662	$	(46,573	)	$	2,450,709
December 31, 2017
U.S. government corporations and agencies	$	5,358	$	8	$	(38	)	$	5,328
Mortgage and asset-backed securities	1,785,467		5,856		(37,587		)	1,753,736
Obligations of states and political subdivisions	441,060		4,669		(4,714		)	441,015
Total debt securities	2,231,885		10,533		(42,339		)	2,200,079
Equity securities	16,296		378		—			16,674
Total	$	2,248,181	$	10,911	$	(42,339	)	$	2,216,753

Investment securities as shown in this report reflect categories as required by Heartland’s adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities", on January 1, 2018. That guidance refined the definition of equity securities and required their segregation from available for sale debt securities.

While changes in the fair value of available for sale debt securities continue to be recorded in the equity category of accumulated other comprehensive income (loss), the guidance requires changes in the fair value of equity securities to be recorded in current earnings. As required by the guidance, the unrealized gain in fair value on equity securities (recorded in accumulated other comprehensive income (loss) at December 31, 2017) was reclassified to retained earnings on January 1, 2018. The amount of the reclassification was $280,000, net of tax.

Equity securities include money market accounts that totaled $17.1 million at carrying value and $17.1 million at fair value at December 31, 2018. The portion of unrealized net gains on equity securities recognized in current earnings during 2018, which related to securities still held at December 31, 2018, totaled $212,000.

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of December 31, 2018, and December 31, 2017, are summarized in the table below, in thousands:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
December 31, 2018
Obligations of states and political subdivisions	$	236,283	$	9,554	$	(496	)	$	245,341
Total	$	236,283	$	9,554	$	(496	)	$	245,341
December 31, 2017
Obligations of states and political subdivisions	$	253,550	$	12,460	$	(516	)	$	265,494
Total	$	253,550	$	12,460	$	(516	)	$	265,494

No transfers from available for sale to held to maturity were made in 2018 or 2017.

The amortized cost and estimated fair value of investment securities carried at fair value at December 31, 2018, 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.



	December 31, 2018
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	30,248	$	30,163
Due in 1 to 5 years	51,947		51,120
Due in 5 to 10 years	137,983		135,423
Due after 10 years	193,998		190,219
Total debt securities	414,176		406,925
Mortgage and asset-backed securities	2,061,358		2,026,698
Equity securities with a readily determinable fair value	17,086		17,086
Total investment securities	$	2,492,620	$	2,450,709

The amortized cost and estimated fair value of debt securities held to maturity at December 31, 2018, 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.



	December 31, 2018
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	583	$	589
Due in 1 to 5 years	31,156		31,759
Due in 5 to 10 years	111,690		115,342
Due after 10 years	92,854		97,651
Total investment securities	$	236,283	$	245,341

As of December 31, 2018, securities with a carrying value of $524.8 million were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required and permitted by law.

Gross gains and losses realized related to sales of securities carried at fair value for the years ended December 31, 2018, 2017 and 2016 are summarized as follows, in thousands:



	2018		2017		2016
Available for Sale Securities sold:
Proceeds from sales	$	727,895	$	1,456,750	$	909,942
Gross security gains	3,661		10,585		13,200
Gross security losses	2,576		3,812		1,562

The following tables summarize, 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 Heartland's securities portfolio as of December 31, 2018, and December 31, 2017. 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 or more months. The reference point for determining how long an investment was in an unrealized loss position was December 31, 2018, and December 31, 2017, respectively. Securities for which Heartland has taken credit-related other-than-temporary impairment ("OTTI") write-downs are categorized as being "less than 12 months" or "12 months or longer" in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.



Debt securities available for sale	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2018
U.S. government corporations and agencies	$	24,902	$	(83	)	$	4,577	$	(44	)	$	29,479	$	(127	)
Mortgage and asset-backed securities	733,826		(9,060		)	805,089		(29,340		)	1,538,915		(38,400		)
Obligations of states and political subdivisions	34,990		(390		)	258,143		(7,656		)	293,133		(8,046		)
Total temporarily impaired securities	$	793,718	$	(9,533	)	$	1,067,809	$	(37,040	)	$	1,861,527	$	(46,573	)
December 31, 2017
U.S. government corporations and agencies	$	4,819	$	(38	)	$	—	$	—		$	4,819	$	(38	)
Mortgage and asset-backed securities	851,070		(11,533		)	399,978		(26,054		)	1,251,048		(37,587		)
Obligations of states and political subdivisions	93,040		(667		)	159,180		(4,047		)	252,220		(4,714		)
Total temporarily impaired securities	$	948,929	$	(12,238	)	$	559,158	$	(30,101	)	$	1,508,087	$	(42,339	)



Securities held to maturity	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
December 31, 2018
Obligations of states and political subdivisions	$	10,802	$	(17	)	$	19,508	$	(479	)	$	30,310	$	(496	)
Total temporarily impaired securities	$	10,802	$	(17	)	$	19,508	$	(479	)	$	30,310	$	(496	)
December 31, 2017
Obligations of states and political subdivisions	$	8,512	$	(49	)	$	8,989	$	(467	)	$	17,501	$	(516	)
Total temporarily impaired securities	$	8,512	$	(49	)	$	8,989	$	(467	)	$	17,501	$	(516	)

Heartland reviews the investment securities portfolio on a quarterly basis to monitor its exposure to OTTI. A determination as to whether a security's decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors Heartland may consider in the OTTI analysis include the length of time the security has been in an unrealized loss position, changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, with regard to debt securities, Heartland 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, Heartland 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.

During 2016, Heartland sold the mortgage-backed securities in the held to maturity portfolio because the credit quality of the securities showed further deterioration, and it was unlikely Heartland would recover the remaining basis of the securities prior to maturity. The significant deterioration of the credit quality of these securities was inconsistent with Heartland's original intent upon purchase and classification of these held to maturity securities. The carrying value of these securities was $4.4 million, and the associated realized gross gains were $89,000, and the realized gross losses were $439,000.

Heartland also sold the mortgage-backed security in the available for sale portfolio with previously recorded credit-related OTTI in 2016. The carrying value of this security was $483,000, and the associated gross loss was $85,000.

The remaining unrealized losses on Heartland's mortgage-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the initial 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 Heartland 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, these investments are not considered other-than-temporarily impaired.

During 2016, Heartland sold one obligation of states and political subdivisions from the held to maturity portfolio because the credit quality of the security showed significant deterioration, and it was unlikely Heartland would recover the remaining basis of the security prior to maturity. The significant deterioration of the credit quality of this security was inconsistent with Heartland's original intent upon purchase and classification of this held to maturity security. The carrying value of this security was $503,000, and the associated gross loss was $1,500.

The remaining unrealized losses on Heartland's obligations of states and political subdivisions 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 decline in fair value is attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because Heartland 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, these investments are not considered other-than-temporarily impaired.

There were no gross realized gains or losses on the sale of securities carried at fair value or held to maturity securities with OTTI write-downs for the periods ended December 31, 2018 and December 31, 2017. There were no gross realized gains and $85,000 of gross realized losses on the sale of securities carried at fair value with OTTI write-downs for the period ended December 31, 2016. Additionally, there were $89,000 of gross realized gains and $439,000 of gross realized losses on the sale of held to maturity securities with OTTI write-downs for the period ended December 31, 2016.

The following table shows the detail of OTTI write-downs on debt securities included in earnings and the related changes in AOCI for the same securities, in thousands:



	For the Years Ended December 31,
	2018		2017		2016
OTTI on debt securities
Recorded as part of gross realized losses:
Credit related OTTI	$	—	$	—	$	—
Intent to sell OTTI	—		—		—
Total recorded as part of gross realized losses	—		—		—
Recorded directly to AOCI for non-credit related impairment:
Reclassification of non-credit related impairment	—		—		—
Reduction of non-credit related impairment related to security sales	—		—		(120		)
Accretion of non-credit related impairment	—		—		(7		)
Total changes to AOCI for non-credit related impairment	—		—		(127		)
Total OTTI losses (accretion) recorded on debt securities	$	—	$	—	$	(127	)

The following table presents a rollforward of the credit loss component of OTTI recognized in earnings for debt securities still owned by Heartland. The credit loss component of the amortized cost represents the difference between the present value of expected future cash flows discounted using the security's current effective interest rate and the amortized cost basis of the security prior to considering credit losses. OTTI recognized in earnings for credit impaired debt securities is presented as additions and is classified into one of two components based upon whether the current period is the first time the debt security was credit-impaired (initial credit impairment) or if the debt security was previously credit impaired (subsequent credit impairments). The credit loss component is reduced if Heartland sells, intends to sell, or if management believes they will be required to sell previously credit impaired debt securities. Additionally, the credit loss component is reduced if Heartland receives, expects to receive cash flows in excess of what was previously expected to be received over the remaining life of the credit impaired debt security, the security matures or is fully written down.

Changes in the credit loss component of the credit impaired debt securities for the years ended December 31, 2018, 2017 and 2016, were as follows, in thousands:



	For the Years Ended December 31,
	2018		2017		2016
Credit loss component, beginning of period	$	—	$	—	$	1,750
Additions:
Initial credit impairments	—		—		—
Subsequent credit impairments	—		—		—
Total additions	—		—		—
Reductions:
For securities sold	—		—		1,750
Total reductions	—		—		1,750
Credit loss component, end of period	$	—	$	—	$	—

Included in other securities were shares of stock in each Federal Home Loan Bank (the "FHLB") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of $16.6 million at December 31, 2018 and $14.0 million at December 31, 2017.

The Heartland banks are required to maintain FHLB stock as members of the various FHLBs as required by these institutions. These equity securities are "restricted" in that they can only be sold back to the respective institutions or another member institution at par. Therefore, they are less liquid than other marketable equity securities and their fair value approximates amortized cost. Heartland considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. Heartland evaluates impairment in these investments based on the ultimate recoverability of the par value and at December 31, 2018, did not consider the investments to be other than temporarily impaired.