Fair Value (Tables)

12 Months Ended

Dec. 31, 2018

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 December 31, 2018, and December 31, 2017, 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
December 31, 2018
Assets
Securities available for sale
U.S. government corporations and agencies	$	31,951	$	25,414	$	6,537	$	—
Mortgage and asset-backed securities	2,026,698		—		2,026,698		—
Obligations of states and political subdivisions	374,974		—		374,974		—
Equity securities with a readily determinable fair value	17,086		—		17,086		—
Derivative financial instruments⁽¹⁾	6,539		—		6,539		—
Interest rate lock commitments	725		—		—		725
Forward commitments	—		—		—		—
Total assets at fair value	$	2,457,973	$	25,414	$	2,431,834	$	725
Liabilities
Derivative financial instruments⁽²⁾	$	6,044	$	—	$	6,044	$	—
Forward commitments	399		—		399		—
Total liabilities at fair value	$	6,443	$	—	$	6,443	$	—
December 31, 2017
Assets
Securities available for sale
U.S. government corporations and agencies	$	5,328	$	3,484	$	1,844	$	—
Mortgage-backed securities	1,753,736		—		1,753,736		—
Obligations of states and political subdivisions	441,015		—		441,015		—
Equity securities	16,674		—		16,674		—
Derivative financial instruments⁽¹⁾	3,933		—		3,933		—
Interest rate lock commitments	1,738		—		—		1,738
Forward commitments	80		—		80		—
Total assets at fair value	$	2,222,504	$	3,484	$	2,217,282	$	1,738
Liabilities
Derivative financial instruments⁽²⁾	$	5,167	$	—	$	5,167	$	—
Forward commitments	232		—		232		—
Total liabilities at fair value	$	5,399	$	—	$	5,399	$	—

(1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges.
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded derivatives 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 December 31, 2018
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(Gains)/Losses
Collateral dependent impaired loans:
Commercial	$	12,932	$	—	$	—	$	12,932	$	660
Commercial real estate	405		—		—		405		72
Agricultural and agricultural real estate	11,070		—		—		11,070		575
Residential real estate	478		—		—		478		—
Consumer	624		—		—		624		—
Total collateral dependent impaired loans	$	25,509	$	—	$	—	$	25,509	$	1,307
Loans held for sale	$	119,801	$	—	$	52,577	$	67,224	$	(1,870	)
Other real estate owned	$	6,153	$	—	$	—	$	6,153	$	2,647
Premises, furniture and equipment held for sale	$	7,258	$	—	$	—	$	7,258	$	59
Servicing rights	$	7,143	$	—	$	—	$	7,143	$	58



	Fair Value Measurements at December 31, 2017
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(Gains)/Losses
Collateral dependent impaired loans:
Commercial	$	3,212	$	—	$	—	$	3,212	$	1,119
Commercial real estate	9,480		—		—		9,480		322
Agricultural and agricultural real estate	8,406		—		—		8,406		2,028
Residential real estate	1,137		—		—		1,137		—
Consumer	1,234		—		—		1,234		—
Total collateral dependent impaired loans	$	23,469	$	—	$	—	$	23,469	$	3,469
Loans held for sale	$	44,560	$	—	$	44,560	$	—	$	190
Other real estate owned	$	10,777	$	—	$	—	$	10,777	$	737
Premises, furniture and equipment held for sale	$	1,977	$	—	$	—	$	1,977	$	192
Servicing rights	$	291	$	—	$	—	$	291	$	(21	)

Quantitative Information on Assets Measured at Fair Value on Recurring and Nonrecurring Basis Using Level 3

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



	Fair Value at 12/31/18		Valuation Technique	Unobservable Input	Range (Weighted Average)
Loans held for sale	$	67,224	Discounted cash flows	Sales contract	⁽¹⁾

Interest rate lock commitments	725		Discounted cash flows	Closing ratio	0 - 99% (91%)⁽²⁾
Premises, furniture and equipment held for sale	7,258		Modified appraised value	Third party appraisal	⁽³⁾
Premises, furniture and equipment held for sale				Appraisal discount	0-10%⁽⁵⁾
Other real estate owned	6,153		Modified appraised value	Third party appraisal	⁽³⁾
Other real estate owned				Appraisal discounts	0-10%⁽⁵⁾
Servicing rights	7,143		Discounted cash flows	Third party valuation	⁽⁴⁾
Servicing rights
Collateral dependent impaired loans:
Commercial	12,932		Modified appraised value	Third party appraisal	⁽³⁾
Commercial				Appraisal discount	0-8%⁽⁵⁾
Commercial real estate	405		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	0-19%⁽⁵⁾
Agricultural and agricultural real estate	11,070		Modified appraised value	Third party appraisal	⁽³⁾
Agricultural and agricultural real estate				Appraisal discount	0-24%⁽⁵⁾
Residential real estate	478		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	0-24%⁽⁵⁾
Consumer	624		Modified appraised value	Third party valuation	⁽³⁾
Consumer				Valuation discount	0-14%⁽⁵⁾

(1) The significant unobservable input related to the loans held for sale was the third party sales contract Heartland entered into prior to December 31, 2018. The sale of these consumer loans closed on January 11, 2019.
(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.
(3) 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.
(4) 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.
(5) 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 12/31/17		Valuation Technique	Unobservable Input	Range (Weighted Average)
Interest rate lock commitments	$	1,738	Discounted cash flows	Closing ratio	0 - 99% (89%)⁽¹⁾
Interest rate lock commitments
Premises, furniture and equipment held for sale	1,977		Modified appraised value	Third party appraisal	⁽²⁾
Premises, furniture and equipment held for sale				Appraisal discount	0-10%⁽⁴⁾
Other real estate owned	10,777		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discounts	0-10%
Servicing rights	291		Discounted cash flows	Third party valuation	⁽³⁾
Servicing rights
Collateral dependent impaired loans:
Commercial	3,212		Modified appraised value	Third party appraisal	⁽²⁾
Commercial				Appraisal discount	0-15%⁽⁴⁾
Commercial real estate	9,480		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount	0-12%⁽⁴⁾
Agricultural and agricultural real estate	8,406		Modified appraised value	Third party appraisal	⁽²⁾
Agricultural and agricultural real estate				Appraisal discount	0-10%⁽⁴⁾
Residential real estate	1,137		Modified appraised value	Third party appraisal	⁽²⁾
				Appraisal discount	0-12%⁽⁴⁾
Consumer	1,234		Modified appraised value	Third party valuation	⁽²⁾
Consumer				Valuation discount	0-12%⁽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 that 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.

Summary of Changes in Fair Value of Level 3 Assets Measured at Fair Value on Recurring Basis

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 Years Ended
	December 31, 2018			December 31, 2017
Balance at January 1,	$	1,738		$	2,790
Acquired interest rate lock commitments	1,383			—
Total gains (losses), net, included in earnings	(3,269		)	(1,479		)
Issuances	2,962			1,875
Settlements	(2,089		)	(1,448		)
Balance at period end,	$	725		$	1,738

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, obtaining deposits or fee generating activities. Many of the estimates presented below 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 December 31, 2018
	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	$	273,630	$	273,630	$	273,630	$	—	$	—
Time deposits in other financial institutions	4,672		4,672		4,672		—		—
Securities:
Carried at fair value	2,450,709		2,450,709		25,414		2,425,295		—
Held to maturity	236,283		245,341		—		245,341		—
Other investments	28,396		28,396		—		28,396		—
Loans held for sale	119,801		119,801		—		52,577		67,224
Loans, net:
Commercial	1,994,785		1,955,607		—		1,942,675		12,932
Commercial real estate	3,684,213		3,667,138		—		3,666,733		405
Agricultural and agricultural real estate	561,265		553,112		—		542,042		11,070
Residential real estate	670,473		654,596		—		654,118		478
Consumer	434,998		432,016		—		431,392		624
Total Loans, net	7,345,734		7,262,469		—		7,236,960		25,509
Cash surrender value on life insurance	162,892		162,892		—		162,892		—
Derivative financial instruments⁽¹⁾	6,539		6,539		—		6,539		—
Interest rate lock commitments	725		725		—		—		725
Forward commitments	—		—		—		—		—
Financial liabilities:
Deposits
Demand deposits	3,264,737		3,264,737		—		3,264,737		—
Savings deposits	5,107,962		5,107,962		—		5,107,962		—
Time deposits	1,023,730		1,023,730		—		1,023,730		—
Deposits held for sale	106,409		100,241		—		—		100,241
Short term borrowings	227,010		227,010		—		227,010		—
Other borrowings	274,905		276,966		—		276,966		—
Derivative financial instruments⁽²⁾	6,044		6,044		—		6,044		—
Forward commitments	399		399		—		399		—

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



					Fair Value Measurements at December 31, 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	$	196,003	$	196,003	$	196,003	$	—	$	—
Time deposits in other financial institutions	9,820		9,820		9,820		—		—
Securities:
Carried at fair value	2,216,753		2,216,753		3,484		2,213,269		—
Held to maturity	253,550		265,494				265,494
Other investments	22,563		22,563		—		22,563		—
Loans held for sale	44,560		44,560		—		44,560		—
Loans, net:
Commercial	1,628,043		1,617,956		—		1,614,744		3,212
Commercial real estate	3,140,427		3,132,542		—		3,123,062		9,480
Agricultural and agricultural real estate	508,075		508,987		—		500,581		8,406
Residential real estate	620,939		614,667		—		613,530		1,137
Consumer	438,294		440,820		—		439,586		1,234
Total Loans, net	6,335,778		6,314,972		—		6,291,503		23,469
Cash surrender value on life insurance	142,818		142,818		—		142,818		—
Derivative financial instruments⁽¹⁾	3,933		3,933		—		3,933		—
Interest rate lock commitments	1,738		1,738		—		—		1,738
Forward commitments	80		80		—		80		—
Financial liabilities:
Deposits
Demand deposits	2,983,128		2,983,128		—		2,983,128		—
Savings deposits	4,240,328		4,240,328		—		4,240,328		—
Time deposits	923,453		923,453		—		923,453		—
Short term borrowings	324,691		324,691		—		324,691		—
Other borrowings	285,011		285,609		—		285,609		—
Derivative financial instruments⁽²⁾	5,167		5,167		—		5,167		—
Forward commitments	232		232		—		232		—

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