FAIR VALUE (Tables)

6 Months Ended

Jun. 30, 2019

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 June 30, 2019, and December 31, 2018, 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
June 30, 2019
Assets
Securities available for sale
U.S. government corporations and agencies	$	18,621	$	12,480	$	6,141	$	—
Mortgage and asset-backed securities	2,193,326		—		2,193,326		—
Obligations of states and political subdivisions	331,783		—		331,783		—
Equity securities with a readily determinable fair value	18,157		—		18,157		—
Derivative financial instruments⁽¹⁾	14,413		—		14,413		—
Interest rate lock commitments	1,072		—		—		1,072
Forward commitments	2		—		2		—
Total assets at fair value	$	2,577,374	$	12,480	$	2,563,822	$	1,072
Liabilities
Derivative financial instruments⁽²⁾	$	19,383	$	—	$	19,383	$	—
Forward commitments	430		—		430		—
Total liabilities at fair value	$	19,813	$	—	$	19,813	$	—
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	17,086		—		17,086		—
Derivative financial instruments⁽¹⁾	6,539		—		6,539		—
Interest rate lock commitments	725		—		—		725
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	$	—

(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 June 30, 2019
	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	$	13,337	$	—	$	—	$	13,337	$	3,070
Commercial real estate	808		—		—		808		72
Agricultural and agricultural real estate	9,032		—		—		9,032		379
Residential real estate	1,076		—		—		1,076		—
Consumer	627		—		—		627		2
Total collateral dependent impaired loans	$	24,880	$	—	$	—	$	24,880	$	3,523
Loans held for sale	$	34,575	$	—	$	34,575	$	—	$	(1,386	)
Other real estate owned	$	6,646	$	—	$	—	$	6,646	$	936
Premises, furniture and equipment held for sale	$	3,701	$	—	$	—	$	3,701	$	954
Mortgage servicing rights	$	5,801	$	—	$	—	$	5,801	$	953



	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)		Year-to- Date (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
Mortgage servicing rights	$	7,143	$	—	$	—	$	7,143	$	58

Fair Value Inputs, Assets, Quantitative Information

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 6/30/2019		Valuation Technique	Unobservable Input	Range (Weighted Average)
Interest rate lock commitments	$	1,072	Discounted cash flows	Closing ratio	0-99% (90%)⁽¹⁾
Other real estate owned	6,646		Modified appraised value	Third party appraisal	(2)
Other real estate owned				Appraisal discount	0-10%⁽³⁾
Mortgage servicing rights	5,801		Discounted cash flows	Third party valuation	(4)
Premises, furniture and equipment held for sale	3,701		Modified appraised value	Third party appraisal	(2)
Premises, furniture and equipment held for sale				Appraisal discount	0-10%⁽³⁾
Collateral dependent impaired loans:
Commercial	13,337		Modified appraised value	Third party appraisal	(2)
Commercial				Appraisal discount	0-20%⁽³⁾
Commercial real estate	808		Modified appraised value	Third party appraisal	(2)
Commercial real estate				Appraisal discount	0-20%⁽³⁾
Agricultural and agricultural real estate	9,032		Modified appraised value	Third party appraisal	(2)
Agricultural and agricultural real estate				Appraisal discount	0-15%⁽³⁾
Residential real estate	1,076		Modified appraised value	Third party appraisal	(2)
Residential real estate				Appraisal discount	0-12%⁽³⁾
Consumer	627		Modified appraised value	Third party valuation	(2)
Consumer				Valuation discount	0-12%⁽³⁾

(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. The weighted average closing ratio for PrimeWest Mortgage Corporation is 90%.
(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) 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.
(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.



	Fair Value at 12/31/2018		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⁾
Other real estate owned	6,153		Modified appraised value	Third party appraisal	(3)
Other real estate owned				Appraisal discount	0-10%⁽⁴⁾
Servicing rights	7,143		Discounted cash flows	Third party valuation	⁽⁵⁾
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%⁽⁴⁾
Other real estate owned	6,153		Modified appraised value	Third party appraisal	(3)
Other real estate owned				Appraisal discount	0-10%⁽⁴⁾
Collateral dependent impaired loans:
Commercial	12,932		Modified appraised value	Third party appraisal	(3)
				Appraisal discount	0-8%⁽⁴⁾
Commercial real estate	405		Modified appraised value	Third party appraisal	(3)
				Appraisal discount	0-19%⁽⁴⁾
Agricultural and agricultural real estate	11,070		Modified appraised value	Third party appraisal	(3)
Agricultural and agricultural real estate				Appraisal discount	0-24%⁽⁴⁾
Residential real estate	478		Modified appraised value	Third party appraisal	(3)
Residential real estate				Appraisal discount	0-24%⁽⁴⁾
Consumer	624		Modified appraised value	Third party valuation	(3)
Consumer				Valuation discount	0-14%⁽⁴⁾

(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) 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.
(5) 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.

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

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 Six Months Ended June 30, 2019			For the Year Ended December 31, 2018
Balance at January 1,	$	725		$	1,738
Acquired interest rate lock commitments	—			1,383
Total gains (losses) included in earnings	816			(3,269		)
Issuances	4,661			2,962
Settlements	(5,130		)	(2,089		)
Balance at period end	$	1,072		$	725

Fair Value, by Balance Sheet Grouping

Heartland does not believe that the estimated information presented herein is representative of the earnings power or value of Heartland. 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 June 30, 2019
	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	$	642,139	$	642,139	$	642,139	$	—	$	—
Time deposits in other financial institutions	4,430		4,430		4,430		—		—
Securities:
Carried at fair value	2,561,887		2,561,887		12,480		2,549,407		—
Held to maturity	88,166		96,619		—		96,619		—
Other investments	31,366		31,366		—		31,366		—
Loans held for sale	34,575		34,575		—		34,575		—
Loans, net:
Commercial	2,213,691		2,185,030		—		2,171,693		13,337
Commercial real estate	3,963,406		3,948,274		—		3,947,466		808
Agricultural and agricultural real estate	544,109		535,926		—		526,894		9,032
Residential real estate	611,025		597,534		—		596,458		1,076
Consumer	456,970		455,559		—		454,932		627
Total Loans, net	7,789,201		7,722,323		—		7,697,443		24,880
Cash surrender value on life insurance	170,421		170,421		—		170,421		—
Derivative financial instruments⁽¹⁾	14,413		14,413		—		14,413		—
Interest rate lock commitments	1,072		1,072		—		—		1,072
Forward commitments	2		2		—		2		—
Financial liabilities:
Deposits
Demand deposits	3,426,758		3,426,758		—		3,426,758		—
Savings deposits	5,533,503		5,533,503		—		5,533,503		—
Time deposits	1,148,296		1,148,296		—		1,148,296		—
Deposits held for sale	—		—		—		—		—
Short term borrowings	107,260		107,260		—		107,260		—
Other borrowings	282,863		283,695		—		283,695		—
Derivative financial instruments⁽²⁾	19,383		19,383		—		19,383		—
Forward commitments	430		430		—		430		—

(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, 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
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.