FAIR VALUE

Heartland utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale, trading securities and derivatives are recorded in the consolidated balance sheets at fair value on a recurring basis. Additionally, from time to time, Heartland may be required to record at fair value other assets on a nonrecurring basis such as loans held for sale, loans held to maturity and certain other assets including, but not limited to, mortgage servicing rights, commercial servicing rights and other real estate owned. These nonrecurring fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.

Fair Value Hierarchy

Under ASC 820, assets and liabilities are grouped at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

Level 1 — Valuation is based upon quoted prices for identical instruments in active markets.

Level 2 — Valuation is based upon quoted prices for similar instruments in active markets, or similar instruments in markets that are not active, and model-based valuation techniques for all significant assumptions are observable in the market.

Level 3 — Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a recurring or non-recurring basis.

Assets

Securities Available for Sale and Held to Maturity

Securities available for sale are recorded at fair value on a recurring basis. Securities held to maturity are generally recorded at cost and are recorded at fair value only to the extent a decline in fair value is determined to be other-than-temporary. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security's credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, as well as U.S. Treasury securities. Level 2 securities include U.S. government and agency securities, mortgage-backed securities and private collateralized mortgage obligations, municipal bonds and corporate debt securities. Level 3 securities consist primarily of Z-TRANCHE mortgage-backed securities and corporate debt securities. On a quarterly basis, a secondary independent pricing service is used for a sample of securities to validate the pricing from Heartland's primary pricing service.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value on an aggregate basis. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, Heartland classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.

Loans Held to Maturity

Heartland does not record loans held to maturity at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC 310. The fair value of impaired loans is measured using one of the following impairment methods: 1) the present value of expected future cash flows discounted at the loan's effective interest rate or 2) the observable market price of the loan or 3) the fair value of the collateral if the loan is collateral dependent. In accordance with ASC 820, impaired loans measured at fair value are classified as nonrecurring Level 3 in the fair value hierarchy.

Premises, furniture and equipment held for sale

Heartland values premises, furniture and equipment held for sale based on third-party appraisals less estimated disposal costs. Heartland considers third party appraisals, as well as independent fair value assessments from Realtors or persons involved in selling bank premises, furniture and equipment, in determining the fair value of particular properties. Accordingly, the valuation of premises, furniture and equipment held for sale is subject to significant external and internal judgment. Heartland periodically reviews premises, furniture and equipment held for sale to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. Premises, furniture and equipment held for sale are classified as nonrecurring Level 3 in the fair value hierarchy.

Mortgage Servicing Rights

Mortgage servicing rights assets represent the value associated with servicing residential real estate loans that have been sold to outside investors with servicing retained. Heartland uses the amortization method (i.e., the lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, to determine the carrying value of its mortgage servicing rights. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. Mortgage servicing rights are subject to impairment testing. The carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third party. For purposes of measuring impairment, the rights are stratified into certain risk characteristics including note type and note term. If the valuation model reflects a fair value less than the carrying value, mortgage servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies mortgage servicing rights as nonrecurring with Level 3 measurement inputs.

Commercial Servicing Rights

Commercial servicing rights assets represent the value associated with servicing commercial loans guaranteed by the Small Business Administration and the United States Department of Agriculture that have been sold with servicing retained by Heartland. Heartland uses the amortization method (i.e., the lower of amortized cost or estimated fair value measured on a nonrecurring basis), not fair value measurement accounting, to determine the carrying value of its commercial servicing rights. The fair value for servicing assets is determined through market prices for comparable servicing contracts, when available, or through a valuation model that calculates the present value of estimated future net servicing income. Inputs utilized include discount rates, prepayment speeds and delinquency rate assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. Commercial servicing rights are subject to impairment testing, and the carrying values of these rights are reviewed quarterly for impairment based upon the calculation of fair value as performed by an outside third party. If the valuation model reflects a fair value less than the carrying value, commercial servicing rights are adjusted to fair value through a valuation allowance. Heartland classifies commercial servicing rights as nonrecurring with Level 3 measurement inputs.

Derivative Financial Instruments

Heartland's current interest rate risk strategy includes interest rate swaps. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of ASC 820, Heartland incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, Heartland has considered the impact of netting any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although Heartland has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2016, and December 31, 2015, Heartland has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, Heartland has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Interest rate lock commitments

Heartland uses an internal valuation model that relies on internally developed inputs to estimate the fair value of its interest rate lock commitments which is based on unobservable inputs that reflect management's assumptions and specific information about each borrower. Interest rate lock commitments are classified in Level 3 of the fair value hierarchy.

Forward commitments

The fair value of forward commitments are estimated using an internal valuation model, which includes current trade pricing for similar financial instruments in active markets that Heartland has the ability to access and are classified in Level 2 of the fair value hierarchy.

Other Real Estate Owned

Other real estate owned ("OREO") represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the fair value of the property at the time of acquisition (representing the property's cost basis), plus any acquisition costs, or the estimated fair value of the property, less disposal costs. Heartland considers third party appraisals, as well as independent fair value assessments from realtors or persons involved in selling OREO, in determining the fair value of particular properties. Accordingly, the valuation of OREO is subject to significant external and internal judgment. Heartland periodically reviews OREO to determine if the fair value of the property, less disposal costs, has declined below its recorded book value and records any adjustments accordingly. OREO is classified as nonrecurring Level 3 of the fair value hierarchy.

The table below presents Heartland's assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2016, and December 31, 2015, 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, 2016
Assets
Securities available for sale
U.S. government corporations and agencies	$	5,101	$	535	$	4,566	$	—
Mortgage-backed securities	1,220,732		—		1,219,000		1,732
Obligations of states and political subdivisions	326,422		—		326,422		—
Corporate debt securities	830		—		500		330
Equity securities	13,507		—		13,507		—
Derivative financial instruments⁽¹⁾	5,689		—		5,689		—
Interest rate lock commitments	6,864		—		—		6,864
Forward commitments	469		—		469		—
Total assets at fair value	$	1,579,614	$	535	$	1,570,153	$	8,926
Liabilities
Derivative financial instruments⁽²⁾	$	19,148	$	—	$	19,148	$	—
Forward commitments	2,502		—		2,502		—
Total liabilities at fair value	$	21,650	$	—	$	21,650	$	—
December 31, 2015
Assets
Securities available for sale
U.S. government corporations and agencies	$	25,766	$	519	$	25,247	$	—
Mortgage-backed securities	1,242,702		—		1,240,663		2,039
Obligations of states and political subdivisions	295,982		—		295,982		—
Corporate debt securities	846		—		—		846
Equity securities	13,138		—		13,138		—
Derivative financial instruments⁽¹⁾	2,237		—		2,237		—
Interest rate lock commitments	3,168		—		—		3,168
Forward commitments	523		—		523		—
Total assets at fair value	$	1,584,362	$	519	$	1,577,790	$	6,053
Liabilities
Derivative financial instruments⁽²⁾	$	8,401	$	—	$	8,401	$	—
Forward commitments	315		—		315		—
Total liabilities at fair value	$	8,716	$	—	$	8,716	$	—

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

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, 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 Losses
Collateral dependent impaired loans:
Commercial	$	1,333	$	—	$	—	$	1,333	$	—
Commercial real estate	14,113		—		—		14,113		998
Agricultural and agricultural real estate	105		—		—		105		—
Residential real estate	3,508		—		—		3,508		—
Consumer	1,845		—		—		1,845		15
Total collateral dependent impaired loans	$	20,904	$	—	$	—	$	20,904	$	1,013
Other real estate owned	$	11,003	$	—	$	—	$	11,003	$	548
Premises, furniture and equipment held for sale	$	3,889			$	—	$	3,889	$	—
Commercial servicing rights	$	1,258	$	—	$	—	$	1,258	$	46



	Fair Value Measurements at December 31, 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	$	597	$	—	$	—	$	597	$	82
Commercial real estate	1,522		—		—		1,522		86
Agricultural and agricultural real estate	—		—		—		—		—
Residential real estate	2,330		—		—		2,330		104
Consumer	1,905		—		—		1,905		—
Total collateral dependent impaired loans	$	6,354	$	—	$	—	$	6,354	$	272
Other real estate owned	$	11,524	$	—	$	—	$	11,524	$	5,520
Premises, furniture and equipment held for sale	$	3,889	$	—	$	—	$	3,889	$	—
Commercial servicing rights	$	—	$	—	$	—	$	—	$	—

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 6/30/16		Valuation Technique	Unobservable Input	Range (Weighted Average)
Z-TRANCHE Securities	$	1,732	Discounted cash flows	Pretax discount rate	7.50 - 9.50%
				Actual defaults	19.85 - 34.02% (30.17%)
				Actual deferrals	9.57 - 22.12% (13.34%)
Corporate debt securities	330		Discounted cash flows	Bank analysis	⁽¹⁾
Interest rate lock commitments	6,864		Discounted cash flows	Closing ratio	⁽²⁾
Premises, furniture and equipment held for sale	3,889		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Commercial servicing rights	1,258		Discounted cash flows	Third party valuation	⁽⁴⁾
Other real estate owned	11,003		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Collateral dependent impaired loans:
Commercial	1,333		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Commercial real estate	14,113		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Agricultural and agricultural real estate	105		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Residential real estate	3,508		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Consumer	1,845		Modified appraised value	Third party valuation	⁽³⁾
				Valuation 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 June 30, 2016, was 87%.
(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.
(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 12/31/15		Valuation Technique	Unobservable Input	Range (Weighted Average)
Z-TRANCHE Securities	$	2,039	Discounted cash flows	Pretax discount rate	7.50 - 9.50%
				Actual defaults	22.20 - 33.55% (30.60%)
				Actual deferrals	10.75 - 21.82% (13.36%)
Corporate debt securities	846		Discounted cash flows	Bank analysis	⁽¹⁾
Interest rate lock commitments	3,168		Discounted cash flows	Closing ratio	⁽²⁾
Premises, furniture and equipment held for sale	3,889		Modified appraised value	Third party appraisal	⁽³⁾
Commercial servicing rights	—		Discounted cash flows	Third party valuation	⁽⁴⁾
Other real estate owned	11,524		Modified appraised value	Disposal costs	⁽³⁾
				Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Collateral dependent impaired loans:
Commercial	597		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Commercial real estate	1,522		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	2,330		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Consumer	1,905		Modified appraised value	Third party valuation	⁽³⁾
				Valuation 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, 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.
(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.

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 Six Months Ended June 30, 2016			For the Year Ended December 31, 2015
Balance at January 1,	$	2,039		$	4,947
Total gains (losses):
Included in earnings	—			(3,038		)
Included in other comprehensive income	(307		)	982
Purchases, sales and settlements:
Purchases	—			6
Sales	—			(736		)
Settlements	—			(122		)
Balance at period end	$	1,732		$	2,039

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 Six Months Ended June 30, 2016			For the Year Ended December 31, 2015
Balance at January 1,	$	846		$	—
Total gains (losses):
Included in earnings	121			—
Included in other comprehensive income	(91		)	106
Purchases, acquired, sales and settlements:
Purchases	—			—
Acquired	—			740
Sales	(546		)	—
Settlements	—			—
Balance at period end	$	330		$	846

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 Six Months Ended June 30, 2016			For the Year Ended December 31, 2015
Balance at January 1,	$	3,168		$	2,496
Total gains (losses) included in earnings	5,808			288
Issuances	142			5,428
Settlements	(2,254		)	(5,044		)
Balance at period end	$	6,864		$	3,168

Gains included in gains (losses) on sale of loans held for sale attributable to interest rate lock commitments held at June 30, 2016, and December 31, 2015, were $6.9 million and $3.2 million, respectively.

The tables below summarize the estimated fair value of Heartland's financial instruments as defined by ASC 825 as of June 30, 2016, and December 31, 2015, in thousands. The carrying amounts in the following tables are recorded in the consolidated balance sheets under the indicated captions. In accordance with ASC 825, the assets and liabilities that are not financial instruments are not included in the disclosure, such as the value of the mortgage servicing rights, premises, furniture and equipment, premises, furniture and equipment held for sale, goodwill and other intangibles and other liabilities.

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, 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	$	229,950	$	229,950	$	229,950	$	—	$	—
Time deposits in other financial institutions	2,105		2,105		2,105		—		—
Securities:
Available for sale	1,566,592		1,566,592		535		1,563,995		2,062
Held to maturity	270,423		292,854		—		292,854		—
Other investments	22,680		22,680		—		22,445		235
Loans held for sale	82,538		82,538		—		82,538		—
Loans, net:
Commercial	1,271,131		1,265,814		—		1,264,481		1,333
Commercial real estate	2,619,284		2,619,499		—		2,605,386		14,113
Agricultural and agricultural real estate	477,450		480,805		—		480,700		105
Residential real estate	641,006		637,007		—		633,499		3,508
Consumer	421,631		425,110		—		423,265		1,845
Total Loans, net	5,430,502		5,428,235		—		5,407,331		20,904
Derivative financial instruments⁽¹⁾	5,689		5,689		—		5,689		—
Interest rate lock commitments	6,864		6,864		—		—		6,864
Forward commitments	469		469		—		469		—
Financial liabilities:
Deposits
Demand deposits	2,149,911		2,149,911		—		2,149,911		—
Savings deposits	3,691,791		3,691,791		—		3,691,791		—
Time deposits	995,870		995,870		—		995,870		—
Short term borrowings	303,707		303,707		—		303,707		—
Other borrowings	296,895		297,384		—		297,384		—
Derivative financial instruments⁽²⁾	19,148		19,148		—		19,148		—
Forward commitments	2,502		2,502		—		2,502		—

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



					Fair Value Measurements at December 31, 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	$	258,799	$	258,799	$	258,799	$	—	$	—
Time deposits in other financial institutions	2,355		2,355		2,355		—		—
Securities:
Available for sale	1,578,434		1,578,434		519		1,575,030		2,885
Held to maturity	279,117		294,513		—		294,513		—
Other investments	21,443		21,443		—		21,208		235
Loans held for sale	74,783		74,783		—		74,783		—
Loans, net:
Commercial	1,262,612		1,257,355		—		1,256,758		597
Commercial real estate	2,305,908		2,304,716		—		2,303,194		1,522
Agricultural and agricultural real estate	468,533		469,485		—		469,485		—
Residential real estate	536,190		531,931		—		529,601		2,330
Consumer	379,558		382,579		—		380,674		1,905
Total Loans, net	4,952,801		4,946,066		—		4,939,712		6,354
Derivative financial instruments⁽¹⁾	2,237		2,237		—		2,237		—
Interest rate lock commitments	3,168		3,168		—		—		3,168
Forward commitments	523		523		—		523		—
Financial liabilities:
Deposits
Demand deposits	1,914,141		1,914,141		—		1,914,141		—
Savings deposits	3,367,479		3,367,479		—		3,367,479		—
Time deposits	1,124,203		1,124,203		—		1,124,203		—
Short term borrowings	293,898		293,898		—		293,898		—
Other borrowings	263,214		281,271		—		281,271		—
Derivative financial instruments⁽²⁾	8,401		8,401		—		8,401		—
Forward commitments	315		315		—		315		—

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

Cash and Cash Equivalents — The carrying amount is a reasonable estimate of fair value due to the short-term nature of these instruments.

Time Deposits in Other Financial Institutions — The carrying amount is a reasonable estimate of fair value due to the short-term nature of these instruments.

Securities — For securities either held to maturity, available for sale or trading, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. For Level 3 securities, Heartland utilizes independent pricing provided by third party vendors or brokers.

Other Investments — Fair value measurement of other investments, which consists primarily of FHLB stock, are based on their redeemable value, which is at cost due to the restrictions placed on their transferability. The market for these securities is restricted to the issuer of the stock and subject to impairment evaluation.

Loans and Leases — The fair value of loans is estimated using an entrance price concept by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of impaired loans is measured using the fair value of the underlying collateral. The fair value of loans held for sale is estimated using quoted market prices.

Interest Rate Lock Commitments — The fair value of interest rate lock commitments is estimated using an internal valuation model, which includes grouping the interest rate lock commitments by interest rate and terms, applying an estimated closing ratio based on historical experience, and then multiplying by quoted investor prices determined to be reasonably applicable to the loan commitment groups based on interest rate, terms, and rate lock expiration dates of the loan commitment group.

Forward Commitments — The fair value of these instruments is estimated using an internal valuation model, which includes current trade pricing for similar financial instruments.

Derivative Financial Instruments — The fair value of all derivatives is estimated based on the amount that Heartland would pay or would be paid to terminate the contract or agreement, using current rates and prices, and, when appropriate, the current creditworthiness of the counter-party.

Deposits — The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. If the fair value of the fixed maturity certificates of deposit is calculated at less than the carrying amount, the carrying value of these deposits is reported as the fair value.

Short-term and Other Borrowings — Rates currently available to Heartland for debt with similar terms and remaining maturities are used to estimate fair value of existing debt.

Commitments to Extend Credit, Unused Lines of Credit and Standby Letters of Credit — Based upon management's analysis of the off balance sheet financial instruments, there are no significant unrealized gains or losses associated with these financial instruments based upon review of the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.