Fair Value (Tables)

9 Months Ended

Sep. 30, 2016

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, 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
September 30, 2016
Assets
Securities available for sale
U.S. government corporations and agencies	$	4,955	$	530	$	4,425	$	—
Mortgage-backed securities	1,275,093		—		1,273,196		1,897
Obligations of states and political subdivisions	362,107		—		362,107		—
Corporate debt securities	—		—		—		—
Equity securities	13,541		—		13,541		—
Derivative financial instruments⁽¹⁾	5,228		—		5,228		—
Interest rate lock commitments	6,239		—		—		6,239
Forward commitments	209		—		209		—
Total assets at fair value	$	1,667,372	$	530	$	1,658,706	$	8,136
Liabilities
Derivative financial instruments⁽²⁾	$	16,606	$	—	$	16,606	$	—
Forward commitments	1,312		—		1,312		—
Total liabilities at fair value	$	17,918	$	—	$	17,918	$	—
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

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, 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	$	2,366	$	—	$	—	$	2,366	$	190
Commercial real estate	14,707		—		—		14,707		3,895
Agricultural and agricultural real estate	2,213		—		—		2,213		—
Residential real estate	3,200		—		—		3,200		—
Consumer	1,913		—		—		1,913		—
Total collateral dependent impaired loans	$	24,399	$	—	$	—	$	24,399	$	4,085
Other real estate owned	$	10,740	$	—	$	—	$	10,740	$	1,094
Premises, furniture and equipment held for sale	$	3,634			$	—	$	3,634	$	255
Commercial servicing rights	$	332	$	—	$	—	$	332	$	41



	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	$	—	$	—	$	—	$	—	$	—

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 9/30/16		Valuation Technique	Unobservable Input	Range (Weighted Average)
Z-TRANCHE Securities	$	1,897	Discounted cash flows	Pretax discount rate	7.50 - 9.50%
				Actual defaults	17.09 - 35.91% (30.93%)
				Actual deferrals	8.22 - 22.82% (13.62%)
Corporate debt securities	—		Discounted cash flows	Bank analysis	⁽¹⁾
Interest rate lock commitments	6,239		Discounted cash flows	Closing ratio	⁽²⁾
Premises, furniture and equipment held for sale	3,634		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Commercial servicing rights	332		Discounted cash flows	Third party valuation	⁽⁴⁾
Other real estate owned	10,740		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Collateral dependent impaired loans:
Commercial	2,366		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Commercial real estate	14,707		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Agricultural and agricultural real estate	2,213		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Residential real estate	3,200		Modified appraised value	Third party appraisal	⁽³⁾
				Appraisal discount	⁽³⁾
Consumer	1,913		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 September 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.

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

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 Nine Months Ended September 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	(142		)	982
Purchases, sales and settlements:
Purchases	—			6
Sales	—			(736		)
Settlements	—			(122		)
Balance at period end	$	1,897		$	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 Nine Months Ended September 30, 2016			For the Year Ended December 31, 2015
Balance at January 1,	$	846		$	—
Total gains (losses):
Included in earnings	56			—
Included in other comprehensive income	(106		)	106
Purchases, acquired, sales and settlements:
Purchases	—			—
Acquired	—			740
Sales	(796		)	—
Settlements	—			—
Balance at period end	$	—		$	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 Nine Months Ended September 30, 2016			For the Year Ended December 31, 2015
Balance at January 1,	$	3,168		$	2,496
Total gains (losses) included in earnings	4,464			288
Issuances	1,540			5,428
Settlements	(2,933		)	(5,044		)
Balance at period end	$	6,239		$	3,168

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, 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	$	202,089	$	202,089	$	202,089	$	—	$	—
Time deposits in other financial institutions	2,105		2,105		2,105		—		—
Securities:
Available for sale	1,655,696		1,655,696		530		1,653,269		1,897
Held to maturity	265,302		284,948		—		284,948		—
Other investments	22,082		22,082		—		21,847		235
Loans held for sale	78,317		78,317		—		78,317		—
Loans, net:
Commercial	1,277,691		1,271,961		—		1,269,595		2,366
Commercial real estate	2,580,136		2,584,885		—		2,570,178		14,707
Agricultural and agricultural real estate	485,071		487,861		—		485,648		2,213
Residential real estate	622,684		618,770		—		615,570		3,200
Consumer	418,480		422,770		—		420,857		1,913
Total Loans, net	5,384,062		5,386,247		—		5,361,848		24,399
Derivative financial instruments⁽¹⁾	5,228		5,228		—		5,228		—
Interest rate lock commitments	6,239		6,239		—		—		6,239
Forward commitments	209		209		—		209		—
Financial liabilities:
Deposits
Demand deposits	2,238,736		2,238,736		—		2,238,736		—
Savings deposits	3,753,300		3,753,300		—		3,753,300		—
Time deposits	920,657		920,657		—		920,657		—
Short term borrowings	214,105		214,105		—		214,105		—
Other borrowings	294,493		297,018		—		297,018		—
Derivative financial instruments⁽²⁾	16,606		16,606		—		16,606		—
Forward commitments	1,312		1,312		—		1,312		—

(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, embedded conversion options and free standing derivative instruments