Fair Value (Tables)

3 Months Ended

Mar. 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 March 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
March 31, 2018
Assets
Securities available for sale
U.S. government corporations and agencies	$	11,188	$	9,421	$	1,767	$	—
Mortgage and asset-backed securities	1,647,604		—		1,647,604		—
Obligations of states and political subdivisions	352,180		—		352,180		—
Corporate debt securities	—		—		—		—
Equity securities	16,693		—		16,693		—
Derivative financial instruments⁽¹⁾	6,265		—		6,265		—
Interest rate lock commitments	1,959		—		—		1,959
Forward commitments	283		—		283		—
Total assets at fair value	$	2,036,172	$	9,421	$	2,024,792	$	1,959
Liabilities
Derivative financial instruments⁽²⁾	$	4,709	$	—	$	4,709	$	—
Forward commitments	320		—		320		—
Total liabilities at fair value	$	5,029	$	—	$	5,029	$	—
December 31, 2017
Assets
Securities available for sale
U.S. government corporations and agencies	$	5,328	$	3,484	$	1,844	$	—
Mortgage and asset-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 cash flow hedges, embedded derivatives and back-to-back loan swaps
(2) Includes cash flow hedges, fair value hedges, back-to-back 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 March 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	$	2,923	$	—	$	—	$	2,923	$	—
Commercial real estate	8,316		—		—		8,316		—
Agricultural and agricultural real estate	8,041		—		—		8,041		—
Residential real estate	1,421		—		—		1,421		4
Consumer	1,721		—		—		1,721		—
Total collateral dependent impaired loans	$	22,422	$	—	$	—	$	22,422	$	4
Loans held for sale	$	24,376	$	—	$	24,376	$	—	$	288
Other real estate owned	$	11,801	$	—	$	—	$	11,801	$	16
Premises, furniture and equipment held for sale	$	1,477	$	—	$	—	$	1,477	$	(115	)
Commercial servicing rights	$	272	$	—	$	—	$	272	$	2



	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)		Year-to- Date (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
Commercial servicing rights	$	291	$	—	$	—		$	291	$	(21	)

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 3/31/2018		Valuation Technique	Unobservable Input	Range (Weighted Average)
Interest rate lock commitments	$	1,959	Discounted cash flows	Closing ratio	0-99% (89%)⁽¹⁾
Premises, furniture and equipment held for sale	1,477		Modified appraised value	Third party appraisal	⁽²⁾
Premises, furniture and equipment held for sale				Appraisal discount	0-10%⁽⁴⁾
Commercial servicing rights	272		Discounted cash flows	Third party valuation	⁽³⁾
Other real estate owned	11,801		Modified appraised value	Third party appraisal	⁽²⁾
Other real estate owned				Appraisal discount	0-10%
Collateral dependent impaired loans:
Commercial	2,923		Modified appraised value	Third party appraisal	⁽²⁾
Commercial				Appraisal discount	0-10%⁽⁴⁾
Commercial real estate	8,316		Modified appraised value	Third party appraisal	⁽²⁾
Commercial real estate				Appraisal discount	0-10%⁽⁴⁾
Agricultural and agricultural real estate	8,041		Modified appraised value	Third party appraisal	⁽²⁾
Agricultural and agricultural real estate				Appraisal discount	0-10%⁽⁴⁾
Residential real estate	1,421		Modified appraised value	Third party appraisal	⁽²⁾
Residential real estate				Appraisal discount	0-12%⁽⁴⁾
Consumer	1,721		Modified appraised value	Third party valuation	⁽²⁾
Consumer				Valuation discount	0-14%⁽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 which 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.



	Fair Value at 12/31/2017		Valuation Technique	Unobservable Input	Range (Weighted Average)
Interest rate lock commitments	$	1,738	Discounted cash flows	Closing ratio	0-99% (89%)⁽¹⁾
Premises, furniture and equipment held for sale	1,977		Modified appraised value	Third party appraisal	⁽²⁾ 0-10%⁽⁴⁾
Commercial servicing rights	291		Discounted cash flows	Third party valuation	⁽³⁾
Other real estate owned	10,777		Modified appraised value	Third party appraisal	⁽²⁾
Other real estate owned				Appraisal discount	0-10%
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⁾
Commercial real estate				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⁾
Residential real estate				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 which 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.

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 Three Months Ended March 31, 2018			For the Year Ended December 31, 2017
Balance at January 1,	$	1,738		$	2,790
Total gains (losses) included in earnings	17			(1,479		)
Issuances	492			1,875
Settlements	(288		)	(1,448		)
Balance at period end	$	1,959		$	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, 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 March 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	$	266,346	$	266,346	$	266,346	$	—	$	—
Time deposits in other financial institutions	6,297		6,297		6,297		—		—
Securities:
Available for sale	2,027,665		2,027,665		9,421		2,018,244		—
Held to maturity	249,766		258,638		—		258,638		—
Other investments	22,982		22,982		—		22,982		—
Loans held for sale	24,376		24,376		—		24,376		—
Loans, net:
Commercial	1,786,838		1,766,760		—		1,763,837		2,923
Commercial real estate	3,298,798		3,280,785		—		3,272,469		8,316
Agricultural and agricultural real estate	514,471		508,582		—		500,541		8,041
Residential real estate	621,295		614,234		—		612,813		1,421
Consumer	465,957		464,793		—		463,072		1,721
Total Loans, net	6,687,359		6,635,154		—		6,612,732		22,422
Cash surrender value on life insurance	143,444		143,444		—		143,444		—
Derivative financial instruments⁽¹⁾	6,265		6,265		—		6,265		—
Interest rate lock commitments	1,959		1,959		—		—		1,959
Forward commitments	283		283		—		283		—
Financial liabilities:
Deposits
Demand deposits	3,094,457		3,094,457		—		3,094,457		—
Savings deposits	4,536,106		4,536,106		—		4,536,106		—
Time deposits	910,977		910,977		—		910,977		—
Short term borrowings	131,240		131,240		—		131,240		—
Other borrowings	276,118		276,193		—		276,193		—
Derivative financial instruments⁽²⁾	4,709		4,709		—		4,709		—
Forward commitments	320		320		—		320		—

(1) Includes cash flow hedges, embedded derivatives and back-to-back loan swaps
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded conversion options 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:
Available for sale	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 cash flow hedges, embedded derivatives and back-to-back loan swaps
(2) Includes cash flow hedges, fair value hedges, back-to-back loan swaps, embedded conversion options and free standing derivative instruments