SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of debt securities available for sale and equity securities with a readily determinable that are carried at fair value as of September 30, 2018, and December 31, 2017, are summarized in the table below, in thousands:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2018
U.S. government corporations and agencies	$	27,112	$	—	$	(115	)	$	26,997
Mortgage and asset-backed securities	1,926,803		1,341		(56,325		)	1,871,819
Obligations of states and political subdivisions	372,146		239		(13,902		)	358,483
Total debt securities	2,326,061		1,580		(70,342		)	2,257,299
Equity securities with a readily determinable fair value	16,916		—		—			16,916
Total	$	2,342,977	$	1,580	$	(70,342	)	$	2,274,215
December 31, 2017
U.S. government corporations and agencies	$	5,358	$	8	$	(38	)	$	5,328
Mortgage and asset-backed securities	1,785,467		5,856		(37,587		)	1,753,736
Obligations of states and political subdivisions	441,060		4,669		(4,714		)	441,015
Total debt securities	2,231,885		10,533		(42,339		)	2,200,079
Equity securities	16,296		378		—			16,674
Total	$	2,248,181	$	10,911	$	(42,339	)	$	2,216,753

Investment securities as shown in this report reflect categories as required by Heartland’s adoption of ASU 2016-01, "Recognition and Measurement of Financial Assets and Financial Liabilities", on January 1, 2018. That new guidance refined the definition of equity securities and required their segregation from available for sale debt securities.

While changes in the fair value of available for sale debt securities continue to be recorded in the equity category of accumulated other comprehensive income, the new guidance requires changes in the fair value of equity securities to be recorded in current earnings. As required by the new guidance, the unrealized gain in fair value on equity securities (recorded in accumulated other comprehensive income at December 31, 2017) was reclassified to retained earnings on January 1, 2018. The amount of the reclassification was $280,000, net of tax.

Equity securities include money market accounts that totaled $16.9 million at cost and $16.9 million at fair value at September 30, 2018. The portion of unrealized net gains on equity securities recognized in current earnings during the first nine months of 2018, which related to securities still held at September 30, 2018, totaled $97,000.

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of September 30, 2018, and December 31, 2017, are summarized in the table below, in thousands:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
September 30, 2018
Obligations of states and political subdivisions	$	239,908	$	8,422	$	(936	)	$	247,394
Total	$	239,908	$	8,422	$	(936	)	$	247,394
December 31, 2017
Obligations of states and political subdivisions	$	253,550	$	12,460	$	(516	)	$	265,494
Total	$	253,550	$	12,460	$	(516	)	$	265,494

At September 30, 2018, approximately 70% of Heartland's mortgage and asset-backed securities were issued by government-sponsored enterprises.

The amortized cost and estimated fair value of investment securities carried at fair value at September 30, 2018, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.



	September 30, 2018
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	23,216	$	23,161
Due in 1 to 5 years	50,520		49,592
Due in 5 to 10 years	131,431		125,824
Due after 10 years	194,091		186,903
Total debt securities	399,258		385,480
Mortgage and asset-backed securities	1,926,803		1,871,819
Equity securities with a readily determinable fair value	16,916		16,916
Total investment securities	$	2,342,977	$	2,274,215

The amortized cost and estimated fair value of debt securities held to maturity at September 30, 2018, by contractual maturity, are as follows, in thousands. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties.



	September 30, 2018
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	1,274	$	1,281
Due in 1 to 5 years	31,121		31,495
Due in 5 to 10 years	105,183		107,052
Due after 10 years	102,330		107,566
Total investment securities	$	239,908	$	247,394

As of September 30, 2018, and December 31, 2017, securities with a fair value of $551.3 million and $670.3 million, respectively, were pledged to secure public and trust deposits, short-term borrowings and for other purposes as required or permitted by law.

Gross gains and losses realized related to the sales of securities carried at fair value for the three- and nine-month periods ended September 30, 2018 and 2017, are summarized as follows, in thousands:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Proceeds from sales	$	59,137	$	503,083	$	694,872	$	1,127,091
Gross security gains	67		2,088		3,537		8,585
Gross security losses	212		409		2,500		3,023

The following tables summarize, in thousands, the amount of unrealized losses, defined as the amount by which cost or amortized cost exceeds fair value, and the related fair value of investments with unrealized losses in Heartland's securities portfolio as of September 30, 2018, and December 31, 2017. The investments were segregated into two categories: those that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or more. The reference point for determining how long an investment was in an unrealized loss position was September 30, 2017, and December 31, 2016, respectively. Securities for which Heartland has taken credit-related other-than-temporary impairment ("OTTI") write-downs are categorized as being "less than 12 months" or "12 months or longer" in a continuous loss position based on the point in time that the fair value declined to below the cost basis and not the period of time since the credit-related OTTI write-down.



Debt securities available for sale	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2018
U.S. government corporations and agencies	$	22,392	$	(39	)	$	4,605	$	(76	)	$	26,997	$	(115	)
Mortgage and asset-backed securities	1,007,078		(18,299		)	668,623		(38,026		)	1,675,701		(56,325		)
Obligations of states and political subdivisions	203,363		(5,552		)	139,394		(8,350		)	342,757		(13,902		)
Total temporarily impaired securities	$	1,232,833	$	(23,890	)	$	812,622	$	(46,452	)	$	2,045,455	$	(70,342	)
December 31, 2017
U.S. government corporations and agencies	$	4,819	$	(38	)	$	—	$	—		$	4,819	$	(38	)
Mortgage and asset-backed securities	851,070		(11,533		)	399,978		(26,054		)	1,251,048		(37,587		)
Obligations of states and political subdivisions	93,040		(667		)	159,180		(4,047		)	252,220		(4,714		)
Total temporarily impaired securities	$	948,929	$	(12,238	)	$	559,158	$	(30,101	)	$	1,508,087	$	(42,339	)



Securities held to maturity	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2018
Obligations of states and political subdivisions	$	29,174	$	(209	)	$	13,160	$	(727	)	$	42,334	$	(936	)
Total temporarily impaired securities	$	29,174	$	(209	)	$	13,160	$	(727	)	$	42,334	$	(936	)
December 31, 2017
Obligations of states and political subdivisions	$	8,512	$	(49	)	$	8,989	$	(467	)	$	17,501	$	(516	)
Total temporarily impaired securities	$	8,512	$	(49	)	$	8,989	$	(467	)	$	17,501	$	(516	)

Heartland reviews the investment securities portfolio on a quarterly basis to monitor its exposure to OTTI. A determination as to whether a security's decline in fair value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors Heartland may consider in the OTTI analysis include the length of time the security has been in an unrealized loss position, changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, with regard to debt securities, Heartland may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain debt securities in unrealized loss positions, Heartland prepares cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

The remaining unrealized losses on Heartland's mortgage and asset-backed securities are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. The losses are not related to concerns regarding the underlying credit of the issuers or the underlying collateral. It is expected that the securities will not be settled at a price less than the amortized cost of the investment. Because the decline in fair value is attributable to changes in interest rates or widening market spreads and not credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, these investments are not considered other-than-temporarily impaired.

The remaining unrealized losses on Heartland's obligations of states and political subdivisions are the result of changes in market interest rates or widening of market spreads subsequent to the initial purchase of the securities. Management monitors the published credit ratings of these securities and the stability of the underlying municipalities. Because the decline in fair value is attributable to changes in interest rates or widening market spreads due to insurance company downgrades and not underlying credit quality, and because Heartland has the intent and ability to hold these investments until a market price recovery or to maturity and does not believe it will be required to sell the securities before maturity, these investments are not considered other-than-temporarily impaired.

There were no gross realized gains or losses on the sale of securities carried at fair value or held to maturity securities with OTTI write-downs for the nine-month periods ended September 30, 2018, and September 30, 2017, respectively.

Other investments, at cost, include equity securities without a readily determinable fair value. Equity securities without a readily determinable fair value totaled $22.4 million and $18.6 million at September 30, 2018, and December 31, 2017, respectively. At September 30, 2018, and December 31, 2017, other investments at cost included shares of stock in the Federal Home Loan Banks (the "FHLBs") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of $15.1 million and $14.0 million, respectively.

The Heartland banks are required by federal law to maintain FHLB stock as members of the various FHLBs. These equity securities are "restricted" in that they can only be sold back to the respective institutions from which they were acquired or another member institution at par. Therefore, the FHLB stock is less liquid than other marketable equity securities, and the fair value approximates amortized cost. Heartland considers its FHLB stock as a long-term investment that provides access to competitive products and liquidity. Heartland evaluates impairment in these investments based on the ultimate recoverability of the par value and, at September 30, 2018, did not consider the investments to be other than temporarily impaired.