FAIR VALUE (Tables)

9 Months Ended

Sep. 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 September 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
September 30, 2019
Assets

Securities available for sale
U.S. government corporations and agencies	$	8,950	$	7,497	$	1,453	$	—
Mortgage and asset-backed securities	2,480,677		—		2,480,677		—
Obligations of states and political subdivisions	512,579		—		512,579		—

Equity securities with a readily determinable fair value	18,362		—		18,362		—
Derivative financial instruments⁽¹⁾	22,152		—		22,152		—
Interest rate lock commitments	970		—		—		970
Forward commitments	64		—		64		—
Total assets at fair value	$	3,043,754	$	7,497	$	3,035,287	$	970
Liabilities
Derivative financial instruments⁽²⁾	$	27,479	$	—	$	27,479	$	—
Forward commitments	209		—		209		—

Total liabilities at fair value	$	27,688	$	—	$	27,688	$	—
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 September 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	$	10,767	$	—	$	—	$	10,767	$	1,098
Commercial real estate	1,088		—		—		1,088		72
Agricultural and agricultural real estate	11,536		—		—		11,536		1,015
Residential real estate	1,042		—		—		1,042		24
Consumer	645		—		—		645		—
Total collateral dependent impaired loans	$	25,078	$	—	$	—	$	25,078	$	2,209
Loans held for sale	$	35,427	$	—	$	35,427	$	—	$	(1,234)
Other real estate owned	$	6,425	$	—	$	—	$	6,425	$	880
Premises, furniture and equipment held for sale	$	3,251	$	—	$	—	$	3,251	$	954
Servicing rights	$	5,039	$	—	$	—	$	5,039	$	1,579


	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
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
9/30/2019

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Interest rate lock commitments

970

Discounted cash flows

Closing ratio

0-99% (90%)⁽¹⁾

Other real estate owned

6,425

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Servicing rights

5,039

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

3,251

Modified appraised value

Third party appraisal

Appraisal discount

0-10%⁽³⁾

Collateral dependent impaired loans:

Commercial

10,767

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%⁽³⁾

Commercial real estate

1,088

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Agricultural and agricultural real estate

11,536

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%⁽³⁾

Residential real estate

1,042

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-12%⁽³⁾

Consumer

645

Modified appraised value

Third party valuation

(2)

Valuation discount

0-10%⁽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)

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)

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)

Appraisal discount

0-24%⁽⁴⁾

Residential real estate

478

Modified appraised value

Third party appraisal

(3)

Appraisal discount

0-24%⁽⁴⁾

Consumer

624

Modified appraised value

Third party valuation

(3)

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 Nine Months Ended September 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	561		(3,269)
Issuances	8,077		2,962
Settlements	(8,393)		(2,089)
Balance at period end	$	970	$	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 September 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	$	447,767	$	447,767	$	447,767	$	—	$	—
Time deposits in other financial institutions	3,711		3,711		3,711		—		—
Securities:

Carried at fair value	3,020,568		3,020,568		7,497		3,013,071		—
Held to maturity	87,965		97,905		—		97,905		—
Other investments	29,042		29,042		—		29,042		—
Loans held for sale	35,427		35,427		—		35,427		—
Loans, net:
Commercial	2,250,134		2,187,799		—		2,177,032		10,767
Commercial real estate	4,084,592		4,057,687		—		4,056,599		1,088
Agricultural and agricultural real estate	540,406		532,650		—		521,114		11,536
Residential real estate	587,288		561,187		—		560,145		1,042
Consumer	442,966		440,984		—		440,339		645
Total Loans, net	7,905,386		7,780,307		—		7,755,229		25,078
Cash surrender value on life insurance	171,471		171,471		—		171,471		—
Derivative financial instruments⁽¹⁾	22,152		22,152		—		22,152		—
Interest rate lock commitments	970		970		—		—		970
Forward commitments	64		64		—		64		—
Financial liabilities:
Deposits
Demand deposits	3,581,127		3,581,127		—		3,581,127		—
Savings deposits	5,770,754		5,770,754		—		5,770,754		—
Time deposits	1,117,975		1,117,975		—		1,117,975		—
Deposits held for sale	—		—		—		—		—
Short term borrowings	107,853		107,853		—		107,853		—
Other borrowings	278,417		278,707		—		278,707		—
Derivative financial instruments⁽¹⁾	27,479		27,479		—		27,479		—
Forward commitments	209		209		—		209		—

(1) Includes embedded derivatives, back-to-back loan swaps, fair value hedges, free standing derivative instruments and cash flow hedges.


					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⁽¹⁾	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.