FAIR VALUE (Tables)

6 Months Ended

Jun. 30, 2020

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 June 30, 2020, and December 31, 2019, 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, 2020
Assets

Securities available for sale
U.S. government corporations and agencies	$	5,842	$	4,547	$	1,295	$	—
Mortgage and asset-backed securities	3,134,439		—		3,134,439		—
Obligations of states and political subdivisions	966,679		—		966,679		—

Equity securities with a readily determinable fair value	19,391		—		19,391		—
Derivative financial instruments⁽¹⁾	52,618		—		52,618		—
Interest rate lock commitments	2,653		—		—		2,653

Total assets at fair value	$	4,181,622	$	4,547	$	4,174,422	$	2,653
Liabilities
Derivative financial instruments⁽²⁾	$	62,189	$	—	$	62,189	$	—
Forward commitments	281		—		281		—

Total liabilities at fair value	$	62,470	$	—	$	62,470	$	—
December 31, 2019
Assets

Securities available for sale
U.S. government corporations and agencies	$	9,893	$	8,503	$	1,390	$	—
Mortgage and asset-backed securities	2,577,278		—		2,577,278		—
Obligations of states and political subdivisions	707,190		—		707,190		—

Equity securities	18,435		—		18,435		—
Derivative financial instruments⁽¹⁾	17,527		—		17,527		—
Interest rate lock commitments	681		—		—		681

Total assets at fair value	$	3,331,019	$	8,503	$	3,321,835	$	681
Liabilities
Derivative financial instruments⁽²⁾	$	21,462	$	—	$	21,462	$	—
Forward commitments	113		—		113		—

Total liabilities at fair value	$	21,575	$	—	$	21,575	$	—

(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 June 30, 2020
	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 loans:
Commercial and industrial	$	7,672	$	—	$	—	$	7,672	$	322
Owner occupied commercial real estate	3,982		—		—		3,982		—
Non-owner occupied commercial real estate	1,144		—		—		1,144		—
Real estate construction	132		—		—		132		—
Agricultural and agricultural real estate	11,358		—		—		11,358		—
Residential real estate	563		—		—		563		52
Consumer	162		—		—		162		—
Total collateral dependent loans	$	25,013	$	—	$	—	$	25,013	$	374
Loans held for sale	$	54,382	$	—	$	54,382	$	—	$	(2,001)
Other real estate owned	5,539		—		—		5,539		651
Premises, furniture and equipment held for sale	567		—		—		567		—
Servicing rights	4,485		—		—		4,485		1,556


	Fair Value Measurements at December 31, 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 and industrial	$	15,173	$	—	$	—	$	15,173	$	1,114
Owner occupied commercial real estate	1,352		—		—		1,352		—
Non-owner occupied commercial real estate	1,305		—		—		1,305		—
Real estate construction	—		—		—		—		—
Agricultural and agricultural real estate	12,623		—		—		12,623		1,254
Residential real estate	4,978		—		—		4,978		82
Consumer	1,033		—		—		1,033		—
Total collateral dependent impaired loans	$	36,464	$	—	$	—	$	36,464	$	2,450
Loans held for sale	$	26,748	$	—	$	26,748	$	—	$	(980)

Other real estate owned	6,914		—		—		6,914		947
Premises, furniture and equipment held for sale	2,967		—		—		2,967		735
Servicing rights	5,621		—		—		5,621		911

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
6/30/2020

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Interest rate lock commitments

2,653

Discounted cash flows

Closing ratio

0-99% (88%)⁽¹⁾

Other real estate owned

5,539

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Servicing rights

4,485

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

567

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Collateral dependent impaired loans:

Commercial

7,672

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Owner occupied commercial real estate

3,982

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%⁽³⁾

Non-owner occupied commercial real estate

1,144

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-7%⁽³⁾

Real estate construction

132

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Agricultural and agricultural real estate

11,358

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-8%⁽³⁾

Residential real estate

563

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-6%⁽³⁾

Consumer

162

Modified appraised value

Third party valuation

(2)

Valuation discount

0-7%⁽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.

(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
12/31/2019

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

Interest rate lock commitments

681

Discounted cash flows

Closing ratio

0-99% (90%)⁽¹⁾

Other real estate owned

6,914

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Servicing rights

5,621

Discounted cash flows

Third party valuation

(4)

Premises, furniture and equipment held for sale

2,967

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-10%⁽³⁾

Collateral dependent impaired loans:

Commercial

15,173

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-25%⁽³⁾

Owner occupied commercial real estate

1,352

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-14%⁽³⁾

Non-owner occupied commercial real estate

1,305

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-14%⁽³⁾

Real estate construction

—

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-14%⁽³⁾

Agricultural and agricultural real estate

12,623

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-15%⁽³⁾

Residential real estate

3,088

Modified appraised value

Third party appraisal

(2)

Appraisal discount

0-25%⁽³⁾

Consumer

988

Modified appraised value

Third party valuation

(2)

Valuation discount

0-10%⁽³⁾

(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 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 Six Months Ended June 30, 2020		For the Year Ended December 31, 2019
Balance at January 1,	$	681	$	725

Total gains (losses) included in earnings	2,994		18
Issuances	5,734		10,702
Settlements	(6,756)		(10,764)
Balance at period end	$	2,653	$	681

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 June 30, 2020
	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	$	453,578	$	453,578	$	453,578	$	—	$	—
Time deposits in other financial institutions	3,128		3,128		3,128		—		—
Securities:

Carried at fair value	4,126,351		4,126,351		4,547		4,121,804		—
Held to maturity	90,579		101,557		—		101,557		—
Other investments	35,902		35,902		—		35,902		—
Loans held for sale	54,382		54,382		—		54,382		—
Loans, net:
Commercial and industrial	2,331,869		2,307,865		—		2,300,193		7,672
PPP	1,124,430		1,124,430		—		1,124,430		—
Owner occupied commercial real estate	1,409,869		1,400,849		—		1,396,867		3,982
Non-owner occupied commercial real estate	1,533,461		1,524,064		—		1,522,920		1,144
Real estate construction	1,087,176		1,101,835		—		1,101,703		132
Agricultural and agricultural real estate	515,072		496,297		—		484,939		11,358
Residential real estate	726,458		726,139		—		725,576		563
Consumer	398,558		397,445		—		397,283		162
Total Loans, net	9,126,893		9,078,924		—		9,053,911		25,013
Cash surrender value on life insurance	172,813		172,813		—		172,813		—
Derivative financial instruments⁽¹⁾	52,618		52,618		—		52,618		—
Interest rate lock commitments	2,653		2,653		—		—		2,653
Forward commitments	30		30		—		30		—
Financial liabilities:
Deposits
Demand deposits	4,831,151		4,831,151		—		4,831,151		—
Savings deposits	6,810,296		6,810,296		—		6,810,296		—
Time deposits	1,067,252		1,067,453		—		1,067,453		—

Short term borrowings	88,631		88,631		—		88,631		—
Other borrowings	306,459		308,561		—		308,561		—
Derivative financial instruments⁽²⁾	62,189		62,189		—		62,189		—
Forward commitments	281		281		—		281		—

(1) Includes embedded derivatives and back-to-back loan swaps.
(2) 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, 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	$	378,734	$	378,734	$	378,734	$	—	$	—
Time deposits in other financial institutions	3,564		3,564		3,564		—		—
Securities:

Carried at fair value	3,312,796		3,312,796		8,503		3,304,293		—
Held to maturity	91,324		100,484		—		100,484		—
Other investments	31,321		31,321		—		31,321		—
Loans held for sale	26,748		26,748		—		26,748		—
Loans, net:
Commercial and industrial	2,530,809		2,621,253		—		2,606,080		15,173
Owner occupied commercial real estate	1,472,704		1,409,388		—		1,408,036		1,352
Non-owner occupied commercial real estate	1,495,877		1,397,527		—		1,396,222		1,305
Real estate construction	1,027,081		924,041		—		924,041		—
Agricultural and agricultural real estate	565,837		576,821		—		564,198		12,623
Residential real estate	832,277		841,453		—		838,365		3,088
Consumer	443,332		470,927		—		469,939		988
Total Loans, net	8,297,522		8,243,343		—		8,206,879		36,464
Cash surrender value on life insurance	171,625		171,625		—		171,625		—
Derivative financial instruments⁽¹⁾	17,527		17,527		—		17,527		—
Interest rate lock commitments	681		681		—		—		681

Financial liabilities:
Deposits
Demand deposits	3,543,863		3,543,863		—		3,543,863		—
Savings deposits	6,307,425		6,307,425		—		6,307,425		—
Time deposits	1,193,043		1,193,043		—		1,193,043		—

Short term borrowings	182,626		182,626		—		182,626		—
Other borrowings	275,773		278,169		—		278,169		—
Derivative financial instruments⁽¹⁾	21,462		21,462		—		21,462		—
Forward commitments	113		113		—		113		—

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