SECURITIES

9 Months Ended

Sep. 30, 2020

Investments, Debt and Equity Securities [Abstract]

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 fair value that are carried at fair value as of September 30, 2020, and December 31, 2019, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
September 30, 2020
U.S. government corporations and agencies	$	3,185	$	87	$	—	$	3,272
Mortgage and asset-backed securities	3,719,747		46,959		(24,198)		3,742,508
Obligations of states and political subdivisions	1,127,030		60,974		(2,655)		1,185,349

Total debt securities	4,849,962		108,020		(26,853)		4,931,129
Equity securities with a readily determinable fair value	19,569		—		—		19,569
Total	$	4,869,531	$	108,020	$	(26,853)	$	4,950,698
December 31, 2019
U.S. government corporations and agencies	$	9,844	$	49	$	—	$	9,893
Mortgage and asset-backed securities	2,579,081		17,200		(19,003)		2,577,278
Obligations of states and political subdivisions	704,073		12,516		(9,399)		707,190

Total debt securities	3,292,998		29,765		(28,402)		3,294,361
Equity securities with a readily determinable fair value	18,435		—		—		18,435
Total	$	3,311,433	$	29,765	$	(28,402)	$	3,312,796

The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity securities as of September 30, 2020, and December 31, 2019, are summarized in the table below, in thousands:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Allowance for Credit Losses
September 30, 2020

Obligations of states and political subdivisions	$	88,761	$	10,858	$	—	$	99,619	$	(61)
Total	$	88,761	$	10,858	$	—	$	99,619	$	(61)
December 31, 2019

Obligations of states and political subdivisions	$	91,324	$	9,160	$	—	$	100,484	$	—
Total	$	91,324	$	9,160	$	—	$	100,484	$	—

As of September 30, 2020, Heartland had $14.7 million of accrued interest receivable, which is included in other assets on the consolidated balance sheet. Heartland does not consider accrued interest receivable in the carrying amount of financial assets held at amortized cost basis or in the allowance for credit losses calculation.

The amortized cost and estimated fair value of investment securities carried at fair value at September 30, 2020, 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, 2020
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	6,756	$	6,784
Due in 1 to 5 years	25,556		26,229
Due in 5 to 10 years	68,084		72,131
Due after 10 years	1,029,819		1,083,477
Total debt securities	1,130,215		1,188,621
Mortgage and asset-backed securities	3,719,747		3,742,508
Equity securities with a readily determinable fair value	19,569		19,569
Total investment securities	$	4,869,531	$	4,950,698

The amortized cost and estimated fair value of debt securities held to maturity at September 30, 2020, 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, 2020
	Amortized Cost		Estimated Fair Value
Due in 1 year or less	$	930	$	944
Due in 1 to 5 years	18,694		19,855
Due in 5 to 10 years	59,367		65,371
Due after 10 years	9,770		13,449
Total debt securities	88,761		99,619
Allowance for credit losses	(61)		—
Total investment securities	$	88,700	$	99,619

As of September 30, 2020, and December 31, 2019, securities with a carrying value of $1.91 billion and $509.6 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, 2020 and 2019, are summarized as follows, in thousands:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Proceeds from sales	$	306,383	$	290,877	$	818,022	$	1,485,773
Gross security gains	1,825		2,371		8,687		10,301
Gross security losses	726		358		3,924		3,133

The following table summarizes, 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, 2020, and December 31, 2019. 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, 2019, and December 31, 2018, respectively.


Debt securities available for sale	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count	Fair Value		Unrealized Losses		Count
September 30, 2020

Mortgage and asset-backed securities	$	1,277,625	$	(14,276)	69	$	544,573	$	(9,922)	108	$	1,822,198	$	(24,198)	177
Obligations of states and political subdivisions	155,689		(2,655)		29	—		—		—	155,689		(2,655)		29



Total temporarily impaired securities	$	1,433,314	$	(16,931)	98	$	544,573	$	(9,922)	108	$	1,977,887	$	(26,853)	206
December 31, 2019

Mortgage and asset-backed securities	$	1,231,732	$	(14,189)	150	$	241,232	$	(4,814)	58	$	1,472,964	$	(19,003)	208
Obligations of states and political subdivisions	387,534		(9,399)		50	—		—		—	387,534		(9,399)		50



Total temporarily impaired securities	$	1,619,266	$	(23,588)	200	$	241,232	$	(4,814)	58	$	1,860,498	$	(28,402)	258

Heartland had no securities held to maturity with unrealized losses at September 30, 2020, or December 31, 2019.

On January 1, 2020, Heartland adopted the amendments within ASU 2016-13, which replaced the legacy GAAP other-than-temporary impairment ("OTTI") model with a credit loss model. The credit loss model under ASC 326-30, applicable to AFS debt securities, requires the recognition of credit losses through an allowance account, but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. See Note 1, "Basis of Presentation," to the consolidated financial statements included herein for a discussion of the impact of the adoption of ASU 2016-13. Heartland reviews the investment securities portfolio at the security level on a quarterly basis for potential credit losses, which takes into consideration numerous factors, and the relative significance of any single factor can vary by security. Some factors Heartland may consider include 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, no credit losses were recognized on these securities during the three and nine months ended September 30, 2020.

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, no credit losses were recognized on these securities during the three and nine months ended September 30, 2020.

In the third quarter of 2020, Heartland sold two obligations of states and political subdivisions securities from the held to maturity portfolio. Because the underlying credit quality of the individual securities showed significant deterioration, it was unlikely Heartland would recover the remaining basis of the securities prior to maturity and therefore inconsistent with

Heartland's original intent upon purchase and classification of these held to maturity securities. The carrying value of these securities was $855,000, and the associated gross gains were $201,000.

The credit loss model under ASC 326-30, applicable to held to maturity debt securities, requires the recognition of lifetime expected credit losses through an allowance account at the time when the security is purchased. The following table presents, in thousands, the activity in the allowance for credit losses for securities held to maturity by major security type for the three- and nine months ended September 30, 2020:


	Obligations of states and political subdivisions
Balance at June 30, 2020	$	62
Provision for credit losses	(1)
Balance at September 30, 2020	$	61

	Obligations of states and political subdivisions
Balance at December 31, 2019	$	—
Impact of ASU 2016-13 adoption on January 1, 2020	158
Adjusted balance at January 1, 2020	158
Provision for credit losses	(97)
Balance at September 30, 2020	$	61

The following table summarizes, in thousands, the carrying amount of Heartland's held to maturity debt securities by investment rating as of September 30, 2020, which are updated quarterly and used to monitor the credit quality of the securities:


Rating	Obligations of states and political subdivisions
AAA	$	—
AA, AA+, AA-	27,465
A+, A, A-	10,451
BBB	—
Not Rated	50,845
Total	$	88,761

Included in other securities were shares of stock in each Federal Home Loan Bank (the "FHLB") of Des Moines, Chicago, Dallas, San Francisco and Topeka at an amortized cost of $20.9 million at September 30, 2020 and $16.8 million at December 31, 2019.

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, 2020, did not consider the investments to be impaired.