HTLF uses derivative financial instruments as part of its interest rate risk management strategy. As part of the strategy, HTLF considers the use of interest rate swaps, caps, floors, collars, and certain interest rate lock commitments and forward sales of securities related to mortgage banking activities. HTLF's current strategy includes the use of interest rate swaps, interest rate lock commitments and forward sales of mortgage securities. In addition, HTLF is facilitating back-to-back loan swaps to assist customers in managing interest rate risk. HTLF's objectives are to add stability to its net interest margin and to manage its exposure to movements in interest rates. The contract or notional amount of a derivative is used to determine, along with the other terms of the derivative, the amounts to be exchanged between the counterparties. HTLF is exposed to credit risk in the event of nonperformance by counterparties to financial instruments. HTLF minimizes this risk by entering into derivative contracts with counterparties that meet HTLF’s credit standards, and the contracts contain collateral provisions protecting the at-risk party. HTLF has not experienced any losses from nonperformance by these counterparties. HTLF monitors counterparty risk in accordance with the provisions of ASC 815.

In addition, interest rate-related derivative instruments generally contain language outlining collateral pledging requirements for each counterparty. Collateral must be posted when the market value exceeds certain threshold limits which are determined by credit ratings of each counterparty. HTLF was required to pledge $2.9 million of cash as collateral at March 31, 2021 compared to $3.8 million at December 31, 2020. At both March 31, 2021 and December 31, 2020, no collateral was required to be pledged by HTLF's counterparties.

HTLF has variable rate funding which creates exposure to variability in interest payments due to changes in interest rates. To manage the interest rate risk related to the variability of interest payments, HTLF has entered into various interest rate swap agreements. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received or made on HTLF's variable-rate liabilities. For the three months ended March 31, 2021, the change in net unrealized losses on cash flow hedges reflects changes in the fair value of the swaps and reclassification from accumulated other comprehensive income to interest expense totaling $591,000. For the next twelve months, HTLF estimates that cash payments and reclassification from accumulated other comprehensive income to interest expense will total $2.4 million.

HTLF entered into forward starting interest rate swap transactions to effectively convert Heartland Financial Statutory Trust IV, VI, and VII, which total $65.0 million, from variable rate subordinated debentures to fixed rate debt. For accounting purposes, these swap transactions are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $65.0 million of HTLF's subordinated debentures that reset quarterly on a specified reset date. At inception, HTLF asserted that the underlying principal balance would remain outstanding throughout the hedge transaction, making it probable that sufficient LIBOR-based interest payments would exist through the maturity date of the swaps. During the first quarter of 2021, the interest rate swap transaction associated with Heartland Financial Statutory Trust IV, totaling $25.0 million, matured and the fixed rate debt has been converted to a variable rate subordinated debenture.

On May 18, 2018, HTLF acquired cash flow hedges related to OCGI Statutory Trust III and OCGI Capital Trust IV with notional amounts of $3.0 million and $6.0 million, respectively, in the First Bank Lubbock Bancshares, Inc. transaction. The cash flow hedges effectively convert OCGI Statutory Trust III and OGCI Capital Trust IV from variable rate subordinated debentures to fixed rate debt. These swaps are designated as cash flow hedges of the changes in LIBOR, the benchmark interest rate being hedged, associated with the interest payments made on $9.0 million of HTLF's subordinated debentures that reset quarterly on a specified reset date.


	Notional Amount		Fair Value		Balance Sheet Category	Receive Rate		Weighted Average Pay Rate		Maturity
March 31, 2021

Interest rate swap	$	25,000	$	—	Other liabilities	—	%	—	%	03/17/2021




Interest rate swap	20,667		(37)		Other liabilities	2.606		3.674		05/10/2021
Interest rate swap	22,000		(1,669)		Other liabilities	2.607		5.425		07/24/2028
Interest rate swap	20,000		(1,194)		Other liabilities	0.184		2.390		06/15/2024
Interest rate swap	20,000		(1,144)		Other liabilities	0.225		2.352		03/01/2024
Interest rate swap	6,000		(26)		Other liabilities	0.184		1.866		06/15/2021
Interest rate swap	3,000		(13)		Other liabilities	0.184		1.878		06/30/2021
December 31, 2020
Interest rate swap	$	25,000	$	(127)	Other liabilities	0.229	%	2.255	%	03/17/2021

Interest rate swap	21,667		(91)		Other liabilities	2.649		3.674		05/10/2021
Interest rate swap	22,750		(2,220)		Other liabilities	2.643		5.425		07/24/2028
Interest rate swap	20,000		(1,482)		Other liabilities	0.217		2.390		06/15/2024
Interest rate swap	20,000		(1,385)		Other liabilities	0.225		2.352		03/01/2024
Interest rate swap	6,000		(50)		Other liabilities	0.217		1.866		06/15/2021
Interest rate swap	3,000		(25)		Other liabilities	0.241		1.878		06/30/2021


	Effective Portion					Ineffective Portion
	Recognized in OCI		Reclassified from AOCI into Income			Recognized in Income on Derivatives
	Amount of Gain (Loss)		Category	Amount of Gain (Loss)		Category	Amount of Gain (Loss)














Three Months Ended March 31, 2021












Interest rate swaps	$	1,297	Interest expense	$	591	Other income	$	—












Three Months Ended March 31, 2020










Interest rate swaps	$	(3,863)	Interest expense	$	183	Other income	$	—

value of the derivative and the change in fair value of the risk being hedged on the related loan, being recorded in the consolidated statements of income. The ineffective portions of the unrealized gains or losses, if any, are recorded in interest income and interest expense in the consolidated statements of income. HTLF uses statistical regression to assess hedge effectiveness, both at the inception of the hedge as well as on a continual basis. The regression analysis involves regressing the periodic change in the fair value of the hedging instrument against the periodic changes in the fair value of the asset being hedged due to changes in the hedge risk.

HTLF has fixed rate loans with embedded derivatives. The loans contain terms that affect the cash flows or value of the loan similar to a derivative instrument, and therefore are considered to contain an embedded derivative. The embedded derivatives are bifurcated from the loans because the terms of the derivative instrument are not clearly and closely related to the loans. The embedded derivatives are recorded at fair value on the consolidated balance sheets as a part of other assets, and changes in the fair value are a component of noninterest income. The table below identifies the notional amount, fair value and balance sheet category of the embedded derivatives at March 31, 2021, and December 31, 2020, in thousands:

HTLF has interest rate swap loan relationships with customers to meet their financing needs. Upon entering into these loan swaps, HTLF enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as free standing financial derivatives with the fair values reported in other assets and other liabilities on the consolidated balance sheets. HTLF was required to post $27.9 million and $46.5 million as of March 31, 2021, and December 31, 2020, respectively, as collateral related to these back-to-back swaps. HTLF's counterparties were required to pledge $0 at both March 31, 2021, and December 31, 2020. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the three months ended March 31, 2021 and March 31, 2020, no gain or loss was recognized. The table below identifies the balance sheet category and fair values of the derivative instruments designated as loan swaps at March 31, 2021, and December 31, 2020, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category	Weighted Average Receive Rate		Weighted Average Pay Rate
March 31, 2021
Customer interest rate swaps	$	444,056	$	23,440	Other assets	4.51	%	2.48	%
Customer interest rate swaps	444,056		(23,440)		Other liabilities	2.48		4.51
December 31, 2020
Customer interest rate swaps	$	440,719	$	43,422	Other assets	4.46	%	2.46	%
Customer interest rate swaps	440,719		(43,422)		Other liabilities	2.46		4.46

HTLF has entered into interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans and mortgage backed securities that are considered derivative instruments. HTLF enters into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on the commitments to fund the loans as well as on residential mortgage loans available for sale. The fair value of these commitments is recorded on the consolidated balance sheets, with the changes in fair value recorded in the consolidated statements of income as a component of gains on sale of loans held for sale. These derivative contracts are designated as free standing derivative contracts and are not designated against specific assets and liabilities on the consolidated balance sheets or forecasted transactions and therefore do not qualify for hedge accounting treatment. HTLF was required to pledge no collateral at both March 31, 2021, and December 31, 2020. HTLF's counterparties were required to pledge no collateral at both March 31, 2021 and December 31, 2020, as collateral for these forward commitments.

HTLF acquired undesignated interest rate swaps in 2015. These swaps were entered into primarily for the benefit of customers seeking to manage their interest rate risk and are not designated against specific assets or liabilities on the consolidated balance sheet or forecasted transactions and therefore do not qualify for hedge accounting in accordance with ASC 815. These swaps are carried at fair value on the consolidated balance sheets as a component of other liabilities, with changes in the fair value recorded as a component of other noninterest income.


	Balance Sheet Category	Notional Amount		Fair Value
March 31, 2021
Interest rate lock commitments (mortgage)	Other assets	$	54,369	$	1,857

Forward commitments	Other assets	83,500		1,213
Forward commitments	Other liabilities	2,000		(4)
Undesignated interest rate swaps	Other liabilities	9,084		(551)

December 31, 2020
Interest rate lock commitments (mortgage)	Other assets	$	42,078	$	1,827

Forward commitments	Other assets	—		—
Forward commitments	Other liabilities	86,500		(697)
Undesignated interest rate swaps	Other liabilities	9,198		(680)

The table below identifies the income statement category of the gains and losses recognized in income on HTLF's other free standing derivative instruments not designated as hedging instruments for the three months ended March 31, 2021, and March 31, 2020, in thousands:


	Income Statement Category	Gain (Loss) Recognized




Three Months Ended March 31, 2021
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	(1,485)
Forward commitments	Net gains on sale of loans held for sale	1,906
Undesignated interest rate swaps	Other noninterest income	129




Three Months Ended March 31, 2020
Interest rate lock commitments (mortgage)	Net gains on sale of loans held for sale	$	1,698

Forward commitments	Net gains on sale of loans held for sale	(1,146)
Undesignated interest rate swaps	Other noninterest income	(361)