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DERIVATIVE FINANCIAL INSTRUMENTS
12 Months Ended
Dec. 31, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS

HTLF considers and uses derivative financial instruments as part of its interest rate risk management strategy, which may include interest rate swaps, fair value hedges, risk participation agreements, 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. In addition, HTLF facilitates back-to-back loan swaps to assist customers in managing their interest rate risk while executing offsetting interest rate swaps with dealer counterparties.

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. HTLF was required to post $27.7 million of collateral at December 31, 2023, compared to $793,000 as of December 31, 2022, related to derivative financial instruments. HTLF's counterparties were required to pledge $44.8 million at December 31, 2023, compared to $45.1 million at December 31, 2022. HTLF records interest rate derivatives subject to master netting agreements at their gross value and does not offset derivative assets and liabilities on the consolidated balance sheets.

HTLF's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note Eighteen, "Fair Value," for additional fair value information and disclosures.

Cash Flow Hedges
In 2021, two interest rate swap transactions were terminated, and the debt was converted to variable rate subordinated debentures. For the next twelve months, HTLF estimates cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense related to the terminated swaps will total $227,000.

In the first quarter of 2023, HTLF terminated its interest rate swap agreement, which effectively converted $500.0 million of variable rate loans to fixed rate loans. For the next twelve months, HTLF estimates cash payments and reclassification from accumulated other comprehensive income (loss) to interest expense will total $985,000.

HTLF had no derivative instruments designated as cash flow hedges at December 31, 2023. The table below identifies the balance sheet category and fair value of HTLF's derivative instrument designated as a cash flow hedge at December 31, 2022, in thousands:
Notional AmountFair Value Balance Sheet Category
December 31, 2022
Interest rate swap500,000 13 Other Assets

The table below identifies the gains recognized on HTLF's derivative instrument designated as a cash flow hedge for the year ended December 31, 2023, and December 31, 2022, in thousands:
Recognized in OCIReclassified from AOCI into Income
Amount of Gain (Loss)CategoryAmount of Gain (Loss)
For the Year Ended December 31, 2023
Interest rate swap $1,952 Interest income$(575)
For the Year Ended December 31, 2022
Interest rate swap $13 Interest income$487 

Fair Value Hedges
HTLF uses interest rate swaps to convert certain long term fixed rate loans to floating rates to hedge interest rate risk exposure. HTLF also uses interest rate swaps to mitigate the risk of changes in the fair market value of certain municipal and mortgage-backed securities. The changes in the fair values of derivatives that have been designated and qualify for fair value hedge accounting are recorded in the same line item in the consolidated statements of income as the changes in the fair value of the hedged items attributable to the risk being hedged.

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.

During 2023, HTLF entered into interest rate swaps designated as fair value hedges with initial notional amounts totaling $838.1 million primarily designed to provide protection for unrealized securities losses against the impact of higher mid-to-long term interest rates. HTLF also executed interest rate swaps designated as a fair value hedges with total original notional amounts of $2.5 billion to convert certain long-term fixed rate loans to floating rates to hedge interest rate risk exposure using the portfolio layer method, which allows HTLF to designate as the hedged item a stated amount of the assets that are not expected to be affected by prepayments, defaults and other factors that would affect the timing and amount of cash flow.

The table below identifies the fair value of the interest rate swaps designated as fair value hedges and the balance sheet category of the interest rate swaps at December 31, 2023, and December 31, 2022, in thousands:
Fair ValueBalance Sheet Category
December 31, 2023
Interest rate swaps-loans receivable held to maturity$5,027 Other assets
Interest rate swaps-securities carried at fair value23,182 Other assets
Interest rate swaps-loans receivable held to maturity27,554 Other liabilities
December 31, 2022
Interest rate swaps-loans receivable held to maturity$54 Other assets

The table below identifies the carrying amount of the hedged assets and cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged assets that are designated as a fair value hedge accounting relationship at December 31, 2023, and December 31, 2022, in thousands:
Location in the consolidated
balance sheet
Carrying Amount of
the Hedged Assets
Cumulative Amount of Fair Value
Hedging Adjustment Included in
Carrying Amount of Hedged Assets
December 31, 2023
Interest rate swapLoans receivable held to maturity$2,525,261 $24,652 
Interest rate swapSecurities carried at fair value 786,716(20,979)
December 31, 2022
Interest rate swap Loans receivable held to maturity$1,185 $(54)

The table below identifies the net impact to interest income recognized on HTLF's fair value hedges specific to the fair value remeasurements and the income statement classification where it is recorded in comparison to the total amount of interest income presented on the consolidated statements of income for the year ended December 31, 2023, and December 31, 2022, in thousands:
Year Ended December 31,
20232022
Gain (loss) recognized in interest income and fees on loans
$(386)$46 
Total amount of interest and fees on loans697,997477,970 
Gain (loss) recognized in interest income on securities-taxable
66 — 
Total amount of interest on securities-taxable223,521169,544 

The table below identifies the effect of fair value hedge accounting on the consolidated statements of income, in thousands:

Year Ended December 31,
20232022
Hedged item (loans receivable held to maturity)$24,318 $(113)
Hedged item (securities carried at fair value)(20,913)— 
Derivatives designated as hedging instruments on loans receivable held to maturity(24,704)159 
Derivatives designated as hedging instruments on securities carried at fair value20,979 — 

Embedded Derivatives
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 HTLF's embedded derivatives as of December 31, 2023, and December 31, 2022, in thousands:
Notional AmountFair ValueBalance Sheet Category
December 31, 2023
Embedded derivatives $2,391 $61 Other Assets
December 31, 2022
Embedded derivatives $6,028 $135 Other Assets
The table below identifies the gains and losses recognized on HTLF's embedded derivatives for the years ended December 31, 2023 and December 31, 2022, in thousands:
Year Ended December 31,
20232022
Gain (loss) recognized in other noninterest income on embedded derivatives$(74)$452 

Back-to-Back Loan Swaps
HTLF has loan interest rate swap relationships with customers to assist them in managing their interest rate risk. Upon entering into these loan swaps, HTLF enters into offsetting positions with counterparties in order to minimize interest rate risk to HTLF. 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. Any gains and losses on these back-to-back swaps are recorded in noninterest income on the consolidated statements of income, and for the years ended December 31, 2023, and December 31, 2022, no gains or losses were recognized. HTLF recognized $7.7 million in fee income for the year ended December 31, 2023, compared to $6.6 million for the year ended December 31, 2022.

The table below identifies the balance sheet category and fair values of HTLF's derivative instruments designated as loan swaps at December 31, 2023 and 2022, in thousands:
Notional
Amount
Fair
Value
Balance Sheet
Category
Weighted
Average
Receive
Rate
Weighted
Average
Pay
Rate
December 31, 2023
Customer interest rate swaps$1,672,729 $56,634 Other Assets4.12 %4.96 %
Customer interest rate swaps1,672,729 (56,634)Other Liabilities4.96 %4.12 %
December 31, 2022
Customer interest rate swaps$819,662 $46,091 Other Assets4.23 %6.76 %
Customer interest rate swaps819,662 (46,091)Other Liabilities6.76 %4.23 %

Other Free-Standing Derivatives
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 $0 at both December 31, 2023, and December 31, 2022, as collateral for these forward commitments. HTLF's counterparties were required to pledge no cash as collateral at both December 31, 2023, and December 31, 2022, 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.
The table below identifies the balance sheet category and fair values of HTLF's other free standing derivative instruments not designated as hedging instruments at December 31, 2023, and December 31, 2022, in thousands:
 
Notional
Amount
Fair
Value
Balance Sheet
Category
December 31, 2023
Interest rate lock commitments (mortgage)$— $— Other Assets
Forward commitments— — Other Assets
Forward commitments— — Other Liabilities
Undesignated interest rate swaps2,391 (61)Other Liabilities
December 31, 2022
Interest rate lock commitments (mortgage)$9,340 $174 Other Assets
Forward commitments6,400 47 Other Assets
Forward commitments5,750 (99)Other Liabilities
Undesignated interest rate swaps6,028 (135)Other Liabilities

HTLF recognizes gains and losses on other free-standing derivatives in two separate income statement categories. Interest rate lock commitments and forward commitments are recognized in net gains on sale of loans held for sale and undesignated interest rate swaps are recognized in other noninterest income. The table below identifies the gains and losses recognized in income on HTLF's other free standing derivative instruments not designated as hedging instruments for the years ended December 31, 2023, and December 31, 2022, in thousands:
Year Ended December 31,
 20232022
Interest rate lock commitments (mortgage)$(291)$(1,828)
Forward commitments52 11 
Undesignated interest rate swaps74 (452)