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DERIVATIVE FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS
DERIVATIVE FINANCIAL INSTRUMENTS

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, risk participation agreements, caps, floors and 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 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 movement 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 large, stable financial institutions. HTLF has not experienced any losses from nonperformance by these counterparties. HTLF monitors counterparty risk in accordance with the provisions of ASC 815.

HTLF's derivative and hedging instruments are recorded at fair value on the consolidated balance sheets. See Note 19, "Fair Value," for additional fair value information and disclosures.

Cash Flow Hedges
During the third quarter of 2021, the interest rate swap transactions associated with Heartland Financial Statutory VI and VII were terminated, and the debt was converted to variable rate subordinated debentures. In addition, HTLF had two swap transactions associated with an unaffiliated bank, one of which matured in the second quarter, and the other was terminated in the third quarter. The underlying debt with the unaffiliated bank was paid off in the third quarter of 2021. For the next twelve months, HTLF estimates that cash payments and reclassification from accumulated other comprehensive income to interest expense related to the terminated swaps will total $733,000.

HTLF has variable rate loans 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 the interest receipts, HTLF entered into one interest rate swap agreement in 2022 to effectively convert $500.0 million of variable rate loans to fixed rate loans. For accounting purposes, this swap transaction is designated as a cash flow hedge of the changes in one-month SOFR, the benchmark interest rate being hedged, associated with the interest receipts made on $500.0 million of HTLF's variable rate loans that reset quarterly on a specified reset date.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income as interest payments are received or made on Heartland's variable-rate assets. For the twelve months ended December 31, 2022, 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 loss to interest expense totaling $487,000. For the next twelve months, Heartland estimates that cash payments and reclassification from accumulated other comprehensive loss to interest expense will total $2.9 million.
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. At December 31, 2021, HTLF had no derivative instruments designated as cash flow hedges.
Notional AmountFair Value Balance Sheet Category
December 31, 2022
Interest rate swap$500,000 $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, 2022, in thousands:
Recognized in OCIReclassified from AOCI into Income
Amount of Gain (Loss)CategoryAmount of Gain (Loss)
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 uses hedge accounting in accordance with ASC 815, with the unrealized gains and losses, representing the change in fair 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 was required to pledge $481,000 and $3.8 million of cash as collateral for these fair value hedges at December 31, 2022, and December 31, 2021, respectively.

The table below identifies the notional amount, fair value and balance sheet category of HTLF's fair value hedges at December 31, 2022, and December 31, 2021, in thousands:
Notional AmountFair ValueBalance Sheet Category
December 31, 2022
Fair value hedges$1,185 $54 Other Assets
December 31, 2021
Fair value hedges$16,755 $(1,208)Other Liabilities

The table below identifies the gains and losses recognized on HTLF's fair value hedges for the years ended December 31, 2022, and December 31, 2021, in thousands:
Year Ended December 31,
20222021
Gain (loss) recognized in interest income on fair value hedges$1,262 $1,272 

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, 2022, and December 31, 2021, in thousands:
Notional AmountFair ValueBalance Sheet Category
December 31, 2022
Embedded derivatives $6,028 $135 Other Assets
December 31, 2021
Embedded derivatives $7,496 $(317)Other Liabilities

The table below identifies the gains and losses recognized on HTLF's embedded derivatives for the years ended December 31, 2022 and December 31, 2021, in thousands:
Year Ended December 31,
20222021
Gain (loss) recognized in other noninterest income on embedded derivatives$452 $(997)

Back-to-Back Loan Swaps
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 $312,000 and $24.1 million as of December 31, 2022, and December 31, 2021, respectively, as collateral related to these back-to-back swaps. HTLF's counterparties were required to pledge $45.1 million at December 31, 2022 compared to $0 at December 31, 2021, related to these back-to-back swaps. 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, 2022, and December 31, 2021, no gains or losses were recognized. The table below identifies the balance sheet category and fair values of HTLF's derivative instruments designated as loan swaps at December 31, 2022 and 2021, in thousands:
Notional
Amount
Fair
Value
Balance Sheet
Category
Weighted
Average
Receive
Rate
Weighted
Average
Pay
Rate
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 %
December 31, 2021
Customer interest rate swaps$463,069 $23,574 Other Assets4.44 %2.35 %
Customer interest rate swaps463,069 (23,574)Other Liabilities2.35 %4.44 %

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, 2022, and December 31, 2021, as collateral for these forward commitments. HTLF's counterparties were required to pledge no cash as collateral at both December 31, 2022, and December 31, 2021, 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, 2022, and December 31, 2021, in thousands:
 
Notional
Amount
Fair
Value
Balance Sheet
Category
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
December 31, 2021
Interest rate lock commitments (mortgage)$37,046 $1,306 Other Assets
Forward commitments19,000 32 Other Assets
Forward commitments35,500 (95)Other Liabilities
Undesignated interest rate swaps7,496 317 Other Assets

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, 2022, and December 31, 2021, in thousands:
Year Ended December 31,
 20222021
Interest rate lock commitments (mortgage)$(1,828)$(2,345)
Forward commitments15 32 
Forward commitments(4)602 
Undesignated interest rate swaps(452)997