HTLF 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, and collars. HTLF's current strategy includes the use of interest rate swaps as well as 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 that contain collateral posting provisions with counterparties that meet HTLF’s credit standards. 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 $591,000 of collateral at June 30, 2024, compared to $27.7 million as of December 31, 2023, related to derivative financial instruments. HTLF's counterparties were required to pledge $104.5 million at June 30, 2024, compared to $44.8 million at December 31, 2023.

In 2021, one interest rate swap terminated, and the debt was converted to variable rate subordinated debentures. HTLF recognized all remaining cash payments related to the terminated derivatives in the first quarter of 2024 and reclassified the remaining cash payments from accumulated other comprehensive income (loss) to interest expense.

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 income will total $982,000.

The table below identifies the gains and losses recognized on HTLF's terminated derivative instruments designated as cash flow hedges for the three and six months ended June 30, 2024, and June 30, 2023, in thousands:


	Effective Portion
	Recognized in OCI		Reclassified from AOCI into Income
	Amount of Gain (Loss)		Category	Amount of Gain (Loss)
Three Months Ended June 30, 2024
Interest rate swap	$	—	Interest income	$	245
Six Months Ended June 30, 2024
Interest rate swap	$	—	Interest income	$	210
Three Months Ended June 30, 2023
Interest rate swap	$	—	Interest income	$	63
Six Months Ended June 30, 2023
Interest rate swap	$	1,952	Interest income	$	(701)

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 fair value hedges with total original notional amounts of $2.50 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 as of June 30, 2024 and December 31, 2023, in thousands:


	Fair Value		Balance Sheet Category
June 30, 2024
Interest rate swaps-loans receivable held to maturity	$	14,914	Other assets
Interest rate swaps-securities carried at fair value	51,297		Other assets
Interest rate swaps-loans receivable held to maturity	2,267		Other liabilities
December 31, 2023
Interest rate swaps-loans receivable held to maturity	$	5,027	Other assets
Interest rate swaps-securities carried at fair value	23,182		Other assets
Interest rate swaps-loans receivable held to maturity	27,554		Other liabilities

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 fair value hedge accounting relationships at June 30, 2024, and December 31, 2023, 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
June 30, 2024

Interest rate swap	Loans receivable held to maturity	$	2,489,744	$	(10,762)
Interest rate swap	Securities carried at fair value	734,510		(49,140)
December 31, 2023
Interest rate swap	Loans receivable held to maturity	$	2,525,261	$	24,652
Interest rate swap	Securities carried at fair value	786,716		(20,979)

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 three- and six- months ended June 30, 2024, and June 30, 2023, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Gain (loss) recognized in interest income and fees on loans	$	7	$	3	$	15	$	3
Total amount of interest and fees on loans	199,161		168,899		394,822		322,742
Gain (loss) recognized in interest income on securities-taxable	(85)		74		(388)		74
Total amount of interest on securities-taxable	47,381		58,172		94,395		114,148


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Hedged item (loans receivable held to maturity)	$	(4,870)	$	(12,897)	$	(35,399)	$	(12,882)
Hedged item (securities carried at fair value)	(8,398)		(29,510)		(28,549)		(29,510)
Derivatives designated as hedging instruments on loans receivable held to maturity	4,877		12,900		35,414		12,885
Derivatives designated as hedging instruments on securities carried at fair value	8,313		29,584		28,161		29,584

HTLF has fixed rate loans with embedded derivatives. These 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 June 30, 2024, and December 31, 2023, in thousands:

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 three and six months ended June 30, 2024, and June 30, 2023, no gain or loss was recognized. HTLF recognized $1.6 million and $2.5 million in fee income related to executing back-to-back loan swaps for customers for the three and six months ended June 30, 2024, respectively, compared to $3.1 million and $5.1 million for the three and six months ended June 30, 2023, respectively.


	Notional Amount		Fair Value		Balance Sheet Category
June 30, 2024
Customer interest rate swaps	$	1,844,969	$	62,576	Other assets
Customer interest rate swaps	1,844,969		(62,576)		Other liabilities
December 31, 2023
Customer interest rate swaps	$	1,672,729	$	56,634	Other assets
Customer interest rate swaps	1,672,729		(56,634)		Other liabilities

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 sheets 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 June 30, 2024, and December 31, 2023, in thousands:


	Notional Amount		Fair Value		Balance Sheet Category
June 30, 2024




Undesignated interest rate swaps	$	2,296	$	(62)	Other liabilities

December 31, 2023




Undesignated interest rate swaps	$	2,391	$	(61)	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. As of the balance sheet dates presented above there were no interest rate lock commitments or forward commitments. 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 three- and six- months ended June 30, 2024, and June 30, 2023, in thousands:


	Three Months Ended June 30,				Six Months Ended June 30,
	2024		2023		2024		2023
Interest rate lock commitments (mortgage)	$	—	$	(128)	$	—	$	282

Forward commitments	—		(181)		—		91
Undesignated interest rate swaps	8		(20)		(1)		17