Busey entered into derivative instruments designated as cash flow hedges. For a derivative instrument that is designated and qualifies as a cash flow hedge, the change in fair value of the derivative instrument is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in fair value of components excluded from the assessment of effectiveness are recognized in current earnings.

Interest rate swaps with notional amounts totaling $350.0 million as of both June 30, 2023, and December 31, 2022, were designated as cash flow hedges. Busey entered into one $50.0 million interest rate swap to hedge the risks of variability in cash flows for future interest payments attributable to changes in the contractually specified 3-month LIBOR benchmark interest rate on the Busey’s junior subordinated debt owed to unconsolidated trusts (Debt Swap). In addition, Busey entered into one $300.0 million receive fixed pay floating interest rate swap to reduce Busey’s asset sensitivity (Loan Swap). Duration was added to our loan portfolio by fixing a portion of floating prime based loans. Interest rates had risen above their historical lows allowing Busey to lock in a portion of its loan portfolio to reduce asset sensitivity while creating a more stable margin in a volatile rate market. These hedges were determined to be highly effective during the period, and Busey expects its hedges to remain highly effective during the remaining terms of the swaps. Changes in fair value were recorded net of tax in OCI.


		As of
	Location	June 30, 2023			December 31, 2022
Debt Swap
Notional amount		$	50,000		$	50,000
Weighted average fixed pay rates		1.79		%	1.79		%
Weighted average variable 3-month LIBOR receive rates		5.55		%	4.77		%
Weighted average maturity		1.21 years			1.71 years

Loan Swap
Notional amount		$	300,000		$	300,000
Weighted average fixed receive rates		4.81		%	4.81		%
Weighted average variable Prime pay rates		8.25		%	7.32		%
Weighted average maturity		5.61 years			6.10 years

Gross aggregate fair value of the swaps
Gross aggregate fair value of swap assets	Other assets	$	2,230		$	2,535
Gross aggregate fair value of swap liabilities	Other liabilities	32,505			32,367

Balances carried in AOCI
Unrealized gains (losses) on cash flow hedges, net of tax	AOCI	$	(21,153)		$	(20,985)

Busey expects to reclassify unrealized gains and losses from OCI to interest income and interest expense as shown in the following table, during the next 12 months (dollars in thousands). Amounts actually recognized could differ from these expectations due to changes in interest rates, hedge de-designations, and the addition of other hedges subsequent to June 30, 2023.


	As of June 30, 2023
Unrealized gains (losses) in OCI expected to be recognized in income
Unrealized losses expected to be reclassified from OCI to interest income	$	(859)
Unrealized gains expected to be reclassified from OCI to interest expense	481
Net unrealized gains (losses) in OCI expected to be recognized in net interest income	$	(378)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Interest on swap transactions
Increase (decrease) in interest income on swap transactions	$	(2,537)	$	668	$	(4,729)	$	1,353
(Increase) decrease in interest expense on swap transactions	404		(101)		787		(286)
Net increase (decrease) in net interest income on swap transactions	$	(2,133)	$	567	$	(3,942)	$	1,067

The following table reflects the net gains (losses) relating to cash flow derivative instruments that were recorded in AOCI and the unaudited Consolidated Statements of Income during the periods presented (dollars in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Unrealized gains (losses) on cash flow hedges
Net gain (loss) recognized in OCI, net of tax	$	(6,036)	$	(6,550)	$	(2,986)	$	(11,395)
(Gain) loss reclassified from OCI to interest income, net of tax	1,813		(479)		3,380		(968)
(Gain) loss reclassified from OCI to interest expense, net of tax	(288)		72		(562)		204
Net change in unrealized gains (losses) on cash flow hedges, net of tax	$	(4,511)	$	(6,957)	$	(168)	$	(12,159)

Busey may offer derivative contracts to its customers in connection with their risk management needs. Busey manages the risk associated with these contracts by entering into equal and offsetting derivative agreements with a third-party dealer. These contracts support variable rate, commercial loan relationships totaling $623.2 million as of June 30, 2023, and $576.9 million as of December 31, 2022. These derivatives generally work together as an economic interest rate hedge, but Busey did not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability are recorded as either a charge or credit to current earnings during the period in which the changes occurred.


	As of June 30, 2023
	Derivative Asset				Derivative Liability
	Notional Amount		Fair Value		Notional Amount		Fair Value
Derivatives not designated as hedging instruments
Interest rate swaps – pay floating, receive fixed	$	21,803	$	185	$	601,384	$	35,750
Interest rate swaps – pay fixed, receive floating	601,384		35,750		21,803		185
Total derivatives not designated as hedging instruments	$	623,187	$	35,935	$	623,187	$	35,935


	As of December 31, 2022
	Derivative Asset				Derivative Liability
	Notional Amount		Fair Value		Notional Amount		Fair Value
Derivatives not designated as hedging instruments
Interest rate swaps – pay floating, receive fixed	$	48,728	$	370	$	528,183	$	39,685
Interest rate swaps – pay fixed, receive floating	528,183		39,685		48,728		370
Total derivatives not designated as hedging instruments	$	576,911	$	40,055	$	576,911	$	40,055


		Three Months Ended June 30,				Six Months Ended June 30,
	Location	2023		2022		2023		2022
Interest rate swaps
Pay floating, receive fixed	Noninterest expense	$	3,306	$	7,025	$	(4,361)	$	3,475
Pay fixed, receive floating	Noninterest expense	(3,306)		(7,025)		4,361		(3,475)
Net change in fair value of interest rate swaps		$	—	$	—	$	—	$	—

To manage the credit risk exposure related to customer-facing swaps, Busey entered into risk participation agreements in conjunction with loan participation arrangements with other financial institutions. The risk participation agreements mature between 2026 and 2029, and are summarized as follows (dollars in thousands):

Busey entered into foreign currency exchange contracts to support the business requirements of its customers. Foreign currency contracts involve the exchange of one currency for another on a specified date and at a specified rate. These contracts are executed on behalf of the Busey's customers and are used by customers to manage fluctuations in foreign exchange rates. Busey minimizes its exposure by entering into similar offsetting positions with other financial institutions. Busey is subject to the credit risk that another party will fail to perform. Amounts and fair values of derivative assets and liabilities related to foreign currency contracts recorded in the Consolidated Balance Sheets are summarized as follows (dollars in thousands):


	As of June 30, 2023
	Derivative Asset				Derivative Liability
	Notional Amount		Fair Value		Notional Amount		Fair Value
Foreign currency forward contracts
Foreign currency exchange forward contract (Buy)	$	354	$	47	$	—	$	—
Foreign currency exchange forward contract (Sell)	—		—		344		(37)
Total foreign currency forward contracts	$	354	$	47	$	344	$	(37)

Interest rate lock commitments that meet the definition of derivative financial instruments under ASC Topic 815 “Derivatives and Hedging” are carried at their fair values in other assets or other liabilities in the Consolidated Balance Sheets, with changes in the fair values of the corresponding derivative financial assets or liabilities recorded as either a charge or credit to current earnings during the period in which the changes occurred.

Busey economically hedges mortgage loans held for sale and interest rate lock commitments issued to its residential loan customers related to loans that will be held for sale by obtaining corresponding forward sales commitments with an investor to sell the loans at an agreed-upon price at the time the interest rate locks are issued to the customers. Forward sales commitments that meet the definition of derivative financial instruments under ASC Topic 815 “Derivatives and Hedging” are carried at their fair values in other assets or other liabilities in the Consolidated Balance Sheets. While such forward sales commitments generally served as an economic hedge to mortgage loans held for sale and interest rate lock commitments, Busey did not designate them for hedge accounting treatment. Changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.


		As of June 30, 2023				As of December 31, 2022
	Location	Notional Amount		Fair Value		Notional Amount		Fair Value
Derivatives with positive fair value
Interest rate lock commitments	Other assets	$	1,553	$	10	$	1,517	$	16
Forward sales commitments	Other assets	1,274		16		83		1
Mortgage banking derivatives recorded in other assets		$	2,827	$	26	$	1,600	$	17

Derivatives with negative fair value
Interest rate lock commitments	Other liabilities	$	765	$	6	$	83	$	1
Forward sales commitments	Other liabilities	2,557		23		2,757		39
Mortgage banking derivatives recorded in other liabilities		$	3,322	$	29	$	2,840	$	40


		Three Months Ended June 30,				Six Months Ended June 30,
	Location	2023		2022		2023		2022
Net gains (losses)
Interest rate lock commitments	Mortgage revenue	$	(49)	$	134	$	(12)	$	149
Forward sales commitments	Mortgage revenue	86		(319)		32		(213)
Net gains (losses)		$	37	$	(185)	$	20	$	(64)