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DERIVATIVE FINANCIAL INSTRUMENTS | 3 Months Ended
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Mar. 31, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS | DERIVATIVE FINANCIAL INSTRUMENTS Busey utilizes interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. Additionally, Busey enters into derivative financial instruments, including interest rate lock commitments issued to residential loan customers for loans that will be held for sale; forward sales commitments to sell residential mortgage loans to investors; and interest rate swaps, risk participation agreements, and foreign currency exchange contracts with customers and other third parties. See “Note 12: Fair Value Measurements” for further discussion of the fair value measurement of such derivatives. To secure its obligations under derivative contracts, Busey pledged cash and held collateral as follows (dollars in thousands):
| As of
| March 31, 2024 |  | December 31, 2023
Cash pledged to secure obligations under derivative contracts | $ | 34,210 |  |  | $ | 34,210 |
Collateral held to secure obligations under derivative contracts | 24,860 |  |  | 19,280 |
Derivative Instruments Designated as Hedges 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 Designated as Cash Flow Hedges Interest rate swaps with notional amounts totaling $450.0 million as of March 31, 2024, and $350.0 million as of December 31, 2023, 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 3-month CME Term SOFR benchmark interest rate on 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 (Prime 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. Further, in 2024 Busey entered into one $100.0 million one year forward-starting SOFR-based receive-fixed pay-floating interest rate swap, with an effective date of March 5, 2025, to reduce Busey’s asset sensitivity (SOFR Loan Swap). Changes in fair value were recorded net of tax in OCI. A summary of the interest-rate swaps designated as cash flow hedges is presented below (dollars in thousands):
|  |  | As of
| Location |  | March 31, 2024 |  | December 31, 2023
Debt Swap |  |  |  |  |
Notional amount |  |  | $ | 50,000 |  |  | $ | 50,000 |
Weighted average fixed pay rates |  |  | 1.79 | % |  | 1.79 | %
Weighted average variable 3-month Fallback Rate (SOFR) receive rates |  |  | 5.62 | % |  | 5.61 | %
Weighted average maturity |  |  | 0.46 years |  | 0.71 years
Prime Loan Swap |  |  |  |  |
Notional amount |  |  | $ | 300,000 |  |  | $ | 300,000 |
Weighted average fixed receive rates |  |  | 4.81 | % |  | 4.81 | %
Weighted average variable Prime pay rates |  |  | 8.50 | % |  | 8.50 | %
Weighted average maturity |  |  | 4.85 years |  | 5.10 years
SOFR Loan Swap |  |  |  |  |
Notional amount |  |  | $ | 100,000 |  |  | $ | — |
Weighted average fixed receive rates |  |  | 3.72 | % |  | — |
Weighted average maturity |  |  | 4.93 years |  | — |
Gross aggregate fair value of the swaps |  |  |  |  |
Gross aggregate fair value of swap assets | Other assets |  | $ | 1,178 |  |  | $ | 1,293 |
Gross aggregate fair value of swap liabilities | Other liabilities |  | 30,303 |  |  | 25,411 |
Balances carried in AOCI |  |  |  |  |
Unrealized gains (losses) on cash flow hedges, net of tax | AOCI |  | $ | (20,272) |  |  | $ | (16,694) |
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 March 31, 2024.
| As of March 31, 2024
Unrealized gains (losses) in OCI expected to be recognized in income |
Unrealized losses expected to be reclassified from OCI to interest income | $ | (952) |
Unrealized gains expected to be reclassified from OCI to interest expense | 483 |
Net unrealized gains (losses) in OCI expected to be recognized in net interest income | $ | (469) |
Interest expense recorded on these swap transactions was as follows for the periods presented (dollars in thousands):
|  |  | Three Months Ended March 31,
|  |  |  |  | 2024 |  | 2023
Interest on swap transactions |  |  |  |  |  |  |
Increase (decrease) in interest income on swap transactions |  |  |  |  | $ | (2,796) |  |  | $ | (2,192) |
(Increase) decrease in interest expense on swap transactions |  |  |  |  | 483 |  |  | 383 |
Net increase (decrease) in net interest income on swap transactions |  |  |  |  | $ | (2,313) |  |  | $ | (1,809) |
The following table reflects the net gains (losses) relating to cash flow derivative instruments that were recorded in AOCI and the Consolidated Statements of Income (Unaudited) during the periods presented (dollars in thousands):
|  |  | Three Months Ended March 31,
|  |  |  |  | 2024 |  | 2023
Unrealized gains (losses) on cash flow hedges |  |  |  |  |  |  |
Net gain (loss) recognized in OCI, net of tax |  |  |  |  | $ | (5,232) |  |  | $ | 3,050 |
(Gain) loss reclassified from OCI to interest income, net of tax |  |  |  |  | 1,999 |  |  | 1,567 |
(Gain) loss reclassified from OCI to interest expense, net of tax |  |  |  |  | (345) |  |  | (274) |
Net change in unrealized gains (losses) on cash flow hedges, net of tax |  |  |  |  | $ | (3,578) |  |  | $ | 4,343 |
Derivative Instruments Not Designated as Hedges Interest Rate Swaps Not Designated as Hedges 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 third-party dealers. These contracts supported variable rate, commercial loan relationships totaling $678.3 million as of March 31, 2024, and $663.1 million as of December 31, 2023. These derivatives generally worked 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 were recorded as either a charge or credit to current earnings during the period in which the changes occurred. Amounts and fair values of derivative assets and liabilities related to customer interest rate swaps recorded in the Consolidated Balance Sheets (Unaudited) are summarized as follows (dollars in thousands):
| As of March 31, 2024
| 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 | $ | 71,472 |  |  | $ | 868 |  |  | $ | 606,862 |  |  | $ | 33,552 |
Interest rate swaps – pay fixed, receive floating | 606,862 |  |  | 33,552 |  |  | 71,472 |  |  | 868 |
Total derivatives not designated as hedging instruments | $ | 678,334 |  |  | $ | 34,420 |  |  | $ | 678,334 |  |  | $ | 34,420 |
| As of December 31, 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 | $ | 177,883 |  |  | $ | 2,375 |  |  | $ | 485,253 |  |  | $ | 26,289 |
Interest rate swaps – pay fixed, receive floating | 485,253 |  |  | 26,289 |  |  | 177,883 |  |  | 2,375 |
Total derivatives not designated as hedging instruments | $ | 663,136 |  |  | $ | 28,664 |  |  | $ | 663,136 |  |  | $ | 28,664 |
Changes in fair value of these derivative assets and liabilities were recorded in noninterest expense in the Consolidated Statements of Income (Unaudited) and are summarized as follows (dollars in thousands):
|  |  |  |  | Three Months Ended March 31,
| Location |  |  |  |  |  | 2024 |  | 2023
Interest rate swaps |  |  |  |  |  |  |  |  |
Pay floating, receive fixed | Noninterest expense |  |  |  |  |  | $ | 5,480 |  |  | $ | (7,667) |
Pay fixed, receive floating | Noninterest expense |  |  |  |  |  | (5,480) |  |  | 7,667 |
Net change in fair value of interest rate swaps |  |  |  |  |  |  | $ | — |  |  | $ | — |
Risk Participation Agreements 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. Under these risk participation agreements, Busey purchased a portion of the credit exposure, paying an up-front fee, and will receive a payment from the counterparty if the loan customer defaults on its obligations. Busey also entered into a risk participation agreement under which Busey sold a portion of its credit exposure, receiving an up-front fee, and will be required to make a payment to the counterparty if the loan customer defaults on its obligations. The notional amount of the risk participation agreements reflect Busey's pro-rata share of the derivative instrument, consistent with its share of the related participated loan. The risk participation agreements mature between June 2024 and January 2029, and are summarized as follows (dollars in thousands):
| As of
| March 31, 2024 |  | December 31, 2023
Risk participation agreements purchased |  |  |
Number of risk participation agreements | 4 |  |  | 3 |
Notional amount | $ | 35,097 |  |  | $ | 34,251 |
Fair value | 9 |  |  | 15 |
Risk participation agreements sold |  |  |
Number of risk participation agreements | 1 |  |  | 1 |
Notional amount | $ | 20,001 |  |  | 20,001 |
Fair value | — |  |  | — |
Mortgage Banking Derivatives Interest Rate Lock Commitments 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 (Unaudited), 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. Forward Sales Commitments 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 (Unaudited). 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. Amounts and fair values of mortgage banking derivatives included in the Consolidated Balance Sheets (Unaudited) are summarized as follows (dollars in thousands):
|  |  | As of March 31, 2024 |  | As of December 31, 2023
| Location |  | Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
Mortgage banking derivative assets |  |  |  |  |  |  |  |  |
Interest rate lock commitments | Other assets |  | $ | 9,123 |  |  | $ | 133 |  |  | $ | 3,477 |  |  | $ | 25 |
Forward sales commitments | Other assets |  | 2,772 |  |  | 9 |  |  | 1,761 |  |  | 11 |
Mortgage banking derivative assets |  |  | $ | 11,895 |  |  | $ | 142 |  |  | $ | 5,238 |  |  | $ | 36 |
Mortgage banking derivative liabilities |  |  |  |  |  |  |  |  |
Interest rate lock commitments | Other liabilities |  | $ | 268 |  |  | $ | 3 |  |  | $ | 1,615 |  |  | $ | 10 |
Forward sales commitments | Other liabilities |  | 6,619 |  |  | 51 |  |  | 5,216 |  |  | 47 |
Mortgage banking derivative liabilities |  |  | $ | 6,887 |  |  | $ | 54 |  |  | $ | 6,831 |  |  | $ | 57 |
Gains (losses) relating to these derivative instruments are summarized as follows for the periods presented (dollars in thousands):
|  |  |  |  | Three Months Ended March 31,
| Location |  |  |  |  |  | 2024 |  | 2023
Gains (losses) |  |  |  |  |  |  |  |  |
Interest rate lock commitments | Mortgage revenue |  |  |  |  |  | $ | 267 |  |  | $ | 37 |
Forward sales commitments | Mortgage revenue |  |  |  |  |  | 9 |  |  | (54) |
Interest rate lock commitments | Other expense |  |  |  |  |  | 5 |  |  | — |
Forward sales commitments | Other expense |  |  |  |  |  | 51 |  |  | — |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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