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.

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 $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.


		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)


	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)


	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

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.


	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

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.

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	—		—

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.

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.


		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