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DERIVATIVE FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 30, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS | NOTE 12. 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 13: 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
| September 30, 2024 |  | December 31, 2023
Cash pledged to secure obligations under derivative contracts | $ | 17,270 |  |  | $ | 34,210 |
Collateral held to secure obligations under derivative contracts | 9,380 |  |  | 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 $400.0 million as of September 30, 2024, and $350.0 million as of December 31, 2023, were designated as cash flow hedges. 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). During the three months ended September 30, 2024, one 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) matured. Changes in the fair value of these interest rate swaps 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 |  | September 30, 2024 |  | December 31, 2023
Debt Swap |  |  |  |  |
Notional amount |  |  | — |  |  | $ | 50,000 |
Weighted average rate: pay-fixed |  |  | — |  |  | 1.79 | %
Weighted average variable 3-month Fallback Rate (SOFR) receive rates |  |  | — |  |  | 5.61 | %
Weighted average maturity |  |  | — |  |  | 0.71 years
Prime Loan Swap |  |  |  |  |
Notional amount |  |  | $ | 300,000 |  |  | $ | 300,000 |
Weighted average rate: receive-fixed |  |  | 4.81 | % |  | 4.81 | %
Weighted average variable Prime pay rates |  |  | 8.25 | % |  | 8.50 | %
Weighted average maturity |  |  | 4.35 years |  | 5.10 years
SOFR Loan Swap |  |  |  |  |
Notional amount |  |  | $ | 100,000 |  |  | $ | — |
Weighted average rate: receive-fixed |  |  | 3.72 | % |  | — |
Weighted average maturity |  |  | 4.43 years |  | — |
Gross aggregate fair value of the swaps |  |  |  |  |
Gross aggregate fair value of swap assets | Other assets |  | $ | 2,332 |  |  | $ | 1,293 |
Gross aggregate fair value of swap liabilities | Other liabilities |  | 19,176 |  |  | 25,411 |
Balances carried in AOCI |  |  |  |  |
Unrealized gains (losses) on cash flow hedges, net of tax | AOCI |  | $ | (11,487) |  |  | $ | (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 September 30, 2024.
| As of September 30, 2024
Unrealized losses expected to be reclassified from OCI to interest income | $ | (859) |
Interest income and interest expense recorded on these swap transactions is presented in the following table (dollars in thousands):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
Interest on swap transactions |  |  |  |  |  |  |
Increase (decrease) in interest income on swap transactions | $ | (2,776) |  |  | $ | (2,771) |  |  | $ | (8,366) |  |  | $ | (7,500) |
(Increase) decrease in interest expense on swap transactions | 412 |  |  | 481 |  |  | 1,378 |  |  | 1,268 |
Net increase (decrease) in net interest income on swap transactions | $ | (2,364) |  |  | $ | (2,290) |  |  | $ | (6,988) |  |  | $ | (6,232) |
Net gains (losses) relating to cash flow derivative instruments that were recorded in OCI on the Consolidated Statements of Income (Unaudited) are presented in the table below (dollars in thousands):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
Unrealized gains (losses) on cash flow hedges |  |  |  |  |  |  |
Net gain (loss) recognized in OCI, net of tax | $ | 7,439 |  |  | $ | (5,577) |  |  | $ | 211 |  |  | $ | (8,563) |
(Gain) loss reclassified from OCI to interest income, net of tax | 1,984 |  |  | 1,982 |  |  | 5,981 |  |  | 5,362 |
(Gain) loss reclassified from OCI to interest expense, net of tax | (294) |  |  | (344) |  |  | (985) |  |  | (906) |
Net change in unrealized gains (losses) on cash flow hedges, net of tax | $ | 9,129 |  |  | $ | (3,939) |  |  | $ | 5,207 |  |  | $ | (4,107) |
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 $711.2 million as of September 30, 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 derivative liabilities related to customer interest rate swaps recorded on the Consolidated Balance Sheets (Unaudited), are summarized as follows (dollars in thousands):
|  |  | As of September 30, 2024 |  | As of December 31, 2023
| Location |  | Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
Derivative assets not designated as hedging instruments |  |  |  |  |  |  |  |  |
Interest rate swaps: receive-fixed, pay-floating | Other assets |  | $ | 333,545 |  |  | $ | 6,730 |  |  | $ | 177,883 |  |  | $ | 2,375 |
Interest rate swaps: receive-floating, pay-fixed | Other assets |  | 377,609 |  |  | 18,648 |  |  | 485,253 |  |  | 26,289 |
Derivative assets not designated as hedging instruments |  |  | $ | 711,154 |  |  | $ | 25,378 |  |  | $ | 663,136 |  |  | $ | 28,664 |
Derivative liabilities not designated as hedging instruments |  |  |  |  |  |  |  |  |
Interest rate swaps: receive-fixed, pay-floating | Other liabilities |  | $ | 377,609 |  |  | $ | 18,648 |  |  | $ | 485,253 |  |  | $ | 26,289 |
Interest rate swaps: receive-floating, pay-fixed | Other liabilities |  | 333,545 |  |  | 6,730 |  |  | 177,883 |  |  | 2,375 |
Derivative liabilities not designated as hedging instruments |  |  | $ | 711,154 |  |  | $ | 25,378 |  |  | $ | 663,136 |  |  | $ | 28,664 |
Changes in fair value of these derivative assets and liabilities are included in the Consolidate d Statements of Income (U naudited) and are summarized as follows (dollars in thousands):
|  |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
| Location |  | 2024 |  | 2023 |  | 2024 |  | 2023
Interest rate swaps |  |  |  |  |  |  |  |  |
Receive-fixed, pay-floating | Noninterest expense |  | $ | (9,224) |  |  | $ | 9,007 |  |  | $ | (3,050) |  |  | $ | 4,646 |
Receive-floating, pay-fixed | Noninterest expense |  | 9,224 |  |  | (9,007) |  |  | 3,050 |  |  | (4,646) |
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 credit risk participation, paying an up-front fee to a counterparty to accept a portion of its credit exposure, and will receive a payment from the counterparty if the swap customer defaults on its obligations. Busey also entered into a risk participation agreement under which Busey sold credit risk participation, receiving an up-front fee from a counterparty in exchange for accepting a portion of the counterparty’s credit exposure. This agreement matured on June 30, 2024. The swap customer did not default on its obligations, and Busey was not required to make a payment to the counterparty of the risk participation agreement. Notional amounts of the risk participation agreements reflect the participating banks’ pro-rata shares of the derivative instruments, consistent with their shares of the related participated loans. The risk participation agreements mature between August 2026 and January 2029, and are summarized as follows (dollars in thousands):
| As of
| September 30, 2024 |  | December 31, 2023
Risk participation agreements purchased |  |  |
Number of risk participation agreements | 6 |  |  | 3 |
Notional amount | $ | 41,110 |  |  | $ | 34,251 |
Fair value | 16 |  |  | 15 |
Risk participation agreements sold |  |  |
Number of risk participation agreements | — |  |  | 1 |
Notional amount | — |  |  | $ | 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 on 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 on 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 on the Consolidated Balance Sheets (Unaudited) are summarized as follows (dollars in thousands):
|  |  | As of September 30, 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 |  | $ | 4,666 |  |  | $ | 76 |  |  | $ | 3,477 |  |  | $ | 25 |
Forward sales commitments | Other assets |  | 3,887 |  |  | 9 |  |  | 1,761 |  |  | 11 |
Mortgage banking derivative assets |  |  | $ | 8,553 |  |  | $ | 85 |  |  | $ | 5,238 |  |  | $ | 36 |
Mortgage banking derivative liabilities |  |  |  |  |  |  |  |  |
Interest rate lock commitments | Other liabilities |  | $ | 309 |  |  | $ | 2 |  |  | $ | 1,615 |  |  | $ | 10 |
Forward sales commitments | Other liabilities |  | 10,430 |  |  | 80 |  |  | 5,216 |  |  | 47 |
Mortgage banking derivative liabilities |  |  | $ | 10,739 |  |  | $ | 82 |  |  | $ | 6,831 |  |  | $ | 57 |
Gains and losses relating to these derivative instruments are reported in noninterest income, and are summarized as follows for the periods presented (dollars in thousands):
|  |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  |  | 2024 |  | 2023 |  | 2024 |  | 2023
Net gains (losses) on mortgage banking derivatives |  |  |  |  |  |  |  |  |
Gains (losses) on interest rate lock commitments |  |  | $ | 121 |  |  | $ | (16) |  |  | $ | 569 |  |  | $ | (28) |
Gains (losses) on forward sales commitments |  |  | (91) |  |  | 60 |  |  | (165) |  |  | 92 |
Net gains (losses) on mortgage banking derivatives |  |  | $ | 30 |  |  | $ | 44 |  |  | $ | 404 |  |  | $ | 64 |

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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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