XML 54 R24.htm IDEA: XBRL DOCUMENT
v3.22.4

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | 12 Months Ended
--- | ---
Dec. 31, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES At year-end 2022, the Company held derivatives with a total notional amount of $4.5 billion. That amount included $0.6 billion in interest rate swap derivatives and $0.2 billion in interest rate collars that were designated as cash flow hedges for accounting purposes. The Company had economic hedges and non-hedging derivatives totaling $3.7 billion and $4.1 million, respectively, which are not designated as hedges for accounting purposes and are therefore recorded at fair value with changes in fair value recorded directly through earnings. Economic hedges included interest rate swaps totaling $3.4 billion, risk participation agreements with dealer banks of $341.9 million, and $0.9 million in forward commitment contracts. As part of the Company’s risk management strategy, the Company enters into interest rate swap agreements to mitigate the interest rate risk inherent in certain of the Company’s assets and liabilities. Interest rate swap agreements involve the risk of dealing with both Bank customers and institutional derivative counterparties and their ability to meet contractual terms. The agreements are entered into with counterparties that meet established credit standards and contain master netting and collateral provisions protecting the at-risk party. The derivatives program is overseen by the Risk Management, Capital and Compliance Committee of the Company’s Board of Directors. Based on adherence to the Company’s credit standards and the presence of the netting and collateral provisions, the Company believes that the credit risk inherent in these contracts was not significant at December 31, 2022. The Company had no pledged collateral to derivative counterparties in the form of cash at year-end 2022. The Company had pledged securities to derivative counterparties with an amortized cost of $12.0 million and a fair value of $12.0 million at year-end 2022. At December 31, 2021, the Company pledged cash collateral of $43.7 million and securities with an amortized cost of $34.8 million and a fair value of $34.9 million. The Company does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back economic hedges. However certain language is written into the International Swaps Dealers Association, Inc. (“ISDA”) and loan documents where, in default situations, the Bank is allowed to access collateral supporting the loan relationship to recover any losses suffered on the derivative asset or liability. The Company may need to post additional collateral in the future in proportion to potential increases in unrealized loss positions. Information about interest rate swap agreements and non-hedging derivative assets and liabilities at December 31, 2022 follows:
|  | Notional Amount |  | Weighted Average Maturity |  | Weighted Average Rate |  | Estimated Fair Value Asset (Liability)
December 31, 2022 |  |  |  | Received |  | Contract pay rate |
|  | (In thousands) |  | (In years) |  |  |  |  |  | (In thousands)
Cash flow hedges: |  |  |  |  |  |  |  |  |  |
Interest rate swaps on commercial loans (1) |  | $ | 400,000 |  |  | 2.7 |  | 4.09 | % |  | 3.51 | % |  | $ | — |
Forward-starting interest rate swaps on commercial loans (1) |  | 200,000 |  |  | 3.3 |  | — | % |  | 3.90 | % |  | — |
Interest rate collars on commercial loans |  | 200,000 |  |  | 3.5 |  |  |  |  |  | 1,937 |
Total cash flow hedges |  | 800,000 |  |  |  |  |  |  |  |  | 1,937 |
Economic hedges: |  |  |  |  |  |  |  |  |  |
Interest rate swap on tax advantaged economic development bond |  | $ | 7,062 |  |  | 6.9 |  | 4.49 | % |  | 5.09 | % |  | $ | (193) |
Interest rate swaps on loans with commercial loan customers (1) |  | 1,685,263 |  |  | 5.7 |  | 4.11 | % |  | 5.55 | % |  | (95,114) |
Reverse interest rate swaps on loans with commercial loan customers (1) |  | 1,685,263 |  |  | 5.7 |  | 5.55 | % |  | 4.11 | % |  | 50,267 |
Risk participation agreements with dealer banks |  | 341,885 |  |  | 6.6 |  |  |  |  |  | (89) |
Forward sale commitments |  | 927 |  |  | 0.2 |  |  |  |  |  | 8 |
Total economic hedges |  | 3,720,400 |  |  |  |  |  |  |  |  | (45,121) |
Non-hedging derivatives: |  |  |  |  |  |  |  |  |  |
Commitments to lend |  | 4,114 |  |  | 0.2 |  |  |  |  |  | 17 |
Total non-hedging derivatives |  | 4,114 |  |  |  |  |  |  |  |  | 17 |
Total |  | $ | 4,524,514 |  |  |  |  |  |  |  |  | $ | (43,167) |
(1) Fair value estimates include the impact of $38.3 million settled to market contract agreements. Information about interest rate swap agreements and non-hedging derivative asset and liabilities at December 31, 2021 follows:
|  | Notional Amount |  | Weighted Average Maturity |  | Weighted Average Rate |  | Estimated Fair Value Asset (Liability)
December 31, 2021 |  |  |  | Received |  | Contract pay rate |
|  | (In thousands) |  | (In years) |  |  |  |  |  | (In thousands)
Economic hedges: |  |  |  |  |  |  |  |  |  |
Interest rate swap on tax advantaged economic development bond |  | $ | 7,879 |  |  | 7.9 |  | 0.47 | % |  | 5.09 | % |  | $ | (1,158) |
Interest rate swaps on loans with commercial loan customers |  | 1,684,238 |  |  | 5.8 |  | 3.99 | % |  | 1.91 | % |  | 74,348 |
Reverse interest rate swaps on loans with commercial loan customers (1) |  | 1,684,238 |  |  | 5.8 |  | 1.91 | % |  | 3.99 | % |  | (30,454) |
Risk participation agreements with dealer banks |  | 320,981 |  |  | 5.8 |  |  |  |  |  | 432 |
Forward sale commitments |  | 6,377 |  |  | 0.2 |  |  |  |  |  | 134 |
Total economic hedges |  | 3,703,713 |  |  |  |  |  |  |  |  | 43,302 |
Non-hedging derivatives: |  |  |  |  |  |  |  |  |  |
Commitments to lend |  | 8,192 |  |  | 0.2 |  |  |  |  |  | 124 |
Total non-hedging derivatives |  | 8,192 |  |  |  |  |  |  |  |  | 124 |
Total |  | $ | 3,711,905 |  |  |  |  |  |  |  |  | $ | 43,426 |
(1) Fair value estimates include the impact of $45.7 million settled to market contract agreements. Cash flow hedges The effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges is reported in other comprehensive (loss)/income and subsequently reclassified to earnings in the same period or periods during which the hedged transaction is forecasted to affect earnings. Each quarter, the Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The ineffective portion of changes in the fair value of the derivatives is recognized directly in earnings. All cash flow hedges are considered highly effective. The Company has designated its interest rate collars as cash flow hedges. The structure of these instruments is such that the Company pays the counterparty an incremental amount if the collar index exceeds the cap rate. Conversely, the Company receives an incremental amount if the index falls below the floor rate. No payments are required if the collar index falls between the cap and floor rates. As of December 31, 2022, the Company had six interest rate swap contracts and two forward-starting interest rate swap contracts with a combined notional value of $600.0 million. The two forward starting swaps will become effective in 2023. The interest rate swaps have durations of two to four years. This hedge strategy converts commercial variable rate loans to fixed interest rates, thereby protecting the Company from floating interest rate variability. In December 2022, the Company entered into two interest rate collars. The first interest rate collar has a 3.00% floor and a 5.75% cap with a notional value of $100.0 million. The second interest rate collar has a 3.25% floor and a 5.75% cap with a notional value of $100.0 million. The interest rate collars have durations of three to four years. The structure of these instruments is such that the Company pays the counterparty an incremental amount if the collar index exceeds the cap rate. Conversely, the Company receives an incremental amount if the index falls below the floor rate. No payments are required if the collar index falls between the cap and floor rates. Amounts included in the Consolidated Statements of Operations and in the other comprehensive (loss)/income section of the Consolidated Statements of Comprehensive (Loss)/Income (related to interest rate derivatives designated as hedges of cash flows), were as follows:
| Years Ended December 31,
(In thousands) | 2022 |  | 2021 |  | 2020
Interest rate swaps and collars on commercial loans: |  |  |  |  |
Unrealized (loss) recognized in accumulated other comprehensive loss | $ | (6,667) |  |  | $ | — |  |  | $ | — |
Less: Reclassification of unrealized (loss) from accumulated other comprehensive loss to interest expense | — |  |  | — |  |  | — |
Net tax benefit on items recognized in accumulated other comprehensive income | 1,789 |  |  | — |  |  | — |
Other comprehensive loss recorded in accumulated other comprehensive (loss)/income, net of reclassification adjustments and tax effects | $ | (4,878) |  |  | $ | — |  |  | $ | — |
Net interest expense recognized in interest expense on hedged commercial loans | $ | (15) |  |  | $ | — |  |  | $ | — |
Economic hedges As of December 31, 2022 the Company has an interest rate swap with a $7.1 million notional amount to swap out the fixed rate of interest on an economic development bond bearing a fixed rate of 5.09%, currently within the Company’s trading portfolio under the fair value option, in exchange for a LIBOR-based floating rate. The intent of the economic hedge is to improve the Company’s asset sensitivity to changing interest rates in anticipation of favorable average floating rates of interest over the 21-year life of the bond. The fair value changes of the economic development bond are mostly offset by fair value changes of the related interest rate swap. The Company also offers certain derivative products directly to qualified commercial borrowers. The Company economically hedges derivative transactions executed with commercial borrowers by entering into mirror-image, offsetting derivatives with third-party financial institutions. The transaction allows the Company’s customer to convert a variable-rate loan to a fixed rate loan. Because the Company acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts mostly offset each other in earnings. There was no credit valuation loss adjustment arising from the difference in credit worthiness of the commercial loan and financial institution counterparties as of December 31, 2022. The interest income and expense on these mirror image swaps exactly offset each other. The Company has risk participation agreements with dealer banks. Risk participation agreements occur when the Company participates on a loan and a swap where another bank is the lead. The Company earns a fee to take on the risk associated with having to make the lead bank whole on Berkshire’s portion of the pro-rated swap should the borrower default. The Company utilizes forward sale commitments to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans held for sale. The forward sale commitments are accounted for as derivatives with changes in fair value recorded in current period earnings. The company uses the following types of forward sale commitments contracts: •Best efforts loan sales, •Mandatory delivery loan sales, and •To be announced (TBA) mortgage-backed securities sales. A best efforts contract refers to a loan sales agreement where the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. The Company may enter into a best efforts contract once the price is known, which is shortly after the potential borrower’s interest rate is locked. A mandatory delivery contract is a loan sales agreement where the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, the Company may enter into mandatory delivery contracts shortly after the loan closes with a customer. The Company may sell to-be-announced mortgage-backed securities to hedge the changes in fair value of interest rate lock commitments and held for sale loans, which do not have corresponding best efforts or mandatory delivery contracts. These security sales transactions are closed once mandatory contracts are written. On the closing date the price of the security is locked-in, and the sale is paired-off with a purchase of the same security. Settlement of the security purchase/sale transaction is done with cash on a net-basis. Non-hedging derivatives The Company enters into commitments to lend for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. Commitments that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding commitments expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The commitments are free-standing derivatives which are carried at fair value with changes recorded in non-interest income in the Company’s Consolidated Statements of Operations. Changes in the fair value of commitments subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time. Amounts included in the Consolidated Statements of Operations related to economic hedges and non-hedging derivatives were as follows:
|  | Years Ended December 31,
(In thousands) |  | 2022 |  | 2021 |  | 2020
Economic hedges |  |  |  |  |  |
Interest rate swap on industrial revenue bond: |  |  |  |  |  |
Unrealized gain/(loss) recognized in other non-interest income |  | $ | 941 |  |  | $ | 619 |  |  | $ | (289) |
Interest rate swaps on loans with commercial loan customers: |  |  |  |  |  |
Unrealized (loss)/gain recognized in other non-interest income |  | (171,272) |  |  | (86,099) |  |  | 85,206 |
Favorable/(unfavorable) change in credit valuation adjustment recognized in other non-interest income |  | 1,809 |  |  | 1,431 |  |  | (1,516) |
Reverse interest rate swaps on loans with commercial loan customers: |  |  |  |  |  |
Unrealized gain/(loss) recognized in other non-interest income |  | 171,272 |  |  | 86,099 |  |  | (85,206) |
Risk Participation Agreements: |  |  |  |  |  |
Unrealized (loss)/gain recognized in other non-interest income |  | (521) |  |  | (233) |  |  | 345 |
Forward Commitments: |  |  |  |  |  |
Unrealized (loss)/gain recognized in other non-interest income |  | (126) |  |  | (186) |  |  | — |
Unrealized (loss)/gain recognized in discontinued operations |  | — |  |  | — |  |  | 547 |
Realized (loss) in discontinued operations |  | — |  |  | — |  |  | (8,205) |
Non-hedging derivatives |  |  |  |  |  |
Commitments to lend: |  |  |  |  |  |
Unrealized (loss) recognized in other non-interest income |  | $ | (107) |  |  | $ | (611) |  |  | $ | — |
Unrealized (loss) recognized in discontinued operations |  | — |  |  | — |  |  | (1,893) |
Realized gain in other non-interest income |  | 462 |  |  | 2,854 |  |  | — |
Realized gain in discontinued operations |  | — |  |  | — |  |  | 15,672 |
Assets and Liabilities Subject to Enforceable Master Netting Arrangements Interest Rate Swap Agreements (“Swap Agreements”) The Company enters into swap agreements to facilitate the risk management strategies for commercial banking customers. The Company mitigates this risk by entering into equal and offsetting swap agreements with highly rated third party financial institutions. The swap agreements are free-standing derivatives and are recorded at fair value in the Company’s Consolidated Balance Sheets. The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral generally in the form of marketable securities is received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds. The Company had net asset positions with its financial institution counterparties totaling $51.2 million and $2.2 million as of December 31, 2022 and December 31, 2021, respectively. The Company had net asset positions with its commercial banking counterparties totaling $1.0 million and $76.8 million as of December 31, 2022 and December 31, 2021, respectively. The Company had net liability positions with its financial institution counterparties totaling $1.2 million and $33.3 million as of December 31, 2022 and December 31, 2021, respectively. The Company had net liability positions with its commercial banking counterparties totaling $96.1 million and $2.5 million as of December 31, 2022 and December 31, 2021, respectively. The Company has collateral pledged to cover this liability. The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of December 31, 2022 and December 31, 2021: Offsetting of Financial Assets and Derivative Assets
|  | Gross Amounts of Recognized Assets |  | Gross Amounts Offset in the Statements of Condition |  | Net Amounts of Assets Presented in the Statements of Condition |  | Gross Amounts Not Offset in the Statements of Condition |  |
|  |  |  |  | Financial Instruments |  | Cash Collateral Received |  |
(in thousands) |  |  |  |  |  |  | Net Amount
As of December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swap Agreements:
Institutional counterparties |  | $ | 96,295 |  |  | $ | (45,046) |  |  | $ | 51,249 |  |  | $ | — |  |  | $ | — |  |  | $ | 51,249 |
Commercial counterparties |  | 975 |  |  | — |  |  | 975 |  |  | — |  |  | — |  |  | 975 |
Total |  | $ | 97,270 |  |  | $ | (45,046) |  |  | $ | 52,224 |  |  | $ | — |  |  | $ | — |  |  | $ | 52,224 |
Offsetting of Financial Liabilities and Derivative Liabilities
|  | Gross Amounts of Recognized Liabilities |  | Gross Amounts Offset in the Statements of Condition |  | Net Amounts of Liabilities Presented in the Statement of Condition |  | Gross Amounts Not Offset in the Statements of Condition |  |
|  |  |  |  | Financial Instruments |  | Cash Collateral Received |  |
(in thousands) |  |  |  |  |  |  | Net Amount
As of December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swap Agreements:
Institutional counterparties |  | $ | (1,271) |  |  | $ | 36 |  |  | $ | (1,235) |  |  | $ | 11,973 |  |  | $ | — |  |  | $ | 10,738 |
Commercial counterparties |  | (102,595) |  |  | 6,507 |  |  | (96,088) |  |  | — |  |  | — |  |  | (96,088) |
Total |  | $ | (103,866) |  |  | $ | 6,543 |  |  | $ | (97,323) |  |  | $ | 11,973 |  |  | $ | — |  |  | $ | (85,350) |
Offsetting of Financial Assets and Derivative Assets
|  | Gross Amounts of Recognized Assets |  | Gross Amounts Offset in the Statements of Condition |  | Net Amounts of Assets Presented in the Statements of Condition |  | Gross Amounts Not Offset in the Statements of Condition |  |
|  |  |  |  | Financial Instruments |  | Cash Collateral Received |  |
(in thousands) |  |  |  |  |  |  | Net Amount
As of December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swap Agreements:
Institutional counterparties |  | $ | 2,223 |  |  | $ | (75) |  |  | $ | 2,148 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,148 |
Commercial counterparties |  | 76,809 |  |  | — |  |  | 76,809 |  |  | — |  |  | — |  |  | 76,809 |
Total |  | $ | 79,032 |  |  | $ | (75) |  |  | $ | 78,957 |  |  | $ | — |  |  | $ | — |  |  | $ | 78,957 |
Offsetting of Financial Liabilities and Derivative Liabilities
|  | Gross Amounts of Recognized Liabilities |  | Gross Amounts Offset in the Statements of Condition |  | Net Amounts of Liabilities Presented in the Statement of Condition |  | Gross Amounts Not Offset in the Statements of Condition |  |
|  |  |  |  | Financial Instruments | Cash Collateral Received |  |
(in thousands) |  |  |  |  |  | Net Amount
As of December 31, 2021 |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swap Agreements:
Institutional counterparties |  | $ | (78,146) |  |  | $ | 44,814 |  |  | $ | (33,332) |  |  | $ | 34,896 |  | $ | 43,694 |  |  | $ | 45,258 |
Commercial counterparties |  | (2,461) |  |  | — |  |  | (2,461) |  |  | — |  | — |  |  | (2,461) |
Total |  | $ | (80,607) |  |  | $ | 44,814 |  |  | $ | (35,793) |  |  | $ | 34,896 |  | $ | 43,694 |  |  | $ | 42,797 |

X
- References No definition available. + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- 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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI https://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008 + Details
Name: | us-gaap_DerivativeInstrumentsAndHedgingActivitiesDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration