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DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES | 9 Months Ended
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Sep. 30, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES | DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES As of September 30, 2024, the Company held derivatives with a total notional amount of $4.8 billion. That amount included $0.8 billion in interest rate swap derivatives that were designated as cash flow hedges for accounting purposes. The Company also had economic hedges totaling $4.0 billion and $24.2 million non-hedging derivatives, which are not designated as hedges for accounting purposes with changes in fair value recorded directly through earnings. Economic hedges included interest rate swaps totaling $3.6 billion, risk participation agreements with dealer banks of $0.3 billion, and $5.5 million in forward commitment contracts. As of December 31, 2023, the Company held derivatives with a total notional amount of $4.8 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 $4.0 billion and $11.1 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 $3.6 billion, risk participation agreements with dealer banks of $376.6 million, and $2.2 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 and Capital 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 September 30, 2024. The Company had no pledged collateral to derivative counterparties in the form of cash as of September 30, 2024. The Company had pledged securities to derivative counterparties with an amortized cost of $9.6 million and a fair value of $9.2 million as of September 30, 2024. 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 derivative assets and liabilities at September 30, 2024, follows:
|  |  | Weighted |  | Weighted Average Rate |  | Estimated
| Notional |  | Average |  |  |  | Contract |  | Fair Value
| Amount |  | Maturity |  | Received |  | pay rate |  | Asset (Liability)
| (In thousands) |  | (In years) |  |  |  |  |  | (In thousands)
Cash flow hedges: |  |  |  |  |  |  |  |  |
Interest rate swaps on commercial loans (1) | $ | 600,000 |  |  | 1.1 |  | 3.64 | % |  | 5.15 | % |  | $ | 1,015 |
Interest rate collars on commercial loans | 200,000 |  |  | 1.8 |  |  |  |  |  | 1,116 |
Total cash flow hedges | 800,000 |  |  |  |  |  |  |  |  | 2,131 |
Economic hedges: |  |  |  |  |  |  |  |  |
Interest rate swap on tax advantaged economic development bond | $ | 5,528 |  |  | 5.2 |  | 5.70 | % |  | 5.09 | % |  | $ | (185) |
Interest rate swaps on loans with commercial loan customers | 1,802,749 |  |  | 4.6 |  | 4.60 | % |  | 6.10 | % |  | (29,675) |
Offsetting interest rate swaps on loans with commercial loan customers (1) | 1,802,749 |  |  | 4.6 |  | 6.10 | % |  | 4.60 | % |  | 8,595 |
Risk participation agreements with dealer banks | 343,673 |  |  | 5.3 |  |  |  |  |  | 247 |
Forward sale commitments | 5,536 |  |  | 0.2 |  |  |  |  |  | 52 |
Total economic hedges | 3,960,235 |  |  |  |  |  |  |  |  | (20,966) |
Non-hedging derivatives: |  |  |  |  |  |  |  |  |
Commitments to lend | 24,185 |  |  | 0.2 |  |  |  |  |  | 165 |
Total non-hedging derivatives | 24,185 |  |  |  |  |  |  |  |  | 165 |
Total | $ | 4,784,420 |  |  |  |  |  |  |  |  | $ | (18,670) |
(1) Fair value estimates included the impact of $19.4 million settled to market contract agreements. Information about derivative assets and liabilities at December 31, 2023, follows:
|  |  | Weighted |  | Weighted Average Rate |  | Estimated
| Notional |  | Average |  |  |  | Contract |  | Fair Value
| Amount |  | Maturity |  | Received |  | pay rate |  | Asset (Liability)
| (In thousands) |  | (In years) |  |  |  |  |  | (In thousands)
Cash flow hedges: |  |  |  |  |  |  |  |  |
Interest rate swaps on commercial loans | $ | 600,000 |  |  | 1.9 |  | 3.64 | % |  | 5.35 | % |  | $ | — |
Interest rate collars on commercial loans | 200,000 |  |  | 2.5 |  |  |  |  |  | 1,658 |
| 800,000 |  |  |  |  |  |  |  |  | 1,658 |
Economic hedges: |  |  |  |  |  |  |  |  |
Interest rate swap on tax advantaged economic development bond | $ | 6,202 |  |  | 5.9 |  | 5.82 | % |  | 5.09 | % |  | $ | (172) |
Interest rate swaps on loans with commercial loan customers | 1,795,562 |  |  | 4.9 |  | 4.36 | % |  | 6.27 | % |  | (63,865) |
Offsetting interest rate swaps on loans with commercial loan customers (1) | 1,795,562 |  |  | 4.9 |  | 6.27 | % |  | 4.36 | % |  | 32,053 |
Risk participation agreements with dealer banks | 376,553 |  |  | 5.5 |  |  |  |  |  | (18) |
Forward sale commitments | 2,207 |  |  | 0.2 |  |  |  |  |  | 21 |
Total economic hedges | 3,976,086 |  |  |  |  |  |  |  |  | (31,981) |
Non-hedging derivatives: |  |  |  |  |  |  |  |  |
Commitments to lend | 11,104 |  |  | 0.2 |  |  |  |  |  | 34 |
Total non-hedging derivatives | 11,104 |  |  |  |  |  |  |  |  | 34 |
Total | $ | 4,787,190 |  |  |  |  |  |  |  |  | $ | (30,289) |
(1) Fair value estimates included the impact of $26.7 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 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. As of September 30, 2024, the Company had eight interest rate swap contracts with a notional value of $600.0 million. The interest rate swaps have durations of one to two years. This hedge strategy converts commercial variable rate loans to fixed interest rates, thereby protecting the Company from floating interest rate variability. As of September 30, 2024, the Company had 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 one to two 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 Income and in the other comprehensive income section of the Consolidated Statements of Comprehensive Income/(Loss) (related to interest rate derivatives designated as hedges of cash flows), were as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(In thousands) | 2024 |  | 2023 |  | 2024 |  | 2023
Interest rate swaps on commercial loans: |  |  |  |  |  |  |
Unrealized gain/(loss) recognized in accumulated other comprehensive loss | $ | 9,190 |  |  | $ | (3,118) |  |  | $ | 3,776 |  |  | $ | (9,545) |
Less: Reclassification of unrealized (loss) from accumulated other comprehensive loss to interest expense | (159) |  |  | (159) |  |  | (473) |  |  | (473) |
Net tax benefit on items recognized in accumulated other comprehensive income | (2,542) |  |  | 794 |  |  | (1,155) |  |  | 2,435 |
Other comprehensive gain/(loss) recorded in accumulated other comprehensive income, net of reclassification adjustments and tax effects | $ | 6,807 |  |  | $ | (2,165) |  |  | $ | 3,094 |  |  | $ | (6,637) |
Net interest expense recognized on hedged commercial loans | $ | 2,687 |  |  | $ | 2,621 |  |  | $ | 8,135 |  |  | $ | 6,262 |
Economic hedges As of September 30, 2024, the Company had an interest rate swap with a $5.5 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 SOFR-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 September 30, 2024. 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 gets paid 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. Changes in fair value are recorded in current period earnings. 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 originated 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 sale 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 sale 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 TBA 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 interest rate lock commitments (“IRLCs”), or 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. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs 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 IRLCs are free-standing derivatives which are carried at fair value with changes recorded in non-interest income in the Company’s Consolidated Statements of Income. Changes in the fair value of IRLCs 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 Income related to economic hedges and non-hedging derivatives were as follows:
| Three Months Ended September 30, |  | Nine Months Ended September 30,
(In thousands) | 2024 |  | 2023 |  | 2024 |  | 2023
Economic hedges |  |  |  |  |  |  |
Interest rate swap on industrial revenue bond: |  |  |  |  |  |  |
Unrealized (loss)/gain recognized in other non-interest income | $ | (124) |  |  | $ | 88 |  |  | $ | (13) |  |  | $ | 163 |
Interest rate swaps on loans with commercial loan customers: |  |  |  |  |  |  |
Unrealized gain/(loss) recognized in other non-interest income | 53,303 |  |  | (24,728) |  |  | 34,124 |  |  | (21,934) |
Favorable change in credit valuation adjustment recognized in other non-interest income | — |  |  | — |  |  | — |  |  | — |
Offsetting interest rate swaps on loans with commercial loan customers: |  |  |  |  |  |  |
Unrealized (loss)/gain recognized in other non-interest income | (53,303) |  |  | 24,728 |  |  | (34,124) |  |  | 21,934 |
Risk participation agreements: |  |  |  |  |  |  |
Unrealized gain recognized in other non-interest income | 120 |  |  | 65 |  |  | 264 |  |  | 73 |
Forward commitments: |  |  |  |  |  |  |
Unrealized gain/(loss) recognized in other non-interest income | 20 |  |  | (53) |  |  | 31 |  |  | 2 |
Non-hedging derivatives |  |  |  |  |  |  |
Commitments to lend |  |  |  |  |  |  |
Unrealized gain/(loss) recognized in other non-interest income | $ | 64 |  |  | $ | (46) |  |  | $ | 131 |  |  | $ | (26) |
Realized gain in other non-interest income | 350 |  |  | 210 |  |  | 1,909 |  |  | 304 |
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 Statements of Income. 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 $28.2 million and $39.8 million as of September 30, 2024 and December 31, 2023, respectively. The Company had net asset positions with its commercial banking counterparties totaling $16.9 million and $6.0 million as of September 30, 2024 and December 31, 2023, respectively. The Company had net liability positions with its financial institution counterparties totaling $17.3 million and $6.1 million as of September 30, 2024 and December 31, 2023, respectively. The Company had net liability positions with its commercial banking counterparties totaling $46.6 million and $69.8 million as of September 30, 2024 and December 31, 2023. The following table presents the assets and liabilities subject to an enforceable master netting arrangement as of September 30, 2024 and December 31, 2023: Offsetting of Financial Assets and Derivative Assets
|  | Gross Amounts of |  | Gross Amounts Offset in the |  | Net Amounts of Assets Presented in the |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |
|  | Recognized |  | Consolidated |  | Consolidated |  | Financial |  | Cash |  |
(In thousands) |  | Assets |  | Balance Sheets |  | Balance Sheets |  | Instruments |  | Collateral Received |  | Net Amount
September 30, 2024 |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swap Agreements: |  |  |  |  |  |  |  |  |  |  |  |
Institutional counterparties |  | $ | 49,312 |  |  | $ | (21,080) |  |  | $ | 28,232 |  |  | $ | — |  |  | $ | (10,620) |  |  | $ | 17,612 |
Commercial counterparties |  | 16,939 |  |  | — |  |  | 16,939 |  |  | — |  |  | — |  |  | 16,939 |
Total |  | $ | 66,251 |  |  | $ | (21,080) |  |  | $ | 45,171 |  |  | $ | — |  |  | $ | (10,620) |  |  | $ | 34,551 |
Offsetting of Financial Liabilities and Derivative Liabilities
|  | Gross Amounts of |  | Gross Amounts Offset in the |  | Net Amounts of Liabilities Presented in the |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |
|  | Recognized |  | Consolidated |  | Consolidated |  | Financial |  | Cash |  |
(In thousands) |  | Liabilities |  | Balance Sheets |  | Balance Sheets |  | Instruments |  | Collateral Pledged |  | Net Amount
September 30, 2024 |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swap Agreements: |  |  |  |  |  |  |  |  |  |  |  |
Institutional counterparties |  | $ | (18,973) |  |  | $ | 1,714 |  |  | $ | (17,259) |  |  | $ | 9,208 |  |  | $ | — |  |  | $ | (8,051) |
Commercial counterparties |  | (46,614) |  |  | — |  |  | (46,614) |  |  | — |  |  | — |  |  | (46,614) |
Total |  | $ | (65,587) |  |  | $ | 1,714 |  |  | $ | (63,873) |  |  | $ | 9,208 |  |  | $ | — |  |  | $ | (54,665) |
Offsetting of Financial Assets and Derivative Assets
|  | Gross Amounts of |  | Gross Amounts Offset in the |  | Net Amounts of Assets Presented in the |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |
|  | Recognized |  | Consolidated |  | Consolidated |  | Financial |  | Cash |  |
(In thousands) |  | Assets |  | Balance Sheets |  | Balance Sheets |  | Instruments |  | Collateral Received |  | Net Amount
December 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swap Agreements: |  |  |  |  |  |  |  |  |  |  |  |
Institutional counterparties |  | $ | 71,579 |  |  | $ | (31,812) |  |  | $ | 39,767 |  |  | $ | — |  |  | $ | — |  |  | $ | 39,767 |
Commercial counterparties |  | 5,992 |  |  | — |  |  | 5,992 |  |  | — |  |  | — |  |  | 5,992 |
Total |  | $ | 77,571 |  |  | $ | (31,812) |  |  | $ | 45,759 |  |  | $ | — |  |  | $ | — |  |  | $ | 45,759 |
Offsetting of Financial Liabilities and Derivative Liabilities
|  | Gross Amounts of |  | Gross Amounts Offset in the |  | Net Amounts of Liabilities Presented in the |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |
|  | Recognized |  | Consolidated |  | Consolidated |  | Financial |  | Cash |  |
(In thousands) |  | Liabilities |  | Balance Sheets |  | Balance Sheets |  | Instruments |  | Collateral Pledged |  | Net Amount
December 31, 2023 |  |  |  |  |  |  |  |  |  |  |  |
Interest Rate Swap Agreements: |  |  |  |  |  |  |  |  |  |  |  |
Institutional counterparties |  | $ | (11,277) |  |  | $ | 5,142 |  |  | $ | (6,135) |  |  | $ | 9,633 |  |  | $ | — |  |  | $ | 3,498 |
Commercial counterparties |  | (69,796) |  |  | — |  |  | (69,796) |  |  | — |  |  | — |  |  | (69,796) |
Total |  | $ | (81,073) |  |  | $ | 5,142 |  |  | $ | (75,931) |  |  | $ | 9,633 |  |  | $ | — |  |  | $ | (66,298) |

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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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