XML 28 R16.htm IDEA: XBRL DOCUMENT v3.21.2
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
6 Months Ended
Jun. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
As of June 30, 2021, the Company held derivatives with a total notional amount of $3.9 billion. The Company had economic hedges totaling $3.9 billion and $19.1 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 $3.5 billion, risk participation agreements with dealer banks of $0.4 billion, and $3.7 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 June 30, 2021.

The Company pledged collateral to derivative counterparties in the form of cash totaling $53.9 million and securities with an amortized cost of $35.9 million and a fair value of $36.2 million as of June 30, 2021. 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 June 30, 2021, follows:
  WeightedWeighted Average RateEstimated
 NotionalAverage ContractFair Value
 AmountMaturityReceivedpay rateAsset (Liability)
 (In thousands)(In years)  (In thousands)
Economic hedges:     
Interest rate swap on tax advantaged economic development bond$8,271 8.40.46 %5.09 %$(1,422)
Interest rate swaps on loans with commercial loan customers1,759,309 6.04.08 %1.91 %110,750 
Offsetting interest rate swaps on loans with commercial loan customers (1)
1,759,309 6.01.91 %4.08 %(44,411)
Risk participation agreements with dealer banks353,474 6.9  486 
Forward sale commitments 3,664 0.2  92 
Total economic hedges3,884,027    65,495 
Non-hedging derivatives:     
Commitments to lend 19,142 0.2  261 
Total non-hedging derivatives19,142    261 
Total$3,903,169    $65,756 
(1) Fair value estimates include the impact of $68.1 million settled to market contract agreements.
Information about derivative assets and liabilities at December 31, 2020, follows:
  WeightedWeighted Average RateEstimated
 NotionalAverage ContractFair Value
 AmountMaturityReceivedpay rateAsset (Liability)
 (In thousands)(In years)  (In thousands)
Economic hedges:     
Interest rate swap on tax advantaged economic development bond$8,654 8.90.52 %5.09 %$(1,778)
Interest rate swaps on loans with commercial loan customers1,734,978 6.14.15 %1.95 %159,016 
Offsetting interest rate swaps on loans with commercial loan customers (1)
1,734,978 6.11.95 %4.15 %(64,645)
Risk participation agreements with dealer banks326,862 8.0  665 
Forward sale commitments 11,544 0.2  320 
Total economic hedges3,817,016    93,578 
Non-hedging derivatives:     
Commitments to lend 40,099 0.2  735 
Total non-hedging derivatives 40,099    735 
Total$3,857,115    $94,313 
(1) Fair value estimates include the impact of $97.6 million settled to market contract agreements.
Economic hedges
As of June 30, 2021, the Company has an interest rate swap with a $8.3 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. Credit valuation loss adjustments arising from the difference in credit worthiness of the commercial loan and financial institution counterparties totaled $1.2 million as of June 30, 2021. 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 operations. 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 June 30,Six Months Ended June 30,
(In thousands)2021202020212020
Economic hedges    
Interest rate swap on industrial revenue bond:    
Unrealized gain/(loss) recognized in other non-interest income$10 $13 $355 $(550)
Interest rate swaps on loans with commercial loan customers:    
Unrealized gain/(loss) recognized in other non-interest income10,516 9,733 (49,785)114,653 
(Unfavorable)/favorable change in credit valuation adjustment recognized in other non-interest income(982)103 1,520 (2,435)
Offsetting interest rate swaps on loans with commercial loan customers:    
Unrealized (loss)/gain recognized in other non-interest income(10,516)(9,733)49,785 (114,653)
Risk participation agreements:    
Unrealized gain/(loss) recognized in other non-interest income150 99 (179)365 
Forward commitments:    
Unrealized (loss)/gain recognized in other non-interest income(234)4,937 (228)674 
Realized (loss) in other non-interest income— (6,408)— (8,330)
Non-hedging derivatives    
Commitments to lend    
Unrealized gain/(loss) recognized in other non-interest income$76 $(3,687)$(474)$(1,479)
Realized gain in other non-interest income457 3,669 1,810 12,970 
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 condition. 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 $0.7 million and $1.0 million as of June 30, 2021 and December 31, 2020, respectively. The Company had net asset positions with its commercial banking counterparties totaling $111.6 million and $159.0 million as of June 30, 2021 and December 31, 2020, respectively. The Company had net liability positions with its financial institution counterparties totaling $46.1 million and $66.8 million as of June 30, 2021 and December 31, 2020, respectively. The Company had net liability positions with its commercial banking counterparties totaling $0.8 million as of June 30, 2021. The Company had no net liability positions with its commercial banking counterparties as of December 31, 2020. 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 June 30, 2021 and December 31, 2020:

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 Statements of Condition
 RecognizedStatements ofStatements ofFinancialCash 
(In thousands)AssetsConditionConditionInstrumentsCollateral ReceivedNet Amount
June 30, 2021      
Interest Rate Swap Agreements:      
Institutional counterparties$780 $(52)$728 $— $— $728 
Commercial counterparties111,597 — 111,597 — — 111,597 
Total$112,377 $(52)$112,325 $— $— $112,325 

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 Statements of Condition
 RecognizedStatements ofStatements ofFinancialCash 
(In thousands)LiabilitiesConditionConditionInstrumentsCollateral PledgedNet Amount
June 30, 2021      
Interest Rate Swap Agreements:      
Institutional counterparties$(115,134)$69,060 $(46,074)$36,158 $53,882 $43,966 
Commercial counterparties(846)— (846)— — (846)
Total$(115,980)$69,060 $(46,920)$36,158 $53,882 $43,120 
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 Statements of Condition
 RecognizedStatements ofStatements ofFinancialCash 
(In thousands)AssetsConditionConditionInstrumentsCollateral ReceivedNet Amount
December 31, 2020      
Interest Rate Swap Agreements:      
Institutional counterparties$1,124 $(78)$1,046 $— $— $1,046 
Commercial counterparties159,016 — 159,016 — — 159,016 
Total$160,140 $(78)$160,062 $— $— $160,062 

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 Statements of Condition
 RecognizedStatements ofStatements ofFinancialCash 
(In thousands)LiabilitiesConditionConditionInstrumentsCollateral PledgedNet Amount
December 31, 2020      
Interest Rate Swap Agreements:      
Institutional counterparties$(164,543)$97,740 $(66,803)$37,815 $75,070 $46,082 
Commercial counterparties— — — — — — 
Total$(164,543)$97,740 $(66,803)$37,815 $75,070 $46,082