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Derivatives and Hedging Activities | 9 Months Ended
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Sep. 30, 2021
Derivative Instruments And Hedging Activities Disclosure [Abstract] |
Derivatives and Hedging Activities | 11. Derivatives and Hedging Activities Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loans and borrowings. The Company also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk of the Company’s assets or liabilities. The Company has entered into an offsetting position for each of these derivative instruments with a matching instrument from another financial institution in order to minimize its net risk exposure resulting from such transactions. Fair Values of Derivative Instruments on the Consolidated Balance Sheets The table below presents the fair value of the Company’s derivative financial instruments as of September 30, 2021 and December 31, 2020. The Company’s derivative assets and derivative liabilities are located within Other assets and Other liabilities, respectively, on the Company’s Consolidated Balance Sheets. Derivative fair values are determined using valuation techniques including discounted cash flow analysis on the expected cash flows from each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees. This table provides a summary of the fair value of the Company’s derivative assets and liabilities as of September 30, 2021 and December 31, 2020 (in thousands):
|  | Derivative Assets |  |  | Derivative Liabilities |
|  | September 30, |  |  | December 31, |  |  | September 30, |  |  | December 31, |
Fair Value |  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Interest Rate Products: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  | $ | 68,700 |  |  | $ | 103,506 |  |  | $ | 12,392 |  |  | $ | 9,375 |
Derivatives designated as hedging instruments |  |  | 1 |  |  |  | 48 |  |  |  | 1,468 |  |  |  | — |
Total |  | $ | 68,701 |  |  | $ | 103,554 |  |  | $ | 13,860 |  |  | $ | 9,375 |
Fair Value Hedges of Interest Rate Risk The Company is exposed to changes in the fair value of certain of its fixed-rate assets and liabilities due to changes in the benchmark interest rate, London Interbank Offered Rate (LIBOR). Interest rate swaps designated as fair value hedges involve making fixed rate payments to a counterparty in exchange for the Company receiving variable rate payments over the life of the agreements without the exchange of the underlying notional amount. As of September 30, 2021, the Company had 11 interest rate swaps that were designated as fair value hedges of interest rate risk associated with the Company’s fixed rate loan assets and municipal bond securities. These swaps had an aggregate notional amount of $1.0 billion as of September 30, 2021. As of December 31, 2020, the Company had one interest rate swap that was designated as a fair value hedge of interest rate risk associated with the Company’s fixed rate loan assets. This swap had a notional amount of $5.0 million as of December 31, 2020. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in Interest income in the Consolidated Statements of Income. Cash Flow Hedges of Interest Rate Risk The Company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and floors as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of September 30, 2021 and December 31, 2020, the Company had two interest rate swaps that were designated as cash flow hedges of interest rate risk associated with the Company’s variable-rate subordinated debentures issued by Marquette Capital Trusts III and IV. These swaps had an aggregate notional amount of $51.5 million at both September 30, 2021 and December 31, 2020. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an upfront premium. On August 28, 2020, the Company terminated an interest rate floor with a notional amount of $750.0 million. At the date of termination, the interest rate floor had a net asset fair value of $34.1 million. The gross unrealized gain on the terminated interest rate floor remaining in AOCI was $13.5 million, or $10.2 million net of tax, and $17.0 million, or $12.9 million net of tax, as of September 30, 2021 and December 31, 2020, respectively. The unrealized gain will be reclassified into Interest income as the underlying forecasted transactions impact earnings through the original maturity of the hedged forecasted transactions. The total remaining term over which the unrealized gain will be reclassified into earnings is 2.9 years. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and is subsequently reclassified into interest expense and interest income in the period during which the hedged forecasted transaction affects earnings. Amounts reported in AOCI related to interest rate swap derivatives will be reclassified to Interest expense as interest payments are received or paid on the Company’s derivatives. Amounts reported in AOCI related to interest rate floor derivatives will be reclassified to Interest income as the underlying forecasted transactions impact earnings through the original maturity of the hedged forecasted transactions. The Company expects to reclassify $1.3 million from AOCI to Interest expense and $4.9 million from AOCI to Interest income during the next 12 months. As of September 30, 2021, the Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 15.0 years. Non-designated Hedges The remainder of the Company’s derivatives are not designated in qualifying hedging relationships. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously offset by interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of both the customer swaps and the offsetting swaps are recognized in Other noninterest expense in the Consolidated Statements of Income. As of September 30, 2021, the Company had 192 interest rate swaps with an aggregate notional amount of $2.8 billion related to this program. As of December 31, 2020, the Company had 176 interest rate swaps with an aggregate notional amount of $2.5 billion. Effect of Derivative Instruments on the Consolidated Statements of Income and Accumulated Other Comprehensive Income This table provides a summary of the amount of gain or loss recognized in Interest income and Other noninterest expense in the Consolidated Statements of Income related to the Company’s derivative assets and liabilities for the three and nine months ended September 30, 2021 and September 30, 2020 (in thousands):
|  | Amount of Gain (Loss) Recognized |
|  | For the Three Months Ended |  |  | For the Nine Months Ended |
|  | September 30, |  |  | September 30, |  |  | September 30, |  |  | September 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Interest Rate Products |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives not designated as hedging instruments |  | $ | 95 |  |  | $ | 10 |  |  | $ | 339 |  |  | $ | (233 | )
Total |  | $ | 95 |  |  | $ | 10 |  |  | $ | 339 |  |  | $ | (233 | )
Interest Rate Products |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fair value adjustments on derivatives |  | $ | 2,370 |  |  | $ | 33 |  |  | $ | 2,745 |  |  | $ | (173 | )
Fair value adjustments on hedged items |  |  | (2,363 | ) |  |  | (32 | ) |  |  | (2,718 | ) |  |  | 173 |
Total |  | $ | 7 |  |  | $ | 1 |  |  | $ | 27 |  |  | $ | — |
These tables provide a summary of the effect of hedges on AOCI in the Consolidated Statements of Comprehensive Income related to the Company’s derivative assets and liabilities for the three and nine months ended September 30, 2021 and September 30, 2020 (in thousands):
|  | For the Three Months Ended September 30, 2021 |
Derivatives in Cash Flow Hedging Relationships |  | Gain Recognized in OCI on Derivative |  |  | Gain Recognized in OCI Included Component |  |  | Gain Recognized in OCI Excluded Component |  |  | Gain (Loss) Reclassified from AOCI into Earnings |  |  | Gain (Loss) Reclassified from AOCI into Earnings Included Component |  |  | Loss Reclassified from AOCI into Earnings Excluded Component |
Interest rate floor |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,175 |  |  | $ | 1,742 |  |  | $ | (567 | )
Interest rate swaps |  |  | 432 |  |  |  | 432 |  |  |  | — |  |  |  | (344 | ) |  |  | (344 | ) |  |  | — |
Total |  | $ | 432 |  |  | $ | 432 |  |  | $ | — |  |  | $ | 831 |  |  | $ | 1,398 |  |  | $ | (567 | )
|  | For the Three Months Ended September 30, 2020 |
Derivatives in Cash Flow Hedging Relationships |  | (Loss) Gain Recognized in OCI on Derivative |  |  | (Loss) Gain Recognized in OCI Included Component |  |  | Loss Recognized in OCI Excluded Component |  |  | Gain (Loss) Reclassified from AOCI into Earnings |  |  | Gain (Loss) Reclassified from AOCI into Earnings Included Component |  |  | Loss Reclassified from AOCI into Earnings Excluded Component |
Interest rate floor |  | $ | (1,231 | ) |  | $ | (576 | ) |  | $ | (655 | ) |  | $ | 1,443 |  |  | $ | 2,059 |  |  | $ | (616 | )
Interest rate swaps |  |  | 1,109 |  |  |  | 1,109 |  |  |  | — |  |  |  | (320 | ) |  |  | (320 | ) |  |  | — |
Total |  | $ | (122 | ) |  | $ | 533 |  |  | $ | (655 | ) |  | $ | 1,123 |  |  | $ | 1,739 |  |  | $ | (616 | )
|  | For the Nine Months Ended September 30, 2021 |
Derivatives in Cash Flow Hedging Relationships |  | Gain Recognized in OCI on Derivative |  |  | Gain Recognized in OCI Included Component |  |  | Gain Recognized in OCI Excluded Component |  |  | Gain (Loss) Reclassified from AOCI into Earnings |  |  | Gain (Loss) Reclassified from AOCI into Earnings Included Component |  |  | Loss Reclassified from AOCI into Earnings Excluded Component |
Interest rate floor |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 3,551 |  |  | $ | 5,234 |  |  | $ | (1,683 | )
Interest rate swaps |  |  | 3,513 |  |  |  | 3,513 |  |  |  | — |  |  |  | (1,001 | ) |  |  | (1,001 | ) |  |  | — |
Total |  | $ | 3,513 |  |  | $ | 3,513 |  |  | $ | — |  |  | $ | 2,550 |  |  | $ | 4,233 |  |  | $ | (1,683 | )
|  | For the Nine Months Ended September 30, 2020 |
Derivatives in Cash Flow Hedging Relationships |  | Gain (Loss) Recognized in OCI on Derivative |  |  | Gain (Loss) Recognized in OCI Included Component |  |  | Loss Recognized in OCI Excluded Component |  |  | Gain (Loss) Reclassified from AOCI into Earnings |  |  | Gain (Loss) Reclassified from AOCI into Earnings Included Component |  |  | Loss Reclassified from AOCI into Earnings Excluded Component |
Interest rate floor |  | $ | 28,390 |  |  | $ | 34,917 |  |  | $ | (6,527 | ) |  | $ | 1,578 |  |  | $ | 3,466 |  |  | $ | (1,888 | )
Interest rate swaps |  |  | (9,375 | ) |  |  | (9,375 | ) |  |  | — |  |  |  | (709 | ) |  |  | (709 | ) |  |  | — |
Total |  | $ | 19,015 |  |  | $ | 25,542 |  |  | $ | (6,527 | ) |  | $ | 869 |  |  | $ | 2,757 |  |  | $ | (1,888 | )
Credit-risk-related Contingent Features The Company has agreements with certain of its derivative counterparties that contain a provision that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. As of September 30, 2021, the termination value of derivatives in a net liability position, which includes accrued interest, related to these agreements was $6.0 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties. At September 30, 2021, the Company had posted $8.8 million of collateral. If the Company had breached any of these provisions at September 30, 2021, it could have been required to settle its obligations under the agreements at the termination value.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://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 http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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