Derivatives:

The Company utilizes derivative financial instruments as part of its ongoing efforts to manage its interest rate risk exposure as well as the exposure for its customers. Derivative financial instruments are included in the Consolidated Balance Sheets line item “Other assets” or “Other liabilities” at fair value in accordance with ASC 815, “Derivatives and Hedging.”

The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate-lock commitments). Under such commitments, interest rates for mortgage loans are typically locked in for up to sixty days with the customer. These interest rate lock commitments are recorded at fair value in the Company’s Consolidated Balance Sheets. The Company also enters into best effort or mandatory delivery forward commitments to sell residential mortgage loans to secondary market investors. Gains and losses arising from changes in the valuation of the rate-lock commitments and forward commitments are recognized currently in earnings and are reflected under the line item “Mortgage banking income” on the Consolidated Statements of Income.

The Company enters into forward commitments, futures and options contracts that are not designated as hedging instruments as economic hedges to offset the changes in fair value of MSRs. Gains and losses associated with these instruments are included in earnings and are reflected under the line item “Mortgage banking income” on the Consolidated Statements of Income.

Additionally, the Company enters into derivative instruments that are not designated as hedging instruments to help its commercial customers manage their exposure to interest rate fluctuations. To mitigate the interest rate risk associated with customer contracts, the Company enters into an offsetting derivative contract. The Company manages its credit risk, or potential risk of default by its commercial customers through credit limit approval and monitoring procedures.

The Company also maintains two interest rate swap agreements with notional amounts totaling $30,000 used to hedge interest rate exposure on outstanding subordinated debentures included in long-term debt totaling $30,930. Under these agreements, the Company receives a variable rate of interest equal to 3-month LIBOR and pays a weighted average fixed rate of interest of 2.08%. The interest rate swap contracts, which mature in June of 2024, are designated as cash flow hedges with the objective of reducing the variability in cash flows resulting from changes in interest rates. These contracts had a negative fair value of $837 at September 30, 2019 and a positive fair value of $721 at December 31, 2018.

In July 2017, the Company entered into three interest rate swap contracts on floating rate liabilities at the Bank level with notional amounts of $30,000, $35,000 and $35,000 for a period of three, four and five years, respectively. These interest rate swaps were designated as cash flow hedges with the objective of reducing the variability of cash flows associated with $100,000 of FHLB borrowings obtained in conjunction with the Clayton Banks acquisition. During the first quarter of 2018, these swaps were canceled, locking in a tax-adjusted gain of $1,564 in other comprehensive income to be accreted over the three, four and five-year terms of the underlying contracts. As of September 30, 2019 and December 31, 2018, there was $1,093 and $1,436, respectively, remaining in the other comprehensive income to be accreted.

Certain financial instruments, including derivatives, may be eligible for offset in the Consolidated Balance Sheets when the “right of setoff” exists or when the instruments are subject to an enforceable master netting agreement, which includes the right of the non-defaulting party or non-affected party to offset recognized amounts, including collateral posted with the counterparty, to determine a net receivable or net payable upon early termination of the agreement. Certain of the Company’s derivative instruments are subject to master netting agreements. The Company has not elected to offset such financial instruments in the Consolidated Balance Sheets.

Most derivative contracts with clients are secured by collateral. Additionally, in accordance with the interest rate agreements with derivatives dealers, the Company may be required to post margin to these counterparties. At September 30, 2019 and December 31, 2018, the Company had minimum collateral posting thresholds with certain derivative counterparties and had collateral posted of $34,172 and $13,904, respectively, against its obligations under these agreements. Cash collateral related to derivative contracts is recorded in other assets in the Consolidated Balance Sheets.

The following table provides details on the Company’s derivative financial instruments as of the dates presented:



	September 30, 2019
	Notional Amount		Asset		Liability
Not designated as hedging:
Interest rate contracts	$	427,468	$	19,050	$	19,050
Forward commitments	824,724		582		—
Interest rate-lock commitments	679,524		9,142		—
Futures contracts	270,000		398		—
Option contracts	—		—		—
Total	$	2,201,716	$	29,172	$	19,050



	December 31, 2018
	Notional Amount		Asset		Liability
Not designated as hedging:
Interest rate contracts	$	295,333	$	6,679	$	6,679
Forward commitments	474,208		—		4,958
Interest rate-lock commitments	318,706		6,241		—
Futures contracts	166,000		649		—
Options contracts	3,800		26		—
Total	$	1,258,047	$	13,595	$	11,637



	September 30, 2019
	Notional Amount		Asset		Liability
Designated as hedging:
Interest rate swaps	$	30,000	$	—	$	837



	December 31, 2018
	Notional Amount		Asset		Liability
Designated as hedging:
Interest rate swaps	$	30,000	$	721	$	—

Gains (losses) included in the Consolidated Statements of Income related to the Company’s derivative financial instruments were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Not designated as hedging instruments (included in mortgage banking income):
Interest rate lock commitments	$	447		$	(3,415	)	$	4,202		$	(688	)
Forward commitments	(3,227		)	1,524			(12,895		)	7,477
Futures contracts	4,685			(563		)	10,663			(4,379		)
Option contracts	3			(55		)	47			(50		)
Total	$	1,908		$	(2,509	)	$	2,017		$	2,360



	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Designated as hedging:
Amount of gain reclassified from other comprehensive income and recognized in interest expense on borrowings, net of taxes of ($46), $20, ($121), and $22	$	130	$	69	$	343	$	62
Gain included in interest expense on borrowings	19		20		113		64
Total	$	149	$	89	$	456	$	126

The following discloses the amount included in other comprehensive income (loss), net of tax, for derivative instruments designated as cash flow hedges for the periods presented:



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019			2018		2019			2018
Designated as hedging:
Amount of (loss) gain recognized in other comprehensive income, net of tax	$	(256	)	$	169	$	(1,151	)	$	1,638