Trustmark utilizes a portfolio of exchange-traded derivative instruments, such as Treasury note futures contracts and option contracts, to achieve a fair value return that economically hedges changes in the fair value of the MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting. The total notional amount of these derivative instruments was $209.0 million at June 30, 2022 compared to $409.5 million at December 31, 2021. Changes in the fair value of these exchange-traded derivative instruments are recorded as noninterest income in mortgage banking, net and are offset by changes in the fair value of the MSR. The impact of this strategy resulted in a net negative ineffectiveness of $632 thousand and a net positive ineffectiveness $1.3 million for the three months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022 and 2021, the impact was a net positive ineffectiveness of $374 thousand and $1.5 million, respectively.

As part of Trustmark’s risk management strategy in the mortgage banking area, derivative instruments such as forward sales contracts are utilized. Trustmark’s obligations under forward sales contracts consist of commitments to deliver mortgage loans, originated and/or purchased, in the secondary market at a future date. Changes in the fair value of these derivative instruments are recorded as noninterest income in mortgage banking, net and are offset by changes in the fair value of LHFS. Trustmark’s off-balance sheet obligations under these derivative instruments totaled $182.5 million at June 30, 2022, with a negative valuation adjustment of $194 thousand, compared to $236.0 million, with a negative valuation adjustment of $81 thousand, at December 31, 2021.

Trustmark also utilizes derivative instruments such as interest rate lock commitments in its mortgage banking area. Interest rate lock commitments are residential mortgage loan commitments with customers, which guarantee a specified interest rate for a specified time period. Changes in the fair value of these derivative instruments are recorded as noninterest income in mortgage banking, net and are offset by the changes in the fair value of forward sales contracts. Trustmark’s off-balance sheet obligations under these derivative instruments totaled $127.1 million at June 30, 2022, with a positive valuation adjustment of $1.6 million, compared to $142.6 million, with a positive valuation adjustment of $1.9 million, at December 31, 2021.

Trustmark offers certain derivatives products directly to qualified commercial lending clients seeking to manage their interest rate risk. Trustmark economically hedges interest rate swap transactions executed with commercial lending clients by entering into offsetting interest rate swap transactions with institutional derivatives market participants. Derivatives transactions executed as part of this program are not designated as qualifying hedging relationships and are, therefore, carried at fair value with the change in fair value recorded as noninterest income in bank card and other fees. Because these derivatives have mirror-image contractual terms, in addition to collateral provisions which mitigate the impact of non-performance risk, the changes in fair value are expected to substantially offset. The Chicago Mercantile Exchange rules legally characterize variation margin collateral payments made or received for centrally cleared interest rate swaps as settlements rather than collateral. As a result, centrally cleared interest rate swaps included in other assets and other liabilities are presented on a net basis in the accompanying consolidated balance sheets. At June 30, 2022, Trustmark had interest rate swaps with an aggregate notional amount of $1.255 billion related to this program, compared to $1.225 billion at December 31, 2021.

Trustmark has agreements with its financial institution counterparties that contain provisions where if Trustmark defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then Trustmark could also be declared in default on its derivatives obligations.

At June 30, 2022, there was no termination value of interest rate swaps in a liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements compared to a termination value of $655 thousand at December 31, 2021. At June 30, 2022, Trustmark had posted collateral of $40 thousand against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of these triggering provisions at June 30, 2022, it could have been required to settle its obligations under the agreements at the termination value.

Credit risk participation agreements arise when Trustmark contracts with other financial institutions, as a guarantor or beneficiary, to share credit risk associated with certain interest rate swaps. These agreements provide for reimbursement of losses resulting from a third-party default on the underlying swap. At June 30, 2022, Trustmark had entered into five risk participation agreements as a beneficiary with an aggregate notional amount of $50.9 million compared to six risk participation agreements as a beneficiary with an aggregate notional amount of $52.0 million at December 31, 2021. At June 30, 2022, Trustmark had entered into twenty-five risk participation agreements as a guarantor with an aggregate notional amount of $206.8 million compared to twenty-four risk participation agreements as a guarantor with an aggregate notional amount of $173.5 million at December 31, 2021. The aggregate fair values of these risk participation agreements were immaterial at both June 30, 2022 and December 31, 2021.

The following tables disclose the fair value of derivative instruments in Trustmark’s consolidated balance sheets at June 30, 2022 and December 31, 2021 as well as the effect of these derivative instruments on Trustmark’s results of operations for the periods presented ($ in thousands):


	June 30, 2022		December 31, 2021
Derivatives not designated as hedging instruments
Interest rate contracts:
Exchange traded purchased options included in other assets	$	70	$	438
OTC written options (rate locks) included in other assets		1,582		1,859
Futures contracts included in other assets		—		2,356
Interest rate swaps included in other assets (1)		3,898		20,115
Credit risk participation agreements included in other assets		19		41
Futures contracts included in other liabilities		1,428		—
Forward contracts included in other liabilities		194		81
Exchange traded written options included in other liabilities		680		414
Interest rate swaps included in other liabilities (1)		26,257		4,144
Credit risk participation agreements included in other liabilities		16		38

(1)

In accordance with GAAP, the variation margin collateral payments made or received for interest rate swaps that are centrally cleared are legally characterized as settled. As a result, the centrally cleared interest rate swaps included in other assets and other liabilities are presented on a net basis in the accompanying consolidated balance sheets.


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Derivatives not designated as hedging instruments:
Amount of gain (loss) recognized in mortgage banking, net	$	(13,258	)	$	(1,614	)	$	(30,776	)	$	(10,812	)
Amount of gain (loss) recognized in bank card and other fees		(87	)		(667	)		322			935

Trustmark’s interest rate swap derivative instruments are subject to master netting agreements, and therefore, eligible for offsetting in the consolidated balance sheets. Trustmark has elected to not offset any derivative instruments in its consolidated balance sheets. Information about financial instruments that are eligible for offset in the consolidated balance sheets as of June 30, 2022 and December 31, 2021 is presented in the following tables ($ in thousands):


Offsetting of Derivative Assets
As of June 30, 2022
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Received		Net Amount
Derivatives	$	3,898	$	—	$	3,898	$	(1,059	)	$	—	$	2,839


Offsetting of Derivative Liabilities
As of June 30, 2022
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Posted			Net Amount
Derivatives	$	26,257	$	—	$	26,257	$	(1,059	)	$	(40	)	$	25,158


Offsetting of Derivative Assets
As of December 31, 2021
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Assets presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Received		Net Amount
Derivatives	$	20,115	$	—	$	20,115	$	(55	)	$	—	$	20,060


Offsetting of Derivative Liabilities
As of December 31, 2021
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments			Cash Collateral Posted			Net Amount
Derivatives	$	4,144	$	—	$	4,144	$	(55	)	$	(850	)	$	3,239