On April 4, 2013, Trustmark entered into a forward interest rate swap contract on junior subordinated debentures with a total notional amount of $60.0 million. The interest rate swap contract was designated as a derivative instrument in a cash flow hedge under FASB ASC Topic 815, “Derivatives and Hedging,” with the objective of protecting the quarterly interest payments on Trustmark’s $60.0 million of junior subordinated debentures issued to Trustmark Preferred Capital Trust I throughout the five-year period beginning December 31, 2014 and ending December 31, 2019 from the risk of variability of those payments resulting from changes in the three-month LIBOR interest rate. Under the swap, which became effective on December 31, 2014, Trustmark will pay a fixed interest rate of 1.66% and receive a variable interest rate based on three-month LIBOR on a total notional amount of $60.0 million, with quarterly net settlements.

No ineffectiveness related to the interest rate swap designated as a cash flow hedge was recognized in the consolidated statements of income for the three months ended March 31, 2019 and 2018. The accumulated net after-tax gain related to the effective cash flow hedge included in accumulated other comprehensive loss totaled $294 thousand at March 31, 2019 compared to a net after-tax gain of $469 thousand at December 31, 2018. Amounts reported in accumulated other comprehensive loss related to this derivative are reclassified to other interest expense as interest payments are made on Trustmark’s variable rate junior subordinated debentures. During the next nine months, Trustmark estimates that $391 thousand will be reclassified as a decrease to other interest expense.

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 were $414.0 million at March 31, 2019 compared to $318.0 million at December 31, 2018. 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 $4.7 million compared to a net positive ineffectiveness of $3.3 million for the three months ended March 31, 2019 and 2018, 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 $191.6 million at March 31, 2019, with a negative valuation adjustment of $1.6 million, compared to $132.0 million, with a negative valuation adjustment of $1.8 million, at December 31, 2018.

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 $113.9 million at March 31, 2019, with a positive valuation adjustment of $1.8 million, compared to $71.2 million, with a positive valuation adjustment of $1.2 million, as of December 31, 2018.

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. As of March 31, 2019, Trustmark had interest rate swaps with an aggregate notional amount of $538.6 million related to this program, compared to $475.8 million as of December 31, 2018.

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.

As of March 31, 2019, Trustmark had 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 $75 thousand at December 31, 2018. As of March 31, 2019, Trustmark had no posted collateral against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of these triggering provisions at March 31, 2019, 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 both March 31, 2019 and December 31, 2018, Trustmark had entered into three risk participation agreements as a beneficiary with an aggregate notional amount of $22.8 million and $23.1 million, respectively. Trustmark had entered into eight risk participation agreements as a guarantor with an aggregate notional amount of $42.2 million at March 31, 2019 compared to seven risk participation agreements as a guarantor with an aggregate notional amount of $39.0 million at December 31, 2018. The aggregate fair values of these risk participation agreements were immaterial at March 31, 2019 and December 31, 2018.

The following tables disclose the fair value of derivative instruments in Trustmark’s consolidated balance sheets as of March 31, 2019 and December 31, 2018 as well as the effect of these derivative instruments on Trustmark’s results of operations for the periods presented ($ in thousands):

	March 31, 2019		December 31, 2018
Derivatives in hedging relationships
Interest rate contracts:
Interest rate swaps included in other assets	$	391	$	625

Derivatives not designated as hedging instruments
Interest rate contracts:
Futures contracts included in other assets	$	3,458	$	4,445
Exchange traded purchased options included in other assets		244		561
OTC written options (rate locks) included in other assets		1,765		1,187
Interest rate swaps included in other assets		7,914		5,487
Credit risk participation agreements included in other assets		48		42
Forward contracts included in other liabilities		1,614		1,773
Exchange traded written options included in other liabilities		262		66
Interest rate swaps included in other liabilities		1,533		2,369
Credit risk participation agreements included in other liabilities		9		5

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

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 March 31, 2019 and December 31, 2018 is presented in the following tables ($ in thousands):

Offsetting of Derivative Assets
As of March 31, 2019
							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	$	8,305	$	—	$	8,305	$	(471	)	$	(90	)	$	7,744

Offsetting of Derivative Liabilities
As of March 31, 2019
							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	$	1,533	$	—	$	1,533	$	(471	)	$	—	$	1,062

Offsetting of Derivative Assets
As of December 31, 2018
							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	$	6,112	$	—	$	6,112	$	(339	)	$	(620	)	$	5,153

Offsetting of Derivative Liabilities
As of December 31, 2018
							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	$	2,369	$	—	$	2,369	$	(339	)	$	—	$	2,030