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 which began December 31, 2014 and ended 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 paid a fixed interest rate of 1.66% and received a variable interest rate based on three-month LIBOR on a total notional amount of $60.0 million, with quarterly net settlements.

The interest rate swap matured on December 31, 2019; therefore, there was no accumulated net after-tax amount related to the effective cash flow hedge included in accumulated other comprehensive income (loss) at December 31, 2019. No ineffectiveness related to the interest rate swap designated as a cash flow hedge was recognized in the consolidated statements of income for the nine months ended September 30, 2019. Amounts reported in accumulated other comprehensive income (loss) related to this derivative were reclassified to other interest expense as interest payments were made on Trustmark’s variable rate junior subordinated debentures.

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 $331.0 million at September 30, 2020 compared to $564.0 million at December 31, 2019. 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 positive ineffectiveness of $815 thousand and a net negative ineffectiveness of $3.7 million for the three months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, the impact was a net positive ineffectiveness of $8.7 million and a net negative ineffectiveness of $8.5 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 $462.0 million at September 30, 2020, with a negative valuation adjustment of $1.1 million, compared to $209.0 million, with a negative valuation adjustment of $486 thousand, at December 31, 2019.

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 $393.4 million at September 30, 2020, with a positive valuation adjustment of $12.2 million, compared to $92.1 million, with a positive valuation adjustment of $1.4 million, as of December 31, 2019.

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 nonperformance risk, the changes in fair value are expected to substantially offset. As of September 30, 2020, Trustmark had interest rate swaps with an aggregate notional amount of $1.054 billion related to this program, compared to $893.1 million as of December 31, 2019.

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 September 30, 2020 and December 31, 2019, the 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 was $1.5 million and $1.0 million, respectively. As of September 30, 2020, Trustmark had posted collateral of $1.6 million against its obligations because of negotiated thresholds and minimum transfer amounts under these agreements. If Trustmark had breached any of these triggering provisions at September 30, 2020, 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 September 30, 2020 and December 31, 2019, Trustmark had entered into three risk participation agreements as a beneficiary with an aggregate notional amount of $41.4 million and $37.6 million, respectively. At September 30, 2020, Trustmark had entered into twenty-one risk participation agreements as a guarantor with an aggregate notional amount of $145.6 million compared to ten risk participation agreements as a guarantor with an aggregate notional amount of $79.3 million at December 31, 2019. The aggregate fair values of these risk participation agreements were immaterial at both September 30, 2020 and December 31, 2019.

The following tables disclose the fair value of derivative instruments in Trustmark’s consolidated balance sheets as of September 30, 2020 and December 31, 2019 as well as the effect of these derivative instruments on Trustmark’s results of operations for the periods presented ($ in thousands):

	September 30, 2020		December 31, 2019
Derivatives not designated as hedging instruments
Interest rate contracts:
Futures contracts included in other assets	$	539	$	—
Exchange traded purchased options included in other assets		105		244
OTC written options (rate locks) included in other assets		12,213		1,439
Interest rate swaps included in other assets		41,992		16,209
Credit risk participation agreements included in other assets		111		64
Futures contracts included in other liabilities		—		2,654
Forward contracts included in other liabilities		1,139		486
Exchange traded written options included in other liabilities		512		1,760
Interest rate swaps included in other liabilities		1,483		1,122
Credit risk participation agreements included in other liabilities		219		41

	Three Months Ended September 30,					Nine Months Ended September 30,
	2020		2019			2020			2019
Derivatives in hedging relationships
Amount of gain (loss) reclassified from accumulated other comprehensive income (loss) and recognized in other interest expense	$	—	$	101		$	—		$	413

Derivatives not designated as hedging instruments
Amount of gain (loss) recognized in mortgage banking, net	$	74	$	6,191		$	45,955		$	18,988
Amount of gain (loss) recognized in bank card and other fees		234		(600	)		(1,502	)		(1,343	)

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):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Derivatives in cash flow hedging relationship
Amount of gain (loss) recognized in other comprehensive income (loss), net of tax	$	—	$	14	$	—	$	(109	)

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 September 30, 2020 and December 31, 2019 is presented in the following tables ($ in thousands):

Offsetting of Derivative Assets
As of September 30, 2020
							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	$	41,992	$	—	$	41,992	$	—	$	—	$	41,992

Offsetting of Derivative Liabilities
As of September 30, 2020
							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	$	1,483	$	—	$	1,483	$	—	$	(1,483	)	$	—

Offsetting of Derivative Assets
As of December 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	$	16,209	$	—	$	16,209	$	—	$	—	$	16,209

Offsetting of Derivative Liabilities
As of December 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	$	1,122	$	—	$	1,122	$	—	$	(1,390	)	$	(268	)