United is exposed to certain risks arising from both its business operations and economic conditions. United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk through a combination of pricing and term structure of deposit product offerings, the amount and duration of its investment securities portfolio and wholesale funding and, to a lesser degree, through the use of derivative financial instruments. From time to time, United enters into derivative financial instruments to manage interest rate risk 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. Derivative financial instruments are used to manage differences in the amount, timing, and duration of known or expected cash receipts and known or expected cash payments principally related to loans, investment securities, wholesale borrowings and deposits.

In conjunction with the FASB’s fair value measurement guidance, United made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting arrangements on a gross basis.

United clears certain derivatives centrally through the Chicago Mercantile Exchange (“CME”). CME rules legally characterize variation margin payments for centrally cleared derivatives as settlements of the derivatives’ exposure rather than as collateral. As a result, the variation margin payment and the related derivative instruments are considered a single unit of account for accounting purposes. Variation margin, as determined by the CME, is settled daily. As a result, derivative contracts that clear through the CME have an estimated fair value of zero. The table below presents the fair value of derivative financial instruments as of the dates indicated as well as their classification on the consolidated balance sheets (in thousands):



		December 31,
Interest Rate Products	Balance Sheet Location	2019		2018
Customer derivative positions	Derivative assets	$	27,277	$	5,216
Dealer offsets to customer derivative positions	Derivative assets	394		7,620
Mortgage banking - loan commitment	Derivative assets	1,970		1,190
Mortgage banking - forward sales commitment	Derivative assets	98		28
Bifurcated embedded derivatives	Derivative assets	5,268		10,651
		$	35,007	$	24,705

Customer derivative positions	Derivative liabilities	$	446	$	9,661
Dealer offsets to customer derivative positions	Derivative liabilities	6,425		781
Risk participations	Derivative liabilities	12		8
Mortgage banking - forward sales commitment	Derivative liabilities	86		259
Dealer offsets to bifurcated embedded derivatives	Derivative liabilities	7,667		13,339
De-designated hedges	Derivative liabilities	—		703
		$	14,636	$	24,751

Customer derivative positions are between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap/cap program. In addition, to accommodate customers, United occasionally enters into credit risk participation agreements with counterparty banks to accept a portion of the credit risk related to interest rate swaps. The agreements, which are typically executed in conjunction with a participation in a loan with the same customer, allow customers to execute an interest rate swap with one bank while allowing for the distribution of the credit risk among participating members. Collateral used to support the credit risk for the underlying lending relationship is also available to offset the risk of credit risk participations and customer derivative positions.

United also has three interest rate swap contracts that are not designated as hedging instruments but are economic hedges of market-linked brokered certificates of deposit. The market-linked brokered certificates of deposit contain embedded derivatives that are bifurcated from the host instruments and marked to market through earnings. The fair value marks on the market linked swaps and the bifurcated embedded derivatives tend to move in opposite directions with changes in 90-day LIBOR and therefore provide an economic hedge.

In addition, United originates certain residential mortgage loans with the intention of selling these loans. Between the time United enters into an interest-rate lock commitment to originate a residential mortgage loan that is to be held for sale and the time the loan is funded and eventually sold, United is subject to the risk of variability in market prices. United also enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. The commitments to originate residential mortgage loans and forward loan sales commitments are freestanding derivative instruments. United accounts for most newly originated mortgage loans at fair value pursuant to the fair value option, and these loans are not reflected in the table above. Fair value adjustments on these derivative instruments are recorded within mortgage loan and other related fee income in the consolidated statements of income.

At December 31, 2019 and 2018, United did not have any active cash flow hedges. Changes in balance sheet composition and interest rate risk position made cash flow hedges not currently necessary as protection against rising interest rates. The loss remaining in other comprehensive income from prior hedges that had previously been de-designated was being amortized into earnings over the original term of the swaps as the forecasted transactions that the swaps were originally designated to hedge were still expected to occur. This was the only effect of cash flow hedges on the consolidated statements of income for the years ended December 31, 2019, 2018 and 2017. During the second quarter of 2019, United amortized the remaining balance of losses on terminated hedging positions from other comprehensive income. See Note 15 for further detail.

United is exposed to changes in the fair value of certain of its fixed-rate obligations due to changes in interest rates. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in interest rates. 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 earnings. United includes the gain or loss on the hedged items in the same income statement line item as the offsetting loss or gain on the related derivatives.

At December 31, 2019 and 2018, United had four interest rate swaps with an aggregate notional amount of $37.9 million and $39.0 million, respectively, that were designated as fair value hedges of fixed-rate brokered time deposits. The swaps involved the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements.



	Year Ended December 31,
	2019			2018								2017
	Interest expense - deposits			Interest expense - deposits			Interest revenue - taxable investment securities		Other noninterest income			Interest expense - deposits			Interest revenue - taxable investment securities
Total amounts presented in the consolidated statements of income	$	66,856		$	39,543		$	73,496	$	24,142		$	17,062		$	70,172

Gains (losses) on fair value hedging relationships:
Interest rate contracts:
Amounts related to interest settlements on derivatives	(327		)	(245		)	17		—			160			(302		)
Recognized on derivatives	733			(220		)	—		356			(657		)	72
Recognized on hedged items	(766		)	(145		)	—		(447		)	371			(265		)
Net income (expense) recognized on fair value hedges	$	(360	)	$	(610	)	$	17	$	(91	)	$	(126	)	$	(495	)

In certain cases, the estate of deceased brokered certificate of deposit holders may put the certificate of deposit back to United at par upon the death of the holder. When these estate puts occur, a gain or loss is recognized for the difference between the fair value and the par amount of the deposits put back. The change in the fair value of brokered time deposits that are being hedged in fair value hedging relationships reported in the table above includes gains and losses from estate puts.

The table below presents the carrying amount of hedged fixed-rate brokered time deposits and cumulative fair value hedging adjustments included in the carrying amount of the hedged liability for the periods presented (in thousands).



	December 31,
	2019					2018
Balance Sheet Location	Carrying amount of Assets (Liabilities)			Hedge Accounting Basis Adjustment		Carrying amount of Assets (Liabilities)			Hedge Accounting Basis Adjustment
Deposits	$	(35,880	)	$	645	$	(35,776	)	$	1,838



	Income Statement Location	Year Ended December 31,
	Income Statement Location	2019			2018		2017
Customer derivatives and dealer offsets	Other noninterest income	$	2,878		$	2,658	$	2,416
Bifurcated embedded derivatives and dealer offsets	Other noninterest income	212			307		429
Interest rate caps	Other noninterest income	—			501		252
De-designated hedges	Other noninterest income	(193		)	31		(62		)
Mortgage banking derivatives	Mortgage loan revenue	(1,797		)	904		(676		)
Risk participations	Other noninterest income	(3		)	12		5
Total gains and losses		$	1,097		$	4,413	$	2,364

United manages its credit exposure on derivatives transactions by entering into a bilateral credit support agreement with each non-customer counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty. As of December 31, 2019, collateral totaling $14.9 million was pledged toward derivatives in a liability position.

United’s agreements with each of its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivatives counterparties also include provisions that if not met, could result in United being declared in default. United has agreements with certain of its derivative counterparties that provide that if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements. Derivatives that are centrally cleared do not have credit-risk-related features that require additional collateral if United’s credit rating were downgraded.