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Derivative Financial Instruments | 6 Months Ended
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Jun. 30, 2015
Derivative Financial Instruments [Abstract] |
Derivative Financial Instruments | Note 17 – Derivative Financial Instruments Derivatives Designated as Hedging Instruments 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 six months ended June 30, 2015 and 2014. The accumulated net after-tax loss related to the effective cash flow hedge included in accumulated other comprehensive loss totaled $37 thousand at June 30, 2015 compared to an accumulated net after-tax gain of $136 thousand at December 31, 2014. 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 twelve months, Trustmark estimates that $704 thousand will be reclassified as an increase to other interest expense. Derivatives not Designated as Hedging Instruments 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 MSR attributable to interest rates. These transactions are considered freestanding derivatives that do not otherwise qualify for hedge accounting. Changes in the fair value of these exchange-traded derivative instruments are recorded in noninterest income in mortgage banking, net and are offset by changes in the fair value of MSR. The impact of this strategy resulted in a net positive ineffectiveness of $2.1 million and $546 thousand for the three months ended June 30, 2015 and 2014, respectively. For the six months ended June 30, 2015 and 2014, the impact was a net positive ineffectiveness of $3.4 million and $2.4 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. On October 1, 2014, Trustmark elected to account for its mortgage LHFS under the fair value option in order to reduce the accounting volatility of related hedges. As a result of this election, the forward sales contracts no longer qualify as derivative instruments designated as fair value hedges under FASB ASC Topic 815. Changes in the fair value of these derivative instruments are recorded in 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 $248.0 million at June 30, 2015, with a positive valuation adjustment of $2.0 million, compared to $142.0 million, with a negative valuation adjustment of $1.0 million as of December 31, 2014. 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 in 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 $187.4 million at June 30, 2015, with a positive valuation adjustment of $1.6 million, compared to $88.4 million, with a positive valuation adjustment of $1.3 million as of December 31, 2014. 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 in 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 June 30, 2015, Trustmark had interest rate swaps with an aggregate notional amount of $348.0 million related to this program, compared to $349.4 million as of December 31, 2014. Credit-risk-related Contingent Features 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 June 30, 2015 and December 31, 2014, 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 $1.9 million. As of June 30, 2015, Trustmark had posted collateral of $2.0 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 June 30, 2015, 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. As of June 30, 2015 and December 31, 2014, Trustmark had entered into three risk participation agreements as a beneficiary with an aggregate notional amount of $18.8 million and $19.1 million, respectively. As of June 30, 2015 and December 31, 2014, Trustmark had entered into one risk participation agreement as a guarantor with an aggregate notional amount of $6.0 million and $6.2 million, respectively. The fair values of these risk participation agreements were immaterial at June 30, 2015 and December 31, 2014. Tabular Disclosures The following tables disclose the fair value of derivative instruments in Trustmark’s balance sheets as of June 30, 2015 and December 31, 2014 as well as the effect of these derivative instruments on Trustmark’s results of operations for the periods presented ($ in thousands):
|  | June 30, 2015 |  |  | December 31, 2014 |
Derivatives in hedging relationships |  |  |  |  |  |
Interest rate contracts: |  |  |  |  |  |
Interest rate swaps included in other assets |  | $ | (60 | ) |  | $ | 221 |
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |
Interest rate contracts: |  |  |  |  |  |  |  |
Futures contracts included in other assets |  | $ | (620 | ) |  | $ | 928 |
Exchange traded purchased options included in other assets |  |  | 311 |  |  |  | 253 |
OTC written options (rate locks) included in other assets |  |  | 1,621 |  |  |  | 1,299 |
Interest rate swaps included in other assets |  |  | 2,722 |  |  |  | 2,804 |
Credit risk participation agreements included in other assets |  |  | 18 |  |  |  | 22 |
Forward contracts included in other liabilities |  |  | (1,957 | ) |  |  | 1,014 |
Exchange traded written options included in other liabilities |  |  | 742 |  |  |  | 490 |
Interest rate swaps included in other liabilities |  |  | 2,705 |  |  |  | 2,813 |
Credit risk participation agreements included in other liabilities |  |  | 18 |  |  |  | 21 |
|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2015 |  |  | 2014 |  |  | 2015 |  |  | 2014 |
Derivatives in hedging relationships |  |  |  |  |  |  |  |  |  |  |  |
Amount of loss recognized from accumulated other comprehensive loss and recognized in other interest expense |  | $ | (209 | ) |  | $ | - |  |  | $ | (421 | ) |  | $ | - |
Amount of loss recognized in mortgage banking, net |  |  | - |  |  |  | (2,269 | ) |  |  | - |  |  |  | (4,299 | )
Derivatives not designated as hedging instruments |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Amount of (loss) gain recognized in mortgage banking, net |  | $ | (1,594 | ) |  | $ | 4,977 |  |  | $ | 2,956 |  |  | $ | 8,253 |
Amount of gain (loss) recognized in bank card and other fees |  |  | 118 |  |  |  | (122 | ) |  |  | 34 |  |  |  | (243 | )
The following table discloses the amount included in other comprehensive (loss) income for derivative instruments designated as cash flow hedges for the periods presented ($ in thousands):
|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2015 |  |  | 2014 |  |  | 2015 |  |  | 2014 |
Derivatives in cash flow hedging relationship |  |  |  |  |  |  |  |  |  |  |  |
Amount of gain (loss) recognized in other comprehensive income |  | $ | 174 |  |  | $ | (562 | ) |  | $ | (434 | ) |  | $ | (970 | )
Trustmark’s interest rate swap derivative instruments are subject to master netting agreements, and therefore, eligible for offsetting in the consolidated balance sheet. 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, 2015 and December 31, 2014 is presented in the following tables ($ in thousands):
Offsetting of Derivative Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
As of June 30, 2015 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  | 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 |  | $ | 2,662 |  |  | $ | - |  |  | $ | 2,662 |  |  | $ | (395 | ) |  | $ | - |  |  | $ | 2,267 |
Offsetting of Derivative Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
As of June 30, 2015 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  | 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 |  | $ | 2,705 |  |  | $ | - |  |  | $ | 2,705 |  |  | $ | (395 | ) |  | $ | 1,029 |  |  | $ | 1,281 |
Offsetting of Derivative Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
As of December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  | 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 |  | $ | 3,025 |  |  | $ | - |  |  | $ | 3,025 |  |  | $ | (347 | ) |  | $ | - |  |  | $ | 2,678 |
Offsetting of Derivative Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
As of December 31, 2014 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  |  |  |  | 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 |  | $ | 2,813 |  |  | $ | - |  |  | $ | 2,813 |  |  | $ | (347 | ) |  | $ | - |  |  | $ | 2,466 |

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