NOTE 10. DERIVATIVE INSTRUMENTS

From time to time, we enter into derivative financial instruments to manage certain cash flow and fair value risks.

Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset or liability to a particular risk, such as interest rate risk, are considered fair value hedges. We have three fair value interest rate swaps with notional amounts totaling $14.3 million associated with our medium-term notes. The fair value swaps convert interest payments with fixed rates ranging between 8.88% and 8.89% to a variable rate of 3-month LIBOR plus a spread of 6.17%. Our fair value swaps terminate at various dates in the first quarter of 2018. A $50 million notional fair value swap associated with our senior notes was terminated in December 2017 at a cost of $0.4 million. The termination cost has been recorded as a reduction to the carrying value of our long-term debt and will be amortized to earnings through the original maturity date of November 2019. Approximately $0.2 million will be recorded as interest expense over the next twelve months.

Derivatives designated and qualifying as a hedge of the exposure to variability in the cash flows of a specific asset or liability that is attributable to a particular risk, such as interest rate risk, are considered cash flow hedges. We have one interest rate swap with a notional amount of $27.5 million associated with $27.5 million of term loan debt. The cash flow hedge converts a variable rate of 2.15% plus 3-month LIBOR to a fixed rate of 3.88% and terminates in February 2026. Our cash flow hedge is expected to be highly effective in achieving offsetting cash flows attributable to the hedged interest rate risk through the term of the hedge. Therefore, changes in the fair value of the interest rate swap are recorded as a component of other comprehensive income and will be recognized in earnings when the hedged interest rate affects earnings. Changes in the fair value of the ineffective portion are recognized immediately in earnings. There has been no impact on earnings due to ineffectiveness to date. As of December 31, 2017, the amount of net losses expected to be reclassified into earnings in the next 12 months is inconsequential.

Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements, commodity price movements or other identified risks, but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly into income. In April 2017, we entered into a lumber price swap to fix the price on a total of 36 million board feet (MMBF) of southern yellow pine. The lumber price swap expired on December 31, 2017, resulting in a realized gain of $1.1 million for the period then ended.

The fair values of our cash flow and fair value derivative instruments on our Consolidated Balance Sheets as of December 31 are as follows:

		Asset Derivatives					Liability Derivatives
(Dollars in thousands)	Location	2017		2016		Location	2017		2016
Derivatives designated in fair value hedging relationships:
Interest rate contracts	Other assets, current	$	13	$	32		$	—	$	—
Interest rate contracts	Other assets, non-current				215	Other long-term obligations				91
		$	13	$	247		$	—	$	91

Derivatives designated in cash flow hedging relationships:
Interest rate contracts	Other assets, non-current	$	1,156	$	1,148		$	—	$	—

The following table details the effect of derivatives on our Consolidated Statements of Income:


(Dollars in thousands)	Location	2017			2016			2015
Derivatives designated in fair value hedging relationships:
Interest rate contracts
Realized gain on interest rate contracts¹	Interest expense	$	413		$	805		$	1,534

Derivatives designated in cash flow hedging relationships:
Interest rate contracts
Gain (loss) recognized in other comprehensive income, net of tax (effective portion)		$	(145	)	$	916		$	—
Loss reclassified from accumulated other comprehensive income (effective portion)¹	Interest expense	$	(149	)	$	(215	)	$	—

Derivatives not designated as hedging instruments:
Lumber price contracts
Realized gain on lumber price swap	Gain on lumber price swap	$	1,088		$	—		$	—

Realized gains and losses on interest rate contracts consist of net cash received or paid and interest accruals on the interest rate swaps during the periods. Net cash received or paid is included in the supplemental cash flow information within interest, net of amounts capitalized in the Consolidated Statements of Cash Flows.