NOTE 8. 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 had three fair value interest rate swaps with notional amounts totaling $14.3 million, which matured during 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 four interest rate swaps to convert variable-rate debt, comprised of 1-month and 3-month LIBOR plus a spread, to fixed-rate debt. Our cash flow hedges are expected to be highly effective in achieving offsetting cash flows attributable to the hedged interest rate risk through the term of the swaps. Therefore, changes in fair value are recorded as a component of other comprehensive income and will be recognized in earnings when the hedged interest rates affect earnings. The amounts paid or received on the swaps will be recognized as adjustments to interest expense. As of September 30, 2018, the amount of net losses expected to be reclassified into earnings in the next 12 months is $0.1 million.

The following table presents the gross fair values of derivative instruments on our Condensed Consolidated Balance Sheets:

		Asset Derivatives					Liability Derivatives
(Dollars in thousands)	Location	September 30, 2018		December 31, 2017		Location	September 30, 2018		December 31, 2017
Derivatives designated in fair value hedging relationships:
Interest rate contracts	Other assets, current	$	—	$	13		$	—	$	—

Derivatives designated in cash flow hedging relationships:
Interest rate contracts	Other assets, non-current	$	3,392	$	1,156		$	—	$	—

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

		Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	Location	2018			2017			2018			2017
Derivatives designated in fair value hedging relationships:
Interest rate contracts
Realized gain (loss) on interest rate contracts¹	Interest expense	$	(52	)	$	76		$	(138	)	$	366

Derivatives designated in cash flow hedging relationships:
Interest rate contracts
Gain (loss) recognized in other comprehensive income, net of tax		$	1,330		$	(30	)	$	1,394		$	(258	)
Loss reclassified from accumulated other comprehensive income¹	Interest expense	$	(261	)	$	(30	)	$	(456	)	$	(121	)

Derivatives not designated as hedging instruments:
Lumber price contracts
Realized gain on lumber price swap		$	—		$	986		$	—		$	986
Unrealized gain (loss) on lumber price swap	Gain (loss) on lumber price swap	$	—		$	(3,067	)	$	—		$	199
Net gain (loss) on lumber price contracts		$	—		$	(2,081	)	$	—		$	1,185

Interest expense, net		$	10,109		$	7,336		$	25,125		$	19,654

Realized gain (loss) on hedging instruments consist of net cash settlements and interest accruals on interest rate swaps during the periods. Net cash settlements are included in the supplemental cash flow information within interest, net of amounts capitalized in the Condensed Consolidated Statements of Cash Flows.