DERIVATIVES

The Company uses interest rate swaps to manage interest rate risk related to borrowings that expose the Company to variability in cash flows due to changes in interest rates. The Company entered into LIBOR-based forward interest rate swaps that are designated as cash flow hedges with the objective of limiting the variability of forecasted interest payment cash flows resulting from changes in the benchmark interest rate LIBOR. Changes in the fair value of interest rate swaps designated as cash flow hedging instruments are reported in accumulated other comprehensive income ("AOCI") and subsequently reclassified into interest expense in the same period in which the related interest on the floating-rate borrowings affects earnings.

The Company is also a party to interest rate derivatives that are not designated as hedging instruments. The Company uses interest rate derivative contracts, such as swaps and caps, in the normal course of business to meet the financial needs of its customers. The interest rate swaps that the Company enters into with customers allow the customers to convert variable rate loans to fixed rates. At the same time the interest rate swap is entered into with the customer, an offsetting interest rate swap is entered into with another financial institution. The changes in the fair value of the swaps offset each other, except for any differences in the credit risk of the counterparties, which is determined by considering the risk rating, probability of default and loss given default of each counterparty. The Company recorded $4.0 million and $1.4 million of derivative contract fees in noninterest income in the accompanying Consolidated Statement of Income for the three months ended March 31, 2018 and 2017, respectively.

In addition, the Company has entered into three risk participation agreements. The notional amount of the risk participation agreements sold was $34.8 million as of March 31, 2018. Assuming all underlying third party customers referenced in the swap agreements defaulted at March 31, 2018, there would be an immaterial amount of exposure to the company. These risk participation agreements mature in 2021.

No credit changes in counterparty credit were identified. There was no change in the fair value of derivative assets and derivative liabilities attributable to credit risk included in noninterest expense in the Consolidated Statements of Income for the three months ended March 31, 2018 or 2017.

The following tables summarize the Company’s derivatives outstanding included in other assets and other liabilities in the accompanying Consolidated Balance Sheets:



March 31, 2018	Derivative Assets				Derivative Liabilities
	Notional		Fair Value		Notional		Fair Value
	(Dollars in thousands)
Derivatives designated as cash flow hedges:
Interest rate contracts - pay fixed, receive floating	$	—	$	—	$	250,000	$	1,483
Total cash flow hedges	—		—		250,000		1,483
Derivatives not designated as hedges:
Interest rate contracts - pay floating, receive fixed	352,736		7,232		904,363		15,009
Interest rate contracts - pay fixed, receive floating	904,363		7,777		352,736		—
Interest rate caps purchased	94,765		343		—		—
Interest rate caps sold	—		—		94,765		343
Risk participation agreements	32,319		—		2,450		4
Total derivatives not designated as hedges	1,384,183		15,352		1,354,314		15,356
Total derivatives	$	1,384,183	$	15,352	$	1,604,314	$	16,839



December 31, 2017	Derivative Assets				Derivative Liabilities
	Notional		Fair Value		Notional		Fair Value
	(Dollars in thousands)
Derivatives not designated as hedges:
Interest rate contracts - pay floating, receive fixed	$	757,887	$	11,678	$	380,233	$	4,180
Interest rate contracts - pay fixed, receive floating	380,233		—		757,887		7,498
Interest rate caps - purchased	94,884		155		—		—
Interest rate caps - sold	—		—		94,884		155
Total derivatives	$	1,233,004	$	11,833	$	1,233,004	$	11,833

The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to the cash flow derivative instruments for the following periods:



March 31, 2018	Amount of Gain (Loss) Recognized in AOCI		Amount of Gain (Loss) Reclassified from AOCI to Interest Expense	Location of Gain (Loss) Reclassified from AOCI into Income
	(Dollars in thousands)
Derivatives designated as cash flow hedges:
Interest rate contracts - pay fixed, receive floating	(1,113	)	—	Interest on borrowings

During the three months ended March 31, 2018 and 2017, no derivative positions designated as cash flow hedges were discontinued and none of the gains or losses reported in AOCI were reclassified into earnings as a result of the discontinuance of cash flow hedges or because of the early extinguishment of borrowings.

The derivative transactions entered into with a financial institution are subject to an enforceable master netting arrangement.

The following table summarizes the gross and net fair values of the Company’s derivatives outstanding with this counterparty included in other liabilities in the accompanying Consolidated Balance Sheets:



March 31, 2018	Gross amounts of recognized liabilities		Gross amounts offset in the consolidated balance sheets			Net amounts in the consolidated balance sheets
	(Dollars in thousands)
Offsetting derivative liabilities:
Counterparty A - Interest rate contracts	$	15,009	$	(7,232	)	$	7,777



December 31, 2017	Gross amounts of recognized liabilities		Gross amounts offset in the consolidated balance sheets			Net amounts in the consolidated balance sheets
	(Dollars in thousands)
Offsetting derivative liabilities:
Counterparty A - Interest rate contracts	$	11,833	$	(4,491	)	$	7,342

At March 31, 2018, the Company has pledged investment securities available for sale with a carrying amount of $2.9 million as collateral for the interest rate swaps in a liability position. The amount of collateral required to be posted by the Company varies based on the settlement value of outstanding swaps.

As of March 31, 2018 and December 31, 2017, substantially all of the floating rate terms within the interest rate contracts held by the Company were indexed to 1-month LIBOR.

The fair value of the derivative assets and liabilities are included in a table in Note 14 “Fair Value Measurements,” in the line items “Derivative assets” and “Derivative liabilities.”