The Company utilizes interest rate swaps and floors to mitigate exposure to interest rate risk and to facilitate the needs of our customers. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts principally related to the Company’s assets.

The Company uses interest rate floors to manage its exposure to interest rate movements. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up-front premium.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassed into interest income in the same period(s) during which the hedged transaction affects earnings. The earnings recognition of excluded components is presented in interest income. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassed to interest income as the Company receives interest payments on its variable-rate assets.

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. For the Company’s customers, these are interest rate swaps and risk participation agreements.

Interest Rate Swaps. The Company enters into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating-rate loan payments to fixed rate loan payments. When the Bank enters into an interest rate swap contract with a commercial loan borrower, it simultaneously enters into a “mirror” swap contract with a third party. The third party exchanges the client’s fixed-rate loan payments for floating-rate loan payments. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Because these derivatives have mirror-image contractual terms, the changes in fair value substantially offset each other through earnings. Fees earned in connection with the execution of derivatives related to this program are recognized in earnings in other loan related derivative income.

The credit risk associated with swap transactions is the risk of default by the counterparty. To minimize this risk, the Company only enters into interest rate agreements with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure.

The Company enters into risk participation agreements (“RPAs”) with other banks participating in commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. RPAs are derivative financial instruments and are recorded at fair value. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings with a corresponding offset within other assets or other liabilities.

Under a risk participation-out agreement, a derivative asset, the Company participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower and pays a fee to the participating bank. Under a risk participation-in agreement, a derivative liability, the Company assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower and receives a fee from the other bank.

The following tables present the notional amount, the location, and fair values of derivative instruments in the Company’s Consolidated Balance Sheets:

	June 30, 2019
	Derivative Assets					Derivative Liabilities
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
	(dollars in thousands)					(dollars in thousands)
Derivatives designated as hedging instruments
Interest rate contracts	$	150,000	Other Assets	$	3,528	$	—	Other Liabilities	$	—
Total derivatives designated as hedging instruments				$	3,528				$	—

Derivatives not designated as hedging instruments
Loan related derivative contracts
Interest rate swaps with customers	$	181,291	Other Assets	$	12,348	$	—	Other Liabilities	$	—
Mirror swaps with counterparties		—	Other Assets		—		181,291	Other Liabilities		12,348
Risk participation agreements out to counterparties		19,000	Other Assets		46		—	Other Liabilities		—
Risk participation agreements in with counterparties		—	Other Assets		—		78,700	Other Liabilities		459
Total derivatives not designated as hedging instruments				$	12,394				$	12,807

	December 31, 2018
	Derivative Assets					Derivative Liabilities
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
	(dollars in thousands)					(dollars in thousands)
Derivatives designated as hedging instruments
Interest rate contracts	$	150,000	Other Assets	$	1,970	$	—	Other Liabilities	$	—
Total derivatives designated as hedging instruments				$	1,970				$	—

Derivatives not designated as hedging instruments
Loan related derivative contracts
Interest rate swaps with customers	$	150,489	Other Assets	$	5,782	$	—	Other Liabilities	$	—
Mirror swaps with counterparties		—	Other Assets		—		150,489	Other Liabilities		5,782
Risk participation agreements out to counterparties		19,000	Other Assets		28		—	Other Liabilities		—
Risk participation agreements in with counterparties		—	Other Assets		—		63,825	Other Liabilities		179
Total derivatives not designated as hedging instruments				$	5,810				$	5,961

The following table presents the effect of cash flow hedge accounting on accumulated other comprehensive income (“AOCI”) at June 30, 2019:

	Amount of Gain or (Loss) Recognized in OCI		Amount of Gain or (Loss) Recognized in OCI Included Component		Amount of Gain or (Loss) Recognized in OCI Excluded Component			Location of Gain or (Loss)	Amount of Gain or (Loss) Reclassified from AOCI into Income			Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component		Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
	Three Months Ended June 30, 2019								Three Months Ended June 30, 2019
	(dollars in thousands)								(dollars in thousands)
Interest rate contracts	$	1,647	$	2,080	$	(433	)	Interest Income	$	(48	)	$	—	$	(48	)
Total	$	1,647	$	2,080	$	(433	)		$	(48	)	$	—	$	(48	)

	Amount of Gain or (Loss) Recognized in OCI		Amount of Gain or (Loss) Recognized in OCI Included Component		Amount of Gain or (Loss) Recognized in OCI Excluded Component			Location of Gain or (Loss)	Amount of Gain or (Loss) Reclassified from AOCI into Income			Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component		Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
	Six Months Ended June 30, 2019								Six Months Ended June 30, 2019
	(dollars in thousands)								(dollars in thousands)
Interest rate contracts	$	1,558	$	2,080	$	(522	)	Interest Income	$	(96	)	$	—	$	(96	)
Total	$	1,558	$	2,080	$	(522	)		$	(96	)	$	—	$	(96	)

Over the next 12 months, the Company estimates that an additional $28,000 will be reclassified out of AOCI into earnings, as a reduction to interest income.

The following table presents the effect of the Company’s derivative financial instruments on the Income Statement at June 30, 2019:

	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
	Interest Income			Interest Income
	(dollars in thousands)
Total amount of income presented in the income statement in which the effects of fair value or cash flow hedges are recorded	$	(48	)	$	(96	)
The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest rate contracts
Amount of gain or (loss) reclassed from AOCI into income	$	(48	)	$	(96	)
Amount of gain or (loss) reclassed from AOCI into income - Included Component		—			—
Amount of gain or (loss) reclassed from AOCI into income - Excluded Component	$	(48	)	$	(96	)

The following tables present the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the Income Statement as of the periods presented:

		Amount of Gain or (Loss) Recognized in Income on Derivative
		Three Months Ended June 30,			Three Months Ended June 30,
		2019			2018
	Location of Gain or (Loss)	(dollars in thousands)
Other contracts	Other income	$	(61	)	$	12
Total		$	(61	)	$	12

		Amount of Gain or (Loss) Recognized in Income on Derivative
		Six Months Ended June 30,		Six Months Ended June 30,
		2019		2018
	Location of Gain or (Loss)	(dollars in thousands)
Other contracts	Other income	$	13	$	40
Total		$	13	$	40

By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s Board of Directors. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote.

The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. In addition, the Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative positions, and the Company would be required to settle its obligations under the agreements.

As of June 30, 2019, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements was $8.5 million. As of June 30, 2019, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $8.4 million. If the Company had breached any of these provisions at June 30, 2019, then it could have been required to settle its obligations under the agreements at their termination value of $8.5 million.

Certain financial instruments may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. The Company’s derivative transactions with institutional counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Generally, the Company does not offset such financial instruments for financial reporting purposes.

The following tables present the information about financial instruments that are eligible for offset in the consolidated balance sheet as June 30, 2019 and December 31, 2018:

								Gross Amounts Not Offset
		Gross Amounts of Recognized		Gross Amounts Offset		Net Amounts Recognized		Financial Instruments		Collateral Pledged (Received)			Net Amount
	June 30, 2019
	(dollars in thousands)
Offsetting of Derivative Assets
Derivative Assets		$	15,922	$	—	$	15,922	$	3,663	$	—		$	12,259

Offsetting of Derivative Liabilities
Derivative Liabilities		$	12,807	$	—	$	12,807	$	3,663	$	8,428		$	716

								Gross Amounts Not Offset
		Gross Amounts of Recognized		Gross Amounts Offset		Net Amounts Recognized		Financial Instruments		Collateral Pledged (Received)			Net Amount
	December 31, 2018
	(dollars in thousands)
Offsetting of Derivative Assets
Derivative Assets		$	7,780	$	—	$	7,780	$	3,099	$	(743	)	$	3,938

Offsetting of Derivative Liabilities
Derivative Liabilities		$	5,961	$	—	$	5,961	$	3,099	$	260		$	2,602