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 and its known or expected cash payments principally to manage the Company’s interest rate risk. Additionally, the Company enters into interest rate derivatives and foreign exchange contracts to accommodate the business requirements of its customers (“customer related positions”). The Company minimizes the market and liquidity risks of customer related positions by entering into similar offsetting positions with broker-dealers. Derivative instruments are carried at fair value in the Company’s financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies as a hedge for accounting purposes, and further, by the type of hedging relationship.

The Company does not enter into proprietary trading positions for any derivatives.

Interest Rate Positions

The Company currently utilizes interest rate swap agreements as hedging instruments against interest rate risk associated with the Company’s borrowings. An interest rate swap is an agreement whereby one party agrees to pay a floating rate of interest on a notional principal amount in exchange for receiving a fixed rate of interest on the same notional amount, for a predetermined period of time, from a second party. The amounts relating to the notional principal amount are not actually exchanged. The maximum length of time over which the Company is currently hedging its exposure to the variability in future cash flows for forecasted transactions related to the payment of variable interest on existing financial instruments is three years.

The following table reflects the Company’s derivative positions for the periods indicated below for interest rate swaps which qualify as cash flow hedges for accounting purposes:



September 30, 2015
Notional Amount		Trade Date	Effective Date	Maturity Date	Receive (Variable) Index	Current Rate Received		Pay Fixed Swap Rate		Fair Value
(Dollars in thousands)
$	25,000	16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR	0.34	%	5.04	%	$	(1,409	)
25,000		16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR	0.34	%	5.04	%	(1,409		)
25,000		9-Dec-08	10-Dec-08	10-Dec-18	3 Month LIBOR	0.33	%	2.94	%	(1,537		)
$	75,000									$	(4,355	)
December 31, 2014
Notional Amount		Trade Date	Effective Date	Maturity Date	Receive (Variable) Index	Current Rate Received		Pay Fixed Swap Rate		Fair Value
				(Dollars in thousands)
$	25,000	16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR	0.24	%	5.04	%	$	(2,093	)
25,000		16-Feb-06	28-Dec-06	28-Dec-16	3 Month LIBOR	0.24	%	5.04	%	(2,094		)
25,000		9-Dec-08	10-Dec-08	10-Dec-18	3 Month LIBOR	0.24	%	2.94	%	(1,383		)
$	75,000									$	(5,570	)

For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of the gains or losses is reported as a component of other comprehensive income ("OCI"), and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The Company expects approximately $2.7 million (pre-tax) to be reclassified to interest expense from OCI related to the Company’s cash flow hedges in the next twelve months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of September 30, 2015.

For both the three and nine month periods ended September 30, 2015 and 2014 the Company recognized $61,000 and $183,000, respectively, of net amortization income that was an offset to interest expense related to previously terminated swaps .

The Company had no fair value hedges as of September 30, 2015 or December 31, 2014.

Customer Related Positions

Loan level derivatives, primarily interest rate swaps, offered to commercial borrowers through the Company’s loan level derivative program do not qualify as hedges for accounting purposes. The Company believes that its exposure to commercial customer derivatives is limited because these contracts are simultaneously matched at inception with an offsetting dealer transaction. The commercial customer derivative program allows the Company to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable-to-fixed interest rate swap.

Foreign exchange contracts offered to commercial borrowers through the Company’s derivative program do not qualify as hedges for accounting purposes. The Company acts as a seller and buyer of foreign exchange contracts to accommodate its customers. To mitigate the market and liquidity risk associated with these derivatives, the Company enters into similar offsetting positions.

The following table reflects the Company’s customer related derivative positions for the periods indicated below for those derivatives not designated as hedging:



		Notional Amount Maturing
	Number of Positions (1)	Less than 1 year		Less than 2 years		Less than 3 years		Less than 4 years		Thereafter		Total		Fair Value
	September 30, 2015
	(Dollars in thousands)
Loan level swaps
Receive fixed, pay variable	176	$	63,287	$	19,527	$	42,008	$	92,501	$	435,087	$	652,410	$	29,205
Pay fixed, receive variable	170	$	63,287	$	19,527	$	42,008	$	92,501	$	435,087	$	652,410	$	(29,202	)
Foreign exchange contracts
Buys foreign currency, sells U.S. currency	29	$	35,732	$	—	$	—	$	—	$	—	$	35,732	$	332
Buys U.S. currency, sells foreign currency	29	$	35,732	$	—	$	—	$	—	$	—	$	35,732	$	(304	)
	December 31, 2014
	(Dollars in thousands)
Loan level swaps
Receive fixed, pay variable	174	$	88,147	$	46,854	$	40,958	$	38,108	$	403,208	$	617,275	$	17,840
Pay fixed, receive variable	168	$	88,147	$	46,854	$	40,958	$	38,108	$	403,208	$	617,275	$	(17,837	)
Foreign exchange contracts
Buys foreign currency, sells U.S. currency	23	$	57,112	$	—	$	—	$	—	$	—	$	57,112	$	3,983
Buys U.S. currency, sells foreign currency	23	$	57,112	$	—	$	—	$	—	$	—	$	57,112	$	(3,960	)


(1)	The Company may enter into one dealer swap agreement which offsets multiple commercial borrower swap agreements.

Mortgage Derivatives

Prior to closing and funding certain 1- 4 family residential mortgage loans, an interest rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments are executed, under which the Company agrees to deliver whole mortgage loans to various investors. In addition, the Company may also enter into additional forward To Be Announced ("TBA") mortgage contracts, also considered derivative instruments, which are purchased by the Company from a diversified list of counterparties in order to hedge customer rate locks. These forward contracts carry a market price that has a strong inverse relationship to that of mortgage prices. When the Company locks a rate to the customer, the rate can be held for the benefit of the customer for a certain period of time until the mortgage is sold. During that time, the Company may not have agreed on a price with a mortgage investor and fluctuations in market conditions may cause the mortgage to lose market value. Within a short period after the rate is locked with the customer, the Company may, depending upon the effectiveness of existing hedges, execute a forward TBA trade with a counterparty to hedge that market risk. Certain assumptions, including pull through rates and rate lock periods, are used in managing the existing and future hedges. The effectiveness of the economic hedges rely on the accuracy of these assumptions.

The change in fair value on the interest rate lock commitments, forward delivery sale commitments, and forward TBA mortgage contracts are recorded in current period earnings as a component of mortgage banking income. In addition, the Company has elected the fair value option to carry loans held for sale at fair value. The change in fair value of loans held for sale is recorded in current period earnings as a component of mortgage banking income in accordance with the Company's fair value election. The change in fair value associated with loans held for sale was a decrease of $181,000 and $223,000 for the three months ended September 30, 2015 and 2014, respectively, and an increase of $3,000 and $1,000 for the nine months ended September 30, 2015 and 2014, respectively. These amounts were offset in earnings by the change in the fair value of mortgage derivatives. The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet at the periods indicated:



	Asset Derivatives					Liability Derivatives
		Fair Value at		Fair Value at			Fair Value at		Fair Value at
	Balance Sheet Location	September 30, 2015		December 31, 2014		Balance Sheet Location	September 30, 2015		December 31, 2014
	(Dollars in thousands)
Derivatives designated as hedges
Interest rate derivatives	Other assets	$	—	$	—	Other liabilities	$	4,355	$	5,570
Derivatives not designated as hedges
Customer Related Positions
Loan level derivatives	Other assets	$	29,205	$	18,383	Other liabilities	$	29,202	$	18,380
Foreign exchange contracts	Other assets	662		4,007		Other liabilities	634		3,984
Mortgage Derivatives
Interest rate lock commitments	Other assets	209		295		Other liabilities	—		—
Forward TBA mortgage contracts	Other assets	—		—		Other liabilities	—		16
Forward sales agreements	Other assets	140		3		Other liabilities	—		—
		$	30,216	$	22,688		$	29,836	$	22,380
Total		$	30,216	$	22,688		$	34,191	$	27,950

The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:



	Three Months Ended						Nine Months Ended
	September 30						September 30
	2015			2014			2015			2014
	(Dollars in thousands)
Derivatives designated as hedges
Gain in OCI on derivatives (effective portion), net of tax	$	132		$	578		$	596		$	2,085
Loss reclassified from OCI into interest expense (effective portion)	$	(715	)	$	(726	)	$	(2,130	)	$	(2,937	)
Loss reclassified from OCI into noninterest expense (loss on termination)	$	—		$	—		$	—		$	(1,122	)
Loss recognized in income on derivatives (ineffective portion & amount excluded from effectiveness testing)
Interest expense	$	—		$	—		$	—		$	—
Other expense	—			—			—			—
Total	$	—		$	—		$	—		$	—
Derivatives not designated as hedges
Changes in fair value of customer related positions
Other income	$	39		$	10		$	56		$	54
Other expense	—			(1		)	(51		)	(3		)
Changes in fair value of mortgage derivatives
Mortgage banking income	174			42			$	67		$	43
Total	$	213		$	51		$	72		$	94

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 those counterparties is remote and losses, if any, would be immaterial. The Company had no exposure at September 30, 2015 and $272,000 in exposure relating to institutional counterparties at December 31, 2014. The Company’s exposure relating to customer counterparties was approximately $30.0 million and $18.9 million at September 30, 2015 and December 31, 2014, respectively. Credit exposure may be reduced by the amount of collateral pledged by the counterparty.