DERIVATIVES AND HEDGING ACTIVITIES

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 five 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:



December 31, 2017
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	9-Dec-08	10-Dec-08	10-Dec-18	3 Month LIBOR	1.54	%	2.94	%	$	(264	)
25,000		1-Apr-16	17-Jan-17	15-Dec-21	3 Month LIBOR	1.59	%	1.36	%	772
25,000		1-Apr-16	17-Jan-17	15-Dec-21	3 Month LIBOR	1.59	%	1.36	%	763
25,000		18-Jul-17	15-Aug-17	15-Aug-22	3 Month LIBOR	1.42	%	1.88	%	345
$	100,000									$	1,616

December 31, 2016
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	9-Dec-08	10-Dec-08	10-Dec-18	3 Month LIBOR	0.95	%	2.94	%	$	(740	)
25,000		1-Apr-16	17-Jan-17	15-Dec-21	3 Month LIBOR	N/A		1.36	%	689
25,000		1-Apr-16	17-Jan-17	15-Dec-21	3 Month LIBOR	N/A		1.36	%	675
$	75,000									$	624

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 $202,000 (pre-tax) to be reclassified as an offset 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 December 31, 2017.

The Company recognized $244,000 of net amortization income that was an offset to interest expense related to previously terminated swaps for the years ended December 31, 2017, 2016 and 2015.

The Company had no fair value hedges during 2017, 2016 and 2015.

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. The amounts relating to the notional principal amount are not actually exchanged.

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 amounts relating to the notional principal amount are exchanged.

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



	Number of Positions (1)	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
	December 31, 2017
	(Dollars in thousands)
Loan level swaps
Receive fixed, pay variable	246	$	36,023	$	61,500	$	152,287	$	111,147	$	591,385	$	952,342	$	3,875
Pay fixed, receive variable	231	$	36,023	$	61,500	$	152,287	$	111,147	$	591,385	$	952,342	$	(3,880	)
Foreign exchange contracts
Buys foreign currency, sells U.S. currency	15	$	26,382	$	3,780	$	—	$	—	$	—	$	30,162	$	1,202
Buys U.S. currency, sells foreign currency	15	$	26,382	$	3,780	$	—	$	—	$	—	$	30,162	$	(1,188	)
	December 31, 2016
	(Dollars in thousands)
Loan level swaps
Receive fixed, pay variable	222	$	30,245	$	21,708	$	63,771	$	165,783	$	567,897	$	849,404	$	12,005
Pay fixed, receive variable	207	$	30,245	$	21,708	$	63,771	$	165,783	567,897		$	849,404	$	(12,008	)
Foreign exchange contracts
Buys foreign currency, sells U.S. currency	33	$	45,711	$	—	$	—	$	—	$	—	$	45,711	$	(2,250	)
Buys U.S. currency, sells foreign currency	33	$	45,711	$	—	$	—	$	—	$	—	$	45,711	$	2,277


(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. These forward commitments carry a market price that has a strong inverse relationship to that of mortgage prices. Certain assumptions, including pull through rates and rate lock periods, are used in managing the existing and future economic 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 and forward delivery sale commitments 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 $113,000, an increase of $87,000 and a decrease of $22,000 for the years ended December 31, 2017, 2016, and 2015, respectively. These amounts were offset in earnings by the change in the fair value of mortgage derivatives. Additionally, the aggregate amount of net realized gains or losses on sales of such loans included within mortgage banking income amounted to $4.7 million, $6.1 million and $4.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.

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	December 31, 2017		December 31, 2016		Balance Sheet Location	December 31, 2017		December 31, 2016
	(Dollars in thousands)
Derivatives designated as hedges
Interest rate derivatives	Other assets	$	1,880	$	1,364	Other liabilities	$	264	$	740
Derivatives not designated as hedges
Customer Related Positions:
Loan level derivatives	Other assets	14,236		18,629		Other liabilities	14,241		18,632
Foreign exchange contracts	Other assets	1,202		2,338		Other liabilities	1,188		2,311
Mortgage Derivatives
Interest rate lock commitments	Other assets	149		430		Other liabilities	—		—
Forward sales agreements	Other assets	9		—		Other liabilities	—		233
		15,596		21,397			15,429		21,176
Total		$	17,476	$	22,761		$	15,693	$	21,916

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



	Years Ended December 31
	2017			2016			2015
	(Dollars in thousands)
Derivatives designated as hedges
Gain in OCI on derivatives (effective portion), net of tax	$	443		$	2,170		$	1,199
Loss reclassified from OCI into interest expense (effective portion)	$	(441	)	$	(2,520	)	$	(2,828	)
Loss recognized in income on derivatives (ineffective portion and 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	$	6		$	73		$	60
Other expenses	(21		)	(82		)	(53		)
Changes in fair value of mortgage derivatives
Mortgage banking income	(39		)	(35		)	(50		)
Total	$	(54	)	$	(44	)	$	(43	)

The Company's derivative agreements with institutional counterparties contain various credit-risk related contingent provisions, such as requiring the Company to maintain a well-capitalized capital position. If the Company fails to meet these conditions, the counterparties could request the Company make immediate payment or demand that the Company provide immediate and ongoing full collateralization on derivative positions in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position was $4.2 million and $12.8 million at December 31, 2017 and December 31, 2016, respectively. Although none of the contingency provisions have applied as of December 31, 2017 and December 31, 2016, the Company has posted collateral to offset the net liability exposure with institutional counterparties.

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. The Company's exposure relating to institutional counterparties was $7.1 million and $4.7 million at December 31, 2017 and 2016, respectively. The Company’s exposure relating to customer counterparties was approximately $9.5 million and $16.1 million at December 31, 2017 and 2016, respectively. Credit exposure may be reduced by the amount of collateral pledged by the counterparty.