DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both economic conditions and our business operations. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of our assets and liabilities. We manage a matched book with respect to our derivative instruments in order to minimize our net risk exposure resulting from such transactions. Our cash flow hedging program began in the third quarter of 2016.

Fair Values of Derivative Instruments

The table below presents the fair value of our derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition as of December 31, 2017.



	Fair Values of Derivative Instruments
	December 31, 2017
(Dollars in thousands)	Notional		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Interest Rate Products	$	75,000	Other Liabilities	$	(3,172	)
Total	75,000			$	(3,172	)
Derivatives not designated as hedging instruments:
Interest Rate Lock Commitment with Customers	$	44,079	Other Assets	$	571
Interest Rate Lock Commitment with Customers	8,992		Other Liabilities	(23		)
Forward Sale Commitments	29,064		Other Assets	180
Forward Sale Commitments	19,192		Other Liabilities	(47		)
Total	101,327			681
Total derivatives	176,327			(2,491		)

Cash Flow Hedges of Interest Rate Risk

Our objectives in using interest rate derivatives are to add stability to interest income and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts from a counterparty in exchange for us making variable-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive (loss) income and is subsequently reclassified into earnings in the period that the hedged forecast transaction affects earnings. During the year ended December 31, 2017, such derivatives were used to hedge the variable cash flows associated with a variable rate loan pool. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the year ended December 31, 2017, we did not record any hedge ineffectiveness.

Amounts reported in accumulated other comprehensive income related to derivatives are reclassified to interest income as interest payments are received on our variable-rate pooled loans. During the next twelve months, we estimate that less than $0.5 million will be reclassified as an increase to interest expense.

We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 1 month (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

As of December 31, 2017, the Company had three outstanding interest rate derivatives with a notional amount of $75 million that were designated as a cash flow hedges of interest rate risk.

Effect of Derivative Instruments on the Income Statement

The tables below present the effect of our derivative financial instruments on the Consolidated Statements of Income for the years ended December 31, 2017 and December 31, 2016.



	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
(Dollars in thousands)	Twelve Months Ended
Derivatives in Cash Flow Hedging Relationships	2017			2016
Interest Rate Products	$	184		$	(2,890	)	Interest expense
Total	$	184		$	(2,890	)

	Amount of Gain or (Loss) Recognized in Income						Location of Gain or (Loss) recognized in income
(Dollars in thousands)	Twelve Months Ended
Derivatives Not Designated as a Hedging Instrument	2017			2016
Interest Rate Lock Commitments	680			—			Mortgage banking activity, net
Forward Sale Commitments	(986		)	—			Mortgage banking activity, net
Total	(306		)	—

Credit-risk-related Contingent Features

We have agreements with certain of our derivative counterparties that contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations.

We also have agreements with certain of our derivative counterparties that contain a provision where if we fail to maintain our status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements.

As of December 31, 2017 the termination value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $3.2 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties, and has posted collateral of $3.4 million against its obligations under these agreements. If the Company had breached any of these provisions at December 31, 2017, it could have been required to settle its obligations under the agreements at the termination value.