(

) Derivative Financial Instruments

Periodically, Bancorp enters into an interest rate swap transaction with a borrower, who desires to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the consolidated balance sheet at fair value. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition are expected to have an insignificant effect on earnings. Exchanges of cash flows related to the undesignated interest rate swap agreements for

2017

were offsetting and therefore had

net effect on Bancorp’s earnings or cash flows.

Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. Notional amounts are amounts on which calculations, payments, and the value of the derivative are based. Notional amounts do

not

represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Bancorp is exposed to credit-related losses in the event of nonperformance by counterparties to these agreements. Bancorp mitigates credit risk of its financial contracts through credit approvals, limits, collateral, and monitoring procedures, and does

not

expect any counterparties to fail their obligations.

December 31, 2018

and

2017

Bancorp had outstanding undesignated interest rate swap contracts as follows:

(Dollar amounts in thousands)	Receiving				Paying
	December 31,		December 31,		December 31,		December 31,
	201 8		201 7		201 8		201 7
Notional amount	$	55,505	$	54,964	$	55,505	$	54,964
Weighted average maturity (years)		8.0		8.7		8.0		8.7
Fair value	$	519	$	259	$	543	$	283

2016,

Bancorp entered into an interest rate swap to hedge cash flows of a

$10

million rolling fixed-rate

three

-month FHLB borrowing. The swap began in

December 2016

and ends in

December 2021.

2015,

Bancorp entered into an interest rate swap to hedge cash flows of a

$20

million rolling fixed-rate

three

-month FHLB borrowing. The swap began in

December 2015

and matures in

December 2020.

For purposes of hedging, rolling fixed rate advances are considered to be floating rate liabilities. Interest rate swaps involve exchange of Bancorp’s floating rate interest payments for fixed rate swap payments on underlying principal amounts. These swaps were designated, and qualified, for cash-flow hedge accounting. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of gains or losses is reported as a component of other comprehensive income, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction affects earnings.

The following table details Bancorp’s derivative position designated as a cash flow hedge, and the fair values as of

December 31, 2018

and

2017.

(Dollars in thousands)

Notional		Maturity	Receive (variable)	Pay fixed			Fair value		Fair value
amount		date	index	swap rate			December 31, 201 8		December 31, 201 7
$	10,000	12/6/2021	US 3 Month LIBOR		1.89	%	$	193	$	106
	20,000	12/6/2020	US 3 Month LIBOR		1.79			323		190
$	30,000				1.82	%	$	516	$	296