DERIVATIVES

Lakeland is a party to interest rate derivatives that are not designated as hedging instruments. Under a program, Lakeland executes interest rate swaps with commercial lending customers to facilitate their respective risk management strategies. These interest rate swaps with customers are simultaneously offset by interest rate swaps that Lakeland executes with a third party, such that Lakeland minimizes its net risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. The changes in the fair value of the swaps offset each other, except for the credit risk of the counterparties, which is determined by taking into consideration the risk rating, probability of default and loss given default for all counterparties. As of December 31, 2017 and 2016, Lakeland had $500,000 and $7.5 million, respectively, in securities pledged for collateral on its interest rate swaps.

In June 2016, the Company entered into two cash flow hedges in order to hedge the variable cash outflows associated with its floating rate subordinated debentures (See Note 8). The notional value of these hedges was $30.0 million. The Company’s objective in using the cash flow hedge is to add stability to interest expense and to manage its exposure to interest rate movements. The Company used interest rate swaps designated as cash flow hedges which involved the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In these particular hedges the Company is paying a third party an average of 1.10% in exchange for a payment at 3 month LIBOR. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the year ended December 31, 2017, the Company did not record any hedge ineffectiveness. The Company recognized $29,000 of accumulated other comprehensive income that was reclassified into interest expense during 2017. The Company did not enter into any hedges in 2017.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s debt. During the next twelve months, the Company estimates that $178,000 will be reclassified as a decrease to interest expense should the rate environment remain the same.

The following table presents summary information regarding these derivatives for the periods presented (dollars in thousands):



December 31, 2017	Notional Amount		Average Maturity (Years)	Weighted Average Rate Fixed		Weighted Average Variable Rate	Fair Value
Classified in Other Assets:
3rd Party interest rate swaps	$	110,076	8.8	3.87	%	1 Mo. LIBOR + 2.11%	$	3,634
Customer interest rate swaps	82,760		11.5	4.74	%	1 Mo. LIBOR + 2.21%	1,831
Interest rate swap (cash flow hedge)	30,000		3.5	1.10	%	3 Mo. LIBOR	1,090
Classified in Other Liabilities:
Customer interest rate swaps	$	110,076	8.8	3.87	%	1 Mo. LIBOR + 2.11%	$	(3,634	)
3rd party interest rate swaps	82,760		11.5	4.74	%	1 Mo. LIBOR + 2.21%	(1,831		)



December 31, 2016	Notional Amount			Average Maturity (Years)	Weighted Average Rate Fixed		Weighted Average Variable Rate	Fair Value
Customer interest rate swaps	$	129,252		10.9	4.03	%	1 Mo. LIBOR + 2.10%	$	(2,345	)
3rd party interest rate swaps	(129,252		)	10.9	4.03	%	1 Mo. LIBOR + 2.10%	2,345
Interest rate swap (cash flow hedge)	30,000			4.5	1.10	%	3 Mo. LIBOR	1,033