DERIVATIVE FINANCIAL INSTRUMENTS

The Company is a party to various derivative financial instruments that are used in the normal course of business to meet the needs of its clients and as part of its risk management activities. These instruments include interest rate swaps and option contracts and foreign exchange forward contracts. The Company does not enter into derivative financial instruments for trading purposes.

Using derivative instruments can involve assuming counterparty credit risk to varying degrees. Counterparty credit risk relates to the loss the Company could incur if a counterparty were to default on a derivative contract. Notional amounts of derivative financial instruments do not represent credit risk, and are not recorded in the consolidated balance sheet. The overall credit risk and exposure to individual counterparties is monitored. The Company does not anticipate nonperformance by any counterparties. The amount of counterparty credit exposure is the unrealized gains in excess of collateral pledged, if any, on such derivative contracts along with the value of foreign exchange forward contracts. At December 31, 2017, the Company had $2.1 million of counterparty credit exposure on derivatives. This counterparty risk is considered as part of underwriting and on-going monitoring policies. At December 31, 2017 and 2016, the Company had pledged cash of $1.4 million and $0.7 million, respectively, as collateral in connection with interest rate swap agreements.

Hedging Instruments. At December 31, 2017, the Company had no outstanding hedging instruments used to manage risk. In the past, the Company entered into interest rate caps in order to economically hedge changes in fair value of certain state tax credits held for sale. See Note 18 – Fair Value Measurements for further discussion of the fair value of the state tax credits. The notional amount of the derivative instruments used to manage risk was $3.5 million at December 31, 2016.

Client-Related Derivative Instruments. The Company enters into interest rate swaps to allow customers to hedge changes in fair value of certain loans while maintaining a variable rate loan on its balance sheet. The Company also enters into foreign exchange forward contracts with clients, and enters into offsetting foreign exchange forward contracts with established financial institution counterparties. The table below summarizes the notional amounts and fair values of the client-related derivative instruments.



					Asset Derivatives (Other Assets)				Liability Derivatives (Other Liabilities)
	Notional Amount				Fair Value				Fair Value
(in thousands)	December 31, 2017		December 31, 2016		December 31, 2017		December 31, 2016		December 31, 2017		December 31, 2016
Non-designated hedging instruments
Interest rate swap contracts	$	394,852	$	124,322	$	2,061	$	982	$	2,061	$	982
Foreign exchange forward contracts	1,528		3,034		1,528		3,034		1,528		3,034

Changes in the fair value of client-related derivative instruments are recognized currently in operations. For the years ended December 31, 2017 and 2016, the gains and losses offset each other due to the Company's hedging of the client swaps with other bank counterparties.