DERIVATIVES

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve 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.

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 three months ended March 31, 2017 such derivatives were used to hedge the variable cash outflows associated with four FHLB borrowings totaling $26.0 million. The Company entered into an interest rate swap agreement to hedge its $12.5 million variable rate (3 Mo Libor +1.44%) junior subordinated debt issued by Sussex Capital Trust II, a non-consolidated wholly-owned subsidiary of the Company, for 10 years at a fixed rate of 3.10%. The ineffective portion of the change in fair value of the derivatives are recognized directly in earnings. The Company implemented this program during the quarter ended March 31, 2016.

During the three months ended March 31, 2017 and 2016, the Company did not record any hedge ineffectiveness.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Financial Condition at March 31, 2017 and December 31, 2016:



	March 31, 2017
	Notional/ Contract Amount		Fair Value		Balance Sheet Location	Expiration Date
(Dollars in thousands)
Derivatives designated as hedging instruments Interest rate swaps by effective date:
March 15, 2016	$	12,500	$	651	Other Assets	March 15, 2026
December 15, 2016	5,000		176		Other Assets	December 15, 2026
June 15, 2017	6,000		203		Other Assets	June 15, 2027
December 15, 2017	10,000		450		Other Assets	December 15, 2027
December 15, 2017	5,000		207		Other Assets	December 15, 2027

Total	$	38,500	$	1,687



	December 31, 2016
	Notional/ Contract Amount		Fair Value		Balance Sheet Location	Expiration Date
(Dollars in thousands)
Derivatives designated as hedging instruments Interest rate swaps by effective date:
March 15, 2016	$	12,500	$	629	Other Assets	March 15, 2026
December 15, 2016	5,000		163		Other Assets	December 15, 2026
June 15, 2017	6,000		201		Other Assets	June 15, 2027
December 15, 2017	10,000		448		Other Assets	December 15, 2027
December 15, 2017	5,000		206		Other Assets	December 15, 2027

Total	$	38,500	$	1,647

The table below presents the Company’s derivative financial instruments that are designated as cash flow hedgers of interest rate risk and their effect on the Company’s Consolidated Statements of Financial Conditions during the three months ended March 31, 2017 and 2016:

໿



	Three Months Ended March 31, 2017
	Amount of Gain Recognized in OCI on Derivatives, net of Tax (Effective Portion)		Location of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)	Amount of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)
(Dollars in thousands)
Derivatives in cash flow hedges Interest rate swaps by effective date:
March 15, 2016	$	13	Not applicable	$	—
December 15, 2016	8		Not applicable	—
June 15, 2017	1		Not applicable	—
December 15, 2017	1		Not applicable	—
December 15, 2017	1		Not applicable	—

Total	$	24		$	—



	Three Months Ended March 31, 2016
	Amount of Gain Recognized in OCI on Derivatives, net of Tax (Effective Portion)			Location of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)	Amount of Gain (Loss) Recognized in Income of Derivatives (Ineffective Portion)
(Dollars in thousands)
Derivatives in cash flow hedges Interest rate swaps by effective date:
March 15, 2016	$	(38	)	Not applicable	$	—
December 15, 2016	(58		)	Not applicable	—
June 15, 2017	(68		)	Not applicable	—
December 15, 2017	(43		)	Not applicable	—
December 15, 2017	(32		)	Not applicable	—

Total	$	(239	)		$	—

The Company has master netting arrangements with its counterparty. All master netting arrangements include rights to offset associated with the Company`s recognized derivative assets, derivative liabilities, and cash collateral received and pledged.

As required under the master netting arrangement with its derivatives counterparty, the Company received financial collateral from its counterparty totaling $1.9 million at March 31, 2017 that was not included as an offsetting amount.