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, 2019 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%. During the year ended December 31, 2018, the Company entered into four interest rate swap agreements used to hedge the variable cash outflows associated with two future three month FHLB borrowings totaling $75.0 million, with an effective date of September 15, 2018. Two interest rate swaps mature September 15, 2021 with fixed rates of 2.89% and 2.85%, and the other two mature September 15, 2022 with fixed rates of 2.90% and 2.86%. During the quarter ended March 31, 2019, the Company entered into a forward starting interest rate swap agreement with a notional amount totaling $40 million, designated as a cash flow hedge of variable cash flows associated with a $40 million brokered CD, with a 3 years term and a fixed rate of 2.56%. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

During the three months ended March 31, 2019 and 2018, 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 Income and Comprehensive Income at March 31, 2019 and December 31, 2018:



	March 31, 2019
	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	$	516		Other Assets	March 15, 2026
December 15, 2016	5,000		136			Other Assets	December 15, 2026
June 15, 2017	6,000		145			Other Assets	June 15, 2027
December 15, 2017	10,000		306			Other Assets	December 15, 2027
December 15, 2017	5,000		137			Other Assets	December 15, 2027
September 15, 2018	20,000		(289		)	Other Liabilities	September 15, 2021
September 15, 2018	20,000		(439		)	Other Liabilities	September 15, 2022
September 15, 2018	17,500		(235		)	Other Liabilities	September 15, 2021
September 15, 2018	17,500		(356		)	Other Liabilities	September 15, 2022
February 21, 2019	40,000		(320		)	Other Liabilities	February 21, 2022
Total	$	153,500	$	(399	)



	December 31, 2018
	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	$	768		Other Assets	March 15, 2026
December 15, 2016	5,000		246			Other Assets	December 15, 2026
June 15, 2017	6,000		285			Other Assets	June 15, 2027
December 15, 2017	10,000		554			Other Assets	December 15, 2027
December 15, 2017	5,000		261			Other Assets	December 15, 2027
September 15, 2018	20,000		(176		)	Other Liabilities	September 15, 2021
September 15, 2018	20,000		(266		)	Other Liabilities	September 15, 2022
September 15, 2018	17,500		(134		)	Other Liabilities	September 15, 2021
September 15, 2018	17,500		(203		)	Other Liabilities	September 15, 2022
Total	113,500		1,335

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 Income and Comprehensive Income during the three months ended March 31, 2019 and 2018:

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	Three Months Ended March 31, 2019
	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	$	(176	)	Not applicable	$	—
December 15, 2016	(77		)	Not applicable	—
June 15, 2017	(98		)	Not applicable	—
December 15, 2017	(173		)	Not applicable	—
December 15, 2017	(87		)	Not applicable	—
September 15, 2018	(79		)	Not applicable	—
September 15, 2018	(121		)	Not applicable	—
September 15, 2018	(71		)	Not applicable	—
September 15, 2018	(107		)	Not applicable	—
February 21, 2019	(224		)	Not applicable	—
Total	$	(1,213	)		$	—



	Three Months Ended March 31, 2018
	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	$	234	Not applicable	$	—
December 15, 2016	103		Not applicable	—
June 15, 2017	129		Not applicable	—
December 15, 2017	220		Not applicable	—
December 15, 2017	111		Not applicable	—
Total	$	797		$	—

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.

Amounts reported in accumulated other comprehensive income related to derivatives are reclassified to interest expense as interest payments made on the Company’s variable rate borrowing positions. During the three months ended March 31, 2019 the Company had $59 thousand of reclassifications to interest income. During the three months ended March 31, 2018, the Company had $24 thousand of reclassifications to interest expense.

As required under the master netting arrangement with its derivatives counterparty, the Company pledged $1.4 million and received $550 thousand of financial collateral at March 31, 2019, and received financial collateral in the amount of $2.8 million at March 31, 2018.

Offsetting derivatives

The following table presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives in the Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018. The net amounts of derivative liabilities and assets can be reconciled to the tabular disclosure of the fair value hierarchy, see Note 12, Fair Value of Financial Instruments. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the Company’s Consolidated Balance Sheets.



								Gross Amounts Not Offset
	Gross Amounts Recognized			Gross Amounts Offset	Net Amounts Presented			Financial Instruments	Cash Collateral Pledged			Net Amount
(Dollars in thousands)
March 31, 2019
Assets:
Interest Rate Swaps	$	1,240		—	$	512		—	$	250		$	262
Total	$	1,240		—	$	512		—	$	250		$	262

Liabilities:
Interest Rate Swaps	$	(1,639	)	—	$	(911	)	—	$	(1,070	)	$	159
Total	$	(1,639	)	—	$	(911	)	—	$	(1,070	)	$	159

December 31, 2018
Assets:
Interest Rate Swaps	$	2,114		—	$	1,672		—	$	2,460		$	(788	)
Total	$	2,114		—	$	1,672		—	$	2,460		$	(788	)

Liabilities:
Interest Rate Swaps	$	(779	)	—	$	(337	)	—	—			$	(337	)
Total	$	(779	)	—	$	(337	)	—	—			$	(337	)