DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Cash Flow Hedge

During 2010, the Company entered into an interest rate swap to lock in a fixed rate as opposed to the contractual variable interest rate on certain junior subordinated debentures. The interest rate swap contract has a notional amount of $37.1 million and is hedging the variable rate on certain junior subordinated debentures described in Note 17 of the consolidated financial statements. The Company receives a variable rate of the 90-day LIBOR rate plus 1.63% and pays a fixed rate of 4.11%. The swap matures in September 2020.

This contract is classified as a cash flow hedge of an exposure to changes in the cash flow of a recognized liability. At December 31, 2017 and 2016, the fair value of the remaining instrument totaled a liability of $381,000 and $978,000, respectively. As a cash flow hedge, the change in fair value of a hedge that is deemed to be highly effective is recognized in other comprehensive income and the portion deemed to be ineffective is recognized in earnings. As of December 31, 2017, the hedge is deemed to be highly effective. Interest expense recorded on this swap transaction totaled $484,000, $678,000, and $822,000 during 2017, 2016, and 2015 and is reported as a component of interest expense on other borrowings. At December 31, 2017, the Company expected $235,000 of the unrealized loss to be reclassified as an increase of interest expense during the next 12 months.

Mortgage Banking Derivatives

The Company maintains a risk management program to manage interest rate risk and pricing risk associated with its mortgage lending activities. This program includes the use of forward contracts and other derivatives that are used to offset changes in value of the mortgage inventory due to changes in market interest rates. As a normal part of its operations, the Company enters into derivative contracts such as forward sale commitments and IRLCs to economically hedge risks associated with overall price risk related to IRLCs and mortgage loans held for sale carried at fair value. These mortgage banking derivatives are not designated in hedge relationships. At December 31, 2017, the Company had approximately $86.1 million of IRLCs and $158.3 million of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected as a derivative asset of $2.9 million and a derivative liability of $67,000. At December 31, 2016, the Company had approximately $91.4 million of IRLCs and $150.0 million of forward commitments for the future delivery of residential mortgage loans. The fair value of these mortgage banking derivatives was reflected as a derivative asset of $4.3 million and a derivative liability of $0. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair values of these mortgage-banking derivatives are included in net gains on sales of mortgage loans.

The net gains (losses) relating to free-standing mortgage banking derivative instruments used for risk management are summarized below as of December 31, 2017, 2016 and 2015.



(dollars in thousands)	Location	December 31, 2017			December 31, 2016		December 31, 2015
Forward contracts related to mortgage loans held for sale	Mortgage banking activity	$	(12	)	$	1,285	$	(137	)
Interest rate lock commitments	Mortgage banking activity	$	2,833		$	3,029	$	2,687

The following table reflects the amount and market value of mortgage banking derivatives included in the consolidated balance sheets as of December 31, 2017 and 2016.



	2017				2016
(dollars in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in other assets:
Forward contracts related to mortgage loans held for sale	$	31,500	$	55	$	150,000	$	1,285
Interest rate lock commitments	86,149		2,833		91,426		3,029
Total included in other assets	$	117,649	$	2,888	$	241,426	$	4,314
Included in other liabilities:
Forward contracts related to mortgage loans held for sale	$	126,750	$	67	$	—	$	—
Total included in other liabilities	$	126,750	$	67	$	—	$	—