DERIVATIVE INSTRUMENTS AND OTHER HEDGING ACTIVITIES

The Company enters into derivative financial instruments to manage interest rate risk, exposures related to liquidity and credit risk, and to facilitate customer transactions. The primary types of derivatives used by the Company include interest rate swap agreements, foreign exchange contracts, interest rate lock commitments, forward sales commitments, written and purchased options and credit derivatives. All derivative instruments are recognized on the consolidated balance sheets as "other assets" or "other liabilities" at fair value, as required by ASC Topic 815, Derivatives and Hedging.

Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. The Company enters into interest rate swap agreements in a cash flow hedge to convert forecasted variable interest payments to a fixed rate on its junior subordinated debt. In addition, on May 17, 2018, the Company entered into an interest rate collar and designated the instrument as a cash flow hedge of the risk of fluctuations in interest rates, thereby reducing the Company's exposure to variability in cash flows from variable-rate loans.

For cash flow hedges, the effective and ineffective portions of the gain or loss related to the derivative instrument is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings or when the hedge is terminated, per the Company’s early adoption of ASU No. 2017-12, Derivatives and Hedging (ASC 815): Targeted Improvements to Accounting for Hedging Activities, as of January 1, 2018. In applying hedge accounting for derivatives, the Company establishes and documents a method for assessing the effectiveness of the hedging derivative and a measurement approach for determining the ineffective aspect of the hedge upon the inception of the hedge.

For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivatives are recognized in earnings immediately.

Information pertaining to outstanding derivative instruments is as follows:



	Balance Sheet Location	Derivative Assets - Fair Value				Balance Sheet Location	Derivative Liabilities - Fair Value
(Dollars in thousands)	Balance Sheet Location	June 30, 2018		December 31, 2017		Balance Sheet Location	June 30, 2018		December 31, 2017
Derivatives designated as hedging instruments under ASC Topic 815:
Interest rate contracts	Other assets	$	305	$	—	Other liabilities	$	—	$	—
Total derivatives designated as hedging instruments under ASC Topic 815		$	305	$	—		$	—	$	—
Derivatives not designated as hedging instruments under ASC Topic 815:
Interest rate contracts	Other assets	$	4,083	$	20,446	Other liabilities	$	32,660	$	16,191
Foreign exchange contracts	Other assets	17		7		Other liabilities	17		7
Forward sales contracts	Other assets	114		136		Other liabilities	700		279
Written and purchased options	Other assets	8,385		10,654		Other liabilities	5,219		8,656
Other contracts	Other assets	9		22		Other liabilities	11		21
Total derivatives not designated as hedging instruments under ASC Topic 815		$	12,608	$	31,265		$	38,607	$	25,154
Total		$	12,913	$	31,265		$	38,607	$	25,154



	Derivative Assets - Notional Amount				Derivative Liabilities - Notional Amount
(Dollars in thousands)	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Derivatives designated as hedging instruments under ASC Topic 815:
Interest rate contracts	$	258,500	$	—	$	—	$	108,500
Total derivatives designated as hedging instruments under ASC Topic 815	$	258,500	$	—	$	—	$	108,500

Derivatives not designated as hedging instruments under ASC Topic 815:
Interest rate contracts	$	1,340,648	$	1,218,464	$	1,340,648	$	1,218,464
Foreign exchange contracts	881		268		881		268
Forward sales contracts	45,434		82,347		187,728		142,578
Written and purchased options	305,931		278,638		157,594		165,198
Other contracts	33,705		29,755		74,530		86,744
Total derivatives not designated as hedging instruments under ASC Topic 815	$	1,726,599	$	1,609,472	$	1,761,381	$	1,613,252
Total	$	1,985,099	$	1,609,472	$	1,761,381	$	1,721,752

The Company has entered into risk participation agreements with counterparties to transfer or assume credit exposures related to interest rate derivatives. The notional amounts of risk participation agreements sold were $74.5 million and $86.7 million at June 30, 2018 and December 31, 2017, respectively. Assuming all underlying third party customers referenced in the swap contracts defaulted at June 30, 2018 and December 31, 2017, the exposure from these agreements would not be material based on the fair value of the underlying swaps.

The Company is party to collateral agreements with certain derivative counterparties. Such agreements require that the Company maintain collateral based on the fair values of individual derivative transactions. In the event of default by the Company, the counterparty would be entitled to the collateral.

At June 30, 2018, the Company was not required to post collateral due to the Company's derivative position at the balance sheet date. At December 31, 2017, the Company was required to post $552 thousand in cash or securities as collateral for its derivative transactions, which is included in "interest-bearing deposits in banks" on the Company’s consolidated balance sheets. Effective January 3, 2017, the Chicago Mercantile Exchange and LCH.Clearnet Limited amended their rulebooks to legally characterize variation margin payments for over-the-counter derivatives they clear as settlements of the derivatives' exposure rather than collateral against the exposures. In light of changes to the aforementioned rulebooks, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency (OCC) and the FDIC issued guidance effective August 14, 2017, which is consistent with the SEC's accounting guidance, that allows institutions to treat centrally-cleared derivatives as settled for purposes of the capital rule. At June 30, 2018 and December 31, 2017, the Company was required to post $37.3 million and $5.1 million, respectively, in variation margin payments for its derivative transactions, which is required to be netted against the fair value of the derivatives in "other assets/other liabilities" on the consolidated balance sheets. The Company does not anticipate additional assets will be required to be posted as collateral, nor does it believe additional assets would be required to settle its derivative instruments immediately if contingent features were triggered at June 30, 2018. The Company’s master netting agreements represent written, legally enforceable bilateral agreements that (1) create a single legal obligation for all individual transactions covered by the master agreement and (2) in the event of default, provide the non-defaulting counterparty the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to promptly liquidate or set-off collateral posted by the defaulting counterparty. As permitted by U.S. GAAP, the Company does not offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral against recognized fair value amounts of derivatives executed with the same counterparty under a master netting agreement.

The following table reconciles the gross amounts presented in the consolidated balance sheets to the net amounts that would result in the event of offset.



	June 30, 2018
	Gross Amounts Presented in the Balance Sheet		Gross Amounts Not Offset in the Balance Sheet					Net
(Dollars in thousands)	Gross Amounts Presented in the Balance Sheet		Derivatives			Collateral ⁽¹⁾		Net
Derivatives subject to master netting arrangements
Derivative assets
Interest rate contracts designated as hedging instruments	$	305	$	—		$	—	$	305
Interest rate contracts not designated as hedging instruments	4,083		(310		)	—		3,773
Written and purchased options	5,268		—			—		5,268
Total derivative assets subject to master netting arrangements	$	9,656	$	(310	)	$	—	$	9,346

Derivative liabilities
Interest rate contracts not designated as hedging instruments	$	32,660	$	(310	)	$	—	$	32,350
Written and purchased options	5,121		—			—		5,121
Total derivative liabilities subject to master netting arrangements	$	37,781	$	(310	)	$	—	$	37,471

^{(1) Consists of cash collateral recorded at cost, which approximates fair value, and investment securities.}



	December 31, 2017
	Gross Amounts Presented in the Balance Sheet		Gross Amounts Not Offset in the Balance Sheet						Net
(Dollars in thousands)	Gross Amounts Presented in the Balance Sheet		Derivatives			Collateral ⁽¹⁾			Net
Derivatives subject to master netting arrangements
Derivative assets
Interest rate contracts not designated as hedging instruments	$	20,446	$	(12,469	)	$	—		$	7,977
Written and purchased options	8,610		—			—			8,610
Total derivative assets subject to master netting arrangements	$	29,056	$	(12,469	)	$	—		$	16,587

Derivative liabilities
Interest rate contracts designated as hedging instruments	$	—	$	—		$	—		$	—
Interest rate contracts not designated as hedging instruments	16,191		(12,469		)	(552		)	3,170
Total derivative liabilities subject to master netting arrangements	$	16,191	$	(12,469	)	$	(552	)	$	3,170

^{(1) Consists of cash collateral recorded at cost, which approximates fair value, and investment securities.}

During the six months ended June 30, 2018 and 2017, the Company has not reclassified into earnings any gain or loss as a result of the discontinuance of cash flow hedges because it was probable the original forecasted transaction would not occur by the end of the originally specified term.

At June 30, 2018, the Company does not expect to reclassify a material amount from accumulated other comprehensive income into interest income over the next twelve months for derivatives that will be settled.

At June 30, 2018 and 2017, and for the three and six months then ended, information pertaining to the effect of the hedging instruments on the consolidated financial statements is as follows:



														Location of Gain (Loss) Recognized in Income on Derivatives (Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivatives (Amount Excluded from Effectiveness Testing)
			Amount of Gain (Loss) Recognized in OCI, net of taxes				Location of Gain (Loss) Reclassified from Accumulated OCI into Income		Amount of Gain (Loss) Reclassified from Accumulated OCI into Income, net of taxes



(Dollars in thousands)			For the Three Months Ended June 30,
Derivatives in ASC Topic 815 Cash Flow Hedging Relationships		2018		2017				2018			2017				2018		2017
	Interest rate contracts	$	1,395	$	(996	)	Interest expense	$	(40	)	$	(103	)	Interest expense	$	—	$	—
Total		$	1,395	$	(996	)		$	(40	)	$	(103	)		$	—	$	—



														Location of Gain (Loss) Recognized in Income on Derivatives (Amount Excluded from Effectiveness Testing)	Amount of Gain (Loss) Recognized in Income on Derivatives (Amount Excluded from Effectiveness Testing)
			Amount of Gain (Loss) Recognized in OCI, net of taxes				Location of Gain (Loss) Reclassified from Accumulated OCI into Income		Amount of Gain (Loss) Reclassified from Accumulated OCI into Income, net of taxes



(Dollars in thousands)			For the Six Months Ended June 30,
Derivatives in ASC Topic 815 Cash Flow Hedging Relationships		2018		2017				2018			2017				2018		2017
	Interest rate contracts	$	3,944	$	(923	)	Other income (expense)	$	(156	)	$	(148	)	Other income (expense)	$	—	$	—
Total		$	3,944	$	(923	)		$	(156	)	$	(148	)		$	—	$	—

Information pertaining to the effect of derivatives not designated as hedging instruments on the consolidated financial statements as of June 30, is as follows:



	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives
		For the Three Months Ended June 30,						For the Six Months Ended June 30,
(Dollars in thousands)		2018			2017			2018			2017
Interest rate contracts ⁽¹⁾	Other income	$	1,458		$	1,299		$	2,507		$	2,416
Foreign exchange contracts	Other income	5			7			10			14
Forward sales contracts	Mortgage income	228			(1,526		)	3,615			(1,886		)
Written and purchased options	Mortgage income	517			(1,586		)	1,165			(931		)
Other contracts	Other income	(2		)	5			(5		)	9
Total		$	2,206		$	(1,801	)	$	7,292		$	(378	)

^{(1) Includes fees associated with customer interest rate contracts.}