(7.) DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities, and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company's known or expected cash receipts and its known or expected cash payments.

Cash Flow Hedges of Interest Rate Risk

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 caps as part of its interest rate risk management strategy. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During 2018, such derivatives were used to hedge the variable cash flows associated with short-term borrowings.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company's borrowings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company's cash flow hedge derivatives did not have any hedge ineffectiveness recognized in earnings during the three month periods ended March 31, 2018 and 2017. During the next twelve months, the Company estimates that an additional $84 thousand will be reclassified as an increase to interest expense.

Credit-risk-related Contingent Features

The Company has agreements with certain of its derivative counterparties that contain one or more of the following provisions: (a) if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations, and (b) if the Company fails to maintain its status as a well capitalized institution, the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the notional amounts, respective fair values of the Company's derivative financial instruments, as well as their classification on the balance sheet as of March 31, 2018 and December 31, 2017 (in thousands):


					Asset derivatives					Liability derivatives
		Gross notional amount			Balance		Fair value			Balance		Fair value
		Mar. 31,	Dec. 31,		sheet		Mar. 31,		Dec. 31,	sheet		Mar. 31,		Dec. 31,
		2018	2017		line item		2018		2017	line item		2018		2017

Derivatives
designated as
hedging instruments
					Other					Other
Cash flow hedges	$	100,000	$	-	assets	$	899	$	-	liabilities	$	-	$	-
Total derivatives	$	100,000	$	-		$	899	$	-		$	-	$	-

Derivatives not
designated as
hedging instruments
					Other					Other
Credit contracts	$	34,880	$	12,282	assets	$	-	$	-	liabilities	$	21	$	4
Total derivatives	$	34,880	$	12,282		$	-	$	-		$	21	$	4

Effect of Derivative Instruments on the Income Statement

The table below presents the effect of the Company's derivative financial instruments on the income statement for the three months ended March 31, 2018 and 2017 (in thousands):


			Gain (loss) recognized in income
			Three months ended
	Line item of gain (loss)		March 31,
Undesignated derivatives	recognized in income		2018		2017

Credit contract	Noninterest income - Other	$	174	$	-
Total undesignated		$	174	$	-