Derivatives

The Company enters into interest rate swaps with commercial banking customers which are offset with a corresponding swap agreement with a third party financial institution (“counterparty”). The Company has agreements with its counterparties that contain provisions that provide that if the Company fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. These agreements also require that the Company and the counterparty collateralize any fair value shortfalls that exceed $250,000 with eligible collateral, which includes cash and securities backed with the full faith and credit of the federal government. Similarly, the Company could be required to settle its obligations under the agreement if specific regulatory events occur, such as if the Company were issued a prompt corrective action directive or a cease and desist order, or if certain regulatory ratios fall below specified levels. The Company pledged $301,000 and $216,000 in available for sale securities to collateralize fair value shortfalls on interest rate swap agreements as of December 31, 2016 and 2015, respectively.

The Company had interest rate swaps with an aggregate notional amount of $18.9 million and $21.3 million at December 31, 2016 and December 31, 2015, respectively. At December 31, 2016, the notional amount of interest rate swaps is made up of two variable to fixed rate swaps to commercial loan customers totaling $9.5 million, and two fixed to variable rate swaps with a counterparty totaling $9.5 million. Changes in fair value from these four interest rate swaps offset each other in 2016 and 2015. The Company did not recognize any fee income related to interest rate swaps in 2016, 2015, or 2014. Interest rate swap income is recorded in other income on the Consolidated Statements of Income.

The Company also uses derivatives to hedge the risk of changes in the fair values of interest rate lock commitments. The Company enters into commitments to originate residential mortgage loans at specific rates; the value of these commitments are detailed in the table below as "interest rate lock commitments". The Company also hedges the interest rate risk associated with its residential mortgage loan commitments, which are referred to as "retail interest rate contract" in the table below. Market risk with respect to commitments to originate loans arises from changes in the value of contractual positions due to changes in interest rates. At December 31, 2016 and 2015, RML had commitments to originate mortgage loans held for sale totaling $62.4 million and $71.3 million, respectively. Changes in the value of RML's interest rate derivatives are recorded in the mortgage banking income on the Consolidated Statements of Income.

None of the Company’s derivatives are designated as hedging instruments. Rather, they are accounted for as free-standing derivatives, or economic hedges, with changes in the fair value of the derivatives reported in income. The Company primarily utilizes forward interest rate contracts in its derivative risk management strategy.

The following table presents the fair value of derivatives not designated as hedging instruments at December 31, 2016 and December 31, 2015:



(In thousands)	Asset Derivatives
		December 31, 2016		December 31, 2015
	Balance Sheet Location	Fair Value		Fair Value

Commercial interest rate swaps	Other assets		$71		$125
Interest rate lock commitments	Other assets	1,137		1,514
Total			$1,208		$1,639



(In thousands)	Liability Derivatives
		December 31, 2016		December 31, 2015
	Balance Sheet Location	Fair Value		Fair Value

Commercial interest rate swaps	Other liabilities		$71		$125
Retail interest rate contracts	Other liabilities	78		91
Total			$149		$216

The following table presents the gains of derivatives not designated as hedging instruments at December 31, 2016 and 2015:



(In thousands)	Income Statement Location	December 31, 2016				December 31, 2015

Interest rate contracts	Mortgage banking income			($530	)			($422	)
Interest rate lock commitments	Mortgage banking income		(367		)		626
Total				($897	)			$204

Our derivative transactions with counterparties under International Swaps and Derivative Association master agreements that include “right of set-off” provisions. “Right of set-off” provisions are legally enforceable rights to offset recognized amounts and there may be an intention to settle such amounts on a net basis. We do not offset such financial instruments for financial reporting purposes.

The following table summarizes the derivatives that have a right of offset as of December 31, 2016 and 2015:



December 31, 2016					Gross amounts not offset in the Statement of Financial Position
(In Thousands)	Gross amounts of recognized assets and liabilities	Gross amounts offset in the Statement of Financial Position		Net amounts of assets and liabilities presented in the Statement of Financial Position	Financial Instruments		Collateral Posted		Net Amount
Asset Derivatives
Commercial interest rate swaps	$71		$—	$71		$—		$—	$71

Liability Derivatives
Commercial interest rate swaps	$71		$—	$71		$—	$71			$—
Retail interest rate contracts	78	—		78	—		—		78

December 31, 2015					Gross amounts not offset in the Statement of Financial Position
(In Thousands)	Gross amounts of recognized assets and liabilities	Gross amounts offset in the Statement of Financial Position		Net amounts of assets and liabilities presented in the Statement of Financial Position	Financial Instruments		Collateral Posted		Net Amount
Asset Derivatives
Commercial interest rate swaps	$125		$—	$125		$—		$—	$125

Liability Derivatives
Commercial interest rate swaps	$125		$—	$125		$—		$125		$—
Retail interest rate contracts	91	—		91	—		—		91