NOTE 11 — DERIVATIVES

The Bank executes interest rate swaps with commercial banking customers to facilitate their risk management strategies. These derivative positions relate to transactions in which the Bank enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution. The Bank agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Bank agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Bank’s results of operations. The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $167.6 million at March 31, 2017 and $143.3 million at December 31, 2016.

Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Bank’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in the agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Bank minimizes credit risk through credit approvals, limits, and monitoring procedures.

The fair value of interest rate swaps are summarized below:


		March 31, 2017			December 31, 2016
	Notional				Notional
	Amount		Fair Value		Amount		Fair Value
Included in Other Assets:
Interest Rate Swaps at Fair Value	$	167,585	$	3,457	$	143,300	$	3,003

Included in Other Liabilities:
Interest Rate Swaps at Fair Value	$	167,585	$	3,457	$	143,300	$	3,003

The effect of derivative instruments on the Consolidated Statement of Income is presented below:


	Three Months Ended
	March 31,
	2017		2016
Interest Rate Swaps - Fee Income
Included in Other Income / (Expense)	$	335	$	81