COMMITMENTS AND CONTINGENCIES

The Bank is party to various financial instruments with off-balance-sheet risk in the normal course of business. These instruments include commitments to extend credit, letters of credit, and credit enhancements. These financial instruments carry varying degrees of credit and interest-rate risk in excess of amounts recorded in the consolidated financial statements. The contractual amounts of credit-related financial instruments, such as commitments to extend credit, letters of credit, and credit enhancements, represent the amounts of potential loss should the contract be fully drawn upon, the customer default, or the value of any existing collateral become worthless.

The Company’s commitments are presented in the following table for the dates indicated:



	December 31,
	2012				2011
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
	(Dollars in thousands)
Commitments to extend credit:
Commercial and industrial	$	1,053	$	2,842	$	1,017	$	3,351
Commercial real estate:
Owner occupied	3,721		3,289		6,393		—
Non-owner occupied	4,102		87		1,011		—
Multifamily	842		21		2,755		—
Commercial construction and land development	1,000		2,428		—		856
Commercial participations	—		—		48		—
Retail	3,096		179		3,005		1,215
Commitments to fund unused:
Equity lines of credit	—		38,122		—		39,831
Commercial business lines	4,916		43,902		4,000		48,399
Construction loans	550		298		2,783		2,279
Consumer lines	27		94		24		98
Credit enhancements	14,836		—		15,860		—
Letters of credit	—		2,221		—		3,313

The commitments listed above do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon. The fixed-rate loan commitments have interest rates ranging from 2.45% to 6.75%. Credit enhancements expire at various times through 2018, and letters of credit expire at various times through 2016.

The Bank also has commitments to fund community investments through investments in limited partnerships, which represent future cash outlays for the construction and development of properties for low-income housing, small business real estate, and historic tax credit projects that qualify under the Community Reinvestment Act. These commitments include $376,000 to be funded over two years. The timing and amounts of these commitments are projected based upon the financing arrangements provided in each project’s partnership agreement, and could change due to variances in the construction schedule, project revisions, or the cancellation of the project. These commitments are not included in the commitment table above. See additional disclosures below in Note 13. Variable Interest Entities.

Credit enhancements are related to the issuance by municipalities of taxable and non-taxable revenue bonds. The proceeds from the sale of such bonds are loaned to for-profit and not-for-profit companies for economic development projects. In order for the bonds to receive AAA ratings, which provide for a lower interest rate, the FHLB issues, in favor of the bond trustee, an Irrevocable Direct Pay Letter of Credit (IDPLOC) for the account of the Bank. Since the Bank, in accordance with the terms and conditions of a Reimbursement Agreement between the FHLB and the Bank, would be required to reimburse the FHLB for draws against the IDPLOC, these facilities are analyzed, appraised, secured by real estate mortgages, and monitored as if the Bank had funded the project initially. Management’s current lending strategy does not include the origination of new or additional credit enhancements.

The letters of credit and credit enhancements provided by the Bank are considered financial guarantees under ASC 460-10, Guarantees, and were carried at a fair value of $117,000 and $126,000 in the aggregate as of December 31, 2012 and 2011, respectively.

At December 31, 2012, the Bank was obligated under certain noncancelable operating leases for premises and equipment, which expire at various dates through the year 2029. Many of these leases contain renewal options. Some leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating expenses, or proportionately adjusted for increases in the consumer or other price indices.

The following summary reflects the future minimum rental payments, by year, required under operating leases that, as of December 31, 2012, have initial or remaining noncancelable lease terms in excess of one year at the date indicated:



Year Ended December 31:	(Dollars in thousands)
2013	$	418
2014	246
2015	138
2016	136
2017	136
Thereafter	1,743
	$	2,817

Rental expense charged to operations in 2012, 2011, and 2010, totaled $322,000, $375,000, and $434,000, respectively, including amounts paid under short-term cancelable leases.

The Company is involved in routine legal proceedings that have arisen in the normal course of business. Management believes that the liability, if any, resulting from these matters will not be material to the consolidated financial condition, results of operations, or cash flows of the Company.

The Company has entered into employment agreements with certain officers that provide for the continuation of salary and certain benefits for a specified period of time under certain conditions. Under the terms of the agreements, these payments could occur in the event of a change in control of the Company, as defined, along with other specific conditions.