Commitments and Contingencies

Leases: Rental expense under leases for equipment and premises was $2.8 million, $1.3 million, and $667,000 in 2015, 2014, and 2013, respectively. The Company's required minimum rental payments on non-cancelable leases as of December 31, 2015, are as follows:



(In Thousands)
2016		$2,575
2017	2,181
2018	2,030
2019	2,008
2020	1,589
Thereafter	12,222
Total		$22,605

Rental income under leases was $447,000, $260,000 and $108,000 in 2015, 2014, and 2013, respectively. The Company's future required minimum rental receipts on non-cancelable leases as of December 31, 2015, are as follows:



(In Thousands)
2016		$405
2017	408
2018	392
2019	399
2020	406
Thereafter	239
Total		$2,249

Employee benefit plans: The Company is self-insured for medical, dental, and vision plan benefits provided to employees. The Company has obtained stop-loss insurance to limit total medical claims in any one year to $140,000 per covered individual. The Company has established a liability for outstanding incurred but unreported claims. While management uses what it believes are pertinent factors in estimating the liability, it is subject to change due to claim experience, type of claims, and rising medical costs.

Earn-out on RML purchase: The Company purchased RML on December 1, 2014. Part of the purchase agreement contained an earn-out provision that requires the Company to make annual cash payments to the previous owners of RML over a five year period, provided that the annual adjusted earnings of RML achieves thresholds specified in the purchase agreement during that period. The Company recorded a $7.3 million contingent liability for this earn-out provision in conjunction with the purchase of RML. The Company recorded an additional liability in 2015 of $4.1 million and made payments to the previous owners of RML totaling approximately $4.9 million. The balance was $6.6 million and $7.3 million at December 31, 2015 and 2014, respectively. See Note 2 for a detailed discussion of the earn-out provision.

Legal proceeding: The Company from time to time may be involved with disputes, claims, and litigation related to the conduct of its banking business. In the opinion of management, the resolution of these matters will not have a material effect on the Company’s financial position, results of operations, or cash flows.

Financial Instruments with Off-Balance-Sheet Risk: In the ordinary course of business, the Company enters into various types of transactions that involve financial instruments with off-balance sheet risk. These instruments include commitments to extend credit and standby letters of credit and are not reflected in the accompanying balance sheets. These transactions may involve to varying degrees credit and interest rate risk in excess of the amount, if any, recognized in the balance sheets. Management does not anticipate any loss as a result of these commitments.

The Company’s off-balance sheet credit risk exposure is the contractual amount of commitments to extend credit and standby letters of credit. The Company applies the same credit standards to these contracts as it uses in its lending process.



(In Thousands)	2015		2014
Off-balance sheet commitments:
Commitments to extend credit		$222,387		$219,349
Commitments to originate loans held for sale		$71,280		$39,567
Standby letters of credit		$6,399		$6,004

Commitments to extend credit are agreements to lend to customers. These commitments have specified interest rates and generally have fixed expiration dates but may be terminated by the Company if certain conditions of the contract are violated. Although currently subject to draw down, many of the commitments do not necessarily represent future cash requirements. Collateral held relating to these commitments varies, but generally includes real estate, inventory, accounts receivable, and equipment.

Mortgage loans sold to investors may be sold with servicing rights released, for which the Company makes only standard legal representations and warranties as to meeting certain underwriting and collateral documentation standards. In the past two years, the Company has had to repurchase four loans due to deficiencies in underwriting or loan documentation and has not realized significant losses related to these repurchases. Management believes that any liabilities that may result from such recourse provisions are not significant.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Credit risk arises in these transactions from the possibility that a customer may not be able to repay the Company upon default of performance. Collateral held for standby letters of credit is based on an individual evaluation of each customer’s creditworthiness.

The Company has a reserve for losses related to these commitments and letters of credit that is recorded in other liabilities on the consolidated balance sheets. The reserve was $114,000 and $112,000 as of December 31, 2015 and 2014, respectively.

Capital Expenditures and Commitments: At December 31, 2015, the Company has capital commitments of $606,000 related to the planned improvements to the Company’s corporate office building and remaining commitments related to a new branch that opened in 2015. The Company expects these capital expenditures to be incurred in 2016.