NOTE 14: COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF‑BALANCE‑SHEET RISK

Unfunded Loan Commitments

The Company is party to various financial instruments with off‑balance‑sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit for loans in process, commercial lines of credit, overdraft protection lines and standby letters of credit at both fixed and variable rates of interest. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the involvement the Company has in particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.

The Company uses the same credit policies in making these commitments and conditional obligations as it does for on‑balance‑sheet instruments. The Company evaluates each customer’s credit worthiness on a case‑by‑case basis. The amount of collateral obtained, if considered necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer.

The following is a summary of the various financial instruments whose contract amounts represent credit risk at December 31, 2017 and 2016:


	December 31,
(Dollars in thousands)	2017		2016
Commitments to extend credit, variable	$	626,441	$	493,740
Commitments to extend credit, fixed		61,608		113,719
	$	688,049	$	607,459

Standby letters of credit	$	28,977	$	26,682

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to our customers.

Derivative Financial Instruments

The Company has outstanding interest rate swap contracts in which the Bank entered into an interest rate swap with a customer and entered into an offsetting interest rate swap with another financial institution at the same time. These interest rate swap contracts are not designated as hedging instruments for mitigating interest rate risk of the Bank. The objective of the transactions is to allow the Bank’s customers to effectively convert a variable rate loan to a fixed rate.

In connection with each swap transaction, 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 a similar notional amount at a fixed interest rate. At the same time, the Bank agrees to pay a third‑party financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. Because the Bank acts as an intermediary for its customer, changes in the fair value of the underlying derivative contracts are designed to offset each other and would not significantly impact the Company’s operating results except in certain situations where there is a significant deterioration in the customer’s credit worthiness or that of the counterparties. At December 31, 2017 and 2016, no such deterioration was determined by management.

At December 31, 2017 and 2016, the Company had 14 and 11 interest rate swap agreements outstanding with borrowers, respectively, with a corresponding number outstanding with correspondent financial institutions. These derivative instruments are not designated as accounting hedges and changes in the net fair value are recognized in noninterest income or expense. Fair value amounts are included in other assets and other liabilities. The tables below set forth a summary of the derivative instruments outstanding as of December 31, 2017 and 2016.

Notional

Fair

Weighted-Average

(Dollars in thousands)

Classification

Amounts

Value

Fixed Rate

Floating Rate

Maturity

December 31, 2017

Interest rate swaps with customers

Other Assets

25,882

340

4.75% - 7.25%

LIBOR 1M + 2.50% - 3.20%

7.83 years

Interest rate swaps with financial institution

Other Assets

16,579

426

4.00% - 5.15%

LIBOR 1M + 2.50% - 3.25%

8.12 years

Interest rate swaps with customers

Other Liabilities

16,579

(426)

4.00% - 5.15%

LIBOR 1M + 2.50% - 3.25%

7.83 years

Interest rate swaps with financial institution

Other Liabilities

25,882

(340)

4.75% - 7.25%

LIBOR 1M + 2.50% - 3.20%

8.12 years

Total derivatives not designated as hedging instruments

84,922

—

Notional

Fair

Weighted-Average

(Dollars in thousands)

Classification

Amounts

Value

Fixed Rate

Floating Rate

Maturity

December 31, 2016

Interest rate swaps with customers

Other Assets

13,637

430

5.10% - 7.25%

LIBOR 1M + 2.50% - 3.25%

6.60 years

Interest rate swaps with financial institution

Other Assets

14,399

350

4.00% - 4.75%

LIBOR 1M + 2.50% - 3.00%

9.45 years

Interest rate swaps with customers

Other Liabilities

14,399

(350)

4.00% - 4.75%

LIBOR 1M + 2.50% - 3.00%

6.60 years

Interest rate swaps with financial institution

Other Liabilities

13,637

(430)

5.10% - 7.25%

LIBOR 1M + 2.50% - 3.25%

9.45 years

Total derivatives not designated as hedging instruments

56,072

—

Repurchase Agreements

At December 31, 2017 and 2016, the Company had outstanding funds amounting to $1.5 million and $2.3 million respectively, received from the sale of securities that were sold under agreements to repurchase. Securities subject to the transfer of ownership under the repurchase agreements are included in pledged securities and the carrying value of these securities is disclosed in Note 3. The Company transacts these repurchase agreements with its customers and pays interest rates on these funds according to the terms of each repurchase agreement.

Contingent Liabilities

The Company is committed to contribute capital into two private investment funds and a limited partnership under the SBIC program of the SBA. At December 31, 2017 and 2016, the Company had $3.8 million and $4.0 million, respectively, in outstanding unfunded commitments to these funds which are subject to call. Cumulative capital contributions to these funds of $1.6 million and $1.5 million are included in other investments in the Company’s consolidated balance sheets at December 31, 2017 and 2016, respectively.

The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing the Company, it is the opinion of management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the financial position or results of operations of the Company.

Lease Commitments

Pursuant to the terms of non‑cancelable lease agreements in effect at December 31, 2017, future minimum rent commitments under various leases are as follows:


(Dollars in thousands)	December 31, 2017
2018	$	1,573
2019		1,409
2020		1,394
2021		1,462
2022		1,513
Thereafter		10,833
Total	$	18,184

The Company leases several of its banking facilities under operating leases. Total rent expense for operating leases of premises and equipment was $1.8 million, $2.9 million and $2.2 million for the years ended December 31, 2017, 2016 and 2015, respectively and is reflected in net occupancy expense on the consolidated statements of income. It is expected that in the normal course of business, leases that expire will be renewed or replaced by leases on other property or equipment.