NOTE 8 – COMMITMENTS AND CONTINGENCIES

The Bank occupies office facilities under operating leases extending to 2019. Most of these leases contain an option to renew at the then fair rental value for periods of five and ten years. These options enable the Bank to retain use of facilities in desirable operating areas. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. Rental and lease expense was $181,000 for 2013, $147,000 for 2012 and $162,000 for 2011.

The following is a summary of remaining future minimum lease payments under current non-cancelable operating leases for office facilities:

	(Amounts in thousands)
Years ending:
December 31, 2014	$	185
December 31, 2015		166
December 31, 2016		112
December 31, 2017		109
December 31, 2018		86
Later years		44
Total	$	702

At December 31, 2013, the Bank was required to maintain aggregate cash reserves amounting to $6.0 million in order to satisfy federal regulatory requirements. The reserves are held in useable vault cash and interest-earning balances at the Federal Reserve Bank of Cleveland.

The Bank grants commercial and industrial loans, commercial and residential mortgage loans, and consumer loans to customers in Northeastern Ohio and Western Pennsylvania. Although the Bank has a diversified portfolio, exposure to credit loss can be adversely impacted by downturns in local economic and employment conditions. Approximately 1.0% of total loans are unsecured at December 31, 2013, compared to 1.2% at December 31, 2012.

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market, forward contracts for the future sale of mortgage-backed securities and forward contracts for the future delivery of these mortgage loans are considered derivatives. In calendar 2012 and through the first three quarters of 2013, it was the Company’s practice to enter into the forward contracts for the future sale of mortgage-backed securities when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives were not formally designated in hedge relationships. The Company simultaneously entered into mandatory delivery commitments of mortgage loans, also considered derivatives.

Effective September 13, 2013, in response to decreased levels of loan originations, the Company ceased entering into mandatory forward contracts for the future delivery of mortgage loans. The Company instead chooses to enter into individual best effort loan sale contracts for the future delivery of residential mortgage loans. These contracts are entered into at the same time that the interest rate lock is entered into with the customer, thereby eliminating the necessity of forward contracts for the future sale of mortgage-backed securities. These contracts are also considered to be derivative instruments and limit the Company’s exposure to potential movements in market interest rates. Should levels of loan originations increase to previous levels, the Company may return to entering into forward contracts for the future delivery of mortgage loans.

The Company reports the fair value of the derivative assets and liabilities in other assets and other liabilities; associated income and expense is reported in mortgage banking gains.

Although residential mortgage loans originated and sold are without recourse as to performance, third parties to which the loans are sold can require repurchase of loans in the event noncompliance with the representations and warranties included in the sales agreements exists. These repurchases are typically those for which the borrower is in a nonperforming status, diminishing the prospects for future collection on the loan. The Company historically has not been required to repurchase any loans; however, provision is made for the contingent probability of this occurrence.

The following table is a summary of mortgage banking derivative commitments and the related balance sheet accounts:

	(Amounts in thousands)
	December 31,
	2013		2012
Mortgage banking derivative commitments:
Interest rate lock commitments	$	1,297	$	65,536
Forward contracts for the future delivery of mortgage loans		1,953		15,731
Forward contracts for the future sale of mortgage-backed securities		—		52,000
Corresponding recorded balances :
Derivative asset	$	17	$	531
Derivative liability		—		199
Reserve for loan repurchases		681		430

The Bank is a party to 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, standby letters of credit and financial guarantees. Such instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the consolidated balance sheets. The contract or notional amounts or those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

In the event of nonperformance by the other party, the Company’s exposure to credit loss on these financial instruments is represented by the contract or notional amount of the instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for instruments recorded on the balance sheet. The amount and nature of collateral obtained, if any, is based on management’s credit evaluation.

The following is a summary of such contractual commitments:

	(Amounts in thousands)
	December 31,
	2013		2012
Commitments to extend credit:
Fixed rate	$	13,142	$	14,551
Variable rate		53,275		48,184
Standby letters of credit		670		477

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. Generally these financial arrangements have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. The increase in commitments is in line with the Company’s increased focus on commercial and industrial lending, and specifically lines of credit.

The Company also offers limited overdraft protection as a non-contractual courtesy which is available to businesses as well as individually/jointly owned accounts in good standing for personal or household use. The Company reserves the right to discontinue this service without prior notice.

The following table is a summary of overdraft protection for the periods indicated:

	(Amounts in thousands)
	December 31,
	2013			2012
Overdraft protection available on depositors’ accounts	$	9,678		$	9,814
Balance of overdrafts included in loans		190			167
Average daily balance of overdrafts		115			112
Average daily balance of overdrafts as a percentage of available		1.19	%		1.14	%