NOTE 8 – COMMITMENTS AND CONTINGENCIES

The Bank occupies office facilities under operating leases extending to 2021. 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 $230,000 for 2017, $183,000 for 2016 and $168,000 for 2015.

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, 2018	$	175
December 31, 2019		124
December 31, 2020		116
December 31, 2021		62
December 31, 2022		—
Total	$	477

At December 31, 2017, the Bank was required to maintain aggregate cash reserves amounting to $5 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 0.30% of total loans are unsecured at December 31, 2017 and approximately 0.36% at December 31 2016.

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 on 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,
	2017		2016
Commitments to extend credit:
Fixed rate	$	32,749	$	18,709
Variable rate		60,508		57,176
Standby letters of credit		3,600		412

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 Company 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,
	2017			2016
Overdraft protection available on depositors' accounts	$	9,637		$	9,655
Balance of overdrafts included in loans		103			80
Average daily balance of overdrafts		115			105
Average daily balance of overdrafts as a percentage of available		1.19	%		1.09	%

Customer Derivatives - Interest Rates Swaps/Floors – The Company enters into interest rate swaps that allow our commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate into a fixed-rate. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC 815 and are not marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by FASB ASC 820. There was no effect on earnings in any periods presented. At December 31, 2017 and 2016, the Company had one U.S. Government-sponsored mortgage-backed security pledged for collateral on its interest rate swaps with the third party financial institution with a fair value $1.4 million and $1.7 million, respectively.

Summary information regarding these derivatives is presented below:

			(Amounts in thousands)
	Notional Amount						Fair Value
	December 31,						December 31,
	2017		2016		Interest Rate Paid	Interest Rate Received	2017			2016
Customer interest rate swap
Maturing in 2020	$	2,504	$	2,594	1 Mo. Libor + Margin	Fixed	$	(16	)	$	15
Maturing in 2025		5,288		5,630	1 Mo. Libor + Margin	Fixed		36			101
Maturing in 2026		2,064		2,178	1 Mo. Libor + Margin	Fixed		(44	)		(29	)
Maturing in 2027		14,197		6,150	1 Mo. Libor + Margin	Fixed		209			210
Total	$	24,053	$	16,552			$	185		$	297
Third party interest rate swap
Maturing in 2020	$	2,504	$	2,594	Fixed	1 Mo. Libor + Margin	$	16		$	(15	)
Maturing in 2025		5,288		5,630	Fixed	1 Mo. Libor + Margin		(36	)		(101	)
Maturing in 2026		2,064		2,178	Fixed	1 Mo. Libor + Margin		44			29
Maturing in 2027		14,197		6,150	Fixed	1 Mo. Libor + Margin		(209	)		(210	)
Total	$	24,053	$	16,552			$	(185	)	$	(297	)

The following table presents the fair values of derivative instruments in the balance sheet.

	(Amounts in thousands)
	Assets			Liabilities
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
December 31, 2017
Interest rate derivatives	Other assets	$	185	Other liabilities	$	185
December 31, 2016
Interest rate derivatives	Other assets	$	297	Other liabilities	$	297