8.) Commitments:

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 table is a summary of such contractual commitments:

	(Amounts in thousands)
	June 30, 2018		December 31, 2017
Commitments to extend credit:
Fixed rate	$	34,156	$	32,749
Variable rate		64,011		60,508
Standby letters of credit		3,775		3,600

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)
	June 30, 2018			December 31, 2017
Overdraft protection available on depositors' accounts	$	9,006		$	9,637
Balance of overdrafts included in loans		81			103
Average daily balance of overdrafts		99			115
Average daily balance of overdrafts as a percentage of available		1.10	%		1.19	%

Customer Derivatives - Interest Rate 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 party are not designated as hedges under FASB ASC 815 and are 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 June 30, 2018, based on the contract values, it was not necessary for any collateral to be pledged on the interest rate swap, compared to December 31, 2017 where 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 at a fair value of $1.4 million.

Summary information regarding these derivatives is presented below:

	(Amounts in thousands)
	Notional Amount						Fair Value
	June 30, 2018		December 31, 2017		Interest Rate Paid	Interest Rate Received	June 30, 2018			December 31, 2017
Customer interest rate swap
Maturing in 2020	$	2,457	$	2,504	1 Mo. Libor + Margin	Fixed	$	47		$	(16	)
Maturing in 2025		5,111		5,288	1 Mo. Libor + Margin	Fixed		98			36
Maturing in 2026		2,005		2,064	1 Mo. Libor + Margin	Fixed		98			(44	)
Maturing in 2027		13,995		14,197	1 Mo. Libor + Margin	Fixed		299			209
Maturing in 2028		1,176		—	1 Mo. Libor + Margin	Fixed		(39	)		—
Total	$	24,744	$	24,053			$	503		$	185

Third party interest rate swap
Maturing in 2020	$	2,457	$	2,504	Fixed	1 Mo. Libor + Margin	$	(47	)	$	16
Maturing in 2025		5,111		5,288	Fixed	1 Mo. Libor + Margin		(98	)		(36	)
Maturing in 2026		2,005		2,064	Fixed	1 Mo. Libor + Margin		(98	)		44
Maturing in 2027		13,995		14,197	Fixed	1 Mo. Libor + Margin		(299	)		(209	)
Maturing in 2028		1,176		—	Fixed	1 Mo. Libor + Margin		39			—
Total	$	24,744	$	24,053			$	(503	)	$	(185	)

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
June 30, 2018
Interest rate derivatives	Other assets	$	503	Other liabilities	$	503

December 31, 2017
Interest rate derivatives	Other assets	$	185	Other liabilities	$	185