NOTE 16 – COMMITMENTS AND OFF BALANCE-SHEET RISK

Some financial instruments are used to meet customer financing needs and to reduce exposure to interest rate changes.  These financial instruments include commitments to extend credit and standby letters of credit.  These involve, to varying degrees, credit and interest rate risk in excess of the amount reported in the financial statements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment, and generally have fixed expiration dates.  Standby letters of credit are conditional commitments to guarantee a customer’s performance to a third party.  Exposure to credit loss if the other party does not perform is represented by the contractual amount for commitments to extend credit and standby letters of credit.  Collateral or other security is normally not obtained for these financial instruments prior to their use and many of the commitments are expected to expire without being used.  At December 31, 2023, the reserve for unfunded commitments was $69,000 and was included in other liabilities in the Company's consolidated balance sheet.

A summary of the contractual amounts of financial instruments with off-balance-sheet risk was as follows at year-end (dollars in thousands):

The notional amount of commitments to fund mortgage loans to be sold into the secondary market was $0 and $0 at December 31, 2023 and 2022, respectively.

The Bank enters into commitments to sell mortgage backed securities, which it later buys back in order to hedge its exposure to interest rate risk in its mortgage pipeline.  These commitments were $1.3 million and $0 at December 31, 2023 and 2022, respectively.  The fair value of these commitments was de minimis at December 31, 2023 and 2022.

At year-end 2023, approximately 60.0% of the Bank’s commitments to make loans were at market fixed rates.  The remainder of the commitments to make loans were at variable rates tied to SOFR and the prime rate and generally expire within 30 days.  The majority of the unused lines of credit were at variable rates tied to SOFR and the prime rate.