The Company 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 and letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of 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 is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

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. 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 borrower. Collateral held varies but usually includes income producing commercial properties or residential real estate.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by 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 customers. The Company’s outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer’s underlying line of credit. If the customer’s line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit.

Amounts of financial instruments whose contract amounts represent off-balance sheet credit risk are as follows as of June 30, 2024 and December 31, 2023:


	June 30, 2024		December 31, 2023
	(in thousands)

Commitments to originate loans	$	34,251	$	22,701
Commitments to purchase loans		-		415
Unadvanced funds on lines of credit		76,730		78,378
Unadvanced funds on construction loans		49,763		53,013
Letters of credit		50		-
	$	160,794	$	154,507

The Bank accrues for credit losses related to off-balance sheet financial instruments. Potential losses on off-balance sheet loan commitments are estimated using the same risk factors used to determine the allowance for credit losses, adjusted for the likelihood that funding will occur. The allowance for off-balance sheet commitments is recorded within other liabilities on the consolidated balance sheets and amounted to $757,000 and $756,000 as of June 30, 2024 and December 31, 2023, respectively. For the three months ended June 30, 2024, a benefit of $67,000 was recorded to reflect a reduction in allowance for off-balance sheet commitments. For the six months ended June 30, 2024, provision expense of $1,000 was recorded for off-balance sheet commitments. For the three and six months ended June 30, 2023, a benefit was recorded for off-balance sheet commitments for $213,000 and $209,000, respectively. The provision and benefit for off-balance sheet commitments are recorded with provision for credit losses on the consolidated statements of income.