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Financial Instruments with Off-Balance Sheet Risk

3 Months Ended

Mar. 31, 2023

Financial Instruments with Off-Balance Sheet Risk

Financial Instruments with Off-Balance Sheet Risk

NOTE 11 Financial Instruments with Off-Balance Sheet Risk

In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying consolidated financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the statements of financial condition.

A summary of the contractual amounts of the Bank’s exposure to off-balance sheet risk as of March 31, 2023 and December 31, 2022, respectively, was as follows:


	March 31,		December 31,
(dollars in thousands)	2023		2022
Commitments to extend credit	$	830,636	$	806,431
Standby letters of credit		12,924		13,089
Total	$	843,560	$	819,520

The Company recorded an allowance for credit losses on unfunded commitments of $3.2 million as of December 31, 2022. Upon the adoption of CECL, the Company recorded an additional $1.9 million reserve for unfunded commitments. During the first quarter of 2023, the Company recorded an additional $230 thousand in provision for credit losses on unfunded commitments for a total of $5.2 million of allowance for credit losses on unfunded commitments as of March 31, 2023.

Commitments to extend credit are agreements to lend to a client 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. 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 client’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. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing commercial properties.

The Company was not required to perform on any financial guarantees and did not incur any losses on its commitments during the past two years.

The Company utilizes standby letters of credit issued by either the FHLB or the Bank of North Dakota to secure public unit deposits. The Company had no letters of credit outstanding with the FHLB as of March 31, 2023 or December 31, 2022. With the Bank of North Dakota, the Company had a $70.0 million letter of credit outstanding as of March 31, 2023 and no letters of credit outstanding with the Bank of North Dakota as of December 31, 2022. The Bank of North Dakota letter of credit was collateralized by loans pledged to the Bank of North Dakota in the amount of $223.2 million and $215.5 million as of March 31, 2023 and December 31, 2022, respectively.