Financial Instruments with Off-Balance Sheet Risk

12 Months Ended

Dec. 31, 2022

Financial Instruments with Off-Balance Sheet Risk

We make commitments to extend credit in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. 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. Because various commitments will expire without being fully drawn, the total commitment amount does not necessarily represent future cash requirements.

Our credit loss exposure is equal to the contractual amount of the commitment in the event of nonperformance by the borrower. We use the same credit underwriting criteria for all credit exposure. The amount of collateral

obtained, if deemed necessary by us, is based on management's credit evaluation of the borrower. Collateral types pledged may include accounts receivable, inventory, other personal property and real property.

The contractual amount of unfunded loan commitments and standby letters of credit not reflected in the consolidated statements of condition are as follows:


(in thousands)	December 31, 2022		December 31, 2021
Commercial lines of credit	$	292,204	$	330,234
Revolving home equity lines	218,907		210,938
Undisbursed construction loans	43,179		78,381
Personal and other lines of credit	10,842		11,001
Standby letters of credit	1,738		3,657
Total unfunded loan commitments and standby letters of credit	$	566,870	$	634,211

As of December 31, 2022, approximately 42% of the commitments expire in 2023, 42% expire between 2024 and 2030 and 16% expire thereafter.

We record an allowance for credit losses on unfunded loan commitments at the balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and expected loss rates determined for pooled funded loans. The allowance for credit losses on unfunded commitments totaled $1.5 million and $1.8 million as of December 31, 2022 and December 31, 2021, respectively, which is included in interest payable and other liabilities in the consolidated statements of condition.

The $318 thousand decrease in the allowance for unfunded commitments in 2022 was largely due to the decrease in the balance of unfunded commitments.

The $993 thousand decrease in the allowance for unfunded commitments in 2021 was largely due to ongoing improvements in the underlying economic forecasts under the CECL accounting method at the time.

We adopted the CECL accounting standard on December 31, 2020, (refer to Note 1, Summary of Significant Accounting Policies and Note 3, Loans and Allowance for Credit Losses for additional information). During the first nine months of 2020, we increased the allowance for credit losses on unfunded loan commitments under the incurred loss method ("previous GAAP") by $610 thousand. Upon adoption of the CECL standard, we increased it by $1.1 million, which included approximately $550 thousand related to a $36.9 million increase in available commitments during the fourth quarter of 2020. The remaining increase was due to changes in credit loss assumptions between the CECL and incurred loss methods at the time.