Commitments and Contingencies and Derivatives

9 Months Ended

Sep. 30, 2024

Commitments and Contingencies and Derivatives

Commitments and Contingencies and Derivatives

9.  Commitments and Contingencies and Derivatives

Legal Matters

The Company is involved in various legal proceedings which have arisen in the normal course of business. Management believes that resolution of these matters will not have a material effect on the Company’s financial condition or results of operations.

Employment Agreements

The Company has entered into employment agreements with certain officers. The agreements provide for base salaries and incentive compensation based on performance criteria outlined in the agreements. The agreements also provide for insurance and various other benefits.

Financial Instruments with Off-Balance-Sheet Risk

In the normal course of business, the Company is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers. These financial instruments include standby letters of credit and commitments to extend credit, which include new loan commitments, undisbursed portions of construction loans and other lines of credit and loans sold with recourse. We are obligated under a recourse provision associated with certain first mortgage renovation loans sold in the secondary market to bear all costs when a default, including a foreclosure, occurs. These financial instruments involve, to varying degrees, elements of interest rate risk in excess of the amounts recognized in the statements of financial condition. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

Financial instruments whose contract amounts represent off-balance sheet credit risk are as follows:

	September 30,		December 31,
	2024		2023
Commitments to extend credit summarized as follows:
Future loan commitments	$	4,477	$	5,318
Undisbursed construction loans		21,449		42,482
Undisbursed home equity lines of credit		10,363		10,727
Undisbursed commercial and other line of credit		77,780		69,258
Standby letters of credit		2,941		4,965
Loans sold with recourse		807		1,873
Total	$	117,817	$	134,623

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. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Since these commitments could 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 an extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include residential and commercial property, deposits and securities.

Interest Rate Swaps

The Company enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate loan agreement to a fixed-rate loan agreement. Under these agreements, the Company simultaneously enters into a variable-rate loan and an interest rate swap agreement with a customer. The Company then enters into a corresponding and offsetting swap agreement with a third party to hedge the exposure created by the customer agreements. The interest rate swaps with both the customers and third parties are not designated as hedges under FASB ASC Topic 815, Derivatives and Hedging, and are marked to market through earnings. The fair values of the swaps are recorded as both an asset and a liability, in other assets and other liabilities, respectively, in equal amounts for these transactions.  The accrued interest receivable and payable of $177 and $132 related to our swaps is recorded in other assets and other liabilities as of September 30, 2024 and December 31, 2023, respectively.

Summary information regarding these derivatives is presented below:

	September 30,			December 31,
	2024			2023
Notational amount	$	113,385		$	65,420
Fair value	$	6,043		$	5,343
Weighted average pay rates		5.24	%		5.064	%
Weighted average receive rates		7.29	%		7.49	%
Weighted average maturity (in years)		8.45			8.88
Number of Contracts		19			14

In addition, as of September 30, 2024, the Company has three forward rate swaps with a notional value of $26,110 and a fair value of $583 with effective dates at various points in 2024 and 2025. These forward swaps have a fixed weighted average pay rate of 5.79% and the related weighted average adjustable receive rates will be determined at the time the forward swaps become effective. As of December 31, 2023, there were five forward swaps with a notional value of $30,211, a fair value of $970 and a fixed average pay rate of 4.95%.