OLD SECOND BANCORP INC

For the period ended Mar 31, 2024. Filed May 9, 2024.

About this filing

A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.

Mar 31, 2024 · Filed May 9, 2024

OSBC$25.08-0.0%Stored close · as of Nov 10, 2026

Extracted filing text, with the paragraph anchors used by the comparison.

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Contents

Item 1. Financial Statements

Consolidated Balance Sheets

(In thousands, except share data)


· · (unaudited) · · ·
· · March 31, · · December 31,
	2024		2023
Assets
Cash and due from banks		$48,841		$55,534
Interest earning deposits with financial institutions		49,253		44,611
Cash and cash equivalents		98,094		100,145
Securities available-for-sale, at fair value		1,168,797		1,192,829
Federal Home Loan Bank Chicago (“FHLBC”) and Federal Reserve Bank Chicago (“FRBC”) stock		28,518		33,355
Loans held-for-sale		1,072		1,322
Loans		3,969,411		4,042,953
Less: allowance for credit losses on loans		44,113		44,264
Net loans		3,925,298		3,998,689
Premises and equipment, net		81,290		79,310
Other real estate owned		5,123		5,123
Mortgage servicing rights, at fair value		10,564		10,344
Goodwill		86,478		86,478
Core deposit intangible		10,637		11,217
Bank-owned life insurance (“BOLI”)		110,490		109,318
Deferred tax assets, net		31,699		31,077
Other assets		58,012		63,592
Total assets		$5,616,072		$5,722,799

Liabilities
Deposits:
Noninterest bearing demand		$1,799,927		$1,834,891
Interest bearing:
Savings, NOW, and money market		2,221,696		2,207,949
Time		586,652		527,906
Total deposits		4,608,275		4,570,746
Securities sold under repurchase agreements		33,546		26,470
Other short-term borrowings		220,000		405,000
Junior subordinated debentures		25,773		25,773
Subordinated debentures		59,403		59,382
Other liabilities		72,916		58,147
Total liabilities		5,019,913		5,145,518

Stockholders’ Equity
Common stock		44,908		44,705
Additional paid-in capital		203,129		202,223
Retained earnings		412,388		393,311
Accumulated other comprehensive loss		(63,361)		(62,781)
Treasury stock		(905)		(177)
Total stockholders’ equity		596,159		577,281
Total liabilities and stockholders’ equity		$5,616,072		$5,722,799


· March 31, 2024 · · December 31, 2023
· Common · · Common
· Stock · Stock
Par value	$1.00	$1.00
Shares authorized	60,000,000	60,000,000
Shares issued	44,907,619	44,705,150
Shares outstanding	44,845,629	44,697,917
Treasury shares	61,990	7,233

See accompanying notes to consolidated financial statements*.*

Consolidated Statements of****Income

(In thousands, except per share data)


· · (unaudited) ·
· · Three Months Ended March 31, ·
· 2024 · 2023
Interest and dividend income
Loans, including fees	$62,673	$57,210
Loans held-for-sale	14	12
Securities:
Taxable	8,092	10,735
Tax exempt	1,306	1,337
Dividends from FHLBC and FRBC stock	635	280
Interest bearing deposits with financial institutions	610	585
Total interest and dividend income	73,330	70,159
Interest expense
Savings, NOW, and money market deposits	4,037	1,149
Time deposits	4,041	664
Securities sold under repurchase agreements	86	9
Other short-term borrowings	4,557	2,345
Junior subordinated debentures	280	279
Subordinated debentures	546	546
Senior notes	-	994
Notes payable and other borrowings	-	87
Total interest expense	13,547	6,073
Net interest and dividend income	59,783	64,086
Provision for credit losses	3,500	3,501
Net interest and dividend income after provision for credit losses	56,283	60,585
Noninterest income
Wealth management	2,561	2,270
Service charges on deposits	2,415	2,424
Secondary mortgage fees	50	59
Mortgage servicing rights mark to market gain (loss)	94	(525)
Mortgage servicing income	488	516
Net gain on sales of mortgage loans	314	306
Securities gains (losses), net	1	(1,675)
Change in cash surrender value of BOLI	1,172	242
Card related income	2,376	2,244
Other income	1,030	1,489
Total noninterest income	10,501	7,350
Noninterest expense
Salaries and employee benefits	24,312	22,248
Occupancy, furniture and equipment	3,927	3,475
Computer and data processing	2,255	1,774
FDIC insurance	667	584
Net teller & bill paying	521	502
General bank insurance	309	305
Amortization of core deposit intangible	580	624
Advertising expense	192	142
Card related expense	1,277	1,216
Legal fees	226	319
Consulting & management fees	336	790
Other real estate expense, net	46	306
Other expense	3,593	3,637
Total noninterest expense	38,241	35,922
Income before income taxes	28,543	32,013
Provision for income taxes	7,231	8,406
Net income	$21,312	$23,607

Basic earnings per share	$0.48	$0.53
Diluted earnings per share	0.47	0.52
Dividends declared per share	0.05	0.05

See accompanying notes to consolidated financial statements.

Consolidated Statements of Comprehensive Income (Loss)


· · (unaudited)
· · Three Months Ended March 31,
· 2024 · 2023
Net Income	$21,312	$23,607

Unrealized holding (losses) gains on available-for-sale securities arising during the period	(876)	16,210
Related tax benefit (expense)	245	(4,536)
Holding (losses) gains, after tax, on available-for-sale securities	(631)	11,674

Less: Reclassification adjustment for the net gains (losses) realized during the period
Net realized gains (losses)	1	(1,675)
Related tax benefit	-	471
Net realized gains (losses) after tax	1	(1,204)
Other comprehensive (loss) income on available-for-sale securities	(632)	12,878

Changes in fair value of derivatives used for cash flow hedges	52	1,602
Related tax expense	-	(456)
Other comprehensive income on cash flow hedges	52	1,146

Total other comprehensive (loss) income	(580)	14,024
Total comprehensive income	$20,732	$37,631



· · Accumulated · · Accumulated · · Total
· · Unrealized Gain · · Unrealized Gain · · Accumulated Other
· · (Loss) on Securities · · (Loss) on Derivative · · Comprehensive
(unaudited) · · Available-for -Sale · · Instruments · · Income/(Loss)
For the Three Months Ended
Balance, January 1, 2023	$(88,892)	$(4,232)	$(93,124)
Other comprehensive income, net of tax	12,878	1,146	14,024
Balance, March 31, 2023	$(76,014)	$(3,086)	$(79,100)

Balance, January 1, 2024	$(60,590)	$(2,191)	$(62,781)
Other comprehensive (loss) income, net of tax	(632)	52	(580)
Balance, March 31, 2024	$(61,222)	$(2,139)	$(63,361)

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows


· · (unaudited)
· · Three Months Ended March 31,
	2024	2023
Cash flows from operating activities
Net income	$21,312		$23,607
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount amortization on securities	821		799
Securities (gains) losses, net	(1)		1,675
Provision for credit losses	3,500		3,501
Originations of loans held-for-sale	(9,103)		(10,206)
Proceeds from sales of loans held-for-sale	9,536		9,957
Net gains on sales of mortgage loans	(314)		(306)
Mortgage servicing rights mark to market (gain) loss	(94)		525
Net accretion of discount on loans and unfunded commitments	(157)		(1,180)
Net change in cash surrender value of BOLI	(1,172)		(242)
Net losses on sale of other real estate owned	-		28
Provision for other real estate owned valuation losses	-		269
Depreciation of fixed assets and amortization of leasehold improvements	1,350		1,046
Net gains on disposal and transfer of fixed assets	-		(434)
Amortization of core deposit intangibles	580		624
Change in current income taxes receivable	4,825		7,043
Deferred tax (benefit) expense	(375)		1,442
Change in accrued interest receivable and other assets	1,543		2,635
Accretion of purchase accounting adjustment on time deposits	(78)		(367)
Change in accrued interest payable and other liabilities	14,059		(6,344)
Stock based compensation	1,058		932
Net cash provided by operating activities	47,290		35,004
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale	32,665		37,718
Proceeds from sales of securities available-for-sale	5,331		66,170
Purchases of securities available-for-sale	(15,661)		(4,186)
Proceeds from redemptions (purchases) of FHLBC/FRBC stock	4,837		(9,675)
Net change in loans	70,048		(132,445)
Proceeds from sales of other real estate owned, net of participations and improvements	-		300
Proceeds from disposition of premises and equipment	-		756
Net purchases of premises and equipment	(3,330)		(1,560)
Net cash provided by (used in) investing activities	93,890		(42,922)
Cash flows from financing activities
Net change in deposits	37,607		(213,136)
Net change in securities sold under repurchase agreements	7,076		(4,259)
Net change in other short-term borrowings	(185,000)		225,000
Repayment of term note	-		(9,000)
Vesting of restricted stock	99		-
Dividends paid on common stock	(2,237)		(2,237)
Purchase of treasury stock	(776)		(605)
Net cash (used in) provided by financing activities	(143,231)		(4,237)
Net change in cash and cash equivalents	(2,051)		(12,155)
Cash and cash equivalents at beginning of period	100,145		115,177
Cash and cash equivalents at end of period	$98,094		$103,022

See accompanying notes to consolidated financial statements.

Consolidated Statements of Changes in

Stockholders’ Equity


· · · · · · · · · · · Accumulated · · · · · ·
· · · · · Additional · · · · · Other · · · · · Total
(unaudited) · Common · · Paid-In · · Retained · · Comprehensive · · Treasury · · Stockholders’
	Stock		Capital		Earnings		(Loss) Income		Stock		Equity
For the Three Months Ended

Balance, January 1, 2023		$44,705		$202,276		$310,512		$(93,124)		$(3,228)		$461,141
Net income						23,607						23,607
Other comprehensive income, net of tax								14,024				14,024
Dividends declared on common stock, ($0.05 per share)						(2,229)						(2,229)
Vesting of restricted stock				(3,087)						3,087		-
Stock based compensation				932								932
Purchase of treasury stock from taxes withheld on stock awards										(605)		(605)
Balance, March 31, 2023		$44,705		$200,121		$331,890		$(79,100)		$(746)		$496,870

Balance, January 1, 2024		$44,705		$202,223		$393,311		$(62,781)		$(177)		$577,281
Net income						21,312						21,312
Other comprehensive loss, net of tax								(580)				(580)
Dividends declared on common stock, ($0.05 per share)						(2,235)						(2,235)
Vesting of restricted stock		203		(152)						48		99
Stock based compensation				1,058								1,058
Purchase of treasury stock from taxes withheld on stock awards										(776)		(776)
Balance, March 31, 2024		$44,908		$203,129		$412,388		$(63,361)		$(905)		$596,159

Note 1 – Basis of Presentation and Changes in Significant Accounting Policies

The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information. The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented. Results for the period ended March 31, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. These interim consolidated financial statements and accompanying notes are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2023. Unless otherwise indicated, dollar amounts in the tables contained in the notes to the consolidated financial statements are in thousands. Certain items in prior periods have been reclassified to conform to the current presentation.

The Company’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements.

Recent Accounting Pronouncements

The following is a summary of recent accounting pronouncements that have impacted or could potentially affect the Company**:**

ASU 2023-06 – On October 9, 2023, the FASB issued ASU 2023-06 “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” The amendments in the ASU modify the disclosure or presentation requirements of a variety of Topics in the Codification. Certain of the amendments represent clarifications to, or technical corrections of, the current requirements. Each amendment in the ASU will only become effective if the SEC removes the related disclosure or presentation requirement from its existing regulations by June 30, 2027. The amendments in this ASU are not expected to have a material impact on the financial statements of the Company.

ASU 2023-09 – On December 14, 2023, the FASB issued ASU 2023-09 “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. The amendments require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation, and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income (or loss) by the applicable statutory income tax rate). The amendments require that all entities disclose on an annual basis the following information about income taxes paid: (1) The amount of income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes, and (2) The amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid (net of refunds received) is equal to or greater than 5 percent of total income taxes paid (net of refunds received). The amendments also require that all entities disclose the following information: (1) Income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign, and (2) Income tax expense (or benefit) from continuing operations disaggregated by federal (national), state, and foreign. The ASU is effective for public business entities for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments should be applied on a prospective basis. Retrospective application is permitted. The Company will adopt this ASU for the reporting period beginning January 1, 2025, and does not expect the amendments to have a material impact to the financial statements of the Company.

ASU 2024-01 –On March 21, 2024, the FASB issued ASU 2024-01 “Compensation - Stock Compensation (Topic 718) - Scope Application of Profits Interest and Similar Awards”* *which clarifies how an entity determines whether a profits interest or similar award is within the scope of Topic 718, or is not a share-based payment arrangement and therefore within the scope of other guidance. ASU 2024-01 provides an illustrative example with multiple fact patterns and also amends certain language in the “Scope” and “Scope Exceptions” sections of Topic 718 to improve its clarity and operability without changing the guidance. Entities can apply the amendments either retrospectively to all prior periods presented in the financial statements or prospectively to profits interest and similar awards granted or modified on or after the date of adoption. If prospective application is elected, an entity must disclose the nature of and reason for the change in accounting principle. ASU 2024-01 is effective January 1, 2025, including interim periods, and is not expected to have a material impact the financial statements of the Company.

ASU 2024-02 –On March 29, 2024, the FASB issued ASU 2024-02 “Codification Improvements” amends the Codification to remove references to various concept statements and impacts a variety of topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance, but in most instances the references removed are extraneous and not required to understand or apply the guidance. Generally, the amendments in ASU 2024-02 are not intended to result in significant accounting changes for most entities. ASU 2024-02 is effective January 1, 2025 and is not expected to have a material impact the financial statements of the Company.

Change in Significant Accounting Policies

Significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. During the first quarter of 2024, the Company had no changes to significant accounting policies or estimates.

Subsequent Events

On April 16, 2024, our Board of Directors declared a cash dividend of $0.05 per share of common stock payable on May 6, 2024, to stockholders of record as of April 26, 2024; dividends of $2.2 million were paid to stockholders on May 6, 2024.

Note 2 – Securities

Investment Portfolio Management

Our investment portfolio serves the liquidity needs and income objectives of the Company. While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio also serve as income producing assets. The size and composition of the portfolio reflects liquidity needs, loan demand and interest income objectives. Portfolio size and composition will be adjusted from time to time. While a significant portion of the portfolio consists of readily marketable securities to address liquidity, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.

Investments are comprised of debt securities and non-marketable equity investments. Securities available-for-sale are carried at fair value. Unrealized gains and losses, net of tax, on securities available-for-sale are reported as a separate component of equity. This balance sheet component changes as interest rates and market conditions change. Unrealized gains and losses are not included in the calculation of regulatory capital.

Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments. FHLBC stock was recorded at $13.6 million at March 31, 2024 and $18.5 million at December 31, 2023. FRBC stock was recorded at $14.9 million at March 31, 2024 and December 31, 2023.

The following tables summarize the amortized cost and fair value of the securities portfolio at March 31, 2024, and December 31, 2023, and the corresponding amounts of gross unrealized gains and losses:


· · · · · Gross · · Gross · · ·
· · Amortized · · Unrealized · · Unrealized · · Fair
March 31, 2024 · Cost1 · Gains · Losses · · Value
Securities available-for-sale · · · · · · · · ·
U.S. Treasury	$174,712	$	-	$(3,712)	$171,000
U.S. government agencies	59,829		-	(2,850)	56,979
U.S. government agencies mortgage-backed	114,061		-	(12,986)	101,075
States and political subdivisions	233,343		682	(11,283)	222,742
Collateralized mortgage obligations	431,084		272	(51,753)	379,603
Asset-backed securities	69,666		37	(2,996)	66,707
Collateralized loan obligations	171,131		52	(492)	170,691
Total securities available-for-sale	$1,253,826		$1,043	$(86,072)	$1,168,797


· · · · · Gross · · Gross · · ·
· · Amortized · · Unrealized · · Unrealized · · Fair
December 31, 2023 · Cost1 · Gains · Losses · · Value
Securities available-for-sale
U.S. Treasury	$174,602	$	-	$(5,028)	$169,574
U.S. government agencies	60,011		-	(3,052)	56,959
U.S. government agencies mortgage-backed	118,492		-	(12,122)	106,370
States and political subdivisions	236,072		1,325	(10,332)	227,065
Collateralized mortgage obligations	442,987		421	(50,864)	392,544
Asset-backed securities	71,616		42	(3,222)	68,436
Collateralized loan obligations	173,201		30	(1,350)	171,881
Total securities available-for-sale	$1,276,981		$1,818	$(85,970)	$1,192,829

1 Excludes accrued interest receivable of*$6.3** million and**$6.6** million at March 31, 2024 and December 31, 2023, respectively, that is recorded in other assets on the consolidated balance sheets.*

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2024, by contractual maturity, are listed in the table below. Securities not due at a single maturity date are shown separately.


		Weighted
· · Amortized · · Average · · · Fair ·
Securities available-for-sale · Cost · Yield · · Value
Due in one year or less	$197,825	1.05%	$193,861
Due after one year through five years	53,675	1.92	50,940
Due after five years through ten years	56,283	2.77	51,681
Due after ten years	160,101	3.11	154,239
	467,884	2.06	450,721
Mortgage-backed and collateralized mortgage obligations	545,145	2.43	480,678
Asset-backed securities	69,666	4.06	66,707
Collateralized loan obligations	171,131	6.84	170,691
Total securities available-for-sale	$1,253,826	2.99%	$1,168,797

At March 31, 2024, the Company hadno securities issued from anyone originator, other than the U.S. Government and its agencies, which individually amounted to over 10% of the Company’s stockholders’ equity.

Securities with unrealized losses withno corresponding allowance for credit losses at March 31, 2024 and December 31, 2023, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):


· · Less than 12 months · · 12 months or more · · · · · · · ·
March 31, 2024 · · in an unrealized loss position · · in an unrealized loss position · · Total
· · Number of · · Unrealized · · Fair · · Number of · · Unrealized · · Fair · · Number of · · Unrealized · · Fair
Securities available-for-sale · Securities · Losses · Value · Securities · Losses · Value · Securities · Losses · Value
U.S. Treasuries	-	$	-	$	-	4	$3,712	$171,000	4	$3,712	$171,000
U.S. government agencies	-		-		-	9	2,850	56,979	9	2,850	56,979
U.S. government agencies mortgage-backed	-		-		-	128	12,986	101,075	128	12,986	101,075
States and political subdivisions	20		299		63,127	35	10,984	126,955	55	11,283	190,082
Collateralized mortgage obligations	-		-		-	144	51,753	364,263	144	51,753	364,263
Asset-backed securities	-		-		-	18	2,996	60,864	18	2,996	60,864
Collateralized loan obligations	2		7		10,396	15	485	99,070	17	492	109,466
Total securities available-for-sale	22		$306		$73,523	353	$85,766	$980,206	375	$86,072	$1,053,729


· · Less than 12 months · · 12 months or more · · · · · · · ·
December 31, 2023 · · in an unrealized loss position · · in an unrealized loss position · · Total
· · Number of · · Unrealized · · · Fair · · Number of · · Unrealized · · · Fair · · Number of · · Unrealized · · · Fair
Securities available-for-sale · Securities · Losses · · Value · Securities · Losses · · Value · Securities · Losses · · Value
U.S. Treasuries	-	$	-	$	-	4	$5,028	$169,574	4	$5,028	$169,574
U.S. government agencies	-		-		-	9	3,052	56,959	9	3,052	56,959
U.S. government agencies mortgage-backed	-		-		-	128	12,122	106,370	128	12,122	106,370
States and political subdivisions	12		137		27,974	25	10,195	106,138	37	10,332	134,112
Collateralized mortgage obligations	2		8		734	143	50,856	376,236	145	50,864	376,970
Asset-backed securities	-		-		-	19	3,222	63,941	19	3,222	63,941
Collateralized loan obligations	-		-		-	25	1,350	150,902	25	1,350	150,902
Total securities available-for-sale	14		$145		$28,708	353	$85,825	$1,030,120	367	$85,970	$1,058,828

Each quarter, we perform an analysis to determine if any of the unrealized losses on securities available-for-sale are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. Our assessment includes a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and our ability and intent to hold the security for a period of time sufficient for a recovery in value. We also consider the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. The portfolio continues to consist of a mix of fixed and floating-rate, high quality securities, largely rated AA (or better), displaying an overall effective duration of approximately 3.0 years. No credit losses were determined to be present as of March 31, 2024, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the first quarter of 2024.

The following table presents net realized losses on securities available-for-sale for three months ended:


· · · Three Months Ended · ·
· · · March 31, · ·
Securities available-for-sale · 2024 · 2023 ·
Proceeds from sales of securities		$5,331		$66,170
Gross realized gains on securities		$1	$	-
Gross realized losses on securities		-		(1,675)
Net realized gains (losses)		$1		$(1,675)
Income tax benefit on net realized losses	$	-		$471
Effective tax rate applied		0.0%		28.1%

As of March 31, 2024, securities valued at $804.9 million were pledged for borrowings, and for other purposes, a decrease from $810.2 million of securities pledged at year-end 2023.

Note 3 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:


· March 31, 2024 · December 31, 2023
Commercial	$796,552	$841,697
Leases	425,615	398,223
Commercial real estate – investor	1,018,382	1,034,424
Commercial real estate – owner occupied	782,603	796,538
Construction	169,174	165,380
Residential real estate – investor	51,522	52,595
Residential real estate – owner occupied	220,223	226,248
Multifamily	387,479	401,696
HELOC	98,762	103,237
Other 1	19,099	22,915
Total loans	3,969,411	4,042,953
Allowance for credit losses on loans	(44,113)	(44,264)
Net loans 2	$3,925,298	$3,998,689

1* The “Other” segment includes consumer loans and overdrafts in this table and in subsequent tables within Note 3 – Loans and Allowance for Credit Losses on Loans.*

2* Excludes accrued interest receivable of**$19.4** million and**$20.5** million at March 31, 2024 and December 31, 2023, respectively, that is recorded in other assets on the consolidated balance sheets.*

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to assure access to collateral, in the event of borrower default, through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. Although the Bank makes loans primarily within its market area, there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector. The real estate related categories listed above represent 68.7% and 68.8% of the portfolio at March 31, 2024, and December 31, 2023, respectively, and include a mix of owner occupied and non-owner occupied commercial real estate, residential, construction and multifamily loans.

The following tables represent the activity in the allowance for credit losses for loans, or the ACL, for the three months ended March 31, 2024 and 2023:


· · · · · · · · · ·
· · · · Provision for · · · · · ·
· · Beginning · · (Release of) · · · · · · Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three months ended March 31, 2024
Commercial		$3,998		$2,326		$15		$73		$6,382
Leases		2,952		(33)		-		40		2,959
Commercial real estate – investor		17,105		(902)		16		83		16,270
Commercial real estate – owner occupied		12,280		2,580		3,887		19		10,992
Construction		1,038		59		-		-		1,097
Residential real estate – investor		669		(35)		-		2		636
Residential real estate – owner occupied		1,821		(169)		-		8		1,660
Multifamily		2,728		(135)		-		-		2,593
HELOC		1,656		(165)		-		17		1,508
Other		17		18		70		51		16
Total		$44,264		$3,544		$3,988		$293		$44,113


· · · · · · · · · · ·
· · · · Provision for · · · · · ·
· · Beginning · · (Release of) · · · · · · Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three months ended March 31, 2023
Commercial		$11,968		$(581)		$27		$151		$11,511
Leases		2,865		774		882		9		2,766
Commercial real estate – investor		10,674		4,569		-		17		15,260
Commercial real estate – owner occupied		15,001		573		-		2		15,576
Construction		1,546		(501)		-		-		1,045
Residential real estate – investor		768		(41)		-		19		746
Residential real estate – owner occupied		2,046		(334)		-		10		1,722
Multifamily		2,453		212		-		-		2,665
HELOC		1,806		(47)		-		29		1,788
Other		353		28		113		45		313
Total		$49,480		$4,652		$1,022		$282		$53,392

At March 31, 2024, our allowance for credit losses (“ACL”) on loans totaled $44.1 million, and our ACL on unfunded commitments, included in other liabilities, totaled $2.7 million. During the first three months of 2024, we recorded net provision expense of $3.5 million based on historical loss rate updates driven by higher charge offs in commercial real estate-investor, downward risk rating migration, and our assessment of estimated future credit losses. The ACL on loans excludes $2.7 million, $2.7 million and $3.8 million of allowance for unfunded commitments as of March 31, 2024, December 31, 2023, and March 31, 2023, respectively, recorded within other liabilities.

Generally, the Bank considers a loan to be collateral dependent when, based on current information and events, it is probable that foreclosure could be initiated. Additionally, the Bank will review all loans meeting the criteria for individual analysis, to determine if repayment or satisfaction of the loan is expected through the sale of collateral. This will generally be the case for credits with high loan-to-values. Exceptions to this policy would include loans with guarantors or sponsors that have the means and willingness to support the obligation. Non-accruing loans with an outstanding balance of $500,000 or more are assessed on an individual loan level basis. When a financial asset is deemed collateral-dependent, the level of credit loss is measured by the difference between amortized cost of the financial asset and the fair value of collateral adjusted for estimated cost to sell. The Company had $59.3 million and $63.1 million of collateral dependent loans secured by real estate or business assets as of March 31, 2024, and December 31, 2023, respectively.

The following tables present the collateral dependent loans and the related ACL allocated by segment of loans as of March 31, 2024 and December 31, 2023:


· · · · · Accounts · · · · · · · · ACL
March 31, 2024 · · Real Estate · · Receivable · · Equipment · · Other · · Total · · Allocation
Commercial	$	-		$	-		$571			$1,354		$1,925	$1,356
Leases		-			-		-			-		-	-
Commercial real estate – investor		16,128			-		-			-		16,128	3,569
Commercial real estate – owner occupied		30,847			-		-			-		30,847	1,239
Construction		7,119			-		-			-		7,119	-
Residential real estate – investor		409			-		-			-		409	-
Residential real estate – owner occupied		1,506			-		-			-		1,506	-
Multifamily		1,373			-		-			-		1,373	-
HELOC		39			-		-			-		39	-
Total		$57,421		$	-		$571			$1,354		$59,346	$6,164


				Accounts							ACL
December 31, 2023	Real Estate		Receivable		Equipment	Other		Total		Allocation
Commercial		$837			$797	$	-		$	-		$1,634	$2
Leases		-			-		321			-		321	320
Commercial real estate – investor		15,735			-		-			-		15,735	3,656
Commercial real estate – owner occupied		34,894			-		-			-		34,894	3,900
Construction		7,162			-		-			-		7,162	-
Residential real estate – investor		422			-		-			-		422	-
Residential real estate – owner occupied		1,506			-		-			-		1,506	-
Multifamily		1,402			-		-			-		1,402	-
HELOC		39			-		-			-		39	-
Total		$61,997			$797		$321		$	-		$63,115	$7,878

Aged analysis of past due loans by segments of loans was as follows:


· · · · · · · · · · · · · · · · · · · · 90 days or
· · · · · · · · 90 Days or · · · · · · · · · · · Greater Past
· · 30-59 Days · · 60-89 Days · · Greater Past · · Total Past · · · · · · · · Due and
March 31, 2024 · · Past Due · Past Due · Due · Due · Current · Total Loans · Accruing
Commercial	$12,429	$703	$822	$13,954	$782,598	$796,552	$748
Leases	1,108	-	401	1,509	424,106	425,615	-
Commercial real estate – investor	434	-	4,966	5,400	1,012,982	1,018,382	-
Commercial real estate – owner occupied	971	3,776	22,899	27,646	754,957	782,603	-
Construction	4,220	-	7,119	11,339	157,835	169,174	-
Residential real estate – investor	-	54	249	303	51,219	51,522	-
Residential real estate – owner occupied	656	233	2,086	2,975	217,248	220,223	-
Multifamily	-	304	534	838	386,641	387,479	-
HELOC	177	237	268	682	98,080	98,762	41
Other	-	-	-	-	19,099	19,099	-
Total	$19,995	$5,307	$39,344	$64,646	$3,904,765	$3,969,411	$789


· · · · · · · · · · · · · · · · · · · · 90 days or
· · · · · · · · 90 Days or · · · · · · · · · · · Greater Past
· · 30-59 Days · · 60-89 Days · · Greater Past · · Total Past · · · · · · · · Due and
December 31, 2023 · · Past Due · Past Due · Due · Due · Current · Total Loans · Accruing
Commercial	$982	$	-	$1,228	$2,210	$839,487	$841,697	$1,155
Leases	599		-	347	946	397,277	398,223	-
Commercial real estate – investor	1,209		-	6,087	7,296	1,027,128	1,034,424	-
Commercial real estate – owner occupied	2,103		3,726	15,645	21,474	775,064	796,538	-
Construction	2,540		307	7,161	10,008	155,372	165,380	-
Residential real estate – investor	540		579	168	1,287	51,308	52,595	-
Residential real estate – owner occupied	553		125	1,944	2,622	223,626	226,248	-
Multifamily	1,085		-	233	1,318	400,378	401,696	-
HELOC	565		1,396	269	2,230	101,007	103,237	41
Other	-		1	-	1	22,914	22,915	-
Total	$10,176		$6,134	$33,082	$49,392	$3,993,561	$4,042,953	$1,196

The table presents all nonaccrual loans as of March 31, 2024, and December 31, 2023:


Nonaccrual loan detail · March 31, 2024 · With no ACL · December 31, 2023 · With no ACL
Commercial	$1,998	$644	$870	$870
Leases	595	595	639	318
Commercial real estate – investor	16,128	8,568	16,572	8,926
Commercial real estate – owner occupied	30,897	8,271	34,946	8,429
Construction	7,119	7,119	7,162	7,162
Residential real estate – investor	1,299	1,299	1,331	1,331
Residential real estate – owner occupied	3,031	3,031	3,078	3,078
Multifamily	1,959	1,959	1,775	1,775
HELOC	1,298	1,298	1,210	1,210
Other	-	-	-	-
Total	$64,324	$32,784	$67,583	$33,099

The Company recognized $34,000 of interest on nonaccrual loans during the three months ended March 31, 2024.

Credit Quality Indicators

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison to industry averages, historical payment experience, and current economic trends. This analysis includes loans with outstanding balances or commitments greater than $50,000 and excludes homogeneous loans such as home equity lines of credit and residential mortgages. Loans with a classified risk rating are reviewed quarterly regardless of size or loan type. The Company uses the following definitions for classified risk ratings:

**Special Mention.**Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Credits that are not covered by the definitions above are pass credits, which are not considered to be adversely rated.

Credit quality indicators by loan segment and loan origination date at March 31, 2024 were as follows:


	2024		2023		2022		2021		2020		Prior		RevolvingLoans		RevolvingLoansConvertedTo TermLoans			Total
Commercial
Pass		$10,284		$313,611		$125,215		$28,810		$10,497		$19,834		$252,098		$			$760,349
Special Mention		-		-		3,598		3,064		111		-		14,187			-		20,960
Substandard		-		-		4,703		178		-		-		10,362			-		15,243
Total commercial		10,284		313,611		133,516		32,052		10,608		19,834		276,647			-		796,552

Leases
Pass		61,834		205,567		$100,256		36,105		12,450		7,094		-			-		423,306
Special Mention		-		308		380		1,015		-		11		-			-		1,714
Substandard		-		-		392		203		-		-		-			-		595
Total leases		61,834		205,875		101,028		37,323		12,450		7,105		-			-		425,615

Commercial real estate – investor
Pass		46,126		200,397		341,405		170,710		94,342		101,984		20,264			-		975,228
Special Mention		-		-		-		-		-		-		-			-		-
Substandard		-		1,648		4,128		2,796		5,286		17,065		12,231			-		43,154
Total commercial real estate – investor		46,126		202,045		345,533		173,506		99,628		119,049		32,495			-		1,018,382

Commercial real estate – owner occupied
Pass		7,877		137,719		151,782		185,939		85,511		124,527		1,828			-		695,183
Special Mention		-		1,638		18,249		1,452		3,104		1,710		-			-		26,153
Substandard		-		-		14,647		15,732		13,419		17,469		-			-		61,267
Total commercial real estate – owner occupied		7,877		139,357		184,678		203,123		102,034		143,706		1,828			-		782,603

Construction
Pass		10,236		42,569		77,717		26,818		95		1,747		2,525			-		161,707
Special Mention		-		-		348		-		-		-		-			-		348
Substandard		-		-		7,119		-		-		-		-			-		7,119
Total construction		10,236		42,569		85,184		26,818		95		1,747		2,525			-		169,174

Residential real estate – investor
Pass		1,101		4,925		14,269		8,516		6,137		13,704		1,506			-		50,158
Special Mention		-		-		-		65		-		-		-			-		65
Substandard		-		-		378		-		-		921		-			-		1,299
Total residential real estate – investor		1,101		4,925		14,647		8,581		6,137		14,625		1,506			-		51,522

Residential real estate – owner occupied
Pass		1,397		31,591		40,203		39,818		24,764		78,480		802			-		217,055
Special Mention		-		-		-		-		-		-		-			-		-
Substandard		-		-		-		-		189		2,979		-			-		3,168
Total residential real estate – owner occupied		1,397		31,591		40,203		39,818		24,953		81,459		802			-		220,223

Multifamily
Pass		1,240		75,556		71,322		117,695		51,661		51,998		566			-		370,038
Special Mention		-		-		164		13,374		311		1,633		-			-		15,482
Substandard		-		-		976		-		214		769		-			-		1,959
Total multifamily		1,240		75,556		72,462		131,069		52,186		54,400		566			-		387,479

HELOC
Pass		725		2,678		2,534		449		1,545		4,297		84,886			-		97,114
Special Mention		-		-		-		-		-		-		-			-		-
Substandard		-		-		25		-		41		292		1,290			-		1,648
Total HELOC		725		2,678		2,559		449		1,586		4,589		86,176			-		98,762

Other
Pass		1,575		3,354		1,601		1,029		127		144		11,269			-		19,099
Special Mention		-		-		-		-		-		-		-			-		-
Substandard		-		-		-		-		-		-		-			-		-
Total other		1,575		3,354		1,601		1,029		127		144		11,269			-		19,099

Total loans
Pass		142,395		1,017,967		926,304		615,889		287,129		403,809		375,744			-		3,769,237
Special Mention		-		1,946		22,739		18,970		3,526		3,354		14,187			-		64,722
Substandard		-		1,648		32,368		18,909		19,149		39,495		23,883			-		135,452
Total loans		$142,395		$1,021,561		$981,411		$653,768		$309,804		$446,658		$413,814		$	-		$3,969,411

Credit quality indicators by loan segment and loan origination date at December 31, 2023, were as follows:


	2023		2022		2021		2020		2019		Prior		RevolvingLoans		RevolvingLoansConvertedTo TermLoans		Total
Commercial
Pass		$318,569		$136,668		$35,901		$11,983		$18,390		$3,426		$298,931		$1,408		$825,276
Special Mention		-		2,737		707		171		-		-		4,392		-		8,007
Substandard		-		2,099		146		-		199		-		5,970		-		8,414
Total commercial		318,569		141,504		36,754		12,154		18,589		3,426		309,293		1,408		841,697

Leases
Pass		219,163		113,074		$42,275		14,663		6,975		1,255		-		-		397,405
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		407		203		-		208		-		-		-		818
Total leases		219,163		113,481		42,478		14,663		7,183		1,255		-		-		398,223

Commercial real estate – investor
Pass		159,654		367,512		218,084		108,384		54,322		63,281		8,122		-		979,359
Special Mention		-		-		11,267		-		-		-		-		-		11,267
Substandard		-		-		838		5,327		15,658		9,648		12,327		-		43,798
Total commercial real estate – investor		159,654		367,512		230,189		113,711		69,980		72,929		20,449		-		1,034,424

Commercial real estate – owner occupied
Pass		124,059		134,383		177,553		103,109		42,839		91,062		33,243		-		706,248
Special Mention		1,650		17,415		9,585		3,128		218		3,681		-		-		35,677
Substandard		-		14,630		18,817		4,571		14,809		1,786		-		-		54,613
Total commercial real estate – owner occupied		125,709		166,428		205,955		110,808		57,866		96,529		33,243		-		796,538

Construction
Pass		42,808		66,513		32,942		100		1,593		1,083		3,186		-		148,225
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		9,993		-		7,162		-		-		17,155
Total construction		42,808		66,513		32,942		10,093		1,593		8,245		3,186		-		165,380

Residential real estate – investor
Pass		5,062		14,434		9,027		6,227		6,508		8,469		1,471		-		51,198
Special Mention		-		-		66		-		-		-		-		-		66
Substandard		-		390		-		-		408		533		-		-		1,331
Total residential real estate – investor		5,062		14,824		9,093		6,227		6,916		9,002		1,471		-		52,595

Residential real estate – owner occupied
Pass		32,574		41,528		40,335		25,322		14,233		68,277		763		-		223,032
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		191		685		2,340		-		-		3,216
Total residential real estate – owner occupied		32,574		41,528		40,335		25,513		14,918		70,617		763		-		226,248

Multifamily
Pass		55,310		79,060		123,834		72,539		12,231		40,825		562		-		384,361
Special Mention		-		168		13,425		322		1,645		-		-		-		15,560
Substandard		-		1,009		-		-		-		766		-		-		1,775
Total multifamily		55,310		80,237		137,259		72,861		13,876		41,591		562		-		401,696

HELOC
Pass		2,735		2,679		490		1,757		1,756		2,995		89,161		-		101,573
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		25		1		41		24		184		1,389		-		1,664
Total HELOC		2,735		2,704		491		1,798		1,780		3,179		90,550		-		103,237

Other
Pass		4,060		2,278		1,569		153		85		73		14,697		-		22,915
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total other		4,060		2,278		1,569		153		85		73		14,697		-		22,915

Total loans
Pass		963,994		958,129		682,010		344,237		158,932		280,746		450,136		1,408		3,839,592
Special Mention		1,650		20,320		35,050		3,621		1,863		3,681		4,392		-		70,577
Substandard		-		18,560		20,005		20,123		31,991		22,419		19,686		-		132,784
Total loans		$965,644		$997,009		$737,065		$367,981		$192,786		$306,846		$474,214		$1,408		$4,042,953

The gross charge-offs activity by loan type and year of origination for the three months ended March 31, 2024 were as follows:


Three months ended March 31, 2024 · 2024 · 2023 · 2022 · 2021 · 2020 · Prior · RevolvingLoans · RevolvingLoansConverted To TermLoans · Total
Commercial	$	-		-		-	-	-	15	$	-	$	-	$15
Commercial real estate – investor		-		-		-	-	16	-		-		-	16
Commercial real estate – owner occupied		-				-	3,853	-	34		-		-	3,887
Other		-		-		-	-	-	70		-		-	70
Total	$	-	$	-	$	-	$3,853	$16	$119		-		-	$3,988

The Company had $378,000 and $170,000 in residential real estate loans in the process of foreclosure as of March 31, 2024 and December 31, 2023, respectively.

There weresix loans modified during the three-month period ending March 31, 2024, totaling $18.6 million in aggregate, which were experiencing financial difficulty. There were three loans modified during the three-month period ending March 31, 2023, totaling $2.8 million in aggregate, which were experiencing financial difficulty. There wereno modified loans experiencing financial difficulty in payment default as of March 31, 2024 and March 31, 2023.

The following tables present the amortized costs basis of loans at March 31, 2024, and March 31, 2023 that were both experiencing financial difficulty and modified during the period ended March 31, 2024, and March 31, 2023, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.


March 31, 2024 · · Term Extension · · Combination - Term Extension and Interest Rate Modification · · Combination - Term Extension and Payment Modification (1) · · Total Loans Modified · · % of Total Loan Segment Modified to Total Loan Segment
Commercial	$247	$	-	$	-	$247	0.0%
Commercial real estate – investor	-		-		1,958	1,958	0.2%
Commercial real estate – owner occupied	12,244		3,309		854	16,407	2.1%
Total	$12,491		$3,309		$2,812	$18,612	0.5%


March 31, 2023 · · Term Extension · · Combination - Term Extension and Interest Rate Modification · · Combination - Term Extension and Payment Modification (1) · · Total Loans Modified · · % of Total Loan Segment Modified to Total Loan Segment
Commercial	$	-	$979	$	-	$979	0.1%
Commercial real estate – investor		-	-		1,774	1,774	0.2%
HELOC		20	-		-	20	0.0%
Total		$20	$979		$1,774	$2,773	0.1%

1* Payment modifications are either contractual delays in payment or a modification* of the payment amount.

The Company closely monitors the performance of loan modifications to borrowers experiencing financial difficulty. The following tables present the performance of loans that have been modified as of March 31, 2024 and March 31, 2023.


March 31, 2024 · · 30-59 days past due · · 60-89 Days Past Due · · 90 Days or Greater Past Due · · Total Past Due · · Current · · Total Loans Modified
Commercial	$	-	$	-	$	-	$	-	$247	$247
Commercial real estate – investor		-		-		-		-	1,958	1,958
Commercial real estate – owner occupied		-		-		-		-	16,407	16,407
Total	$	-	$	-	$	-	$	-	$18,612	$18,612


March 31, 2023 · · 30-59 days past due · · 60-89 Days Past Due · · 90 Days or Greater Past Due · · Total Past Due · · Current · · Total Loans Modified
Commercial	$	-	$	-	$	-	$	-	$979	$979
Commercial real estate – investor		-		-		-		-	1,774	1,774
HELOC		-		-		-		-	20	20
Total	$	-	$	-	$	-	$	-	$2,773	$2,773

The following tables summarize the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the period ended March 31, 2024, and March 31, 2023. The Company hadtwo loans that had a payment modification as of March 31, 2024. One changed to a single payment at maturity and the other had a reduction of monthly payment until maturity; the financial impact of these modifications is immaterial. As of March 31, 2023, there was one loan that had a payment modification to a single payment at maturity.


March 31, 2024 · · Weighted-Average Term Extension (In Months) · · Weighted-Average Interest Rate Change · · Weighted-Average Delay of Payment (In Months)
Commercial	4.00	-	%	-
Commercial real estate – investor	24.00	-		-
Commercial real estate – owner occupied	5.24	0.15		-
Total	7.20	0.15%		-


March 31, 2023 · · Weighted-Average Term Extension (In Months) · · Weighted-Average Interest Rate Change · · Weighted-Average Delay of Payment (In Months)
Commercial	4.00	5.00%	-
Commercial real estate – investor	8.00	-	7.00
HELOC	24.00	-	-
Total	6.71	5.00%	7.00

Note 4 – Other Real Estate Owned

Details related to the activity in the other real estate owned (“OREO”) portfolio, net of valuation reserve, for the periods presented are itemized in the following table:


· · Three Months Ended ·
	March 31,
Other real estate owned · 2024 · 2023
Balance at beginning of period		$5,123	$1,561
Property additions, net of acquisition adjustments		-	291
Less:
Proceeds from property disposals, net of participation purchase and gains/losses		-	328
Period valuation write-down		-	269
Balance at end of period		$5,123	$1,255

Activity in the valuation allowance was as follows:


· Three Months Ended ·
	March 31,
· 2024 · 2023
Balance at beginning of period		$118	$856
Provision for unrealized losses		-	269
Reductions taken on sales		-	(272)
Balance at end of period		$118	$853

Expenses related to OREO, net of lease revenue includes:


· · Three Months Ended ·
· · March 31,
· 2024 · 2023
Gain on sales, net	$	-	$28
Provision for unrealized losses		-	269
Operating expenses		113	9
Less:
Lease revenue		67	-
Net OREO expense		$46	$306

Note 5 – Deposits

Major classifications of deposits were as follows:


· March 31, 2024 · December 31, 2023
Noninterest bearing demand	$1,799,927	$1,834,891
Savings	955,528	971,334
NOW accounts	569,814	565,375
Money market accounts	696,354	671,240
Certificates of deposit of less than $100,000	289,962	266,035
Certificates of deposit of $100,000 through $250,000	205,638	180,289
Certificates of deposit of more than $250,000	91,052	81,582
Total deposits	$4,608,275	$4,570,746

Note 6 – Borrowings

The following table is a summary of borrowings as of March 31, 2024 and December 31, 2023. Junior subordinated debentures are discussed in more detail in Note 7.


· March 31, 2024 · December 31, 2023
Securities sold under repurchase agreements	$33,546	$26,470
Other short-term borrowings	220,000	405,000
Junior subordinated debentures1	25,773	25,773
Subordinated debentures	59,403	59,382
Total borrowings	$338,722	$516,625

1See Note 7: Junior Subordinated Debentures.

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities. These transactions consistently mature overnight from the transaction date and are governed by sweep repurchase agreements. All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities, and had a carrying amount of $33.5 million at March 31, 2024, and $26.5 million at December 31, 2023. The fair value of the pledged collateral was $45.2 million at March 31, 2024, and $45.7 million at December 31, 2023. At March 31, 2024, there wereno customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC. Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans. As of March 31, 2024, the Bank had $220.0 million in short-term advances outstanding under the FHLBC, and $405.0 million in short-term advances as of December 31, 2023. FHLBC stock held at March 31, 2024 was valued at $13.6 million, and any potential FHLBC advances were collateralized by loans and securities with a principal balance of $1.44 billion, which carried a FHLBC-calculated combined collateral value of $998.9 billion. The Company had excess collateral of $778.9 million available to secure borrowings at March 31, 2024.

In the second quarter of 2021, we issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). The Company used the net proceeds from the offering for general corporate purposes. The Notes bear interest at a fixed annual rate of 3.50%, from and including the date of issuance to but excluding April 15, 2026, payable semi-annually in arrears. From and including April 15, 2026 to, but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to three-month Term Secured Overnight Financing Rate (“SOFR”) (as defined by the Note) plus 273 basis points, payable quarterly in arrears. As of March 31, 2024 and December 31, 2023, we had $59.4 million of subordinated debentures outstanding, net of deferred issuance cost.

The Company issued senior notes in December 2016 with aten-year maturity, and terms included interest payable semiannually at 5.75% forfive years. Beginning December 31, 2021, the senior debt began to pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points. The notes were redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. On June 30, 2023, we redeemed all of the $45.0 million senior notes, at which point the interest rate was 9.39%. Upon redemption, the related deferred debt issuance costs of $362,000 was also recorded as interest expense, resulting in an effective cost of this debt issuance of 12.85% for the second quarter of 2023.

On February 24, 2020, the Company originated a $20.0 million three-year term note with a correspondent bank. The term note was issued at one-month LIBOR plus 175 basis points, and required principal payments quarterly and interest payments monthly. This note was included within Notes payable and other borrowings on the Consolidated Balance Sheets, and the remaining $9.0 million balance of the note was paid off on February 24, 2023. The Company also has an undrawn line of credit of $30.0 million with a correspondent bank to be used for short-term funding needs; advances under this line can be outstanding up to 360 days from the date of issuance. This line of credit has not been utilized since early 2019.

Note 7 – Junior Subordinated Debentures

The Company issued $25.0 million of cumulative trust preferred securities through a private placement completed by an unconsolidated subsidiary, Old Second Capital Trust II, in April 2007. These trust preferred securities mature in 30 years, but subject to regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017. The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017, and now have a floating rate of 150 basis points over three-month SOFR. Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.37% and 4.39% for the quarters ended March 31, 2024 and March 31, 2023, respectively. The Company issued a $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering. The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

The junior subordinated debentures issued by the Company are disclosed on the Consolidated Balance Sheets, and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of March 31, 2024 and December 31, 2023, the remaining unamortized debt issuance costs related to the junior subordinated debentures were less than $1,000 and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheets. The remaining deferred issuance costs on the junior subordinated debentures related to the issuance of Old Second Capital Trust II will be amortized to interest expense over the remainder of the 30-year term of the notes and are included in the Consolidated Statements of Income.

Note 8 – Equity Compensation Plans

Stock-based awards are outstanding under the Company’s 2019 Equity Incentive Plan, as amended and restated (the “2019 Plan”). The 2019 Plan was originally approved at the May 2019 annual stockholders’ meeting and authorized 600,000 shares, and at the May 2021 annual stockholders’ meeting, the Company obtained stockholder approval to increase the number of shares of common stock authorized for issuance under the 2019 Plan by 1,200,000 shares, from 600,000 shares to 1,800,000 shares. Following the approval of the 2019 Plan, no further awards will be granted under any other prior plan.

The 2019 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”). Awards may be granted to selected directors, officers, employees or eligible service providers under the 2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors. As of March 31, 2024,712,201 shares remained available for issuance under the 2019 Plan. The Company has granted only restricted stock units under the 2019 Equity Plan.

Generally, restricted stock units granted under the 2019 Plan vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change the terms of particular awards including the vesting schedule.

Under the 2019 Plan, unless otherwise provided in an award agreement, upon the occurrence of a change in control, all equity awards then held by the participant will become fully exercisable immediately if, and all stock awards and cash incentive awards will become fully earned and vested immediately if, (i) the 2019 Plan is not an obligation of the successor entity following a change in control or (ii) the 2019 Plan is an obligation of the successor entity following a change in control and the participant incurs a termination of service without cause or for good reason following the change in control. Notwithstanding the immediately preceding sentence, if the vesting of an award is conditioned upon the achievement of performance measures, then such vesting will generally be subject to the following: if, at the time of the change in control, the performance measures are less than 50% attained (pro rata based upon the time of the period through the change in control), the award will become vested and exercisable on a fractional basis with the numerator being equal to the percentage of attainment and the denominator being 50%; and if, at the time of the change in control, the performance measures are at least 50% attained (pro rata based upon the time of the period through the change in control), the award will become fully earned and vested immediately upon the change in control.

Awards of restricted stock under the 2019 Plan generally entitle holders to voting and dividend rights upon grant and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period. Awards of restricted stock units under the 2019 Plan are also subject to forfeiture until certain restrictions have lapsed including employment for a specific period, but do not entitle holders to voting rights until the restricted period ends and shares are transferred in connection with the units.

There were 338,235 and 230,399 restricted stock units issued under the 2019 Plan during the three months ended March 31, 2024 and March 31, 2023, respectively. Compensation expense is recognized over the vesting period of the restricted stock units based on the market value of the award on the issue date. Total compensation cost that has been recorded for the 2019 Plan was $1.2 million for the three months ended March 31, 2024 and $948,000 for the three months ended March 31, 2023.

A summary of changes in the Company’s unvested restricted awards for the three months ended March 31, 2024, is as follows:


· · March 31, 2024
· · · · Weighted
· · Restricted · · Average
· · Stock Shares · · Grant Date
· and Units · Fair Value
Unvested at January 1	709,237	$14.26
Granted	338,235	13.44
Vested	(204,969)	11.32
Forfeited	(3,000)	12.35
Unvested at March 31	839,503	$14.65

Total unrecognized compensation cost of restricted awards was $6.9 million as of March 31, 2024, which is expected to be recognized over a weighted-average period of 2.19 years.

Note 9 – Earnings Per Share

The earnings per share, both basic and diluted, are as follows:


· · Three Months Ended March 31, · ·
	2024		2023
Basic earnings per share:
Weighted-average common shares outstanding		44,758,559		44,619,118
Net income		$21,312		$23,607
Basic earnings per share		$0.48		$0.53

Diluted earnings per share:
Weighted-average common shares outstanding		44,758,559		44,619,118
Dilutive effect of unvested restricted awards 1		765,325		697,480
Diluted average common shares outstanding		45,523,884		45,316,598

Net Income		$21,312		$23,607
Diluted earnings per share		$0.47		$0.52


1 Includes the common stock equivalents for restricted share rights that are dilutive.

Note 10–** Regulatory & Capital Matters**

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies. In connection with the current risk-based capital regulatory guidelines, the Bank’s Board of Directors has established an internal guideline requiring the Bank to maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%). At March 31, 2024, the Bank exceeded those thresholds.

At March 31, 2024, the Bank’s Tier 1 capital leverage ratio was 10.89%, an increase of 48 basis points from December 31, 2023, and is above the 8.00% objective. The Bank’s total capital ratio was 14.03%, an increase of 79 basis points from December 31, 2023, and also above the objective of 12.00%.

Bank holding companies are generally required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System. The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of March 31, 2024 and December 31, 2023.

The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies,” which are generally holding companies with consolidated assets of less than $3.0 billion. A detailed discussion of the Basel III Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, 2023, under the heading “Supervision and Regulation.”

At March 31, 2024 and December 31, 2023, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

Capital levels and industry defined regulatory minimum required levels are as follows:


· · · · · · · · · · · · · ·
· · · · · · · · Minimum Capital · · Well Capitalized ·
· · · · · · · · Adequacy with Capital · · Under Prompt Corrective ·
· · Actual · · Conservation Buffer, if applicable1 · · Action Provisions2 ·
· Amount · Ratio · Amount · Ratio · Amount · Ratio ·
March 31, 2024
Common equity tier 1 capital to risk weighted assets
Consolidated	$566,730	12.02%	$330,042	7.00%	N/A	N/A
Old Second Bank	614,947	13.06	329,604	7.00	$306,061	6.50%
Total capital to risk weighted assets
Consolidated	697,211	14.79	494,977	10.50	N/A	N/A
Old Second Bank	660,429	14.03	494,263	10.50	470,726	10.00
Tier 1 capital to risk weighted assets
Consolidated	591,730	12.55	400,773	8.50	N/A	N/A
Old Second Bank	614,947	13.06	400,233	8.50	376,690	8.00
Tier 1 capital to average assets
Consolidated	591,730	10.47	226,067	4.00	N/A	N/A
Old Second Bank	614,947	10.89	225,876	4.00	282,345	5.00

December 31, 2023
Common equity tier 1 capital to risk weighted assets
Consolidated	$547,721	11.37%	$337,207	7.00%	N/A	N/A
Old Second Bank	592,413	12.32	336,598	7.00	$312,556	6.50%
Total capital to risk weighted assets
Consolidated	677,076	14.06	505,640	10.50	N/A	N/A
Old Second Bank	636,768	13.24	504,990	10.50	480,943	10.00
Tier 1 capital to risk weighted assets
Consolidated	572,721	11.89	409,430	8.50	N/A	N/A
Old Second Bank	592,413	12.32	408,727	8.50	384,684	8.00
Tier 1 capital to average assets
Consolidated	572,721	10.06	227,722	4.00	N/A	N/A
Old Second Bank	592,413	10.41	227,632	4.00	284,540	5.00

1Amounts are shown inclusive of a capital conservation buffer of 2.50%.

2 The prompt corrective action provisions are only applicable at the Bank level. The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized.”

As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted the Current Expected Credit Losses (“CECL”) methodology during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition. As of March 31, 2024, the capital measures of the Company exclude $951,000, which is the modified CECL transition adjustment.

Dividend Restrictions

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a bank without prior regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previoustwo years, subject to the capital requirements described above. As of March 31, 2024, the Bank had capacity to pay dividends of $93.7 million to the Company without prior regulatory approval. Pursuant to the Basel III rules, the Bank must keep a capital conservation buffer of 2.50% above the regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

Note 11–** Fair Value Measurements**

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy established by the Company also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own view about the assumptions that market participants would use in pricing an asset or liability.

There wereno transfers between levels at March 31, 2024, however the Company reclassified one states and political subdivisions security to an asset-backed security in all periods presented. During the three-month period ended March 31, 2023, $14.9 million of asset-backed securities and $6.8 million of collateralized mortgage obligations were transferred to Level 2 from Level 3.

The majority of securities available-for-sale are valued by external pricing services or dealer market participants and are classified in Level 2 of the fair value hierarchy. Both market and income valuation approaches are utilized. Quarterly, the Company evaluates the methodologies used by the external pricing services or dealer market participants to develop the fair values to determine whether the results of the valuations are representative of an exit price in the Company’s principal markets and an appropriate representation of fair value. The Company uses the following methods and significant assumptions to estimate fair value:

●	Government-sponsored agency debt securities are primarily priced using available market information through processes such as benchmark spreads, market valuations of like securities, like securities groupings and matrix pricing.

●

Other government-sponsored agency securities, Mortgage Backed Securities (“MBS”) and some of the actively traded real estate mortgage investment conduits and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment speeds, spreads, volatility of similar securities and trade date.

●

State and political subdivisions are largely grouped by characteristics (e.g., geographical data and source of revenue in trade dissemination systems). Because some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities.

●	Auction rate securities are priced using market spreads, cash flows, prepayment speeds, and loss analytics. Therefore, the valuations of auction rate asset-backed securities are considered Level 2 valuations.

●	Asset-backed collateralized loan obligations were priced using data from a pricing matrix supported by our bond accounting service provider and are therefore considered Level 2 valuations.

●

Annually every security holding is priced by a pricing service independent of the regular and recurring pricing services used. The independent service provides a measurement to indicate if the price assigned by the regular service is within or outside of a reasonable range. Management reviews this report and applies judgment in adjusting calculations at year end related to securities pricing.

●	Residential mortgage loans available for sale in the secondary market are carried at fair market value. The fair value of loans held-for-sale is determined using quoted secondary market prices.

●

Lending related commitments to fund certain residential mortgage loans, e.g., residential mortgage loans with locked interest rates to be sold in the secondary market and forward commitments for the future delivery of mortgage loans to third party investors, as well as forward commitments for future delivery of MBS, are considered derivatives. Fair values are estimated based on observable changes in mortgage interest rates including prices for MBS from the date of the commitment and do not typically involve significant judgments by management.

●

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income to derive the resultant value. The Company is able to compare the valuation model inputs, such as the discount rate, prepayment speeds, weighted average delinquency and foreclosure/bankruptcy rates to widely available published industry data for reasonableness.

●	Interest rate swap positions, both assets and liabilities, are based on valuation pricing models using an income approach reflecting readily observable market parameters such as interest rate yield curves.

●

The fair value of individually evaluated loans with specific allocations of the allowance for credit losses is essentially based on recent real estate appraisals or the fair value of the collateralized asset. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are made in the appraisal process by the appraisers to reflect differences between the available comparable sales and income data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

●

Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (“OREO”) are measured at fair value, less costs to sell. Fair values are based on third party appraisals of the property, resulting in a Level 3 classification, or an executed pending sales contract. In cases where the carrying amount exceeds the fair value, less costs to sell, a valuation loss is recognized.

Assets and Liabilities Measured at Fair Value on a Recurring Basis:

The tables below present the balance of assets and liabilities at March 31, 2024 and December 31, 2023, respectively, measured by the Company at fair value on a recurring basis:


· · March 31, 2024
	Level 1			Level 2			Level 3			Total
Assets:
Securities available-for-sale
U.S. Treasury			$171,000		$	-		$	-		$171,000
U.S. government agencies			-			56,979			-		56,979
U.S. government agencies mortgage-backed			-			101,075			-		101,075
States and political subdivisions			-			209,839			12,903		222,742
Collateralized mortgage obligations			-			379,603			-		379,603
Asset-backed securities			-			64,222			2,485		66,707
Collateralized loan obligations			-			170,691			-		170,691
Loans held-for-sale			-			1,072			-		1,072
Mortgage servicing rights			-			-			10,564		10,564
Interest rate swap agreements, including risk participation agreement			-			6,001			-		6,001
Mortgage banking derivatives			-			49			-		49
Total			$171,000			$989,531			$25,952		$1,186,483

Liabilities:
Interest rate swap agreements, including risk participation agreements		$	-			$8,917		$	-		$8,917
Total		$	-			$8,917		$	-		$8,917


· · December 31, 2023
	Level 1			Level 2			Level 3			Total
Assets:
Securities available-for-sale
U.S. Treasury			$169,574		$	-		$	-		$169,574
U.S. government agencies			-			56,959			-		56,959
U.S. government agencies mortgage-backed			-			106,370			-		106,370
States and political subdivisions			-			214,006			13,059		227,065
Collateralized mortgage obligations			-			392,544			-		392,544
Asset-backed securities			-			66,166			2,270		68,436
Collateralized loan obligations			-			171,881			-		171,881
Loans held-for-sale			-			1,322			-		1,322
Mortgage servicing rights			-			-			10,344		10,344
Interest rate swap agreements			-			5,391			-		5,391
Mortgage banking derivatives			-			(10)			-		(10)
Total			$169,574			$1,014,629			$25,673		$1,209,876

Liabilities:
Interest rate swap agreements, including risk participation agreements		$	-			$8,324		$	-		$8,324
Total		$	-			$8,324		$	-		$8,324

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are as follows:


· · · Three Months Ended March 31, 2024
· · Securities available-for-sale · · ·
· · · · States and · · Mortgage
· · Asset-backed · · Political · · Servicing
· Securities · · Subdivisions · Rights
Beginning balance January 1, 2024	$2,270	$13,059	$10,344
Transfers out of Level 3	-	-	-
Total gains or losses
Included in earnings	-	(33)	172
Included in other comprehensive income	(29)	(89)	-
Purchases, issuances, sales, and settlements
Purchases	259	-	-
Issuances	-	-	126
Settlements	(15)	(34)	(78)
Ending balance March 31, 2024	$2,485	$12,903	$10,564


· · · Three Months Ended March 31, 2023 ·
· · · Securities available-for-sale · · · ·
· · · · Collateralized · · States and · · Mortgage ·
· · Asset-backed · · Mortgage · · Political · · Servicing ·
· Securities · · Obligations · · Subdivisions · Rights
Beginning balance January 1, 2023	$16,741		$6,770	$12,501	$11,189
Transfers into Level 3	-		-	-	-
Transfers out of Level 3	(14,885)		(6,764)	-	-
Total gains or losses
Included in earnings	(11)		-	(34)	(471)
Included in other comprehensive income	219		(6)	430	-
Purchases, issuances, sales, and settlements
Purchases	406		-	-	-
Issuances	-		-	-	120
Settlements	(355)		-	(33)	(54)
Ending balance March 31, 2023	$2,115	$	-	$12,864	$10,784

The following table and commentary present quantitative and qualitative information about Level 3 fair value measurements as of March 31, 2024:


· · · · · · · · · · · Weighted
Measured at fair value · · · · · · · Significant Unobservable · · · · Average
on a recurring basis: · Fair Value · Valuation Methodology · Inputs · Range of Input · of Inputs

States and political subdivisions	$12,903	Discounted Cash Flow	Discount Rate	3.2 – 3.7%	3.5%
			Liquidity Premium	0.5 – 0.5%	0.5%

Asset-backed securities	$2,485	Discounted Cash Flow	Discount Rate	5.5 - 5.5%	5.5%

Mortgage servicing rights	$10,564	Discounted Cash Flow	Discount Rate	9.0 – 11.0%	9.0%
			Prepayment Speed	5.2 – 31.5%	6.1%

The following table and commentary present quantitative and qualitative information about Level 3 fair value measurements as December 31, 2023:


· · · · · · · · · · · Weighted
Measured at fair value · · · · · · · Significant Unobservable · · · · Average
on a recurring basis: · Fair Value · Valuation Methodology · Inputs · Range of Input · of Inputs

States and political subdivisions	$13,059	Discounted Cash Flow	Discount Rate	3.2– 5.4%	4.7%
			Liquidity Premium	0.5 - 0.5%	0.5%

Asset-backed securities	$2,270	Discounted Cash Flow	Discount Rate	5.6 - 5.6%	5.6%

Mortgage servicing rights	$10,344	Discounted Cash Flow	Discount Rate	9.0 – 11.0%	9.0%
			Prepayment Speed	5.1 - 33.0%	6.6%

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of individually evaluated loans and OREO. For assets measured at fair value on a nonrecurring basis at March 31, 2024 and December 31, 2023, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:


· · March 31, 2024
· Level 1 · Level 2 · Level 3 · Total
Individually evaluated loans1	$	-	$	-	$53,182	$53,182
Other real estate owned, net2		-		-	5,123	5,123
Total	$	-	$	-	$58,305	$58,305

1 Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, which had a carrying amount of*$59.3** million and a valuation allowance of**$6.2** million resulting in a decrease of specific allocations within the allowance for credit losses on loans of**$4.9** million for the three months ended March 31, 2024.*

2 OREO is measured at fair value, less costs to sell, and had a net carrying amount of*$5.1** million at March 31, 2024, which is made up of the outstanding balance of**$5.2** million, net of a valuation allowance of**$118,000*.


· · December 31, 2023
· Level 1 · Level 2 · Level 3 · Total
Individually evaluated loans1	$	-	$	-	$66,180	$66,180
Other real estate owned, net2		-		-	5,123	5,123
Total	$	-	$	-	$71,303	$71,303

1 Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, which had a carrying amount of*$77.3** million and a valuation allowance of**$11.1** million resulting in a decrease of specific allocations within the allowance for credit losses on loans of**$6.5** million for the year December 31, 2023.*

2 OREO is measured at fair value, less costs to sell, and had a net carrying amount of*$5.1** million at December 31, 2023, which is made up of the outstanding balance of**$5.2** million, net of a valuation allowance of**$118,000**.*

The Company has estimated the fair values of these assets based primarily on Level 3 inputs. OREO and individually evaluated loans are generally valued using the fair value of collateral provided by third party appraisals. These valuations include assumptions related to cash flow projections, discount rates, and recent comparable sales. The numerical ranges of unobservable inputs for these valuation assumptions are not meaningful.

Note 12 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table. Securities available-for-sale fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security. The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC or another member institution at par. At March 31, 2024 and December 31, 2023, the fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The fair value of time deposits was estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities. The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities. The fair value of off balance sheet volume was not considered material.

The carrying amount and estimated fair values of financial instruments were as follows:


· · March 31, 2024
· · Carrying · · Fair · · · · · · · · ·
	Amount		Value		Level 1		Level 2			Level 3
Financial assets:
Cash and due from banks		$48,841		$48,841		$48,841		$	-		$	-
Interest earning deposits with financial institutions		49,253		49,253		49,253			-			-
Securities available-for-sale		1,168,797		1,168,797		171,000			982,409			15,388
FHLBC and FRBC stock		28,518		28,518		-			28,518			-
Loans held-for-sale		1,072		1,072		-			1,072			-
Net loans		3,925,298		3,841,563		-			-			3,841,563
Mortgage servicing rights		10,564		10,564								10,564
Interest rate swap agreements		5,947		5,947		-			5,947			-
Interest rate lock commitments and forward contracts		49		49		-			49			-
Interest receivable on securities and loans		25,735		25,735		-			25,735			-

Financial liabilities:
Noninterest bearing deposits		$1,799,927		$1,799,927		$1,799,927		$	-		$	-
Interest bearing deposits		2,808,348		2,798,825		-			2,798,825			-
Securities sold under repurchase agreements		33,546		33,546		-			33,546			-
Other short-term borrowings		220,000		220,000		-			220,000			-
Junior subordinated debentures		25,773		20,619		-			20,619			-
Subordinated debentures		59,403		49,797		-			49,797			-
Interest rate swap agreements		8,917		8,917		-			8,917			-
Interest payable on deposits and borrowings		3,617		3,617		-			3,617			-


· · December 31, 2023
· · Carrying · · Fair · · · · · ·
	Amount		Value		Level 1		Level 2			Level 3
Financial assets:
Cash and due from banks		$55,534		$55,534		$55,534		$	-		$	-
Interest earning deposits with financial institutions		44,611		44,611		44,611			-			-
Securities available-for-sale		1,192,829		1,192,829		169,574			1,007,926			15,329
FHLBC and FRBC stock		33,355		33,355		-			33,355			-
Loans held-for-sale		1,322		1,322		-			1,322			-
Net loans		3,998,689		3,876,381		-			-			3,876,381
Mortgage servicing rights		10,344		10,344								10,344
Interest rate swap agreements		5,302		5,302		-			5,302			-
Interest rate lock commitments and forward contracts		(10)		(10)		-			(10)			-
Interest receivable on securities and loans		27,159		27,159		-			27,159			-

Financial liabilities:
Noninterest bearing deposits		$1,834,891		$1,834,891		$1,834,891		$	-		$	-
Interest bearing deposits		2,735,855		2,726,223		-			2,726,223			-
Securities sold under repurchase agreements		26,470		26,470		-			26,470			-
Junior subordinated debentures		405,000		405,000		-			405,000			-
Subordinated debentures		25,773		20,361		-			20,361			-
Senior notes		59,382		47,982					47,982
Interest rate swap agreements		8,234		8,324		-			8,324			-
Interest payable on deposits and borrowings		2,962		2,962		-			2,962			-

Note 13 – Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loan portfolio.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. The aggregate fair value of the swaps is recorded in other assets or other liabilities with changes in fair value recorded in other comprehensive income, net of tax. The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest income or interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income or expense as interest payments are received on the variable rate loan pools or paid on the Company’s fixed-rate borrowings.

Interest rate swaps with notional amounts totaling $300.0 million as of March 31, 2024, and December 31, 2023, were designated as cash flow hedges of certain variable rate commercial and commercial real estate loan pools. Each of these hedges were executed to pay variable and receive fixed rate cash flows. Each of these hedges was determined to be effective during all periods presented and the Company expects the hedges to remain effective during the remaining terms of the swaps.

An interest rate swap with a notional amount of $25.8 million as of March 31, 2024 and December 31, 2023, is designated as a cash flow hedge of junior subordinated debentures and was executed to pay fixed and receive variable rate cash flows. The hedge was determined to be effective during all periods presented and the Company expects the hedge to remain effective during the remaining terms of the swap.

During the next twelve months, the Company estimates that an additional $5.5 million will be reclassified as an increase to interest income and an additional $609,000 will be reclassified as an increase to interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of interest rate swaps with its loan customers as of March 31, 2024 and December 31, 2023 were $107.0 million and $104.8 million, respectively. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

At March 31, 2024 and December 31, 2023, the Company had $6.6 million and $7.3 million of cash collateral pledged withtwo correspondent financial institutions, respectively. The Company held $5.7 million and $4.1 million of cash pledged fromone correspondent financial institution to support the interest rate swap activity during the periods presented, respectively. No investment securities were required to be pledged to any correspondent financial institution during 2024 through March 31, 2024, or during 2023. The Company offsets derivative assets and liabilities that are subject to a master netting arrangement.

The Company also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards. The interest rate risk associated with these loan interest rate lock commitments is managed with contracts for future deliveries of loans as well as selling forward mortgage-backed securities contracts. Loan interest rate lock 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 notional amount of these commitments at March 31, 2024 and December 31, 2023 was $9.5 million and $8.4 million, respectively. Commitments to originate residential mortgage loans held-for-sale and forward commitments to sell residential mortgage loans or forward MBS contracts are considered derivative instruments and changes in the fair value are recorded to mortgage banking revenue. Fair values are estimated based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheets as of March 31, 2024 and December 31, 2023.

Fair Value of Derivative Instruments


· · · · · March 31, 2024
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	5	325,774	Other Assets	3,361	Other Liabilities	6,331
Total derivatives designated as hedging instruments				3,361		6,331

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	16	106,958	Other Assets	2,586	Other Liabilities	2,586
Interest rate lock commitments and forward contracts	38	9,487	Other Assets	49	Other Liabilities	-
Other contracts	4	46,687	Other Assets	54	Other Liabilities	-
Total derivatives not designated as hedging instruments				2,689		2,586


			December 31, 2023
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	5	325,774	Other Assets	2,576	Other Liabilities	5,598
Total derivatives designated as hedging instruments				2,576		5,598

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	17	104,777	Other Assets	2,726	Other Liabilities	2,726
Interest rate lock commitments and forward contracts	24	8,375	Other Assets	(10)	Other Liabilities	-
Other contracts	4	44,790	Other Assets	89	Other Liabilities	-
Total derivatives not designated as hedging instruments				2,805		2,726

Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting

The fair value and cash flow hedge accounting related to derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other Comprehensive Income (“AOCI”) and the Income Statement. The loss recognized in AOCI on derivatives totaled $2.1 million as of March 31, 2024, and $3.1 million as of March 31, 2023. The amount of the loss reclassified from AOCI to net interest income on the income statement was $1.6 million for the three months ended March 31, 2024 and $1.0 million for the three months ended March 31, 2023.

Credit-risk-related Contingent Features

For derivative transactions involving counterparties who are lending customers of the Company, the derivative credit exposure is managed through the normal credit review and monitoring process, which may include collateralization, financial covenants and/or financial guarantees of affiliated parties. Agreements with such customers require that losses associated with derivative transactions receive payment priority from any funds recovered should a customer default and ultimate disposition of collateral or guarantees occur.

Credit exposure to broker/dealer counterparties is managed through agreements with each derivative counterparty that require collateralization of fair value gains owed by such counterparties. Some small degree of credit exposure exists due to timing differences between when a gain may occur and the subsequent point in time that collateral is delivered to secure that gain. This is monitored by the Company and procedures are in place to minimize this exposure. Such agreements also require the Company to collateralize counterparties in circumstances wherein the fair value of the derivatives result in loss to the Company.

Other provisions of such agreements include the definition of certain events that may lead to the declaration of default and/or the early termination of the derivative transaction(s):

●	If the Company either defaults or is capable of being declared in default on any of its indebtedness (exclusive of deposit obligations), then the Company could also be declared in default on its derivative obligations.

●	If a merger occurs that materially changes the Company's creditworthiness in an adverse manner.

●	If certain specified adverse regulatory actions occur, such as the issuance of a Cease and Desist Order, or citations for actions considered Unsafe and Unsound or that may lead to the termination of deposit insurance coverage by the FDIC.

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers. In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO. The following table represents the Company’s contractual commitments due to letters of credit as of March 31, 2024, and December 31, 2023.

The following table is a summary of letter of credit commitments:


· · March 31, 2024 · · December 31, 2023 ·
· Fixed · Variable · Total · Fixed · Variable · Total
Letters of credit:
Borrower:
Financial standby	$229	$17,276	$17,505	$173	$16,621	$16,794
Performance standby	562	12,344	12,906	562	13,689	14,251
	791	29,620	30,411	735	30,310	31,045
Non-borrower:
Performance standby	-	67	67	-	67	67
Total letters of credit	$791	$29,687	$30,478	$735	$30,377	$31,112

Unused loan commitments:	$148,769	$629,544	$778,313	$140,305	$694,960	$835,265

As of March 31, 2024, the Company evaluated current market conditions, including any impacts related to market interest rate changes and unused line of credit utilization trends during the first quarter of 2024, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments totaled $2.7 million. The resultant decrease in the ACL for unfunded commitments of $44,000 for the first quarter of 2024, compared to the prior quarter end, is primarily related adjustments to historical benchmark assumptions, such as the funding rates and the period used to forecast those rates within the ACL calculation. The Company will continue to assess the credit risk at least quarterly, and adjust the allowance for unfunded commitments, which is carried within other liabilities on our Consolidated Balance Sheets, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

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