OLD SECOND BANCORP INC

Previous wording

The following discussion provides additional information regarding our operations for the three and six months ended June 30, 2024, compared to the three and six months ended June 30, 2023, and our financial condition at June 30, 2024, compared to December 31, 2023. This discussion should be read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our Form 10-K for the year ended December 31, 2023. The results of operations for the three and six months ended June 30, 2024, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and June 30, 2024 and 2023 amounts are unaudited.

Current wording

The following discussion provides additional information regarding our operations for the three and nine months ended September 30, 2024, compared to the three and nine months ended September 30, 2023, and our financial condition at September 30, 2024, compared to December 31, 2023. This discussion should be read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our Form 10-K for the year ended December 31, 2023. The results of operations for the three and nine months ended September 30, 2024, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and September 30, 2024 and 2023 amounts are unaudited.

Previous wording

Net income for the second quarter of 2024 was $21.9 million, or $0.48 per diluted share, compared to $25.6 million, or $0.56 per diluted share, for the second quarter of 2023. The reduction in net income was primarily due to a decrease in net interest and dividend income of $3.9 million year over year driven by a $3.2 million increase to interest expense as a result of higher interest rates offered on deposits, as well as a reduction in interest and dividend income as the securities portfolio decreased $162.0 million during the last twelve months. Also contributing to the decrease in net income compared to the prior year like quarter was an increase in provision for credit losses of $1.8 million. Adjusted net income, a non-GAAP financial measure that excludes certain nonrecurring items, as applicable, was $21.0 million for the second quarter of 2024, compared to $21.3 million for the first quarter of 2024, and $25.6 million for the second quarter of 2023. Adjusted net income was $42.3 million for the six months ended June 30, 2024, compared to $49.0 million for the six months ended June 30, 2023. See the discussion entitled “Non-GAAP Financial Measures” on page 40, as well as the table below, which provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalents.

Current wording

Net income for the third quarter of 2024 was $23.0 million, or $0.50 per diluted share, compared to $24.3 million, or $0.54 per diluted share, for the third quarter of 2023. The reduction in net income was primarily due to a decrease in net interest and dividend income of $2.5 million year over year driven by a $4.3 million increase to interest expense as a result of higher interest rates offered on deposits, partially offset by increased interest and dividend income of $1.8 million and lower short-term borrowing expense. Also contributing to the decrease in net income compared to the prior year like quarter was an increase in noninterest expenses of $1.9 million, partially offset by a decrease in provision for credit losses of $1.0 million, an increase in noninterest income of $704,000, and a decrease in provision for income taxes of $1.2 million. Adjusted net income, a non-GAAP financial measure that excludes certain nonrecurring items, as applicable, was $23.3 million for the third quarter of 2024, compared to $21.0 million for the second quarter of 2024, and $24.8 million for the third quarter of 2023.

Previous wording

Our income before taxes was $29.2 million in the second quarter of 2024 compared to $35.0 million in the second quarter of 2023. This decrease in pretax income was primarily due to a $3.9 million decrease in net interest and dividend income, a $1.8 million increase in provision for credit losses, and a $3.0 million increase in noninterest expenses. Income before taxes was positively impacted by a $2.9 million increase in noninterest income, primarily due to no security gains or losses in the second quarter of 2024 compared to $1.5 million of security losses, net, in the second quarter of 2023, as well as an $893,000 death benefit realized on BOLI; no death benefit was recorded in the prior year like period. Noninterest expense increased by $3.0 million primarily due to a $1.6 million increase in salary and employee benefits expense, an $894,000 increase in computer and data processing expenses, and a $369,000 increase in advertising expenses in the second quarter of 2024. Our net income was $21.9 million, or $0.48 per diluted share, for the second quarter of 2024, compared to net income of $25.6 million, or $0.56 per diluted share, for the second quarter of 2023. The Bank remains well positioned to navigate uncertain macroeconomics; we have mitigated interest rate risk, controlled expenses in an inflationary environment, and actively managed daily liquidity. Furthermore, we continue to possess strong liquidity metrics and a short duration securities portfolio for short term funding needs.

Current wording

Our income before taxes was $29.9 million in the third quarter of 2024 compared to $32.5 million in the third quarter of 2023. This decrease in pretax income was primarily due to a $2.5 million decrease in net interest and dividend income and a $1.9 million increase in noninterest expenses. Income before taxes was positively impacted by a $1.0 million decrease in provision for credit losses, and a $704,000 increase in noninterest income, primarily due to a minimal loss on the call of a security in the third quarter of 2024 compared to $924,000 of security losses, net, in the third quarter of 2023, as well as a $571,000 increase in other income. The noninterest expense increase of $1.9 million is primarily due to a $1.6 million increase in salary and employee benefits expense, a $370,000 increase in occupancy, furniture and equipment, a $453,000 increase in computer and data processing expenses primarily due to First Merchants acquisition related costs, a $206,000 increase in advertising expense, and a $269,000 increase in OREO related expenses. Our net income was $23.0 million, or $0.50 per diluted share, for the third quarter of 2024, compared to net income of $24.3 million, or $0.54 per diluted share, for the third quarter of 2023. The Bank remains well positioned to navigate uncertain macroeconomics; we have mitigated interest rate risk, controlled expenses in an inflationary environment, and actively managed daily liquidity. Furthermore, we continue to possess strong liquidity metrics and a short duration securities portfolio for short term funding needs.

Previous wording

Net interest and dividend income was $59.7 million in the second quarter of 2024, compared to $63.6 million in the second quarter of 2023. The $3.9 million decrease was driven by an increase in interest expense in the second quarter of 2024, compared to the second quarter of 2023, primarily due to exception pricing on deposit accounts and product migration into term deposits. Decreases in our securities portfolio also contributed to the decrease in net interest and dividend income during the second quarter of 2024. Partially offsetting the decrease in net interest and dividend income during the second quarter of 2024, compared to the like quarter a year ago, was growth in our loan related interest income due to the effect of higher market interest rates on our loan portfolios.

Current wording

Net interest and dividend income was $60.6 million in the third quarter of 2024, compared to $63.0 million in the third quarter of 2023. The $2.5 million decrease was driven by an increase in deposit interest expense in the third quarter of 2024, compared to the third quarter of 2023, primarily due to exception pricing on deposit accounts and product migration into term deposits. Partially offsetting the decrease in net interest and dividend income during the third quarter of 2024, compared to the like quarter a year ago, was higher loan interest income due to the effect of higher market interest rates on our portfolio coupled with lower short-term borrowing expense on lower average FHLB advances.

Previous wording

Our income before taxes was $57.7 million for the six months ended June 30, 2024, compared to $67.0 million for the six months ended June 30, 2023. This decrease in pretax income was primarily due to an $8.2 million decrease in net interest and dividend income, a $1.7 million increase in provision for credit losses, and a $5.4 million increase in noninterest expenses. These changes were partially offset by a $6.1 million increase in noninterest income, primarily due to no security gains or losses in the first six months of 2024 compared to $3.2 million of security losses, net, recorded in the first six months of 2023, a $1.3 million increase in the cash surrender value of BOLI, and an $893,000 death benefit realized on BOLI. Our net income was $43.2 million, or $0.95 per diluted share, for the six months ended June 30, 2024, compared to net income of $49.2 million, or $1.08 per diluted share, for the same period of 2023.

Current wording

Our income before taxes was $87.6 million for the nine months ended September 30, 2024, compared to $99.5 million for the nine months ended September 30, 2023. This decrease in pretax income was primarily due to a $10.6 million decrease in net interest and dividend income, a $749,000 increase in provision for credit losses, and a $7.3 million increase in noninterest expenses. These changes were partially offset by a $6.8 million increase in noninterest income, primarily due to no net security gains or losses in the first nine months of 2024, compared to $4.1 million of security losses, net, recorded in the first nine months of 2023, a $1.3 million increase in the cash surrender value of BOLI, and a $905,000 death benefit realized on BOLI. Our net income was $66.2 million, or $1.45 per diluted share, for the nine months ended September 30, 2024, compared to net income of $73.5 million, or $1.62 per diluted share, for the same period of 2023.

Previous wording

Net interest and dividend income was $119.5 million for the six months ended June 30, 2024, compared to $127.7 million for the same period of 2023. The $8.2 million decrease was primarily driven by an increase in interest expense in the first six months of 2024, compared to the first six months of 2023, driven by a rise in deposit interest rates stemming from exception pricing on deposit accounts. Also contributing to the decrease in net interest and dividend income was a $4.1 million decrease in securities related income due to the year over year decrease in the securities portfolio. Higher interest expenses were partially offset by the effect of higher market interest rates on our loan portfolio, which contributed to the $6.1 million increase in loan related income. Also offsetting the decrease in net interest and dividend income year over year was a reduction in senior debt expense recorded in the first six month of 2024 as the senior notes were redeemed on June 30, 2023, resulting in no senior debt interest expense after that time.

Current wording

Net interest and dividend income was $180.1 million for the nine months ended September 30, 2024, compared to $190.7 million for the same period of 2023. The $10.6 million decrease was primarily driven by an increase in interest expense in the first nine months of 2024, compared to the first nine months of 2023, due to a rise in deposit interest rates stemming from exception pricing on deposit accounts. Also contributing to the decrease in net interest and dividend income was a $4.0 million decrease in securities related income due to the year over year decrease in the securities portfolio. Higher interest expenses were partially offset by the effect of higher market interest rates on our loan portfolio, which contributed to the $7.9 million increase in loan related income year over year. Also mitigating the decrease in net interest and dividend income year over year was a reduction in overall borrowing expense derived from our redemption of senior notes and subordinated debt in 2023 and the decrease in average short-term borrowing.

Previous wording

Net interest income, which is our primary source of earnings, is the difference between interest income earned on interest-earning assets, such as loans and investment securities, as well as accretion income on purchased loans, and interest incurred on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends upon the relative mix of interest-earning assets and interest-bearing liabilities, the ratio of interest-earning assets to total assets and of interest-bearing liabilities to total funding sources, and movements in market interest rates. Our net interest income can be significantly influenced by a variety of factors, including overall loan demand, economic conditions, credit risk, the amount of nonearning assets including nonperforming loans and OREO, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities, early withdrawal of deposits, exercise of call options on borrowings or securities, a general rise or decline in interest rates, changes in the slope of the yield-curve, and balance sheet growth or contraction.

Current wording

Net interest income, which is our primary source of earnings, is the difference between interest income earned on interest-earning assets, such as loans and investment securities, accretion income on purchased loans, dividend income earned on certain equity investments, and interest incurred on interest-bearing liabilities, such as deposits and borrowings. Net interest income depends upon the relative mix of interest-earning assets and interest-bearing liabilities, the ratio of interest-earning assets to total assets and of interest-bearing liabilities to total funding sources, and movements in market interest rates. Our net interest income can be significantly influenced by a variety of factors, including overall loan demand, economic conditions, credit risk, the amount of nonearning assets including nonperforming loans and OREO, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities, early withdrawal of deposits, exercise of call options on borrowings or securities, a general rise or decline in interest rates, changes in the slope of the yield-curve, and balance sheet growth or contraction.

Previous wording

The increased yield of six basis points on interest earning assets compared to the linked period was driven by repricing within the loan and taxable securities portfolios. Changes in the market interest rate environment impact earning assets at varying intervals depending on the repricing timeline of loans and securities, as well as securities maturity, paydown and purchase and sale activities.

Current wording

The increased yield of 16 basis points on interest earning assets compared to the linked period was driven by repricing within the loan and taxable securities portfolios. Changes in the market interest rate environment impact earning assets at varying intervals depending on the repricing timeline of loans, as well as the securities maturity, paydown and purchase activities.

Previous wording

The year over year increase of 28 basis points on interest earning assets was primarily driven by increases to benchmark interest rates over the past twelve months, primarily impacting variable rate loans. Increases to market rates also impacted securities available for sale income during the quarter ended June 30, 2024. Average balances of securities available for sale decreased $225.2 million in the second quarter of 2024 compared to the prior year like quarter; however, the tax equivalent yield on the securities available for sale portfolio increased 15 basis points year over year due to variable security rate resets.

Current wording

The year over year increase of 34 basis points on interest earning assets was primarily driven by overall increases to benchmark interest rates over the past twelve months, primarily impacting variable rate loans and securities. Average balances of securities available for sale decreased $121.3 million in the third quarter of 2024 compared to the prior year like quarter, while the tax equivalent yield on the securities available for sale portfolio increased 38 basis points year over year due to variable security rate resets. Although average balances of loans and loans held-for-sale decreased $44.1 million, the tax equivalent yield on the loan portfolio increased 28 basis points in the year over year like quarters.

Previous wording

Average balances of interest-bearing deposit accounts have increased steadily during the second quarter of 2024, from $2.76 billion to $2.81 billion, as NOW and money market account average balances increased as well as time deposits average balance increases due to CD rate specials. The increase in average balances of interest-bearing deposit accounts was partially offset by reductions in savings accounts as customers sought higher yielding products. We have continued to control the cost of funds over the periods reflected, with the rate of overall interest-bearing deposits increasing to 133 basis points for the quarter ended June 30, 2024, from 118 basis points for the quarter ended March 31, 2024, and from 40 basis points for the quarter ended June 30, 2023. A 20 basis point increase in the cost of money market funds for the quarter ended June 30, 2024, compared to the prior linked quarter, and a 105 basis point increase compared to the prior year like quarter were both due to select deposit account exception pricing, and drove a significant portion of the overall increase. The increase in transactional account average balances for the linked quarter were slightly offset by a 15 basis point decrease in NOW accounts driven by a large commercial deposit customer moving into an off-balance sheet sweep product, which reduced the overall rates paid on exception priced NOW accounts. Average rates paid on time deposits for the quarter ended June 30, 2024, increased by 36 basis points and 221 basis points in the quarter over linked quarter and year over year quarters, respectively, primarily due to CD rate specials we offered.

Current wording

Average balances of interest-bearing deposit accounts have declined since the second quarter of 2024, from $2.81 billion to $2.79 billion. The decline was driven by NOW and savings accounts while average balances on time deposits increased due to CD rate specials. We have continued to control the cost of funds over the periods reflected by slowing the pace of change; however, the rate of overall interest-bearing deposits increased to 148 basis points for the quarter ended September 30, 2024, from 133 basis points for the quarter ended June 30, 2024, and from 65 basis points for the quarter ended September 30, 2023. A 17 basis point increase in the cost of money market funds for the quarter ended September 30, 2024 compared to the prior linked quarter, and a 90 basis point increase compared to the prior year like quarter were both due to select deposit account exception pricing, and drove a significant portion of the overall increase. Although there was a decrease in transactional account average balances from the prior year like quarter for NOW and savings accounts, average rates paid on these balances increased. Average rates paid on time deposits for the quarter ended September 30, 2024 increased by 11 basis points and 169 basis points in the quarter over linked quarter and year over year quarters, respectively, primarily due to CD rate specials we offered. Average balances on time deposits increased $185.4 million in the year over year quarters, and the growth in rates and average balances resulted in an increase to interest expense on time deposits of $3.6 million.

Previous wording

Borrowing costs decreased in the second quarter of 2024, compared to the first quarter of 2024, primarily due to the $89.3 million decrease in average other short-term borrowings stemming from a decrease in average FHLB advances over the prior quarter. The decrease of $159.6 million year over year of average FHLB advances was based on daily liquidity needs, and was the primary driver of the $1.8 million decrease to interest expense on other short-term borrowings. Subordinated and junior subordinated debt interest expense were essentially flat over each of the periods presented. Senior notes had the most significant interest expense decrease year over year, as we redeemed all of the $45.0 million senior notes, net of deferred issuance costs, in June 2023, resulting in senior notes having no balance after that time.

Current wording

Borrowing costs increased in the third quarter of 2024, compared to the second quarter of 2024, primarily due to the $62.6 million increase in average other short-term borrowings stemming from an increase in average daily FHLB advances over the prior quarter. The decrease of $121.7 million year over year of average FHLB advances was based on daily liquidity needs, and was the primary driver of the $1.7 million decrease to interest expense on other short-term borrowings. Subordinated and junior subordinated debt interest expense were essentially flat over each of the periods presented.

Previous wording

Our net interest margin (GAAP) increased five basis points to 4.60% for the second quarter of 2024, compared to 4.55% for the first quarter of 2024, and decreased one basis point compared to 4.61% for the second quarter of 2023. Our net interest margin (TE) increased five basis points to 4.63% for the second quarter of 2024, compared to 4.58% for the first quarter of 2024, and decreased one basis point compared to 4.64% for the second quarter of 2023. The increase in the second quarter of 2024, compared to the prior quarter, was driven by market rates as well as the composition of assets and liabilities as interest income and expense remained relatively flat compared to the prior quarter while there was a $65.9 million reduction in interest earning assets. Matured securities were replaced with higher yielding positions and the decrease in average loans was primarily driven by lower yielding or nonaccrual credits due to the payoff, charge-off or upgrade of loans year-to-date. Higher deposit interest expense was offset by lower borrowing interest expense due to a decline in average other short-term borrowing. The decrease in our net interest margin (TE) in the second quarter of 2024, compared to the prior year like quarter, is primarily due to an increase in market interest rates, and the related increase in costs of interest-bearing deposits. See the discussion entitled “Non-GAAP Financial Measures” and the table on page 47 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Current wording

Our net interest margin, for both GAAP and TE presentations, was relatively static over the periods presented above. The impact of the Federal Reserve Bank (Federal Open Market Committee, or “FOMC”) fed funds rate reduction made in mid-September 2024 will not have a material impact on our financials until 30-, 60-, and 90-day rate resets are reached on our securities and loans, and deposit exception pricing is lowered. Our net interest margin (GAAP) increased two basis points to 4.62% for the third quarter of 2024, compared to 4.60% for the second quarter of 2024, and decreased two basis points compared to 4.64% for the third quarter of 2023. Our net interest margin (TE) increased one basis point to 4.64% for the third quarter of 2024, compared to 4.63% for the second quarter of 2024, and decreased two basis points compared to 4.66% for the third quarter of 2023. The increase in the third quarter of 2024, compared to the prior quarter, was driven by market interest rates as well as the composition of assets and liabilities as interest income and expense both increased compared to the prior quarter while there was only a $2.9 million increase in interest earning assets. The net interest margin decrease in the third quarter of 2024, compared to the prior year like quarter, is primarily due to an increase in market interest rates, and the related increase in costs of interest-bearing deposits. See the discussion entitled “Non-GAAP Financial Measures” and the table on page 49 that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

Previous wording

The year over year increase of 35 basis points on interest earning assets was driven by increases to benchmark interest rates over the past twelve months. The securities portfolio was primarily impacted by maturities and paydowns of lower yielding assets and timely purchase of higher yielding securities as we work to increase the weighted average yield in the portfolio. Average securities available-for-sale decreased $272.7 million for the six months ended June 30, 2024, compared to the six months ended June 30, 2023, due to maturities, paydowns, and strategic sales. Due to market interest rate increases year over year, securities available-for-sale interest income yields were slightly higher in the six months ended June 30, 2024; however, the decrease in balances resulted in a reduction of securities income to $19.9 million for the six months ended June 30, 2024, compared to $24.1 million for the like 2023 period. Average loans, including loans held for sale, increased $2.3 million in the six months ended June 30, 2024, compared to the six months ended June 30, 2023. The rising interest rate environment resulted in $124.9 million of loan and dividend interest income in the six months ended June 30, 2024, compared to $118.8 million in the like 2023 period.

Current wording

The year over year increase of 34 basis points on interest earning assets was driven by increases to benchmark interest rates over the past twelve months. The securities portfolio was primarily impacted by maturities and paydowns of lower yielding assets and timely purchase of higher yielding securities as we work to increase the weighted average yield in the portfolio. Average securities available-for-sale decreased $221.7 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, due to maturities, paydowns, and strategic sales. Due to market interest rate increases year over year, securities available-for-sale interest income yields were slightly higher in the nine months ended September 30, 2024; however, the decrease in balances resulted in a reduction of tax equivalent securities income to $30.7 million for the nine months ended September 30, 2024, compared to $34.7 million for the like 2023 period. Average loans, including loans held for sale, decreased $13.3 million in the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The rising interest rate environment resulted in $189.4 million of loan and dividend interest income in the nine months ended September 30, 2024, compared to $181.5 million in the like 2023 period.

Previous wording

Average balances of interest bearing deposit accounts have decreased steadily since June 30, 2023, through the six months ended June 30, 2024, from $2.93 billion to $2.78 billion, with these decreases reflected in all categories other than time deposits. We have continued to control the cost of funds over the periods reflected, with the rate of overall interest bearing deposits increasing by 93 basis points to 125 basis points from 32 basis points as of June 30, 2023. A 108 basis point increase in the cost of money market funds as of June 30, 2024, compared to June 30, 2023, was due to select deposit account exception pricing and drove a significant portion of the overall increase. Interest expense paid on time deposits also contributed to the growth in cost of deposits year over year, as the cost of average time deposits increased 226 basis points to 310 basis points for the six months ended June 30, 2024, compared to 84 basis points for the six months ended June 30, 2023, primarily due to CD rate specials we offered.

Current wording

Average balances of interest bearing deposit accounts have decreased steadily since September 30, 2023, compared to the nine months ended September 30, 2024, from $2.89 billion to $2.79 billion, with these decreases reflected in all categories other than time deposits. We have continued to control the cost of funds over the periods reflected, with the rate of overall interest bearing deposits increasing by 90 basis points to 133 basis points from 43 basis points as of September 30, 2023. A 102 basis point increase in the cost of money market funds as of September 30, 2024, compared to September 30, 2023, was due to select deposit account exception pricing and drove a significant portion of the overall increase. Interest expense paid on time deposits also contributed to the increase in cost of deposits year over year, as the cost of average time deposits increased 206 basis points to 320 basis points for the nine months ended September 30, 2024, compared to 114 basis points for the nine months ended September 30, 2023, primarily due to CD rate specials we offered.

Previous wording

Market rates associated with borrowings increased in the six months ended June 30, 2024, compared to the like prior year period. Our borrowing interest expense was controlled over the past twelve months due to lower FHLB advance volumes and the redemption of senior notes and notes payable in 2023. Subordinated and junior subordinated debt interest expense remained flat over the periods presented. Senior notes had the most significant interest expense decrease year over year, as we redeemed all of the $45.0 million senior notes, net of deferred issuance costs, in June 2023, resulting in senior notes having no balance after that time. In February 2023, we paid off the remaining balance of $9.0 million on the original $20.0 million term note issued in 2020, resulting in notes payable and other borrowings having no balance after that time.

Current wording

Market rates associated with borrowings increased in the nine months ended September 30, 2024, compared to the like prior year period. Our borrowing interest expense was controlled over the past twelve months due to lower FHLB advance volumes and the redemption of senior notes and notes payable in 2023. Subordinated and junior subordinated debt interest expense remained flat over the periods presented. Senior notes had the most significant interest expense decrease year over year, as we redeemed all of the $45.0 million senior notes, net of deferred issuance costs, in June 2023, resulting in senior notes having no balance after that time. In February 2023, we paid off the remaining balance of $9.0 million on the original $20.0 million term note issued in 2020, resulting in notes payable and other borrowings having no balance after that time.

Previous wording

Our net interest margin (GAAP) decreased eight basis points to 4.58% for the six months ended June 30, 2024, compared to 4.66% for the six months ended June 30, 2023. Our net interest margin (TE) decreased nine basis points to 4.60% for the six months ended June 30, 2024, compared to 4.69% for the six months ended June 30, 2023. The decrease in the current period, compared to the prior year like period, is primarily due to higher interest expense related to the current interest rate environment and its effect on interest bearing deposits.

Current wording

Our net interest margin (GAAP) decreased seven basis points to 4.59% for the nine months ended September 30, 2024, compared to 4.66% for the nine months ended September 30, 2023. Our net interest margin (TE) decreased six basis points to 4.62% for the nine months ended September 30, 2024, compared to 4.68% for the nine months ended September 30, 2023. The decrease in the current period, compared to the prior year like period, is primarily due to higher interest expense related to the current interest rate environment and its effect on interest bearing deposits.

Previous wording

2 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 47, and includes loan fee expense of $936,000 for the second quarter of 2024, $867,000 for the first quarter of 2024, and $242,000 for the second quarter of 2023. Nonaccrual loans are included in the above-stated average balances.

Current wording

2 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 49, and includes loan fee expense of $155,000 for the third quarter of 2024, $936,000 for the second quarter of 2024, and $780,000 for the third quarter of 2023. Nonaccrual loans are included in the above-stated average balances.

Previous wording

2 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 47, and includes fee expense of $1.8 million and $973,000 for the six months ended June 30, 2024 and 2023, respectively. Nonaccrual loans are included in the above-stated average balances.

Current wording

2 Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 49, and includes fee expense of $2.0 million and $1.8 million for the nine months ended September 30, 2024 and 2023, respectively. Nonaccrual loans are included in the above-stated average balances.

Previous wording

The increase in noninterest income of $2.9 million in the second quarter of 2024, compared to the second quarter of 2023, is primarily due to a $321,000 increase in wealth management income, a $146,000 increase in service charges on deposits, no security sales activity in the second quarter of 2024 compared to net losses on the sale of securities of $1.5 million in the second quarter of 2023, a $402,000 increase in the cash surrender value of BOLI due to changes in market interest rates, and an $893,000 death benefit realized on BOLI. These increases were partially offset by a $261,000 decrease in residential mortgage banking revenue mainly due to a decrease of $334,000 in MSRs mark to market valuation, and a $113,000 decrease in card related income.

Current wording

The increase in noninterest income of $704,000 in the third quarter of 2024, compared to the third quarter of 2023, is primarily due to a $312,000 increase in wealth management income primarily due to growth in advisory fees from new customers and market value increases, a minimal loss on the call of securities in the third quarter of 2024 compared to losses on the sale of securities of $924,000 in the third quarter of 2023, and a $571,000 increase in other income due to a $245,000 refund received from a vendor due to cancellation of services, a refund of $155,000 related to the sold VISA credit card portfolio’s advance reserves, and a $78,000 incentive bonus from a vendor based on certain transactional levels which were attained. These increases were partially offset by a decrease in residential mortgage banking revenue mainly due to a reduction of $1.2 million in MSRs mark to market valuation.

Previous wording

Noninterest income increased $6.1 million, or 38.9%, for the six months ended June 30, 2024, compared to the six months ended June 30, 2023. This increase was primarily driven by $1,000 of securities gains, net, compared to $3.2 million of security losses, net, in the prior year like period, a $1.3 million increase in the cash surrender value of BOLI due to market interest rate changes, an $893,000 death benefit realized on BOLI, a $612,000 increase in wealth management income primarily due to an increase in advisory fees, and a $137,000 increase in service charges on deposits. In addition, the current six month period increased due to a $329,000 increase in mortgage banking revenue, comprised primarily of a $285,000 decrease in MSRs mark to market losses. Partially offsetting these increases was a $490,000 decrease in other income, as the 2023 period reflected credits from a data service provider.

Current wording

Noninterest income increased $6.8 million, or 26.6%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. This increase was primarily driven by no security gains or losses, compared to $4.1 million of security losses, net, in the prior year like period, a $1.3 million increase in the cash surrender value of BOLI due to market interest rate changes, a $905,000 death benefit realized on BOLI, a $924,000 increase in wealth management income primarily due to an increase in advisory fees, and a $279,000 increase in service charges on deposits. Partially offsetting these increases was a $851,000 decrease in mortgage banking revenue, primarily due to a $960,000 increase in MSRs mark to market losses.

Previous wording

2* Theadjusted efficiency ratioshown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses, litigation expense, and net gains on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, death benefits realized on BOLI, mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the discussion entitled “Non-GAAP Financial Measures” above and the table on page 51 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.*

Current wording

2* Theadjusted efficiency ratioshown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses, acquisition expense, net of gains on branch sales, as applicable, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, death benefits realized on BOLI, mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the discussion entitled “Non-GAAP Financial Measures” above and the table on page 53 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.*

Previous wording

Noninterest expense for the second quarter of 2024 decreased $364,000, or 1.0%, compared to the first quarter of 2024, and increased $3.0 million, or 8.7%, compared to the second quarter of 2023. The decrease in the second quarter of 2024 compared to the first quarter of 2024 was attributable to a $888,000 decrease in salaries and employee benefits, with decreases reflected primarily in restricted stock expense, officers’ incentives, payroll taxes, and deferred executive compensation due to changes in market interest rates. Also contributing to the decrease in the second quarter of 2024 was a $71,000 decrease in computer and data processing expenses, a $51,000 decrease in FDIC insurance, and a $133,000 reduction in other real estate owned expense, net, as a gain of $259,000 was recorded on an OREO sale in the second quarter of 2024. Partially offsetting the decreases in noninterest expense in the second quarter of 2024 compared to the first quarter of 2024 was a $57,000 increase in net teller & bill paying expenses, a $280,000 increase in advertising expense primarily due to a new overdraft disclosure mailed to retail deposit customers, and a $461,000 increase in consulting & management fees primarily driven by ongoing systems projects and a deposit compliance matter.

Current wording

Noninterest expense for the third quarter of 2024 increased $1.4 million, or 3.8%, compared to the second quarter of 2024, and increased $1.9 million, or 5.0%, compared to the third quarter of 2023. The increase in the third quarter of 2024 compared to the second quarter of 2024 was attributable to a $1.3 million increase in salaries and employee benefits, with increases reflected primarily in officers’ incentives due to a higher projection of year end accruals based on our bank’s performance, and deferred executive compensation due to changes in market interest rates. Also contributing to the growth in noninterest expense in the third quarter of 2024 was a $191,000 increase in computer and data processing expenses, primarily due to transaction-related costs incurred related to our pending purchase of five bank branches from FRME, and a $329,000 increase in other real estate owned expense, net, as a gain of $259,000 was recorded on an OREO sale in the second quarter of 2024; no like gain was recorded in the third quarter of 2024. Partially offsetting the increases in noninterest expense in the third quarter of 2024 compared to the second quarter of 2024 was a $173,000 decrease in advertising expense primarily due to an overdraft disclosure mailed to retail deposit customers during the second quarter of 2024, and a $317,000 decrease in consulting & management fees as the second quarter of 2024 included costs of a one-time compliance review project.

Previous wording

The year over year increase in noninterest expense is primarily attributable to a $1.6 million increase in salaries and employee benefits, primarily due to increases in annual base salary rates, restricted stock expense, and deferred employee compensation due to market interest rate changes. Also contributing to the increase was a $260,000 increase in occupancy, furniture and equipment due to facilities improvements year over year, an $894,000 increase in computer and data processing primarily due to credits from our core data provider in the prior year period, a $369,000 increase in advertising expense, a $101,000 increase in card related expense, and a $277,000 increase in consulting & management fees. Partially offsetting the increases in noninterest expense in the second quarter of 2024, compared to the second quarter of 2023, was a $178,000 decrease in FDIC insurance, and a $293,000 decrease in other expenses.

Current wording

The year over year increase in noninterest expense for the third quarter of 2024 is primarily attributable to a $1.6 million increase in salaries and employee benefits, primarily due to increases in annual base salary rates, restricted stock expense, and deferred employee compensation due to market interest rate changes. Also contributing to the increase was a $370,000 increase in occupancy, furniture and equipment due to facilities improvements year over year, a $453,000 increase in computer and data processing primarily due to transaction-related costs incurred related to our pending branch purchase from FRME, a $206,000 increase in advertising expense, a $105,000 increase in legal fees largely from merger-related costs, and a $269,000 increase in OREO related expenses. Partially offsetting the increases in noninterest expense in the third quarter of 2024, compared to the third quarter of 2023, was a $1.0 million decrease in other expenses primarily due to $629,000 of liquidation costs recorded in the third quarter of 2023 from the September 2023 Visa credit card portfolio servicing deconversion.

Previous wording

2* The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses, and net gains on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, death benefits realized on BOLI, mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the discussion entitled “Non-GAAP Financial Measures” above and the table on page 51 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.*

Current wording

2* The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses, acquisition expense, net of gains on branch sales, as applicable, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, death benefits realized on BOLI, mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the discussion entitled “Non-GAAP Financial Measures” above and the table on page 54 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.*

Previous wording

Noninterest expense for the six months ended June 30, 2024, increased $5.4 million, or 7.6%, compared to the six months ended June 30, 2023, primarily due to a $3.7 million increase primarily from increases in salaries and employee benefits due to higher annual base salary rates, restricted stock expense, and deferred employee compensation due to market interest rate changes. Computer and data processing increased $1.4 million as credits were received from our core data provider in the prior year period. Occupancy, furniture and equipment increased $712,000, or 10.0%, as multiple branch improvements and office updates were completed over the past year. Advertising expenses increased $419,000 primarily due to a new overdraft disclosure mailed to retail deposit customers in 2024. In addition, card related expense increased $162,000 primarily due to additional customer volumes. Partially offsetting these increases were a $95,000 decrease in FDIC insurance, a $138,000 decrease in legal fees, a $177,000 decrease in consulting & management fees, a $249,000 decrease in net OREO expenses, and a $337,000 decrease in other expenses.

Current wording

Noninterest expense for the nine months ended September 30, 2024, increased $7.3 million, or 6.7%, compared to the nine months ended September 30, 2023, primarily due to a $5.3 million increase in salaries and employee benefits due to higher annual base salary rates, restricted stock expense, and deferred employee compensation due to market interest rate changes. Computer and data processing increased $1.8 million as credits were received from our core data provider in the prior year period, and the 2024 year to date period includes acquisition-related costs related to the FRME transaction. Occupancy, furniture and equipment increased $1.1 million, or 10.2%, as multiple branch improvements and office updates were completed over the past year. Advertising expenses increased $625,000 primarily due to a new overdraft disclosure mailed to retail deposit customers in 2024. In addition, card related expense increased $273,000 primarily due to additional customer volumes. Partially offsetting these increases was a $1.4 million decrease in other expenses driven by $833,000 liquidation fees incurred on the VISA portfolio sale recorded in 2023, which was not incurred in 2024.

Previous wording

We recorded income tax expense of $7.3 million for the second quarter of 2024 on $29.2 million of pretax income, compared to income tax expense of $7.2 million on $28.5 million of pretax income in the first quarter of 2024, and income tax expense of $9.4 million on $35.0 million of pretax income in the second quarter of 2023. Our effective tax rate was 25.0% in the second quarter of 2024, 25.3% for the first quarter of 2024, and 26.9% for the second quarter of 2023.

Current wording

We recorded income tax expense of $6.9 million for the third quarter of 2024 on $29.9 million of pretax income, compared to income tax expense of $7.3 million on $29.2 million of pretax income in the second quarter of 2024, and income tax expense of $8.1 million on $32.5 million of pretax income in the third quarter of 2023. Our effective tax rate was 23.1% in the third quarter of 2024, 25.0% for the second quarter of 2024, and 25.1% for the third quarter of 2023. The reduction in the effective tax rate in the third quarter of 2024 reflects the new state of Illinois ruling regarding tax rate apportionment factors related to income generated from securities or loans originated in other states.

Previous wording

Total assets decreased $60.1 million to $5.66 billion at June 30, 2024, from $5.72 billion at December 31, 2023, due primarily to the decrease of $19.2 million in securities available-for-sale and the decrease of $66.4 million in total loans. The decrease in securities available-for-sale and loans is primarily due to maturities and paydowns. These decreases were partially offset by increases in cash and cash equivalents of $20.7 million, increases in premises and equipment of $3.6 million, increases in other real estate owned of $1.8, and increases in BOLI of $1.2 million. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were $4.52 billion at June 30, 2024, a decrease of $49.0 million from December 31, 2023.

Current wording

Total assets decreased $51.0 million to $5.67 billion at September 30, 2024, from $5.72 billion at December 31, 2023, due primarily to the decrease of $51.9 million in total loans and a $9.0 million decrease in deferred tax assets. Deferred tax assets decreased $9.0 million driven by changes in other accumulated comprehensive income. The decrease in loans was partially offset by an increase in cash and cash equivalents of $15.6 million, increases in premises and equipment of $3.5 million with the build out of a new corporate facility and branches, and an increase in other real estate owned of $3.1 million due to four additions. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were $4.47 billion at September 30, 2024, a decrease of $105.3 million from December 31, 2023.

Previous wording

Securities available-for-sale decreased $19.2 million as of June 30, 2024, compared to December 31, 2023, and decreased $162.0 million compared to June 30, 2023. The decrease in the portfolio during year to date 2024 was driven by paydowns totaling $74.7 million, securities sales totaling $5.3 million, and maturities totaling $97.0 million, partially offset by $157.9 million in purchases. We continue to position the portfolio in higher credit quality, shorter duration securities with an appropriate mix of fixed- and floating-rate exposures.

Current wording

Securities available-for-sale decreased $2.0 million as of September 30, 2024, compared to December 31, 2023, and decreased $38.8 million compared to September 30, 2023. The decrease in the portfolio during year to date 2024 was driven by paydowns totaling $106.0 million, securities sales totaling $5.3 million, and maturities totaling $97.0 million, partially offset by $180.6 million in purchases and a $27.9 million reduction in unrealized losses on securities available-for-sale. We continue to position the portfolio in higher credit quality, shorter duration securities with an appropriate mix of fixed- and floating-rate exposures.

Previous wording

Total loans were $3.98 billion as of June 30, 2024, a decrease of $66.4 million from December 31, 2023. The decrease in total loans in the first six months of 2024, compared to December 31, 2023, was due primarily to paydowns, net of originations, within commercial real estate – owner occupied of $50.6 million, commercial of $32.3 million, commercial real estate – investor of $20.1 million and multifamily of $13.0 million, partially offset by net increases in leases of $54.7 million and construction of $20.3 million. Total loans decreased $38.9 million from June 30, 2023, to June 30, 2024, primarily due to paydowns, net of originations, within commercial real estate – owner occupied of $78.3 million, commercial real estate - investor of $65.7 million, and commercial of $10.6 million, partially offset by net increases in leases of $138.0 million. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) is carried on a gross basis, rather than net of the associated credit loss estimate, and the expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses, or ACL.

Current wording

Total loans were $3.99 billion as of September 30, 2024, a decrease of $51.9 million from December 31, 2023. The decrease in total loans in the first nine months of 2024, compared to December 31, 2023, was due primarily to paydowns, net of originations, within commercial real estate – owner occupied of $78.3 million, commercial of $27.0 million, multifamily of $26.3 million, and residential real estate – owner occupied of $18.0 million, partially offset by net increases in leases of $60.1 million and construction of $41.1 million. Total loans decreased $38.5 million from September 30, 2023, to September 30, 2024, primarily due to paydowns, net of originations, within commercial real estate – owner occupied of $90.8 million, commercial of $20.2 million, and residential real estate – owner occupied of $19.2 million, partially offset by net increases in leases of $103.5 million. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) is carried on a gross basis, rather than net of the associated credit loss estimate, and the expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses, or ACL.

Previous wording

The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate. Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio. These categories comprised 68.0% of the portfolio as of June 30, 2024, compared to 68.8% of the portfolio as of December 31, 2023. At June 30, 2024, our outstanding commercial real estate loans and undrawn commercial real estate commitments, excluding owner occupied real estate, were equal to 259.7% of our Tier 1 capital plus allowance for credit losses, a decrease from 286.9% at December 31, 2023. We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

Current wording

The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate. Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio. These categories comprised 67.8% of the portfolio as of September 30, 2024, compared to 68.8% of the portfolio as of December 31, 2023. At September 30, 2024, our outstanding commercial real estate loans and undrawn commercial real estate commitments, excluding owner occupied real estate, were equal to 264.0% of our Tier 1 capital plus allowance for credit losses, a decrease from 286.9% at December 31, 2023. We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

Previous wording

Nonperforming loans consist of nonaccrual loans and loans 90 days or greater past due. Nonperforming loans decreased by $21.9 million to $46.9 million at June 30, 2024 from $68.8 million at December 31, 2023, and decreased $14.4 million from $61.2 million at June 30, 2023. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced a more-than-insignificant deterioration in credit quality since origination. PCD loans and their related deferred loan costs are included in our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan. Management continues to carefully monitor loans considered to be in a classified status. Nonperforming loans as a percent of total loans were 1.2% as of June 30, 2024, 1.7% as of December 31, 2023, and 1.5% as of June 30, 2023. The distribution of our nonperforming loans is shown in the following table.

Current wording

Nonperforming loans consist of nonaccrual loans and loans 90 days or greater past due. Nonperforming loans decreased by $16.5 million to $52.3 million at September 30, 2024, from $68.8 million at December 31, 2023, and decreased $11.0 million from $63.3 million at September 30, 2023. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced a more-than-insignificant deterioration in credit quality since origination. PCD loans and their related deferred loan costs are included in our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan. Management continues to carefully monitor loans considered to be in a classified status. Nonperforming loans as a percent of total loans were 1.3% as of September 30, 2024, 1.7% as of December 31, 2023, and 1.6% as of September 30, 2023. The distribution of our nonperforming loans is shown in the following table.

Previous wording

Loan charge-offs, net of recoveries, for the second quarter of 2024, prior linked quarter and year over year quarter are shown in the following table.

Current wording

Loan charge-offs, net of recoveries, for the third quarter of 2024, prior linked quarter and year over year quarter are shown in the following table.

Previous wording

Net charge-offs of $5.8 million were recorded for the second quarter of 2024, compared to net charge-offs of $3.7 million for the first quarter of 2024, and net charge-offs of $505,000 for the second quarter of 2023, reflecting continuing management attention to credit quality and remediation efforts. The net charge-offs for the second quarter of 2024 were primarily due to three commercial real estate – investor charge offs totaling $4.6 million and a $1.3 million charge off of a commercial real estate – owner occupied loan. The commercial real estate – owner occupied credit had a reported reserve allocation of $1.2 million prior to the second quarter of 2024 charge-off. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

Current wording

Net recoveries of $155,000 were recorded for the third quarter of 2024, compared to net charge-offs of $5.8 million for the second quarter of 2024, and net charge-offs of $6.6 million for the third quarter of 2023, reflecting continuing management attention to credit quality and remediation efforts. The net recoveries for the third quarter of 2024 were primarily due to a commercial real estate – investor recovery totaling $131,000. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

Previous wording

Classified loans include nonaccrual loans and all other loans considered substandard. Classified assets include both classified loans and OREO. Loans classified as substandard are inadequately protected by either the current net worth and ability to meet payment obligations of the obligor, or by the collateral pledged to secure the loan, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and carry the distinct possibility that we will sustain some loss if deficiencies remain uncorrected.

Current wording

Classified loans include nonaccrual loans and accruing substandard loans. Classified assets include both classified loans and OREO. Loans classified as substandard are inadequately protected by either the current net worth and ability to meet payment obligations of the obligor, or by the collateral pledged to secure the loan, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and carry the distinct possibility that we will sustain some loss if deficiencies remain uncorrected.

Previous wording

Total classified loans and classified assets decreased $10.4 million and $8.6 million as of June 30, 2024, from December 31, 2023, respectively. The decrease since December 31, 2023, is due to outflows of $40.3 million which consisted of $11.9 million loans paid off, $9.8 million charged off, $8.7 million of classified loans upgraded, $6.5 million of principal reductions through payments, and $3.4 million that transferred to OREO. The outflows are offset by the additions of $29.9 million, the majority of which consisted of five relationships totaling $28.2 million. Commercial loans were the majority of the additions, consisting of twelve loans totaling $18.6 million. The increase from June 30, 2023 is primarily due to additions to commercial real estate – owner occupied. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ACL on loans as another measure of overall change in loan related asset quality, which is referred to as the “classified assets ratio.” The classified assets ratio was 18.98% for the period ended June 30, 2024, compared to 21.66% as of December 31, 2023, and 20.46% as of June 30, 2023.

Current wording

Total classified loans and classified assets decreased $20.0 million and $16.9 million as of September 30, 2024, from December 31, 2023, respectively. The decrease since December 31, 2023, is due to outflows of $85.7 million which consisted of $32.6 million of loans paid off, $9.9 million of loans charged off, $29.6 million of classified loans upgraded, $9.0 million of principal reductions through payments, and $4.6 million that transferred to OREO. The outflows are offset by the additions of $65.7 million, which commercial loans were the majority of the additions, totaling $38.4 million. The $32.6 million decrease in classified assets from September 30, 2023 to September 30, 2024, is primarily due to outflows to commercial real estate – investor of $32.5 million and commercial real estate – owner occupied of $13.5 million. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ACL on loans as another measure of overall change in loan related asset quality, which is referred to as the “classified assets ratio.” The classified assets ratio was 17.71% for the period ended September 30, 2024, compared to 21.66% as of December 31, 2023, and 23.51% as of September 30, 2023.

Previous wording

At June 30, 2024, our ACL on loans totaled $42.3 million, and our ACL on unfunded commitments, included in other liabilities, totaled $2.5 million. In the second quarter of 2024, we recorded provision expense on loans of $4.0 million, based on historical loss rates, our assessment of nonperforming loan metrics and trends, downward risk rating migrations, and estimated future credit losses, and a $199,000 reversal of provision on unfunded commitments, primarily due to an adjustment of historical benchmark assumptions, such as funding rates and the period used to forecast those rates, within the ACL calculation. These adjustments resulted in a $3.8 million net impact to the provision for credit losses for the second quarter of 2024.

Current wording

At September 30, 2024, our ACL on loans totaled $44.4 million, and our ACL on unfunded commitments, included in other liabilities, totaled $2.5 million. In the third quarter of 2024, we recorded provision expense on loans of $2.0 million driven by the downgrade of two credits resulting in a higher specific allocation and a slight upward adjustment to a macro-economic forecast, these negative trends were offset by upgrades and payoffs on credits that carried higher loss rates. Further, we recorded a $2,000 reversal of provision on unfunded commitments, primarily due to an adjustment of historical benchmark assumptions, such as funding rates and the period used to forecast those rates, within the ACL calculation. These adjustments resulted in a $2.0 million net impact to the provision for credit losses for the third quarter of 2024.

Previous wording

Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loans, leases and unfunded commitments. The ACL on loans totaled $42.3 million as of June 30, 2024, $44.3 million as of December 31, 2023, and $55.3 million as of June 30, 2023. Our ACL on loans to total loans was 1.1% as of June 30, 2024, and December 31, 2023, and 1.4% as of June 30, 2023. See Item 7 –* Critical Accounting Estimates*in the Management Discussion and Analysis in our 2023 Annual Report in Form 10-K for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

Current wording

Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loans, leases and unfunded commitments. The ACL on loans totaled $44.4 million as of September 30, 2024, $44.3 million as of December 31, 2023, and $51.7 million as of September 30, 2023. Our ACL on loans to total loans was 1.1% as of September 30, 2024, and December 31, 2023, and 1.3% as of September 30, 2023. See Item 7 –* Critical Accounting Estimates*in the Management Discussion and Analysis in our 2023 Annual Report in Form 10-K for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

Previous wording

The coverage ratio of the ACL on loans to nonperforming loans was 90.2% as of June 30, 2024, which was an increase from the coverage ratio of 67.8% as of March 31, 2024, and a slight decrease from 90.3% as of June 30, 2023. When measured as a percentage of quarter to date average loans, our total ACL on loans was 1.07% at June 30, 2024, 1.10% at March 31, 2024, and 1.37% at June 30, 2023.

Current wording

The coverage ratio of the ACL on loans to nonperforming loans was 85.0% as of September 30, 2024, which was a decrease from the coverage ratio of 90.2% as of June 30, 2024, and an increase from 81.7% as of September 30, 2023. When measured as a percentage of quarter to date average loans, our total ACL on loans was 1.12% at September 30, 2024, 1.07% at June 30, 2024, and 1.29% at September 30, 2023.

Previous wording

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at June 30, 2024, and general changes in lending policy, procedures and staffing, as well as other external factors. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. Continued volatility in the economic environment stemming from the impacts of and response to inflation, potential recession, and the war in Ukraine and the conflict in the Middle East, and the associated effects on our customers, or other factors, such as changes in business climates and the condition of collateral at the time of default or repossession, may revise our current expectations of future credit losses in future reporting periods.

Current wording

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at September 30, 2024, as well as general changes in lending policy, procedures and staffing, and other external factors. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. Continued volatility in the economic environment stemming from the impacts of and response to inflation, political election results, potential recession, and the war in Ukraine and the conflict in the Middle East, and the associated effects on our customers, or other factors, such as changes in business climates and the condition of collateral at the time of default or repossession, may revise our current expectations of future credit losses in future reporting periods.

Previous wording

As of June 30, 2024, OREO totaled $6.9 million, reflecting an increase of $1.8 million from $5.1 million at December 31, 2023, and an increase of $6.2 million from $761,000 at June 30, 2023. There were two property additions totaling $3.4 million and one disposal totaling $1.6 million in the OREO portfolio during the second quarter of 2024. No valuation adjustments occurred in the second quarter of 2024, the fourth quarter of 2023, or the second quarter of 2023.

Current wording

As of September 30, 2024, OREO totaled $8.2 million, reflecting an increase of $3.1 million from $5.1 million at December 31, 2023, and an increase of $7.8 million from $407,000 at September 30, 2023. There were two property additions totaling $1.3 million and one carrying value adjustment of $28,000 in the OREO portfolio during the third quarter of 2024 due to an updated appraisal. No valuation adjustments occurred in the fourth quarter of 2023 or the third quarter of 2023.