OLD SECOND BANCORP INC

For the period ended Sep 30, 2024. Filed Nov 7, 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.

Sep 30, 2024 · Filed Nov 7, 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) · · ·
· · September 30, · · December 31,
	2024		2023
Assets
Cash and due from banks		$63,298		$55,534
Interest earning deposits with financial institutions		52,469		44,611
Cash and cash equivalents		115,767		100,145
Securities available-for-sale, at fair value		1,190,854		1,192,829
Federal Home Loan Bank Chicago (“FHLBC”) and Federal Reserve Bank Chicago (“FRBC”) stock		30,205		33,355
Loans held-for-sale		2,447		1,322
Loans		3,991,078		4,042,953
Less: allowance for credit losses on loans		44,422		44,264
Net loans		3,946,656		3,998,689
Premises and equipment, net		82,768		79,310
Other real estate owned		8,202		5,123
Mortgage servicing rights, at fair value		9,726		10,344
Goodwill		86,478		86,478
Core deposit intangible		9,493		11,217
Bank-owned life insurance (“BOLI”)		111,394		109,318
Deferred tax assets, net		22,032		31,077
Other assets		55,738		63,592
Total assets		$5,671,760		$5,722,799

Liabilities
Deposits:
Noninterest bearing demand		$1,669,000		$1,834,891
Interest bearing:
Savings, NOW, and money market		2,125,696		2,207,949
Time		670,728		527,906
Total deposits		4,465,424		4,570,746
Securities sold under repurchase agreements		53,866		26,470
Other short-term borrowings		335,000		405,000
Junior subordinated debentures		25,773		25,773
Subordinated debentures		59,446		59,382
Other liabilities		70,861		58,147
Total liabilities		5,010,370		5,145,518

Stockholders’ Equity
Common stock		44,908		44,705
Additional paid-in capital		204,969		202,223
Retained earnings		452,745		393,311
Accumulated other comprehensive loss		(40,400)		(62,781)
Treasury stock		(832)		(177)
Total stockholders’ equity		661,390		577,281
Total liabilities and stockholders’ equity		$5,671,760		$5,722,799


· September 30, 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	44,851,091	44,697,917
Treasury shares	56,528	7,233

See accompanying notes to consolidated financial statements*.*

Consolidated Statements of****Income

(In thousands, except per share data)


· · (unaudited) · · (unaudited) ·
· · Three Months Ended September 30, · · Nine Months Ended September 30,
· 2024 · 2023 · 2024 · 2023
Interest and dividend income
Loans, including fees	$64,528	$62,665	$189,352	$181,436
Loans held-for-sale	27	29	60	60
Securities:
Taxable	9,113	8,946	25,757	29,611
Tax exempt	1,291	1,333	3,889	4,007
Dividends from FHLBC and FRBC stock	497	597	1,716	1,273
Interest bearing deposits with financial institutions	616	659	1,851	1,887
Total interest and dividend income	76,072	74,229	222,625	218,274
Interest expense
Savings, NOW, and money market deposits	4,860	2,558	13,214	5,449
Time deposits	5,539	1,982	14,541	3,802
Securities sold under repurchase agreements	93	27	262	43
Other short-term borrowings	4,185	5,840	12,080	13,345
Junior subordinated debentures	270	245	838	805
Subordinated debentures	547	547	1,639	1,639
Senior notes	-	-	-	2,408
Notes payable and other borrowings	-	-	-	87
Total interest expense	15,494	11,199	42,574	27,578
Net interest and dividend income	60,578	63,030	180,051	190,696
Provision for credit losses	2,000	3,000	9,250	8,501
Net interest and dividend income after provision for credit losses	58,578	60,030	170,801	182,195
Noninterest income
Wealth management	2,787	2,475	8,127	7,203
Service charges on deposits	2,646	2,504	7,569	7,290
Secondary mortgage fees	84	66	199	201
Mortgage servicing rights mark to market (loss) gain	(964)	281	(1,108)	(148)
Mortgage servicing income	466	519	1,467	1,534
Net gain on sales of mortgage loans	507	407	1,289	1,111
Securities losses, net	(1)	(924)	-	(4,146)
Change in cash surrender value of BOLI	860	919	2,852	1,579
Death benefit realized on BOLI	12	-	905	-
Card related income	2,589	2,606	7,542	7,540
Other income	1,595	1,024	3,367	3,286
Total noninterest income	10,581	9,877	32,209	25,450
Noninterest expense
Salaries and employee benefits	24,676	23,115	72,412	67,161
Occupancy, furniture and equipment	3,876	3,506	11,702	10,620
Computer and data processing	2,375	1,922	6,814	4,986
FDIC insurance	632	744	1,915	2,122
Net teller & bill paying	570	534	1,669	1,551
General bank insurance	320	300	941	911
Amortization of core deposit intangible	570	616	1,724	1,858
Advertising expense	299	93	963	338
Card related expense	1,458	1,347	4,058	3,785
Legal fees	202	97	666	699
Consulting & management fees	480	549	1,613	1,859
Other real estate expense, net	242	(27)	201	181
Other expense	3,608	4,627	10,748	12,104
Total noninterest expense	39,308	37,423	115,426	108,175
Income before income taxes	29,851	32,484	87,584	99,470
Provision for income taxes	6,900	8,149	21,430	25,966
Net income	$22,951	$24,335	$66,154	$73,504

Basic earnings per share	$0.52	$0.55	$1.48	$1.65
Diluted earnings per share	0.50	0.54	1.45	1.62
Dividends declared per share	0.05	0.05	0.15	0.15

See accompanying notes to consolidated financial statements.

Consolidated Statements of Comprehensive Income (Loss)


· · (unaudited) · · (unaudited)
· · Three Months Ended September 30, · · Nine Months Ended September 30,
· 2024 · 2023 · 2024 · 2023
Net Income	$22,951	$24,335	$66,154	$73,504

Unrealized holding gains (losses) on available-for-sale securities arising during the period	26,390	(9,062)	27,919	(1,212)
Related tax (expense) benefit	(7,389)	2,538	(7,817)	344
Holding gains (losses), after tax, on available-for-sale securities	19,001	(6,524)	20,102	(868)

Less: Reclassification adjustment for the net gains (losses) realized during the period
Net realized losses	(1)	(924)	-	(4,146)
Related tax benefit	-	260	-	1,165
Net realized (losses) gains, after tax	(1)	(664)	-	(2,981)
Other comprehensive income (loss) on available-for-sale securities	19,002	(5,860)	20,102	2,113

Changes in fair value of derivatives used for cash flow hedges	1,899	1,975	3,145	560
Related tax expense	(532)	(548)	(866)	(168)
Other comprehensive income on cash flow hedges	1,367	1,427	2,279	392

Total other comprehensive income (loss)	20,369	(4,433)	22,381	2,505
Total comprehensive income	$43,320	$19,902	$88,535	$76,009



· · 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, July 1, 2023	$(80,919)	$(5,267)	$(86,186)
Other comprehensive (loss) income, net of tax	(5,860)	1,427	(4,433)
Balance, September 30, 2023	$(86,779)	$(3,840)	$(90,619)

Balance, July 1, 2024	$(59,490)	$(1,279)	$(60,769)
Other comprehensive income, net of tax	19,002	1,367	20,369
Balance, September 30, 2024	$(40,488)	$88	$(40,400)

For the Nine Months Ended
Balance, January 1, 2023	$(88,892)	$(4,232)	$(93,124)
Other comprehensive income, net of tax	2,113	392	2,505
Balance, September 30, 2023	$(86,779)	$(3,840)	$(90,619)


Balance, January 1, 2024	$(60,590)	$(2,191)	$(62,781)
Other comprehensive income, net of tax	20,102	2,279	22,381
Balance, September 30, 2024	$(40,488)	$88	$(40,400)

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows


· · (unaudited)
· · Nine Months Ended September 30,
	2024	2023
Cash flows from operating activities
Net income	$66,154		$73,504
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount amortization on securities	2,113		2,506
Securities losses, net	-		4,146
Provision for credit losses	9,250		8,501
Originations of loans held-for-sale	(38,773)		(39,068)
Proceeds from sales of loans held-for-sale	38,468		37,962
Net gains on sales of mortgage loans	(1,289)		(1,111)
Mortgage servicing rights mark to market loss	1,108		148
Net accretion of discount on loans and unfunded commitments	(365)		(2,620)
Net change in cash surrender value of BOLI	(2,852)		(1,579)
Net gains on sale of other real estate owned	(259)		(229)
Provision for other real estate owned valuation losses	-		269
Depreciation of fixed assets and amortization of leasehold improvements	4,169		3,246
Net gains on disposal and transfer of fixed assets	-		(636)
Amortization of core deposit intangibles	1,724		1,858
Change in current income taxes receivable	5,137		1,070
Deferred tax expense (benefit)	362		(289)
Change in accrued interest receivable and other assets	4,927		(10,053)
Accretion of purchase accounting adjustment on time deposits	(128)		(1,004)
Change in accrued interest payable and other liabilities	14,706		7,991
Stock based compensation	3,085		2,709
Net cash provided by operating activities	107,537		87,321
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale	203,013		104,471
Proceeds from sales of securities available-for-sale	5,331		205,738
Purchases of securities available-for-sale	(180,563)		(4,186)
Net redemptions (purchases) of FHLBC/FRBC stock	3,150		(15,300)
Net change in loans	38,478		(164,252)
Purchases of BOLI policies	(460)		-
Proceeds from claims on BOLI, net of claims receivable	1,236		-
Proceeds from sales of other real estate owned, net of participations and improvements	1,850		1,800
Proceeds from disposition of premises and equipment	-		4,460
Net purchases of premises and equipment	(8,638)		(8,217)
Net cash provided by investing activities	63,397		124,514
Cash flows from financing activities
Net change in deposits	(105,194)		(495,399)
Net change in securities sold under repurchase agreements	27,396		(6,262)
Net change in other short-term borrowings	(70,000)		345,000
Repayment of term note	-		(9,000)
Repayment of senior notes	-		(45,000)
Dividends paid on common stock	(6,723)		(6,713)
Purchase of treasury stock	(791)		(605)
Net cash used in financing activities	(155,312)		(217,979)
Net change in cash and cash equivalents	15,622		(6,144)
Cash and cash equivalents at beginning of period	100,145		115,177
Cash and cash equivalents at end of period	$115,767		$109,033

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, July 1, 2023		$44,705		$200,963		$355,219		$(86,186)		$(746)		$513,955
Net income						24,335						24,335
Other comprehensive loss, net of tax								(4,433)				(4,433)
Dividends declared on common stock, ($0.05 per share)						(2,234)						(2,234)
Vesting of restricted stock				(345)						345		-
Stock based compensation				935								935
Balance, September 30, 2023		$44,705		$201,553		$377,320		$(90,619)		$(401)		$532,558

Balance, July 1, 2024		$44,908		$204,012		$432,037		$(60,769)		$(853)		$619,335
Net income						22,951						22,951
Other comprehensive income, net of tax								20,369				20,369
Dividends declared on common stock, ($0.05 per share)						(2,243)						(2,243)
Vesting of restricted stock				(21)						21		-
Stock based compensation				978								978
Balance, September 30, 2024		$44,908		$204,969		$452,745		$(40,400)		$(832)		$661,390


For the Nine Months Ended

Balance, January 1, 2023	$44,705	$202,276	$310,512	$(93,124)	$(3,228)	$461,141
Net income			73,504			73,504
Other comprehensive income, net of tax				2,505		2,505
Dividends declared on common stock, ($0.15 per share)			(6,696)			(6,696)
Vesting of restricted stock		(3,432)			3,432	-
Stock based compensation		2,709				2,709
Purchase of treasury stock from taxes withheld on stock awards					(605)	(605)
Balance, September 30, 2023	$44,705	$201,553	$377,320	$(90,619)	$(401)	$532,558


Balance, January 1, 2024	$44,705	$202,223	$393,311	$(62,781)	$(177)	$577,281
Net income			66,154			66,154
Other comprehensive income, net of tax				22,381		22,381
Dividends declared on common stock, ($0.15 per share)			(6,720)			(6,720)
Vesting of restricted stock	203	(339)			136	-
Stock based compensation		3,085				3,085
Purchase of treasury stock from taxes withheld on stock awards					(791)	(791)
Balance, September 30, 2024	$44,908	$204,969	$452,745	$(40,400)	$(832)	$661,390

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 September 30, 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 2023-07 – On November 27, 2023, the FASB issued ASU 2023-07,Segment Reporting (Topic 280): “Improvements to Reportable Segment Disclosures”. The amendments are intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. A public entity should apply the amendments retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption. This ASU is effective for the Company for the fiscal period beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

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 is 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 on the financial statements of the Company.

ASU 2024-02 –On March 29, 2024, the FASB issued ASU 2024-02 “Codification Improvements – Amendments to Remove References to the Concepts Statements”, which 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 third quarter of 2024, the Company had no changes to significant accounting policies or estimates.

Subsequent Events

On October 15, 2024, our Board of Directors declared a cash dividend of $0.06 per share of common stock payable on November 4, 2024, to stockholders of record as of October 25, 2024; dividends of $2.7 million were paid to stockholders on November 4, 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 $15.3 million at September 30, 2024, and $18.5 million at December 31, 2023. FRBC stock was recorded at $14.9 million at September 30, 2024, and December 31, 2023.

The following tables summarize the amortized cost and fair value of the securities portfolio at September 30, 2024, and December 31, 2023, and the corresponding amounts of gross unrealized gains and losses:


· · · · · Gross · · Gross · · ·
· · Amortized · · Unrealized · · Unrealized · · Fair
September 30, 2024 · Cost1 · Gains · Losses · · Value
Securities available-for-sale · · · · · · · · ·
U.S. Treasury	$193,825	$1,559	$(1,196)	$194,188
U.S. government agencies	39,401	-	(1,425)	37,976
U.S. government agencies mortgage-backed	105,262	-	(8,849)	96,413
States and political subdivisions	231,506	1,237	(7,948)	224,795
Collateralized mortgage obligations	422,234	1,027	(38,990)	384,271
Asset-backed securities	65,716	142	(1,911)	63,947
Collateralized loan obligations	189,143	181	(60)	189,264
Total securities available-for-sale	$1,247,087	$4,146	$(60,379)	$1,190,854


· · · · · 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*$7.3** million and**$6.6** million at September 30, 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 September 30, 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	$122,883	1.69%	$121,809
Due after one year through five years	127,710	3.70	127,947
Due after five years through ten years	90,188	2.89	86,075
Due after ten years	123,951	3.11	121,128
	464,732	2.85	456,959
Mortgage-backed and collateralized mortgage obligations	527,496	2.53	480,684
Asset-backed securities	65,716	3.89	63,947
Collateralized loan obligations	189,143	6.29	189,264
Total securities available-for-sale	$1,247,087	3.29%	$1,190,854

At September 30, 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 September 30, 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 · · · · · · · ·
September 30, 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	-	$	-	$	-	2	$1,196	$98,672	2	$1,196	$98,672
U.S. government agencies	-		-		-	8	1,425	37,976	8	1,425	37,976
U.S. government agencies mortgage-backed	-		-		-	128	8,849	96,413	128	8,849	96,413
States and political subdivisions	2		20		12,697	30	7,928	113,587	32	7,948	126,284
Collateralized mortgage obligations	2		19		1,506	141	38,971	346,056	143	38,990	347,562
Asset-backed securities	-		-		-	13	1,911	51,435	13	1,911	51,435
Collateralized loan obligations	7		56		62,219	2	4	12,848	9	60	75,067
Total securities available-for-sale	11		$95		$76,422	324	$60,284	$756,987	335	$60,379	$833,409


· · 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 September 30, 2024, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the third quarter of 2024.

The following table presents net realized gains (losses) on securities available-for-sale for three and six months ended:


· · · Three Months Ended · · · Nine Months Ended · ·
· · · September 30, · · · September 30, · ·
Securities available-for-sale · 2024 · 2023 · · 2024 · 2023 ·
Proceeds from sales of securities	$	-		$65,572		$5,331		$205,738
Gross realized gains on securities	$	-	$	-		$1	$	-
Gross realized losses on securities		(1)		(924)		(1)		(4,146)
Net realized (losses) gains		$(1)		$(924)	$	-		$(4,146)
Income tax benefit on net realized losses	$	-		$260	$	-		$1,165
Effective tax rate applied		0.0%		28.1%		N/M		28.1%

As of September 30, 2024, securities valued at $755.2 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:


· September 30, 2024 · December 31, 2023
Commercial	$814,668	$841,697
Leases	458,317	398,223
Commercial real estate – investor	1,045,060	1,034,424
Commercial real estate – owner occupied	718,265	796,538
Construction	206,458	165,380
Residential real estate – investor	50,332	52,595
Residential real estate – owner occupied	208,227	226,248
Multifamily	375,394	401,696
HELOC	102,611	103,237
Other 1	11,746	22,915
Total loans	3,991,078	4,042,953
Allowance for credit losses on loans	(44,422)	(44,264)
Net loans 2	$3,946,656	$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 September 30, 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 ensure 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 67.8% and 68.8% of the portfolio at September 30, 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 and nine months ended September 30, 2024 and 2023:


· · · · · · · · · ·
· · · · Provision for · · · · · ·
· · Beginning · · (Release of) · · · · · · Ending
Allowance for credit losses	Balance		Credit Losses 1		Charge-offs		Recoveries		Balance
Three months ended September 30, 2024
Commercial		$6,728		$2,950		$33		$40		$9,685
Leases		1,978		40		68		25		1,975
Commercial real estate – investor		17,842		(1,154)		-		149		16,837
Commercial real estate – owner occupied		7,180		(64)		(14)		30		7,160
Construction		2,020		397		-		-		2,417
Residential real estate – investor		609		(63)		-		18		564
Residential real estate – owner occupied		1,618		111		-		11		1,740
Multifamily		2,804		(341)		-		-		2,463
HELOC		1,483		77		-		14		1,574
Other		7		45		78		33		7
Total		$42,269		$1,998		$165		$320		$44,422



· · · · Provision for · · · · · ·
· · Beginning · · (Release of) · · · · · · Ending
Allowance for credit losses	Balance		Credit Losses 1		Charge-offs		Recoveries		Balance
Nine months ended September 30, 2024
Commercial		$3,998		$5,603		$51		$135		$9,685
Leases		2,952		(893)		149		65		1,975
Commercial real estate – investor		17,105		4,076		4,596		252		16,837
Commercial real estate – owner occupied		12,280		(134)		5,154		168		7,160
Construction		1,038		1,379		-		-		2,417
Residential real estate – investor		669		(128)		-		23		564
Residential real estate – owner occupied		1,821		(109)		-		28		1,740
Multifamily		2,728		(265)		-		-		2,463
HELOC		1,656		(128)		-		46		1,574
Other		17		91		214		113		7
Total		$44,264		$9,492		$10,164		$830		$44,422


· · · · · · · · · · ·
· · · · Provision for · · · · · ·
· · Beginning · · (Release of) · · · · · · Ending
Allowance for credit losses	Balance		Credit Losses 1		Charge-offs		Recoveries		Balance
Three months ended September 30, 2023
Commercial		$11,532		$(1,025)		$20		$12		$10,499
Leases		2,690		(193)		-		95		2,592
Commercial real estate – investor		20,031		4,726		6,774		20		18,003
Commercial real estate – owner occupied		12,562		(154)		35		12		12,385
Construction		1,179		(39)		-		100		1,240
Residential real estate – investor		743		(55)		-		3		691
Residential real estate – owner occupied		1,868		(36)		-		25		1,857
Multifamily		2,737		(165)		-		-		2,572
HELOC		1,694		(77)		-		35		1,652
Other		278		30		107		37		238
Total		$55,314		$3,012		$6,936		$339		$51,729



· · · · Provision for · · · · · · ·
Allowance for credit losses · · Beginning · · (Release of) · · · · · · · Ending
Nine months ended September 30, 2023 · Balance · Credit Losses 1 · Charge-offs · Recoveries · · Balance
Commercial	$11,968	$(1,287)	$427	$245	$10,499
Leases	2,865	498	882	111	2,592
Commercial real estate – investor	10,674	14,117	6,845	57	18,003
Commercial real estate – owner occupied	15,001	(2,397)	236	17	12,385
Construction	1,546	(406)	-	100	1,240
Residential real estate – investor	768	(104)	-	27	691
Residential real estate – owner occupied	2,046	(260)	-	71	1,857
Multifamily	2,453	119	-	-	2,572
HELOC	1,806	(242)	-	88	1,652
Other	353	53	301	133	238
Total	$49,480	$10,091	$8,691	$849	$51,729

At September 30, 2024, our allowance for credit losses (“ACL”) on loans totaled $44.4 million, and our ACL on unfunded commitments, included in other liabilities, totaled $2.5 million. During the first nine months of 2024, we recorded net provision for credit losses on loans of $9.5 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 an allowance for unfunded commitments of $2.5 million as of September 30, 2024, and $2.7 million as of both December 31, 2023, and September 30, 2023, which is 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 $50.2 million and $63.1 million of collateral dependent loans secured by real estate or business assets as of September 30, 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 September 30, 2024, and December 31, 2023:


· · · · · Accounts · · · · · · · · ACL
September 30, 2024 · · Real Estate · · Receivable · · Equipment · · Other · · Total · · Allocation
Commercial	$	-			$16,529	$	-		$	-		$16,529	$4,286
Leases		-			-		-			-		-	-
Commercial real estate – investor		8,531			-		-			-		8,531	2,896
Commercial real estate – owner occupied		16,422			-		-			-		16,422	-
Construction		5,766			-		-			-		5,766	758
Residential real estate – investor		413			-		-			-		413	-
Residential real estate – owner occupied		1,644			-		-			-		1,644	221
Multifamily		861			-		-			-		861	-
HELOC		-			-		-			-		-	-
Other		-			-		-			-		-	-
Total		$33,637			$16,529	$	-		$	-		$50,166	$8,161


				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	-
Other		-			-		-			-		-	-
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
September 30, 2024 · · Past Due · Past Due · Due · Due · Current · Total Loans · Accruing
Commercial	$3,671	$2,303	$11,971	$17,945	$796,723	$814,668	$	-
Leases	356	481	586	1,423	456,894	458,317		-
Commercial real estate – investor	492	-	-	492	1,044,568	1,045,060		-
Commercial real estate – owner occupied	9,728	13,393	12,416	35,537	682,728	718,265		-
Construction	-	-	5,766	5,766	200,692	206,458		-
Residential real estate – investor	-	-	449	449	49,883	50,332		-
Residential real estate – owner occupied	75	-	2,029	2,104	206,123	208,227		69
Multifamily	658	206	861	1,725	373,669	375,394		-
HELOC	423	-	161	584	102,027	102,611		40
Other	5	11	-	16	11,730	11,746		-
Total	$15,408	$16,394	$34,239	$66,041	$3,925,037	$3,991,078		$109


· · · · · · · · · · · · · · · · · · · · 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 September 30, 2024, and December 31, 2023:


Nonaccrual loan detail · September 30, 2024 · With no ACL · December 31, 2023 · With no ACL
Commercial	$14,820	$1,012	$870	$870
Leases	746	746	639	318
Commercial real estate – investor	8,531	1,645	16,572	8,926
Commercial real estate – owner occupied	17,032	17,032	34,946	8,429
Construction	5,765	-	7,162	7,162
Residential real estate – investor	1,180	1,180	1,331	1,331
Residential real estate – owner occupied	2,410	1,777	3,078	3,078
Multifamily	1,196	1,196	1,775	1,775
HELOC	491	491	1,210	1,210
Other	-	-	-	-
Total	$52,171	$25,079	$67,583	$33,099

The Company recognized $395,000 and $398,000 of interest on nonaccrual loans during the three months and nine months ended September 30, 2024, respectively.

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 September 30, 2024, were as follows:


	2024		2023		2022		2021		2020		Prior		RevolvingLoans		RevolvingLoansConvertedTo TermLoans			Total
Commercial
Pass		$200,043		$230,428		$81,173		$23,250		$5,838		$7,264		$218,666		$	-		$766,662
Special Mention		3,164		1,942		792		204		-		-		6,861			-		12,963
Substandard		-		16		5,001		2,188		-		-		27,838			-		35,043
Total commercial		203,207		232,386		86,966		25,642		5,838		7,264		253,365			-		814,668

Leases
Pass		167,380		170,456		$78,032		28,810		8,327		3,092		-			-		456,097
Special Mention		-		670		618		181		-		5		-			-		1,474
Substandard		-		306		261		179		-		-		-			-		746
Total leases		167,380		171,432		78,911		29,170		8,327		3,097		-			-		458,317

Commercial real estate – investor
Pass		162,086		185,368		314,843		183,750		91,782		75,277		6,140			-		1,019,246
Special Mention		-		-		-		4,162		-		-		-			-		4,162
Substandard		-		1,645		-		-		-		20,007		-			-		21,652
Total commercial real estate – investor		162,086		187,013		314,843		187,912		91,782		95,284		6,140			-		1,045,060

Commercial real estate – owner occupied
Pass		39,847		124,241		148,449		137,974		81,262		106,093		14,317			-		652,183
Special Mention		-		1,217		8,359		8,972		3,695		1,901		118			-		24,262
Substandard		211		-		1,168		10,670		13,258		16,513		-			-		41,820
Total commercial real estate – owner occupied		40,058		125,458		157,976		157,616		98,215		124,507		14,435			-		718,265

Construction
Pass		30,840		41,991		77,314		27,538		87		1,527		-			-		179,297
Special Mention		-		-		21,396		-		-		-		-			-		21,396
Substandard		-		-		5,765		-		-		-		-			-		5,765
Total construction		30,840		41,991		104,475		27,538		87		1,527		-			-		206,458

Residential real estate – investor
Pass		4,047		3,871		13,914		7,764		5,767		11,596		1,650			-		48,609
Special Mention		-		-		-		543		-		-		-			-		543
Substandard		-		-		383		-		-		797		-			-		1,180
Total residential real estate – investor		4,047		3,871		14,297		8,307		5,767		12,393		1,650			-		50,332

Residential real estate – owner occupied
Pass		8,235		30,383		36,381		33,720		23,492		72,642		762			-		205,615
Special Mention		-		-		-		-		-		-		-			-		-
Substandard		-		-		-		156		101		2,355		-			-		2,612
Total residential real estate – owner occupied		8,235		30,383		36,381		33,876		23,593		74,997		762			-		208,227

Multifamily
Pass		31,468		68,022		70,488		105,789		39,258		46,497		606			-		362,128
Special Mention		-		-		-		9,997		-		-		-			-		9,997
Substandard		1,204		-		990		869		206		-		-			-		3,269
Total multifamily		32,672		68,022		71,478		116,655		39,464		46,497		606			-		375,394

HELOC
Pass		2,235		2,581		2,236		409		1,417		3,858		89,139			-		101,875
Special Mention		-		-		-		-		-		-		-			-		-
Substandard		-		-		-		-		40		219		477			-		736
Total HELOC		2,235		2,581		2,236		409		1,457		4,077		89,616			-		102,611

Other
Pass		2,714		1,058		1,262		707		86		47		5,872			-		11,746
Special Mention		-		-		-		-		-		-		-			-		-
Substandard		-		-		-		-		-		-		-			-		-
Total other		2,714		1,058		1,262		707		86		47		5,872			-		11,746

Total loans
Pass		648,895		858,399		824,092		549,711		257,316		327,893		337,152			-		3,803,458
Special Mention		3,164		3,829		31,165		24,059		3,695		1,906		6,979			-		74,797
Substandard		1,415		1,967		13,568		14,062		13,605		39,891		28,315			-		112,823
Total loans		$653,474		$864,195		$868,825		$587,832		$274,616		$369,690		$372,446		$	-		$3,991,078

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 nine months ended September 30, 2024 and 2023,

were as follows:


Nine months ended September 30, 2024 · 2024 · 2023 · 2022 · 2021 · 2020 · Prior · RevolvingLoans · RevolvingLoansConverted To TermLoans · Total
Commercial	$31	$	-	$	-	$	-	$	-	$20	$	-	$	-	$51
Leases	-		-		96		53		-	-		-		-	149
Commercial real estate – investor	-		-		4,128		452		16	-		-		-	4,596
Commercial real estate – owner occupied	-				-		5,135		-	19		-		-	5,154
Other	-		-		-		-		-	214		-		-	214
Total	$31	$	-		$4,224		$5,640		$16	$253	$	-	$	-	$10,164


Nine months ended September 30, 2023 · 2023 · 2022 · 2021 · 2020 · 2019 · Prior · RevolvingLoans · RevolvingLoansConverted To TermLoans · Total
Commercial	$	-	$	-	$17	$364	$	-	$46	$	-	$	-	$427
Leases		-		870	-	-		12	-		-		-	882
Commercial real estate – investor		-		4,121	71	2,653		-	-		-		-	6,845
Commercial real estate – owner occupied		-		22	178	4		-	32		-		-	236
Other		-		3	26	7		-	265		-		-	301
Total	$	-		$5,016	$292	$3,028		$12	$343	$	-	$	-	$8,691

The Company had $630,000 and $170,000 in residential real estate loans in the process of foreclosure as of September 30, 2024, and December 31, 2023, respectively.

There were thirteen loans modified during the nine-month period ending September 30, 2024, totaling $41.2 million in aggregate, which were experiencing financial difficulty. There were fifteen loans modified during the nine-month period ending September 30, 2023, totaling $43.0 million in aggregate, which were experiencing financial difficulty. There wereno modified loans experiencing financial difficulty in payment default as of September 30, 2024, and September 30, 2023.

The following tables present the amortized costs basis of loans at September 30, 2024, and September 30, 2023, that were both experiencing financial difficulty and modified during the three-months and nine-months ended September 30, 2024, and September 30, 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.


Three months ended September 30, 2024 · · Term Extension · · Combination - Term Extension, Interest Rate Modification, Payment Modification, and Principal Reduction · · 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	$	-	$3,794	$	-	$	-	$3,794	0.5%
Commercial real estate – investor		12,549	-		-		6,886	19,435	1.9%
Commercial real estate – owner occupied		12,571	-		-		-	12,571	1.8%
Residential real estate – owner occupied		-	-		-		-	-	0.0%
Multifamily		-	1,204		-		-	1,204	0.3%
HELOC		-	-		-		-	-	0.0%
Total		$25,120	$4,998	$	-		$6,886	$37,004	0.9%


Nine months ended September 30, 2024 · · Term Extension · · Combination - Term Extension, Interest Rate Modification, Payment Modification, and Principal Reduction · · 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	$3,794	$	-	$	-	$4,041	0.5%
Commercial real estate – investor	12,549	-		-		6,886	19,435	1.9%
Commercial real estate – owner occupied	12,571	-		3,258		663	16,492	2.3%
Residential real estate – investor	-	-		-		-	-	0.0%
Multifamily	-	1,204		-		-	1,204	0.3%
HELOC	-	-		-		-	-	0.0%
Total	$25,367	$4,998		$3,258		$7,549	$41,172	1.0%


Three months ended September 30, 2023 · · Term Extension · · Combination - Term Extension, Interest Rate Modification, Payment Modification, and Principal Reduction · · 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	$864	$	-	$	-	$	-	$864	0.1%
Commercial real estate – investor	-		-		-		8,823	8,823	0.8%
Commercial real estate – owner occupied	16,218		-		-		-	16,218	2.0%
Residential real estate – owner occupied	437		-		-		-	437	0.2%
Multifamily	254		-		-		-	254	0.1%
HELOC	-		-		-		-	-	0.0%
Total	$17,773	$	-	$	-		$8,823	$26,596	0.7%


Nine months ended September 30, 2023 · · Term Extension · · Combination - Term Extension, Interest Rate Modification, Payment Modification, and Principal Reduction · · 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	$1,713	$	-	$979	$	-	$2,692	0.3%
Commercial real estate – investor	12,755		-	-		10,608	23,363	2.2%
Commercial real estate – owner occupied	16,218		-	-		-	16,218	2.0%
Residential real estate – owner occupied	437		-	-		-	437	0.0%
Multifamily	254		-	-		-	254	0.1%
HELOC	39		-	-		-	39	0.0%
Total	$31,416	$	-	$979		$10,608	$43,003	1.1%

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 in the last twelve months as of September 30, 2024, and September 30, 2023.


September 30, 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	$	-	$	-	$	-	$	-	$5,536	$5,536
Commercial real estate – investor		-		-		-		-	19,435	19,435
Commercial real estate – owner occupied		-		12,505		-		12,505	3,987	16,492
Residential real estate – owner occupied		-		-		-		-	111	111
Multifamily		-		-		-		-	1,204	1,204
HELOC		-		-		-		-	87	87
Total	$	-		$12,505	$	-		$12,505	$30,360	$42,865


September 30, 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	$1,713	$2,692
Commercial real estate – investor		-		-	-	-	23,363	23,363
Commercial real estate – owner occupied		-		-	-	-	16,218	16,218
Residential real estate – owner occupied		-		-	-	-	437	437
Multifamily		-		-	-	-	254	254
HELOC		-		-	-	-	39	39
Total	$	-	$	-	$979	$979	$42,024	$43,003

The following tables summarize the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the three-months and nine-months ended September 30, 2024, and September 30, 2023. The Company hadfour loans that had a payment modification as of September 30, 2024. One had an increase of monthly payment until maturity, one had a reduction of monthly payment until maturity, andtwo with interest-only payments during forbearance; the financial impact of these modifications is immaterial. As of September 30, 2023, there weretwo loans that had a payment modification, one to a single payment at maturity and the other to interest-only until maturity.


Three months ended September 30, 2024 · · Weighted-Average Term Extension (In Months) · · Weighted-Average Interest Rate Change · · Weighted-Average Delay of Payment (In Months)
Commercial	7.00	0.50%	-
Commercial real estate – investor	6.00	-	-
Commercial real estate – owner occupied	12.46	-	-
Residential real estate – owner occupied	-	-	-
Multifamily	60.00	2.75	-
HELOC	-	-	-
Total	10.05	1.04%	-


Nine months ended September 30, 2024 · · Weighted-Average Term Extension (In Months) · · Weighted-Average Interest Rate Change · · Weighted-Average Delay of Payment (In Months)
Commercial	7.06	0.50%	-
Commercial real estate – investor	6.00	-	-
Commercial real estate – owner occupied	12.71	0.15	-
Residential real estate – owner occupied	-	-	-
Multifamily	60.00	2.75	-
HELOC	-	-	-
Total	10.37	0.69%	-


Three months ended September 30, 2023 · · Weighted-Average Term Extension (In Months) · · Weighted-Average Interest Rate Change · · Weighted-Average Delay of Payment (In Months)
Commercial	10.57	-	%	-
Commercial real estate – investor	7.00	-		-
Commercial real estate – owner occupied	14.00	-		-
Residential real estate – owner occupied	2.00	-		-
Multifamily	16.00	-		-
HELOC	-	-		-
Total	11.39	-	%	-


Nine months ended September 30, 2023 · · Weighted-Average Term Extension (In Months) · · Weighted-Average Interest Rate Change · · Weighted-Average Delay of Payment (In Months)
Commercial	6.74	5.00%	-
Commercial real estate – investor	9.81	-	7.17
Commercial real estate – owner occupied	14.00	-	-
Residential real estate – owner occupied	2.00	-	-
Multifamily	16.00	-	-
HELOC	24.00	-	-
Total	11.17	5.00%	7.17

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 · · Nine Months Ended
· September 30, · September 30,
Other real estate owned · 2024 · 2023 · 2024 · 2023 ·
Balance at beginning of period	$6,920	$761	$5,123	$1,561
Property additions, net of acquisition adjustments	1,282	210	4,670	686
Less:
Proceeds from property disposals, net of participation purchase and gains/losses	-	564	1,591	1,571
Period valuation write-down	-	-	-	269
Balance at end of period	$8,202	$407	$8,202	$407

Activity in the valuation allowance was as follows:


· Three Months Ended · · Nine Months Ended
· September 30, · September 30,
· 2024 · 2023 · 2024 · 2023
Balance at beginning of period	$118	$114	$118	$856
Provision for unrealized losses	-	-	-	269
Reductions taken on sales	-	4	-	(1,007)
Balance at end of period	$118	$118	$118	$118

Expenses related to OREO, net of lease revenue, includes:


· · Three Months Ended · · Nine Months Ended
· · September 30, · September 30,
· 2024 · 2023 · 2024 · 2023 ·
Gain on sales, net	$	-	$(71)	$(259)	$(229)
Provision for unrealized losses		-	-	-	269
Operating expenses		321	44	673	145
Less:
Lease revenue		79	-	213	4
Net OREO expense		$242	$(27)	$201	$181

Note 5 – Deposits

Major classifications of deposits were as follows:


· September 30, 2024 · December 31, 2023
Noninterest bearing demand	$1,669,000	$1,834,891
Savings	885,933	971,334
NOW accounts	548,923	565,375
Money market accounts	690,840	671,240
Certificates of deposit of less than $100,000	317,312	266,035
Certificates of deposit of $100,000 through $250,000	239,775	180,289
Certificates of deposit of more than $250,000	113,641	81,582
Total deposits	$4,465,424	$4,570,746

Note 6 – Borrowings

The following table is a summary of borrowings as of September 30, 2024, and December 31, 2023. Junior subordinated debentures are discussed in more detail in Note 7.


· September 30, 2024 · December 31, 2023
Securities sold under repurchase agreements	$53,866	$26,470
Other short-term borrowings	335,000	405,000
Junior subordinated debentures1	25,773	25,773
Subordinated debentures	59,446	59,382
Total borrowings	$474,085	$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 $53.9 million at September 30, 2024, and $26.5 million at December 31, 2023. The fair value of the pledged collateral was $75.0 million at September 30, 2024, and $45.7 million at December 31, 2023. At September 30, 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 September 30, 2024, the Bank had $335.0 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 September 30, 2024, was valued at $15.3 million, and any potential FHLBC advances were collateralized by loans and securities with a principal balance of $1.40 billion, which carried a FHLBC-calculated combined collateral value of $953.0 billion. The Company had excess collateral of $653.0 million available to secure borrowings at September 30, 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 September 30, 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 4.17% and 3.77% for the quarters ended September 30, 2024, and September 30, 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 September 30, 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 September 30, 2024,718,193 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 339,235 and 240,149 restricted stock units issued under the 2019 Plan during the nine months ended September 30, 2024, and September 30, 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 $3.1 million for the nine months ended September 30, 2024, and $2.7 million for the nine months ended September 30, 2023.

A summary of changes in the Company’s unvested restricted awards for the nine months ended September 30, 2024, is as follows:


· · September 30, 2024
· · · · Weighted
· · Restricted · · Average
· · Stock Shares · · Grant Date
· and Units · Fair Value
Unvested at January 1	709,237	$14.26
Granted	339,235	13.44
Vested	(211,469)	11.39
Forfeited	(8,954)	14.09
Unvested at September 30	828,049	$14.65

Total unrecognized compensation cost of restricted awards was $5.2 million as of September 30, 2024, which is expected to be recognized over a weighted-average period of 1.86 years.

Note 9 – Earnings Per Share

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


· · Three Months Ended September 30, · · Nine Months Ended September 30, ·
· 2024 · 2023 · 2024 · 2023
Basic earnings per share:
Weighted-average common shares outstanding	44,850,325	44,675,489	44,818,693	44,653,451
Net income	$22,951	$24,335	$66,154	$73,504
Basic earnings per share	$0.52	$0.55	$1.48	$1.65

Diluted earnings per share:
Weighted-average common shares outstanding	44,850,325	44,675,489	44,818,693	44,653,451
Dilutive effect of unvested restricted awards 1	828,815	752,920	809,913	736,767
Diluted average common shares outstanding	45,679,140	45,428,409	45,628,606	45,390,218

Net Income	$22,951	$24,335	$66,154	$73,504
Diluted earnings per share	$0.50	$0.54	$1.45	$1.62


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 September 30, 2024, the Bank exceeded those thresholds.

At September 30, 2024, the Bank’s Tier 1 capital leverage ratio was 11.46%, an increase of 105 basis points from December 31, 2023, and is above the 8.00% objective. The Bank’s total capital ratio was 14.45%, an increase of 121 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 September 30, 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 September 30, 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 ·
September 30, 2024
Common equity tier 1 capital to risk weighted assets
Consolidated	$609,778	12.86%	$331,916	7.00%	N/A	N/A
Old Second Bank	638,983	13.49	331,570	7.00	$307,887	6.50%
Total capital to risk weighted assets
Consolidated	740,371	15.62	497,689	10.50	N/A	N/A
Old Second Bank	684,576	14.45	497,443	10.50	473,755	10.00
Tier 1 capital to risk weighted assets
Consolidated	634,778	13.39	402,958	8.50	N/A	N/A
Old Second Bank	638,983	13.49	402,621	8.50	378,937	8.00
Tier 1 capital to average assets
Consolidated	634,778	11.38	223,121	4.00	N/A	N/A
Old Second Bank	638,983	11.46	223,031	4.00	278,788	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 September 30, 2024, the above capital measures of the Company include $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 September 30, 2024, the Bank had capacity to pay dividends of $117.0 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 during the nine-month period ended September 30, 2024, however the Company reclassified one states and political subdivisions security to an asset-backed security in all periods presented. During the nine-month period ended September 30, 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 September 30, 2024, and December 31, 2023, respectively, measured by the Company at fair value on a recurring basis:


· · September 30, 2024
	Level 1			Level 2			Level 3			Total
Assets:
Securities available-for-sale
U.S. Treasury			$194,188		$	-		$	-		$194,188
U.S. government agencies			-			37,976			-		37,976
U.S. government agencies mortgage-backed			-			96,413			-		96,413
States and political subdivisions			-			211,927			12,868		224,795
Collateralized mortgage obligations			-			384,271			-		384,271
Asset-backed securities			-			60,647			3,300		63,947
Collateralized loan obligations			-			189,264			-		189,264
Loans held-for-sale			-			2,447			-		2,447
Mortgage servicing rights			-			-			9,726		9,726
Interest rate derivatives 1			-			4,576			-		4,576
Mortgage banking derivatives			-			70			-		70
Total			$194,188			$987,591			$25,894		$1,207,673

Liabilities:
Interest rate swap agreements, including risk participation agreements		$	-			$4,389		$	-		$4,389
Total		$	-			$4,389		$	-		$4,389

1 Interest rate derivatives includes interest rate swaps, a rate cap and risk participation agreements.


· · 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 derivatives 1			-			5,391			-		5,391
Total			$169,574			$1,014,639			$25,673		$1,209,886

Liabilities:
Interest rate swap agreements, including risk participation agreements		$	-			$8,324		$	-		$8,324
Mortgage banking derivatives			-			10			-		10
Total		$	-			$8,334		$	-		$8,334

1 Interest rate derivatives includes interest rate swaps, a rate cap and risk participation agreements.

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


· · · Nine Months Ended September 30, 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	-	(98)	(706)
Included in other comprehensive income	(68)	18	-
Purchases, issuances, sales, and settlements
Purchases	1,209	-	-
Issuances	-	-	490
Settlements	(111)	(111)	(402)
Ending balance September 30, 2024	$3,300	$12,868	$9,726


· · · Nine Months Ended September 30, 2023 ·
· · · Securities available-for-sale · · · ·
· · · · Collateralized · · States and · · Mortgage ·
· · Asset-backed · · Mortgage · · Political · · Servicing ·
· Securities · · Obligations · · Subdivisions · Rights
Beginning balance January 1, 2023	$16,740		$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)		-	(99)	232
Included in other comprehensive income	168		(6)	(74)	-
Purchases, issuances, sales, and settlements
Purchases	406		-	-	-
Issuances	-		-	-	420
Settlements	(572)		-	(108)	(380)
Ending balance September 30, 2023	$1,846	$	-	$12,220	$11,461

The following table and commentary present quantitative and qualitative information about Level 3 fair value measurements as of September 30, 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	$12,868	Discounted Cash Flow	Discount Rate	5.2 – 6.1%	6.1%
			Liquidity Premium	0.5 – 0.5%	0.5%

Asset-backed securities	$3,300	Discounted Cash Flow	Discount Rate	4.9 – 4.9%	4.9%

Mortgage servicing rights	$9,726	Discounted Cash Flow	Discount Rate	9.0 – 11.0%	9.0%
			Prepayment Speed	0.0 – 38.1%	7.3%

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 September 30, 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:


· · September 30, 2024
· Level 1 · Level 2 · Level 3 · Total
Individually evaluated loans1	$	-	$	-	$42,005	$42,005
Other real estate owned, net2		-		-	8,202	8,202
Total	$	-	$	-	$50,207	$50,207

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*$50.2** million and a valuation allowance of**$8.2** million resulting in a decrease of specific allocations within the allowance for credit losses on loans of**$2.9** million for the nine months ended September 30, 2024.*

2 OREO is measured at fair value, less costs to sell, and had a net carrying amount of*$8.2** million at September 30, 2024, which is made up of the outstanding balance of**$8.3** 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 September 30, 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:


· · September 30, 2024
· · Carrying · · Fair · · · · · · · · ·
	Amount		Value		Level 1		Level 2			Level 3
Financial assets:
Cash and due from banks		$63,298		$63,298		$63,298		$	-		$	-
Interest earning deposits with financial institutions		52,469		52,469		52,469			-			-
Securities available-for-sale		1,190,854		1,190,854		194,188			980,498			16,168
FHLBC and FRBC stock		30,205		30,205		-			30,205			-
Loans held-for-sale		2,447		2,447		-			2,447			-
Net loans		3,991,078		3,914,124		-			-			3,914,124
Mortgage servicing rights		9,726		9,726		-			-			9,726
Interest rate swap and rate cap agreements		4,499		4,499		-			4,499			-
Interest rate lock commitments and forward contracts		70		70		-			70			-
Interest receivable on securities and loans		26,682		26,682		-			26,682			-

Financial liabilities:
Noninterest bearing deposits		$1,669,000		$1,669,000		$1,669,000		$	-		$	-
Interest bearing deposits		2,796,424		2,790,377		-			2,790,377			-
Securities sold under repurchase agreements		53,866		53,866		-			53,866			-
Other short-term borrowings		335,000		335,000		-			335,000			-
Junior subordinated debentures		25,773		21,316		-			21,316			-
Subordinated debentures		59,446		52,154		-			52,154			-
Interest rate swap and rate cap agreements		4,375		4,375		-			4,375			-
Interest payable on deposits and borrowings		4,275		4,275		-			4,275			-


· · 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 and rate cap agreements		5,302		5,302		-			5,302			-
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			-
Other short-term borrowings		405,000		405,000		-			405,000			-
Junior subordinated debentures		25,773		20,361		-			20,361			-
Subordinated debentures		59,382		47,982		-			47,982			-
Interest rate swap and rate cap agreements		8,234		8,324		-			8,324			-
Interest rate lock commitments and forward contracts		10		10		-			10			-
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 September 30, 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 September 30, 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 $2.0 million will be reclassified as an increase to interest income and an additional $327,000 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 and rate cap agreements with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of interest rate swaps with its loan customers as of September 30, 2024, and December 31, 2023 were $120.5 million and $104.8 million, respectively. The notional amounts of interest rate cap agreements with its loan customers were $32.9 million as of September 30, 2024, and there wereno interest rate cap agreements held at December 31, 2023. Those interest rate swaps and rate cap agreements 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 September 30, 2024, and December 31, 2023, the Company had $3.6 million and $7.3 million of cash collateral pledged withtwo correspondent financial institutions, respectively. The Company held $2.6 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 September 30, 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 September 30, 2024, and December 31, 2023 was $18.8 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 September 30, 2024, and December 31, 2023.

Fair Value of Derivative Instruments


· · · · · September 30, 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	2,165	Other Liabilities	2,041
Total derivatives designated as hedging instruments				2,165		2,041

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers and rate cap	14	153,443	Other Assets	2,334	Other Liabilities	2,334
Interest rate lock commitments and forward contracts	57	18,816	Other Assets	70	Other Liabilities	-
Other contracts	5	57,184	Other Assets	77	Other Liabilities	14
Total derivatives not designated as hedging instruments				2,481		2,348



			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 gain recognized in AOCI on derivatives totaled $88,000 as of September 30, 2024, and the loss recognized in AOCI totaled $3.8 million as of September 30, 2023. The amount of the loss reclassified from AOCI to net interest income on the income statement was $4.8 million for the nine months ended September 30, 2024, and $3.9 million for the nine months ended September 30, 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 September 30, 2024, and December 31, 2023.

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


· · September 30, 2024 · · December 31, 2023 ·
· Fixed · Variable · Total · Fixed · Variable · Total
Letters of credit:
Borrower:
Financial standby	$188	$16,240	$16,428	$173	$16,621	$16,794
Performance standby	552	10,784	11,336	562	13,689	14,251
	740	27,024	27,764	735	30,310	31,045
Non-borrower:
Performance standby	-	67	67	-	67	67
Total letters of credit	$740	$27,091	$27,831	$735	$30,377	$31,112

Unused loan commitments:	$153,788	$623,748	$777,536	$140,305	$694,960	$835,265

As of September 30, 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 third quarter of 2024, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments totaled $2.5 million. The resultant increase in the ACL for unfunded commitments of $2,000 for the third quarter of 2024, compared to the second quarter of 2024, is primarily driven by 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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