National Bank Holdings Corp

Previous wording

The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes as of and for the three and six months ended June 30, 2024, and with our annual report onForm 10-K (file number 001-35654), which includes our audited consolidated financial statements and related notes as of and for the years ended December 31, 2023, 2022 and 2021. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that may cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the section entitled “Cautionary Note Regarding Forward-Looking Statements” located elsewhere in this quarterly report and in Item 1A“Risk Factors” in the annual report onForm 10-K, referenced above, and should be read herewith.

Current wording

The following management's discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes as of and for the three and nine months ended September 30, 2024, and with our annual report onForm 10-K (file number 001-35654), which includes our audited consolidated financial statements and related notes as of and for the years ended December 31, 2023, 2022 and 2021. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that may cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the section entitled “Cautionary Note Regarding Forward-Looking Statements” located elsewhere in this quarterly report and in Item 1A“Risk Factors” in the annual report onForm 10-K, referenced above, and should be read herewith.

Previous wording

Our focus is on building relationships by creating a win-win scenario for our clients and our Company. We believe in providing solutions and services to our clients that are based on fairness and simplicity. We have established a solid financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth. We have executed on strategic acquisition opportunities to expand our presence in attractive markets and to diversify our revenue streams. Additionally, we are innovating and building strategic fintech partnerships with the goal of delivering a comprehensive digital financial ecosystem for our clients. We are focused on providing small and medium-sized businesses with alternative digital access to address borrowing, depository and cash management needs, while also providing information management and access to digital payment tools, under the safety of a regulated bank. We believe that our established presence in our core markets of Colorado, the greater Kansas City region, Utah, Wyoming, Texas, New Mexico and Idaho, as well as our ongoing investment in digital solutions and strategic acquisitions position us well for growth opportunities. As of June 30, 2024, we had $9.9 billion in assets, $7.7 billion in loans, $8.4 billion in deposits, $1.2 billion in equity and $0.9 billion in assets under management in our trust and wealth management business.

Current wording

Our focus is on building relationships by creating a win-win scenario for our clients and our Company. We believe in providing solutions and services to our clients that are based on fairness and simplicity. We have established a solid financial services franchise with a sizable presence for deposit gathering and building client relationships necessary for growth. We have executed on strategic acquisition opportunities to expand our presence in attractive markets and to diversify our revenue streams. Additionally, we are innovating and building strategic fintech partnerships with the goal of delivering a comprehensive digital financial ecosystem for our clients. We are focused on providing small and medium-sized businesses with alternative digital access to address borrowing, depository and cash management needs, while also providing information management and access to digital payment tools, under the safety of a regulated bank. We believe that our established presence in our core markets of Colorado, the greater Kansas City region, Utah, Wyoming, Texas, New Mexico and Idaho, as well as our ongoing investment in digital solutions and strategic acquisitions position us well for growth opportunities. As of September 30, 2024, we had $9.9 billion in assets, $7.7 billion in loans, $8.5 billion in deposits, $1.3 billion in equity and $967.7 million in assets under management in our trust and wealth management business.

Previous wording

Macroeconomic pressures have resulted in volatility and uncertainty in the banking industry. Increases in interest rates, declines in the fair value of securities, lack of available funding, uninsured deposits and risk from concentrations in loan and deposit segments along with declines in commercial real estate property values are drawing increased scrutiny on financial institutions. Liquidity within the financial services sector has tightened, and we expect the intense competition for deposits throughout our markets to continue. While these are widespread challenges for the banking industry, the Company has not experienced a material impact to our financial condition, operations, customer base, liquidity, capital position or risk profile.

Current wording

Macroeconomic pressures have resulted in volatility and uncertainty in the banking industry. The sustained higher-interest rate environment, declines in the fair value of securities, lack of available funding, uninsured deposits and risk from concentrations in loan and deposit segments along with declines in commercial real estate property values are drawing increased scrutiny on financial institutions. Liquidity within the financial services sector has tightened, and we expect the intense competition for deposits throughout our markets to continue. While these are widespread challenges for the banking industry, the Company has not experienced a material impact to our financial condition, operations, customer base, liquidity, capital position or risk profile.

Previous wording

Additionally, we face continual challenges implementing our business strategy. These include growing our assets, particularly loans, and deposits amidst intense competition, changing interest rates, adhering to changes in the regulatory environment and identifying and consummating disciplined acquisition and other expansionary opportunities in a very competitive and inflationary environment. In connection with our digital growth strategy and our digital solution 2UniFi, we have made and will continue to make investments in and also partner with third party fintech companies. The innovations these companies develop for utilization by 2UniFi may prove more difficult to successfully integrate into our existing operations and may require additional operational and control systems to manage fraud, operational, legal and compliance risks.

Current wording

Additionally, we face continual challenges implementing our business strategy. These include growing our assets, particularly loans, and deposits amidst intense competition, changing interest rates, adhering to changes in the regulatory environment and identifying and consummating disciplined acquisition and other expansionary opportunities in a very competitive and inflationary environment. In connection with our digital growth strategy and our digital solution 2UniFi, we have made and will continue to make investments in and also partner with third party fintech companies. The innovations these companies develop for utilization by 2UniFi may prove difficult to successfully integrate into our existing operations and may require additional operational and control systems to manage fraud, cybersecurity, operational, legal and compliance risks.

Previous wording

Future growth in our interest income will ultimately be dependent on our ability to originate high-quality loans and other high-quality earning assets such as investment securities as well as our ability to access liquidity and manage our cost of funds. During the years ended December 31, 2023 and 2022, the Federal Reserve increased prevailing interest rates by a total of 100 and 425 basis points, respectively. Our future earnings will be impacted by the Federal Reserve’s future interest rate policy decisions. Management employs risk management policies to monitor and limit exposure to changes in market rates, which is discussed in more detail in the Asset/Liability Management and Interest Rate Risk section of Management’s Discussion and Analysis.

Current wording

Future growth in our interest income will ultimately be dependent on our ability to originate high-quality loans and other high-quality earning assets such as investment securities as well as our ability to access liquidity and manage our cost of funds. During the years ended December 31, 2023 and 2022, the Federal Reserve increased prevailing interest rates by a total of 100 and 425 basis points, respectively. In September 2024, the Federal Reserve decreased the prevailing interest rate by 50 basis points. Our future earnings will be impacted by the Federal Reserve’s future interest rate policy decisions. Management employs risk management policies to monitor and limit exposure to changes in market rates, which is discussed in more detail in the Asset/Liability Management and Interest Rate Risk section of Management’s Discussion and Analysis.

Previous wording

The determination of the ACL, which represents management’s estimate of lifetime credit losses inherent in our loan portfolio at the balance sheet date, involves a high degree of judgment and complexity. The Company estimates the collective ACL by first disaggregating the loan portfolio into segments based upon broad characteristics such as primary use and underlying collateral. Within these segments, the portfolio is further disaggregated into classes of loans with similar attributes and risk characteristics. The collective ACL is determined at the class level, analyzing loss history based upon specific loss drivers and risk factors affecting each loan class. The Company utilizes a discounted cash flow (“DCF”) model that incorporates forecasts of certain national macroeconomic factors (reasonable and supportable forecasts) which drive the losses predicted in establishing the Company’s collective ACL. Management accounts for the inherent uncertainty of the underlying economic forecast by reviewing and weighting alternate forecast scenarios. For periods beyond the reasonable and supportable forecast period, the Company reverts to historical long-term average loss rates on a straight-line basis. Additionally, the collective ACL calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition.

Current wording

The determination of the ACL, which represents management’s estimate of lifetime credit losses inherent in our loan portfolio at the balance sheet date, involves a high degree of judgment and complexity. The Company estimates the ACL by first disaggregating the loan portfolio into segments based upon broad characteristics such as primary use and underlying collateral. Within these segments, the portfolio is further disaggregated into classes of loans with similar attributes and risk characteristics. The ACL is determined at the class level, analyzing loss history based upon specific loss drivers and risk factors affecting each loan class. The Company utilizes a discounted cash flow (“DCF”) model developed within a third-party software tool that incorporates forecasts of certain national macroeconomic factors (reasonable and supportable forecasts) which drive the losses predicted in establishing the Company’s ACL. Management accounts for the inherent uncertainty of the underlying economic forecast by reviewing and weighting alternate forecast scenarios. For periods beyond the reasonable and supportable forecast period, the Company reverts to historical long-term average loss rates on a straight-line basis. Additionally, the ACL calculation includes subjective adjustments for qualitative risk factors that are likely to cause estimated credit losses to differ from historical experience. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition.

Previous wording

Total assets were $9.9 billion at June 30, 2024, increasing $19.8 million, or 0.2%, from December 31, 2023. Cash and cash equivalents decreased $45.8 million from December 31, 2023, and investment securities increased $31.9 million. Loans totaled $7.7 billion at June 30, 2024 and December 31, 2023, and the allowance for credit losses decreased $1.5 million to $96.5 million at June 30, 2024. During

Current wording

Total assets were $9.9 billion at September 30, 2024, increasing $42.2 million, or 0.4%, from December 31, 2023. Cash and cash equivalents decreased $10.0 million from December 31, 2023, and investment securities increased $33.3 million. Loans totaled $7.7 billion at September 30, 2024 and December 31, 2023, and the allowance for credit losses decreased $2.9 million to $95.0 million at

Previous wording

the six months ended June 30, 2024, lower cost demand, savings, and money market deposits ("transaction deposits") increased $145.8 million, or 4.1% annualized, to $7.4 billion, compared to December 31, 2023. Total deposits increased $186.5 million, or 4.6% annualized, to $8.4 billion at June 30, 2024, compared to December 31, 2023.

Current wording

September 30, 2024. During the nine months ended September 30, 2024, lower cost demand, savings, and money market deposits ("transaction deposits") increased $236.3 million, or 4.4% annualized, to $7.4 billion, compared to December 31, 2023. Total deposits increased $306.7 million, or 5.0% annualized, to $8.5 billion at September 30, 2024, compared to December 31, 2023.

Previous wording

Total investment securities available-for-sale increased 9.9% during the six months ended June 30, 2024 to $0.7 billion. Purchases of available-for-sale securities during the six months ended June 30, 2024 totaled $138.4 million. There were no purchases of available-for-sale securities during the six months ended June 30, 2023. Paydowns and maturities totaled $72.1 million and $47.6 million during the six months ended June 30, 2024 and 2023, respectively.

Current wording

Total investment securities available-for-sale increased 12.7% during the nine months ended September 30, 2024 to $0.7 billion. Purchases of available-for-sale securities during the nine months ended September 30, 2024 totaled $199.1 million. There were no purchases of available-for-sale securities during the nine months ended September 30, 2023. Paydowns and maturities totaled $137.6 million and $71.3 million during the nine months ended September 30, 2024 and 2023, respectively.

Previous wording

Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average life of the available-for-sale mortgage-backed securities portfolio was 4.8 years and 5.2 years at June 30, 2024 and December 31, 2023, respectively. This estimate is based on assumptions and actual results may differ. At June 30, 2024 and December 31, 2023, the duration of the total available-for-sale investment portfolio was 3.9 years and 4.3 years, respectively.

Current wording

Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average life of the available-for-sale mortgage-backed securities portfolio was 4.4 years and 5.2 years at September 30, 2024 and December 31, 2023, respectively. This estimate is based on assumptions and actual results may differ. At September 30, 2024 and December 31, 2023, the duration of the total available-for-sale investment portfolio was 3.6 years and 4.3 years, respectively.

Previous wording

At June 30, 2024 and December 31, 2023, adjustable rate securities comprised 11.8% and 13.0%, respectively, of the available-for-sale MBS portfolio. The remainder of the portfolio was comprised of fixed rate amortizing securities with 10 to 30 year contractual maturities, with a weighted average coupon of 2.29% per annum and 1.73% per annum at June 30, 2024 and December 31, 2023, respectively.

Current wording

At September 30, 2024 and December 31, 2023, adjustable rate securities comprised 8.1% and 13.0%, respectively, of the available-for-sale MBS portfolio. The remainder of the portfolio was comprised of fixed rate amortizing securities with 10 to 30 year contractual maturities, with a weighted average coupon of 2.46% per annum and 1.73% per annum at September 30, 2024 and December 31, 2023, respectively.

Previous wording

The available-for-sale investment portfolio included $103.8 million of unrealized losses and $0.2 million of unrealized gains at June 30, 2024. At December 31, 2023, the available-for-sale investment portfolio included $99.0 million of unrealized losses and $0.1 million of unrealized gains. We believe any unrealized losses are a result of prevailing interest rates, and as such, we do not believe that any of the securities with unrealized losses were impaired. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities and U.S. Treasury securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.

Current wording

The available-for-sale investment portfolio included $82.7 million of unrealized losses and $1.7 million of unrealized gains at September 30, 2024. At December 31, 2023, the available-for-sale investment portfolio included $99.0 million of unrealized losses and $0.1 million of unrealized gains. We believe any unrealized losses are a result of prevailing interest rates, and as such, we do not believe that any of the securities with unrealized losses were impaired. Management believes that default of the available-for-sale securities is highly unlikely. FHLMC, FNMA and GNMA guaranteed mortgage-backed securities and U.S. Treasury securities have a long history of zero credit losses, an explicit guarantee by the U.S. government (although limited for FNMA and FHLMC securities) and yields that generally trade based on market views of prepayment and liquidity risk rather than credit risk.

Previous wording

our stress testing on our debt security portfolio at June 30, 2024, illustrated that we would continue to meet all capital adequacy requirements, even in an up to 200 basis point rate shock scenario.

Current wording

our stress testing on our debt security portfolio at September 30, 2024, illustrated that we would continue to meet all capital adequacy requirements, even in a 200 basis point up or down rate shock scenario.

Previous wording

Held-to-maturity investment securities totaled $554.7 million at June 30, 2024, compared to $585.1 million at December 31, 2023, a decrease of $30.4 million, or 5.2%. There were no purchases of held-to-maturity securities during the six months ended June 30, 2024. Purchases during the six months ended June 30, 2023 totaled $2.5 million. Paydowns and maturities totaled $30.7 million and $34.9 million during the six months ended June 30, 2024 and 2023, respectively.

Current wording

Held-to-maturity investment securities totaled $538.2 million at September 30, 2024, compared to $585.1 million at December 31, 2023, a decrease of $46.9 million, or 8.0%. There were no purchases of held-to-maturity securities during the nine months ended September 30, 2024. Purchases during the nine months ended September 30, 2023 totaled $2.5 million. Paydowns and maturities totaled $47.4 million and $53.9 million during the nine months ended September 30, 2024 and 2023, respectively.

Previous wording

The fair value of the held-to-maturity investment portfolio included $85.8 million of unrealized losses at June 30, 2024. At December 31, 2023, the held-to-maturity investment portfolio included $81.0 million of unrealized losses and $0.2 million of unrealized gains.

Current wording

The fair value of the held-to-maturity investment portfolio included $68.1 million of unrealized losses and $0.7 million of unrealized gains at September 30, 2024. At December 31, 2023, the held-to-maturity investment portfolio included $81.0 million of unrealized losses and $0.2 million of unrealized gains.

Previous wording

Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average expected life of the held-to-maturity mortgage-backed securities portfolio as of June 30, 2024 and December 31, 2023 was 5.6 years and 5.7 years, respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity investment portfolio was 4.4 years and 4.6 years as of June 30, 2024 and December 31, 2023, respectively.

Current wording

Mortgage-backed securities may have actual maturities that differ from contractual maturities depending on the repayment characteristics and experience of the underlying financial instruments. The estimated weighted average expected life of the held-to-maturity mortgage-backed securities portfolio as of September 30, 2024 and December 31, 2023 was 5.3 years and 5.7 years, respectively. This estimate is based on assumptions and actual results may differ. The duration of the total held-to-maturity investment portfolio was 4.3 years and 4.6 years as of September 30, 2024 and December 31, 2023, respectively.

Previous wording

Non-marketable securities included FRB stock, FHLB stock, convertible preferred stock and equity method investments. During the six months ended June 30, 2024, purchases of non-marketable securities totaled $16.9 million, and proceeds from redemptions and sales of non-marketable securities totaled $30.8 million. Purchases consisted primarily of FHLB stock, and proceeds consisted of redemptions of FHLB stock. During the six months ended June 30, 2023, purchases of non-marketable securities totaled $77.1 million, and proceeds from redemptions and sales of non-marketable securities totaled $73.4 million. Changes in the Company’s FHLB stock holdings were directly correlated to FHLB line of credit advances and paydowns.

Current wording

Non-marketable securities included FRB stock, FHLB stock, convertible preferred stock and equity method investments. During the nine months ended September 30, 2024, purchases of non-marketable securities totaled $26.2 million of FHLB stock, and proceeds from redemptions and sales of non-marketable securities totaled $42.6 million, primarily from FHLB stock. During the nine months ended September 30, 2023, purchases of non-marketable securities totaled $93.9 million, and proceeds from redemptions and sales of non-marketable securities totaled $90.3 million. Changes in the Company’s FHLB stock holdings were directly correlated to FHLB line of credit advances and paydowns.

Previous wording

Non-marketable securities include convertible preferred stock without a readily determinable fair value. During the three and six months ended June 30, 2024, the Company recorded $3.9 million of impairment on convertible preferred stock related to venture capital investments, included in other non-interest income in the Company’s consolidated statements of operations. During the three and six months ended June 30, 2023, the Company recorded $4.0 million of impairment on convertible preferred stock related to venture capital investments. During the three and six months ended June 30, 2024, the Company sold convertible preferred stock totaling $1.0 million, which generated realized gains of $0.1 million recorded in other non-interest income in the Company’s consolidated statements of operations. The Company purchased $0.0 million and $0.4 million of convertible preferred stock during the three and six months ended June 30, 2024, respectively.

Current wording

Non-marketable securities include convertible preferred stock without a readily determinable fair value. During the nine months ended September 30, 2024, the Company recorded $3.9 million of impairment on convertible preferred stock related to venture capital investments, included in other non-interest income in the Company’s consolidated statements of operations. During the nine months ended September 30, 2023, the Company recorded $4.0 million of impairment on convertible preferred stock related to venture capital investments. During the nine months ended September 30, 2024, the Company sold convertible preferred stock totaling $1.0 million, which generated realized gains of $0.1 million recorded in other non-interest income in the Company’s consolidated statements of operations. The Company purchased zero and $0.4 million of convertible preferred stock during the three and nine months ended September 30, 2024, respectively.

Previous wording

Non-marketable securities also include equity method investments. During the three and six months ended June 30, 2024, the Company recorded net unrealized gains on equity method investments totaling $0.3 million. During the three and six months ended June 30, 2023, the Company recorded net unrealized losses on equity method investments totaling $0.1 million and $0.4 million, respectively. These gains and losses were recorded in other non-interest income in the Company’s consolidated statements of operations.

Current wording

Non-marketable securities also include equity method investments totaling $25.4 million and $24.6 million at September 30, 2024 and December 31, 2023, respectively, and equity method investments without a readily determinable fair value totaling $1.8 million and zero at September 30, 2024 and December 31, 2023, respectively. During the three and nine months ended September 30, 2024, the Company recorded net unrealized gains on equity method investments totaling $0.4 million and $0.7 million, respectively. During the three and nine months ended September 30, 2023, the Company recorded net unrealized losses on equity method investments totaling zero and $0.4 million, respectively. These gains and losses were recorded in other non-interest income in the Company’s consolidated statements of operations. Carrying values of equity method investments without a readily determinable fair value are updated periodically and impairments may be taken to reflect a new basis. The Company recorded no impairment related to equity method investments without a readily determinable fair value for the nine months ended September 30, 2024 or the year ended December 31, 2023.

Previous wording

The Company maintains a granular and well-diversified loan portfolio with self-imposed concentration limits. The loan portfolio increased $23.4 million, or 0.6% annualized, from December 31, 2023 to June 30, 2024. Loan fundings during the six months ended June 30, 2024 totaled $705.2 million, led by commercial loan fundings of $480.8 million.

Current wording

The Company maintains a granular and well-diversified loan portfolio with self-imposed concentration limits. The loan portfolio increased $15.7 million from December 31, 2023 to September 30, 2024. Loan fundings during the nine months ended September 30, 2024 totaled $1.1 billion, led by commercial loan fundings of $699.9 million.

Previous wording

Our commercial and industrial loan portfolio is highly diversified across industry sectors and geography. At June 30, 2024, there were no industry sectors representing more than 15.0% of our total loan portfolio. Key segments included government/non-profit loans of $778.0 million, or 10.1% of total loans, and health care/hospital loans of $498.5 million, or 6.5% of total loans.

Current wording

Our commercial and industrial loan portfolio is highly diversified across industry sectors and geography. At September 30, 2024, there were no industry sectors representing more than 15.0% of our total loan portfolio. Key sectors included government/non-profit loans of $823.1 million, or 10.7% of total loans, and health care/hospital loans of $510.1 million, or 6.6% of total loans.

Previous wording

Non-owner occupied CRE loans were 165.0% of the Company’s risk based capital, or 24.2% of total loans, and no specific property type comprised more than 10.0% of total loans. The Company maintains little exposure to non-owner occupied CRE retail properties and office properties, comprising 3.4% of total loans. Multifamily loans totaled $356.9 million, or 4.6% of total loans, as of June 30, 2024.

Current wording

Non-owner occupied CRE loans were 157.8% of the Company’s risk based capital, or 23.8% of total loans, and no specific property type comprised more than 10.0% of total loans. The Company maintains little exposure to non-owner occupied CRE retail properties and office properties, comprising 3.3% of total loans. Multifamily loans totaled $335.6 million, or 4.4% of total loans, as of September 30, 2024.

Previous wording

The agriculture industry continues to be impacted by elevated and volatile commodity prices and intermittent disruptions in supply chains. Our food and agribusiness portfolio is 3.8% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 0.9% of total loans. We have maintained relationships with food and agribusiness clients that generally possess low leverage and, correspondingly, low bank debt to assets, minimizing any potential credit losses in the future.

Current wording

The agriculture industry continues to be impacted by volatile commodity prices and generally by higher input costs, combining to stress margins. Our food and agribusiness portfolio is 3.9% of total loans and is well-diversified across food production, crop and livestock types. Crop and livestock loans represent 1.0% of total loans. We have maintained relationships with food and agribusiness clients that generally possess low leverage and, correspondingly, low bank debt to assets, minimizing any potential credit losses in the future.

Previous wording

New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients in our markets and provide needed services at competitive rates. Loan fundings totaled $1.5 billion over the past 12 months, led by commercial loan fundings of $1.0 billion. Fundings are defined as closed-end funded loans and revolving lines of credit advances, net of any current period paydowns. Management utilizes this more conservative definition of fundings to better approximate the impact of fundings on loans outstanding and ultimately net interest income.

Current wording

New loan origination is a direct result of our ability to recruit and retain top banking talent, connect with clients in our markets and provide needed services at competitive rates. Loan fundings totaled $1.5 billion over the trailing 12 months, led by commercial loan fundings of $1.0 billion. Fundings are defined as closed-end funded loans and revolving lines of credit advances, net of any current period paydowns. Management utilizes this more conservative definition of fundings to better approximate the impact of fundings on loans outstanding and ultimately net interest income.

Previous wording

Included in fundings are net fundings (paydowns) under revolving lines of credit totaling $19,281, $(59,523), $16,954, ($12,877) and $13,766 for the dates noted in the table above, respectively.

Current wording

Included in fundings are net fundings (paydowns) under revolving lines of credit totaling $16,302, $19,281, $(59,523), $16,954 and ($12,877) for the dates noted in the table above, respectively.

Previous wording

The Company’s policy is to review each prospective credit to determine the appropriateness and the adequacy of security or collateral prior to making a loan. In the event of borrower default, the Company seeks recovery in compliance with lending laws, the respective loan agreements, and credit monitoring and remediation procedures that may include modifying a loan to provide a concession by the Company to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Such modified loans are considered TDMs. TDMs may include principal forgiveness, interest rate reductions, other-than-insignificant-payment delays, term extensions or any combination thereof. Assets that have been foreclosed on or acquired through deed-in-lieu of foreclosure are classified as OREO until sold, and are carried at the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ACL and any subsequent declines in carrying value charged to impairments on OREO.

Current wording

loan agreements, and credit monitoring and remediation procedures that may include modifying a loan to provide a concession by the Company to the borrower from their original terms due to borrower financial difficulties in order to facilitate repayment. Such modified loans are considered TDMs. TDMs may include principal forgiveness, interest rate reductions, other-than-insignificant-payment delays, term extensions or any combination thereof. Assets that have been foreclosed on or acquired through deed-in-lieu of foreclosure are classified as OREO until sold, and are carried at the fair value of the collateral less estimated costs to sell, with any initial valuation adjustments charged to the ACL and any subsequent declines in carrying value charged to impairments on OREO.

Previous wording

Non-performing assets consist of non-accrual loans and OREO. Interest income that would have been recorded had non-accrual loans performed in accordance with their original contract terms during the three and six months ended June 30, 2024 was $0.4 million and $1.0 million, respectively, and $0.7 million and $0.8 million during the three and six months ended June 30, 2023, respectively.

Current wording

Non-performing assets consist of non-accrual loans and OREO. Interest income that would have been recorded had non-accrual loans performed in accordance with their original contract terms during the three and nine months ended September 30, 2024 was $0.4 million and $1.4 million, respectively, and $0.8 million and $1.6 million during the three and nine months ended September 30, 2023, respectively.

Previous wording

During the six months ended June 30, 2024, total non-performing loans decreased $2.2 million from December 31, 2023. Loans 30-89 days past due and still accruing interest were 0.35% and 0.16% of total loans at March 31, 2024 and December 31, 2023, respectively. A significant portion of the increase in the loans 30-89 days past due was a result of temporary payment delays that were administrative in nature and have been addressed subsequent to quarter end. Loans 90 days or more past due and still accruing interest were 0.05% and 0.01% at June 30, 2024 and December 31, 2023, respectively.

Current wording

During the nine months ended September 30, 2024, total non-performing loans decreased $4.7 million, or 16.6%, from December 31, 2023. Loans 30-89 days past due and still accruing interest were 0.41% and 0.16% of total loans at September 30, 2024 and December 31, 2023, respectively. Loans 90 days or more past due and still accruing interest were 0.12% and 0.01% of total loans at September 30, 2024 and December 31, 2023, respectively.

Previous wording

The ACL represents the amount that we believe is necessary to absorb estimated lifetime credit losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. The Company utilizes a DCF model developed within a third-party software tool to establish expected lifetime credit losses for the loan portfolio. The ACL is calculated as the difference between the amortized cost basis and the projections from the DCF analysis. The DCF model allows for individual life of loan cash flow modeling, excluding extensions and renewals, using loan-specific interest rates and repayment schedules including estimated prepayment rates and loss recovery timing delays. The model incorporates forecasts of certain national macro-economic factors,

Current wording

The ACL represents the amount that we believe is necessary to absorb estimated lifetime credit losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. The Company utilizes a DCF model developed within a third-party software tool to establish expected lifetime credit losses for the loan portfolio. The ACL is calculated as the difference between the amortized cost basis and the projections from the DCF analysis. The DCF model allows for individual lifetime loan cash flow modeling, excluding extensions and renewals, using loan-specific interest rates and repayment schedules including estimated prepayment rates and loss recovery timing delays. The model incorporates forecasts of certain national macro-economic factors, including unemployment rates, home price index (“HPI”), retail sales and gross domestic product (“GDP”), which drive correlated loss rates. The determination and application of the ACL accounting policy involves judgments, estimates and uncertainties that are

Previous wording

We measure expected credit losses for loans on a pooled basis when similar risk characteristics exist. We have identified four primary loan segments within the ACL model that are further stratified into 11 loan classes to provide more granularity in analyzing loss history and to allow for more definitive qualitative adjustments based upon specific risk factors affecting each loan class. Generally, the underlying risk of loss for each of these loan segments will follow certain norms/trends in various economic environments. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Following are the loan classes within each of the four primary loan segments:

Current wording

We measure expected credit losses for groups of loans included in segments with similar risk characteristics. We have identified four primary loan segments within the ACL model that are further stratified into 11 loan classes to provide more granularity in analyzing loss history and to allow for more definitive qualitative adjustments based upon specific risk factors affecting each loan class. Generally, the underlying risk of loss for each of these loan segments will follow certain norms/trends in various economic environments. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Following are the loan classes within each of the four primary loan segments:

Previous wording

The collective resulting ACL for loans is calculated as the sum of the general reserves, specific reserves on individually evaluated loans, and qualitative factor adjustments. While these amounts are calculated by individual loan or on a pool basis by segment and class, the entire ACL is available for any loan that, in our judgment, should be charged-off. The determination and application of the ACL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity or results of operations.

Current wording

The resulting ACL for loans is calculated as the sum of the general reserves, specific reserves on individually evaluated loans, and qualitative factor adjustments. While these amounts are calculated by individual loan or by segment and class, the entire ACL is available for any loan that, in our judgment, should be charged-off. The determination and application of the ACL accounting policy involves judgments, estimates, and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity or results of operations.

Previous wording

During the three months ended June 30, 2024, the Company recorded a decrease in the allowance for credit losses of $1.2 million, due to a decrease in specific reserves related to the resolution of non-performing loans. The allowance for credit losses increased $3.9 million as of June 30, 2024, compared to June 30, 2023, driven by loan growth and higher reserve requirements.

Current wording

During the three and nine months ended September 30, 2024, the Company recorded a decrease in the allowance for credit losses of $1.4 million and $2.9 million, respectively, due to a decrease in specific reserves related to the resolution of non-performing loans. The allowance for credit losses increased $1.6 million as of September 30, 2024, compared to September 30, 2023, driven by higher reserve requirements from changes in the CECL model’s underlying economic forecast.

Previous wording

Net charge-offs on loans during the three and six months ended June 30, 2024 totaled $4.1 million and $4.2 million, respectively, and the ratio of annualized net charge-offs to average total loans totaled 0.22% and 0.11%, respectively. Specific reserves on loans totaled $6.9 million at June 30, 2024.

Current wording

Net charge-offs on loans during the three and nine months ended September 30, 2024 totaled $3.4 million and $7.6 million, respectively, and the ratio of annualized net charge-offs to average total loans totaled 0.18% and 0.13%, respectively. Specific reserves on loans totaled $4.7 million at September 30, 2024.

Previous wording

Net charge-offs on loans during the three and six months ended June 30, 2023 totaled $0.3 million and $0.6 million, respectively, and the ratio of annualized net charge-offs to average total loans totaled 0.02% and 0.02%, respectively. Specific reserves on loans totaled $6.0 million at June 30, 2023.

Current wording

Net charge-offs on loans during the three and nine months ended September 30, 2023 totaled $0.3 million and $0.8 million, respectively, and the ratio of annualized net charge-offs to average total loans totaled 0.01% and 0.02%, respectively. Specific reserves on loans totaled $6.1 million at September 30, 2023.

Previous wording

The Company has elected to exclude AIR from the ACL calculation. As of June 30, 2024 and December 31, 2023, AIR from loans totaled $42.5 million and $42.4 million, respectively. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income.

Current wording

The Company has elected to exclude AIR from the ACL calculation. As of September 30, 2024 and December 31, 2023, AIR from loans totaled $45.7 million and $42.4 million, respectively. When a loan is placed on non-accrual, any recorded AIR is reversed against interest income.

Previous wording

After considering the above mentioned factors, we believe that the ACL of $96.5 million is adequate to cover estimated lifetime losses inherent in the loan portfolio at June 30, 2024. However, it is likely that future adjustments to the ACL will be necessary. Any changes to the underlying assumptions, circumstances or estimates, including but not limited to changes in the underlying macro-economic forecast, used in determining the ACL, could negatively or positively affect the Company's results of operations, liquidity or financial condition.

Current wording

After considering the above mentioned factors, we believe that the ACL of $95.0 million is adequate to cover estimated lifetime losses inherent in the loan portfolio at September 30, 2024. However, it is likely that future adjustments to the ACL will be necessary. Any changes to the underlying assumptions, circumstances or estimates, including but not limited to changes in the underlying macro-economic forecast, used in determining the ACL, could negatively or positively affect the Company's results of operations, liquidity or financial condition.

Previous wording

At June 30, 2024 and December 31, 2023, time deposits that were scheduled to mature within 12 months totaled $789.9 million and $689.0 million, respectively. Of the time deposits scheduled to mature within 12 months at June 30, 2024, $241.3 million were in denominations of $250,000 or more, and $548.6 million were in denominations less than $250,000. Approximately 79% of our total deposits were FDIC insured at June 30, 2024. Additionally, the Company participates in the IntraFi Cash Service program, which

Current wording

At September 30, 2024 and December 31, 2023, time deposits that were scheduled to mature within 12 months totaled $842.9 million and $689.0 million, respectively. Of the time deposits scheduled to mature within 12 months at September 30, 2024, $254.2 million were in denominations of $250,000 or more, and $588.7 million were in denominations less than $250,000. Approximately 78% of our total deposits were FDIC insured at September 30, 2024. Additionally, the Company participates in the IntraFi Cash Service program,

Previous wording

allows depositors to receive reciprocal FDIC insurance coverage. The Company had $955.8 million and $944.3 million of deposits in the program as of June 30, 2024 and December 31, 2023, respectively.

Current wording

which allows depositors to receive reciprocal FDIC insurance coverage. The Company had $960.9 million and $944.3 million of deposits in the program as of September 30, 2024 and December 31, 2023, respectively.

Previous wording

The Company holds a subordinated note purchase agreement to issue and sell a fixed-to-floating rate note totaling $40.0 million. The balance on the note at June 30, 2024 and December 31, 2023, net of long-term debt issuance costs totaling $0.3 million, totaled $39.7 million. Interest expense totaling $0.3 million and $0.6 million was recorded in the consolidated statements of operations during the three and six months ended June 30, 2024, respectively. During the three and six months ended June 30, 2023, interest expense totaled $0.3 million and $0.6 million, respectively.

Current wording

The Company holds a subordinated note purchase agreement to issue and sell a fixed-to-floating rate note totaling $40.0 million. The balance on the note at September 30, 2024 and December 31, 2023, net of long-term debt issuance costs totaling $0.2 million, totaled $39.8 million. During the three and nine months ended September 30, 2024 and 2023, interest expense totaling $0.3 million and $0.9 million, respectively, was recorded in the consolidated statements of operations.

Previous wording

As part of the acquisition of BOJH on October 1, 2022, the Company assumed three subordinated note purchase agreements to issue and sell fixed-to-floating rates totaling $15.0 million. The balance on the notes at June 30, 2024, net of a fair value adjustment related to the acquisition totaling $0.4 million, totaled $14.6 million. At December 31, 2023, the balance on the notes, net of the fair value adjustment from the acquisition totaling $0.5 million, totaled $14.5 million. Interest expense related to the notes totaling $0.1 million and $0.3 million was recorded in the consolidated statements of operations during the three and six months ended June 30, 2024, respectively. During the three and six months ended June 30, 2023, interest expense related to the notes totaled $0.1 million and $0.3 million, respectively.

Current wording

As part of the acquisition of BOJH on October 1, 2022, the Company assumed three subordinated note purchase agreements to issue and sell fixed-to-floating rates totaling $15.0 million. The balance on the notes at September 30, 2024, net of a fair value adjustment related to the acquisition totaling $0.3 million, totaled $14.6 million. At December 31, 2023, the balance on the notes, net of the fair value adjustment from the acquisition totaling $0.5 million, totaled $14.5 million. Interest expense related to the notes totaling $0.1 million and $0.4 million was recorded in the consolidated statements of operations during the three and nine months ended September 30, 2024, respectively. During the three and nine months ended September 30, 2023, interest expense related to the notes totaled $0.1 million and $0.4 million, respectively.