10-Q - OSBC - Equibles

Table of Contents I

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934

For transition period from to

Commission File Number 000-10537

(Exact name of Registrant as specified in its charter)


Delaware		36-3143493
(State or other jurisdiction		(I.R.S. Employer Identification Number)
of incorporation or organization)

37 South River Street , Aurora , Illinois **** 60507

(Address of principal executive offices) (Zip Code)

( 630 ) 892-0202

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’ ‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b–2 of the Exchange Act.

Large accelerated filer☐Accelerated filer☒

Non-accelerated filer☐Smaller reporting company☐Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes ☐ No ☒


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	OSBC	The Nasdaq Stock Market

As of May 5, 2022, the Registrant has 44,461,045 shares of common stock outstanding at $1.00 par value per share.

Table of Contents

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

Cautionary Note Regarding Forward-Looking Statements


	PART I
		Page Number
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	58
Item 4.	Controls and Procedures	59
	PART II

Item 1.	Legal Proceedings	60
Item 1.A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosure	60
Item 5.	Other Information	60
Item 6.	Exhibits	61

	Signatures	62

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other publicly available documents of the Company contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including, but not limited to, management’s expectations regarding future plans, strategies and financial performance, including regulatory developments, industry and economic trends and estimates and assumptions underlying accounting policies. Forward-looking statements are based on our current beliefs, expectations and assumptions and on information currently available and, can be identified by the use of words such as “expects,” “intends,” “believes,” “may,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “estimate,” “possible,” “likely” or the negative thereof as well as other similar words and expressions of the future. Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict as to timing, extent, likelihood and degree of occurrence, which could cause our actual results to differ materially from those anticipated in or by such statements. Potential risks and uncertainties include, but are not limited to, the following:

●	our ability to execute our growth strategy;
●	the continuing impact of COVID-19 and its variants on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;
---	---
●	negative economic conditions, including inflation, that may adversely affect the economy, real estate values, the job market and other factors nationally and in our market area, in each case that may affect our liquidity and the performance of our loan portfolio;
---	---
●	risks with respect to our ability to successfully expand and integrate businesses and operations that we acquire, such as the recent acquisition of West Suburban Bancorp, Inc., as well our ability to identify and complete future mergers or acquisitions;
---	---
●	the financial success and viability of the borrowers of our commercial loans;
---	---
●	changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity and the value of our assets and liabilities;
---	---
●	the transition away from LIBOR to an alternative reference rate;
---	---
●	competitive pressures from other financial service businesses and from nontraditional financial technology (“FinTech”) companies;
---	---
●	any negative perception of our reputation or financial strength;
---	---
●	our ability to raise additional capital on acceptable terms when needed;
---	---
●	our ability to raise cost-effective funding to support business plans when needed;
---	---
●	our ability to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations;
---	---
●	adverse effects on our information technology systems resulting from system failures, human error or cyberattacks;
---	---
●	adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed, particularly our information technology vendors and those vendors performing a service on the Company’s behalf;
---	---
●	the impact of any claims or legal actions, including any effect on our reputation;
---	---
●	losses incurred in connection with repurchases and indemnification payments related to mortgages;
---	---
●	the soundness of other financial institutions and other counter-party risk;
---	---
●	changes in accounting standards, rules and interpretations and the related impact on our financial statements, including assumptions surrounding the ongoing impact of our adoption of the Current Expected Credit Losses (“ CECL”) model, which are subject to change based on a number of factors including changes in our macroeconomic forecasts, credit quality, loan composition and other factors;
---	---
●	our ability to receive dividends from our subsidiaries;
---	---
●	a decrease in our regulatory capital ratios or negative changes in our capital position;
---	---
●	adverse federal or state tax assessments, or changes in tax laws or policies;
---	---
●	risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;
---	---
●	legislative or regulatory changes, particularly changes in regulation of financial services companies;
---	---
●	increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including changes as a result of the current presidential administration and Democratic control of Congress;
---	---
●	the adverse effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics (including COVID-19), war or terrorist activities, such as the war in Ukraine, essential utility outages, deterioration in the global economy, instability in the credit markets, disruptions in our customers’ supply chains or disruption in transportation;
---	---
●	changes in trade policy and any related tariffs; and
---	---
●	each of the factors and risks under the heading “Risk Factors” in our 2021 Annual Report on Form 10-K and in subsequent filings we make with the SEC.
---	---

Because the Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain, there can be no assurances that future actual results will correspond to any forward-looking statements and you should not rely on any forward-looking statements. Additionally, all statements in this Form 10-Q, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events, except as required by applicable law.

Table of Contents PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)


		(unaudited)
		March 31,		December 31,
	****	2022		2021
Assets
Cash and due from banks		$	41,511	$	38,565
Interest earning deposits with financial institutions			593,166		713,542
Cash and cash equivalents			634,677		752,107
Securities available-for-sale, at fair value			1,816,450		1,692,488
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock			21,974		13,257
Loans held-for-sale			8,075		4,737
Loans			3,402,370		3,421,948
Less: allowance for credit losses on loans			44,308		44,281
Net loans			3,358,062		3,377,667
Premises and equipment, net			86,156		88,005
Other real estate owned			2,374		2,356
Mortgage servicing rights, at fair value			10,376		7,097
Goodwill			86,332		86,332
Core deposit intangible			15,639		16,304
Bank-owned life insurance ("BOLI")			105,424		105,300
Deferred tax assets, net			22,628		6,100
Other assets			55,579		60,439
Total assets		$	6,223,746	$	6,212,189

Liabilities
Deposits:
Noninterest bearing demand		$	1,461,712	$	1,428,055
Interest bearing:
Savings, NOW, and money market			3,605,457		3,534,367
Time			477,556		503,810
Total deposits			5,544,725		5,466,232
Securities sold under repurchase agreements			33,521		50,337
Junior subordinated debentures			25,773		25,773
Subordinated debentures			59,233		59,212
Senior notes			44,506		44,480
Notes payable and other borrowings			17,992		19,074
Other liabilities			31,678		45,054
Total liabilities			5,757,428		5,710,162

Stockholders’ Equity
Common stock			44,705		44,705
Additional paid-in capital			203,190		202,443
Retained earnings			261,807		252,011
Accumulated other comprehensive (loss) income			(37,484)		8,768
Treasury stock			(5,900)		(5,900)
Total stockholders’ equity			466,318		502,027
Total liabilities and stockholders’ equity		$	6,223,746	$	6,212,189


	March 31, 2022		December 31, 2021
	Common		Common
	Stock		Stock
Par value	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000
Shares issued		44,705,150		44,705,150
Shares outstanding		44,461,045		44,461,045
Treasury shares		244,105		244,105

See accompanying notes to consolidated financial statements .

Table of Contents Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)


		(unaudited)
		Three Months Ended March 31,
	****	2022		****	2021		****
Interest and dividend income
Loans, including fees		$	36,376		$	22,207
Loans held-for-sale			57			55
Securities:
Taxable			5,047			1,615
Tax exempt			1,433			1,307
Dividends from FHLBC and FRBC stock			153			115
Interest bearing deposits with financial institutions			269			92
Total interest and dividend income			43,335			25,391
Interest expense
Savings, NOW, and money market deposits			397			241
Time deposits			277			500
Securities sold under repurchase agreements			11			31
Junior subordinated debentures			280			280
Subordinated debentures			546			-
Senior notes			485			673
Notes payable and other borrowings			103			123
Total interest expense			2,099			1,848
Net interest and dividend income			41,236			23,543
Release of credit losses			-			(3,000)
Net interest and dividend income after release of credit losses			41,236			26,543
Noninterest income
Wealth management			2,698			2,151
Service charges on deposits			2,090			1,195
Secondary mortgage fees			139			322
Mortgage servicing rights mark to market gain			2,978			1,113
Mortgage servicing income			518			567
Net gain on sales of mortgage loans			1,495			3,721
Change in cash surrender value of BOLI			124			334
Card related income			2,550			1,447
Other income			901			450
Total noninterest income			13,493			11,300
Noninterest expense
Salaries and employee benefits			19,967			13,506
Occupancy, furniture and equipment			3,733			2,467
Computer and data processing			6,228			1,298
FDIC insurance			410			201
General bank insurance			315			276
Amortization of core deposit intangible			665			120
Advertising expense			182			60
Card related expense			534			593
Legal fees			294			55
Consulting & management fees			605			416
Other real estate (gain) expense, net			(12)			36
Other expense			5,365			2,710
Total noninterest expense			38,286			21,738
Income before income taxes			16,443			16,105
Provision for income taxes			4,423			4,226
Net income		$	12,020		$	11,879

Basic earnings per share		$	0.27		$	0.41
Diluted earnings per share			0.27			0.40
Dividends declared per share			0.05			0.01

See accompanying notes to consolidated financial statements.

Table of Contents Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)


		(unaudited)
		Three Months Ended March 31,
	****	2022		2021		****
Net Income		$	12,020	$	11,879

Unrealized holding losses on available-for-sale securities arising during the period			(64,829)		(4,813)
Related tax benefit			18,153		1,371
Holding losses, after tax, on available-for-sale securities			(46,676)		(3,442)

Less: Reclassification adjustment for the net gains (losses) realized during the period
Net realized gains (losses)			-		-
Related tax benefit (expense)			-		-
Net realized gains (losses) after tax			-		-
Other comprehensive loss on available-for-sale securities			(46,676)		(3,442)

Changes in fair value of derivatives used for cash flow hedges			589		2,703
Related tax expense			(165)		(757)
Other comprehensive income on cash flow hedges			424		1,946

Total other comprehensive loss			(46,252)		(1,496)
Total comprehensive (loss) income		$	(34,232)	$	10,383



	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, December 31, 2020	$	17,413	$	(2,651)	$	14,762
Other comprehensive (loss) income, net of tax		(3,442)		1,946		(1,496)
Balance, March 31, 2021	$	13,971	$	(705)	$	13,266

Balance, December 31, 2021	$	11,139	$	(2,371)	$	8,768
Other comprehensive (loss) income, net of tax		(46,676)		424		(46,252)
Balance, March 31, 2022	$	(35,537)	$	(1,947)	$	(37,484)

See accompanying notes to consolidated financial statements.

Table of Contents Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


	Three Months Ended March 31,
	2022		2021		****
Cash flows from operating activities
Net income	$	12,020	$	11,879
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount amortization on securities		1,809		534
Release of provision for credit losses		-		(3,000)
Originations of loans held-for-sale		(32,739)		(78,284)
Proceeds from sales of loans held-for-sale		30,791		85,914
Net gains on sales of mortgage loans		(1,495)		(3,721)
Mortgage servicing rights mark to market loss		(2,978)		(1,113)
Net accretion of discount on loans		(2,382)		(520)
Net change in cash surrender value of BOLI		(124)		(334)
Net gains on sale of other real estate owned		(49)		(20)
Provision for other real estate owned valuation losses		-		6
Depreciation of fixed assets and amortization of leasehold improvements		1,086		765
Amortization of core deposit intangibles		665		120
Change in current income taxes receivable		2,955		3,557
Deferred tax expense (benefit)		1,458		668
Change in accrued interest receivable and other assets		902		2,200
Accretion of purchase accounting adjustment on time deposits		(424)		-
Amortization of senior and subordinated debentures issuance costs		47		26
Change in accrued interest payable and other liabilities		(12,011)		(3,401)
Stock based compensation		747		114
Net cash provided by operating activities		278		15,390
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		75,650		7,259
Purchases of securities available-for-sale		(266,250)		(109,708)
Purchases of FHLBC/FRBC stock		(8,717)		-
Net change in loans		21,900		75,858
Proceeds from sales of other real estate owned, net of participations and improvements		118		325
Proceeds from disposition of fixed assets		1,250		-
Net purchases of premises and equipment		(487)		(343)
Net cash used in investing activities		(176,536)		(26,609)
Cash flows from financing activities
Net change in deposits		78,917		119,469
Net change in securities sold under repurchase agreements		(16,816)		10,341
Repayment of term note		(1,000)		(1,000)
Net change in notes payable and other borrowings, excluding term note		(81)		(78)
Dividends paid on common stock		(2,192)		(293)
Purchase of treasury stock		-		(6,178)
Net cash provided by financing activities		58,828		122,261
Net change in cash and cash equivalents		(117,430)		111,042
Cash and cash equivalents at beginning of period		752,107		329,903
Cash and cash equivalents at end of period	$	634,677	$	440,945

See accompanying notes to consolidated financial statements.

Table of Contents Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)


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

Balance, December 31, 2020		$	34,957		$	122,212		$	236,579		$	14,762		$	(101,423)		$	307,087
Net income									11,879									11,879
Other comprehensive loss, net of tax												(1,496)						(1,496)
Dividends declared and paid, ($0.01 per share)									(293)									(293)
Vesting of restricted stock						(2,251)									2,251			-
Stock based compensation						114												114
Purchase of treasury stock from taxes withheld on stock awards															(577)			(577)
Purchase of treasury stock from stock repurchase program															(5,601)			(5,601)
Balance, March 31, 2021		$	34,957		$	120,075		$	248,165		$	13,266		$	(105,350)		$	311,113

Balance, December 31, 2021		$	44,705		$	202,443		$	252,011		$	8,768		$	(5,900)		$	502,027
Net income									12,020									12,020
Other comprehensive loss, net of tax												(46,252)						(46,252)
Dividends declared and paid, ($0.05 per share)									(2,224)									(2,224)
Stock based compensation						747												747
Balance, March 31, 2022		$	44,705		$	203,190		$	261,807		$	(37,484)		$	(5,900)		$	466,318

Table of Contents Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

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

The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information. The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented. Results for the period ended March 31, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, 2022. These interim consolidated financial statements 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, 2021. 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.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” and Note 1 – Summary of Significant Accounting Policies, both found in our Annual Report on Form 10-K for the year ended December 31, 2021, for further discussion of our Allowance for Credit Losses methodology, which now implements Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Measurement of Credit Losses on Financial Instruments (Topic 326),” also known as Current Expected Credit Losses, or CECL. ASU 2016-13, which is considered a critical accounting estimate, is effective for financial statements issued for fiscal years beginning after December 15, 2019, and was adopted as of January 1, 2020, by the Company.

Recent Accounting Pronouncements

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

ASU 2018-16, ASU 2020-04 and ASU 2021-01 - In October 2018, the Financial Standards Board, or FASB, issued ASU No. 2018-16 “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting.” ASU 2018-16 adds the SOFR overnight index swap rate to the list of United States (U.S.) benchmark rates eligible for hedge accounting purposes, which is the fourth rate permissible to be used as a U.S. benchmark rate. This guidance is effective for annual and interim periods beginning after December 15, 2018, and we do not expect this guidance to have a material impact on the financial condition or liquidity of the Company. ASU 2020-04 and ASU 2021-01 Reference Rate Reform (Topic 848) were issued on March 12, 2020 and January 7, 2021, respectively, and each provide further guidance on optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships due to the discontinuation of LIBOR. In addition, on March 5, 2021, the International Swaps and Derivatives Association (“ISDA”) issued a statement with an “Index Cessation Event Announcement,” which confirmed the extension of the cessation of LIBOR-referenced rates from December 31, 2021, to June 30, 2023, for certain rate tenors.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

The Company formed a LIBOR transition team in 2019, and has developed a project plan to assess the use of alternative indexes and to seek to ensure all financial instruments that reference LIBOR are identified, quantified, and researched for the LIBOR fallback language available or needed. The Company has completed the ISDA protocol adherence for LIBOR fallback language for all commercial swaps, has met with our commercial loan clients to also guide their swap fallback language adherence, and worked to revise all credit documents being issued by our Bank for new loans to ensure appropriate fallback language is included. We have discontinued the use of LIBOR as a reference rate for all consumer loans issued after July 31, 2021, and all commercial loans issued after December 31, 2021, with certain exceptions for those loans that were in the process of funding at the end of 2021. The Company’s systems have been updated to handle multiple SOFR-based indexes and we continue to meet regularly to plan for the transition of existing LIBOR exposures prior to the final LIBOR cessation date of June 30, 2023.

ASU 2022-02 – On March 31, 2022, the FASB issued ASU 2022-02 “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 is effective for any entities that have adopted CECL, and is effective for fiscal years beginning after December 15, 2022, including interim periods within those years. The amendments eliminate certain troubled debt restructuring (“TDR”) recognition and measurement guidance previously in effect, and consideration of the TDRs similar to other modified loans under CECL is now required. ASU 2022-02 also requires enhancements to vintage loan disclosures, requiring detail be provided on current-period gross write-offs and disclosure of the amortized cost basis of financing receivables by credit quality indicators and by loan portfolio class of the gross charge-off based on year of origination.

The Company is currently reviewing ASU 2022-02 for the impact to TDR recognition, measurement and disclosures, and will assess any revisions needed for reporting purposes in the next few quarters. We anticipate adopting ASU 2022-02 as of January 1, 2023.

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, 2021. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. During the first quarter of 2022, the Company had no changes to significant accounting policies or estimates.

Subsequent Events

On April 19, 2022, the Company’s Board of Directors declared a cash dividend of $0.05 per share payable on May 9, 2022, to stockholders of record as of April 29, 2022; dividends of $2.2 million are scheduled to be paid to stockholders on May 9, 2022.

Note 2 – Acquisition

On December 1, 2021, the Company completed its acquisition of West Suburban Bancorp, Inc. (“West Suburban”), a bank holding company, and its wholly owned subsidiary, West Suburban Bank, based in Lombard, Illinois, with operations throughout our existing market footprint. This acquisition brought increased scale and new markets to the Company, and provided new product offerings and line of business opportunities. At closing, the Company acquired $2.94 billion of assets, $1.50 billion of loans, $1.07 billion of securities, and $2.69 billion of deposits, net of fair value adjustments. Under the terms of the merger agreement, each outstanding share of West Suburban common stock was exchanged for 42.413 shares of Company common stock, plus $271.15 of cash. This resulted in merger consideration of $295.2 million, based on the closing price of the Company’s common stock on the date of acquisition, which consisted of 15.7 million shares of the Company’s common stock and $100.7 million of cash. Goodwill of $67.7 million associated with the acquisition was recorded by the Company, which was the result of expected synergies, operational efficiencies and other factors.

The acquisition of West Suburban was accounted for as a business combination. We recorded the estimate of fair value based on initial valuations available at December 1, 2021. The determination of estimated fair value required management to make assumptions related to discount rates, expected future cash flows, market conditions and other future events that are often subjective in nature and may require adjustments. Accordingly, these estimated fair values are considered preliminary as of March 31, 2022, and are subject to adjustment for up to one year after December 1, 2021. These adjustments may include: (i) changes in deferred tax assets or liabilities related to fair value estimates and changes in the expected realization of items considered to be net operating loss carryforwards due to tax calculations still 10

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

in process, and (ii) changes in goodwill as a result of the net effect of any adjustments. No adjustments were identified during the quarter ended March 31, 2022. None of the $67.7 million of goodwill recorded is expected to be deductible for income tax purposes.

The following table provides the preliminary purchase price allocation as of the December 1, 2021 closing date of the merger for the estimated fair value of the assets acquired and liabilities assumed, as recorded by the Company.


West Suburban Acquisition Summary
As of Date of Acquisition

	December 1, 2021
Assets
Cash and due from banks	$	16,794
Interest bearing deposits with financial institutions		232,880
Securities available-for-sale and held-to maturity, at fair value		1,066,373
FHLBC stock		3,340
Loans, net of allowance for credit losses Day One PCD loan adjustment		1,502,118
Premises and equipment		47,456
Other real estate owned		5,552
Core deposit intangible		14,772
Deferred tax assets		2,093
Other assets		52,710
Total assets	$	2,944,088

Liabilities
Noninterest bearing demand	$	409,141
Savings, NOW and money market		2,069,890
Time		215,205
Total deposits		2,694,236
Reserve for unfunded commitments		1,787
Other liabilities		20,629
Total liabilities		2,716,652

Cash consideration paid		100,679
Stock issued for acquisition		194,484
Total Liabilities Assumed and Cash and Stock Consideration Paid for Acquisition	$	3,011,815
Goodwill	$	67,727

Expenses related to the West Suburban acquisition totaled $5.6 million for the quarter ended March 31, 2022, and $13.2 million during the year ended December 31, 2021, and are reported within noninterest expense based on the line items impacted, which are primarily salaries and employee benefits, occupancy, furniture and equipment, computer and data processing, legal fees, and other expense in the Consolidated Statements of Income.

Purchased loans and leases that reflect a more-than-insignificant deterioration of credit from origination are considered purchased credit deteriorated (“PCD”) loans. For PCD loans, the initial estimate of expected credit losses was recognized in the allowance for credit losses (“ACL”) on the date of acquisition using the same methodology as other loans and leases held-for-investment. The following table provides a summary of loans purchased as part of the West Suburban acquisition which were individually evaluated and determined to be PCD loans at acquisition.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)


	As of
West Suburban Acquired PCD Loans	December 1, 2021
Par value of acquired loans	$	108,241
Allowance for credit losses		(12,075)
Non-credit discount		(1,723)
Purchase price of PCD loans at acquisition	$	94,443

The following table presents the carrying amount of all acquired loans as of March 31, 2022 and December 21, 2021, including loans that, as of the acquisition date, had not experienced a more-than-insignificant deterioration in credit quality since origination (“non-PCD loans”):


Acquired Loan Detail	As of March 31, 2022						As of December 31, 2021
	PCD		Non-PCD		Total		PCD		Non-PCD		Total
West Suburban acquired loans	$	88,601	$	1,354,305	$	1,442,906	$	102,409	$	1,418,752	$	1,521,161
ABC Bank acquired loans		4,534		57,904		62,438		4,547		64,236		68,783
Talmer Bank acquired loans		-		44,836		44,836		-		45,858		45,858
Total acquired loans net book value	$	93,135	$	1,457,045	$	1,550,180	$	106,956	$	1,528,846	$	1,635,802
Accretion recorded on acquired loans year to date	$	400	$	2,016	$	2,416	$	401	$	565	$	966

Note 3 – 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 $7.1 million at March 31, 2022, and December 31, 2021. FRBC stock was recorded at $14.9 million at March 31, 2022, and $6.2 million at December 31, 2021.

The following tables summarize the amortized cost and fair value of the securities portfolio at March 31, 2022, and December 31, 2021, and the corresponding amounts of gross unrealized gains and losses: 12

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)


					Gross			Gross
		Amortized			Unrealized			Unrealized		Fair
March 31, 2022	****	Cost^1^		****	Gains		****	Losses		Value
Securities available-for-sale
U.S. Treasury		$	227,646		$	13		$	(7,096)	$	220,563
U.S. government agencies			62,029			-			(2,993)		59,036
U.S. government agencies mortgage-backed			161,119			117			(8,088)		153,148
States and political subdivisions			237,988			4,358			(5,938)		236,408
Corporate bonds			10,000			-			(317)		9,683
Collateralized mortgage obligations			720,960			298			(24,745)		696,513
Asset-backed securities			278,941			240			(4,240)		274,941
Collateralized loan obligations			167,124			3			(969)		166,158
Total securities available-for-sale		$	1,865,807		$	5,029		$	(54,386)	$	1,816,450


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2021	Cost^1^		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	202,251	$	125	$	(37)	$	202,339
U.S. government agencies		62,587		-		(699)		61,888
U.S. government agencies mortgage-backed		172,016		856		(570)		172,302
States and political subdivisions		240,793		16,344		(672)		256,465
Corporate bonds		10,000		-		(113)		9,887
Collateralized mortgage obligations		673,238		2,014		(2,285)		672,967
Asset-backed securities		236,293		1,245		(661)		236,877
Collateralized loan obligations		79,838		3		(78)		79,763
Total securities available-for-sale	$	1,677,016	$	20,587	$	(5,115)	$	1,692,488

^1^ Excludes accrued interest receivable of $5.2 million and $4.3 million at March 31, 2022 and December 31, 2021, respectively, that is recorded in other assets on the consolidated balance sheet.

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2022, 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		$	7,451	1.47	%	$	7,458
Due after one year through five years			300,065	0.95			289,731
Due after five years through ten years			46,076	2.50			44,739
Due after ten years			184,071	2.98			183,762
			537,663	1.78			525,690
Mortgage-backed and collateralized mortgage obligations			882,079	1.50			849,661
Asset-backed securities			278,941	1.33			274,941
Collateralized loan obligations			167,124	2.06			166,158
Total securities available-for-sale		$	1,865,807	1.61	%	$	1,816,450

At March 31, 2022, the Company’s investments included $218.1 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”). Under the FFEL, private lenders made federally guaranteed 13

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL securities are generally guaranteed by the U.S Department of Education (“DOE”) at not less than 97% of the outstanding principal amount of the loans. The guarantee will reduce to 85% if the DOE receives reimbursement requests in excess of 5% of insured loans; reimbursement will drop to 75% if reimbursement requests exceed 9% of insured loans. In addition to the DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $20.3 million, or 9.29%, of outstanding principal.

At March 31, 2022, the Company had no securities issued from any one 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 with no corresponding allowance for credit losses at March 31, 2022 and December 31, 2021, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):


	Less than 12 months					12 months or more
March 31, 2022	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	5	$	7,096	$	216,531	-	$	-	$	-	5	$	7,096	$	216,531
U.S. government agencies	5		2,884		54,588	4		109		4,448	9		2,993		59,036
U.S. government agencies mortgage-backed	124		7,322		142,866	5		766		5,341	129		8,088		148,207
States and political subdivisions	27		4,535		90,991	1		1,403		3,232	28		5,938		94,223
Corporate bonds	2		317		9,683	-		-		-	2		317		9,683
Collateralized mortgage obligations	208		24,649		647,144	1		96		7,366	209		24,745		654,510
Asset-backed securities	41		4,109		230	4		131		4,534	45		4,240		4,764
Collateralized loan obligations	22		885		128,303	2		84		10,587	24		969		138,890
Total securities available-for-sale	434	$	51,797	$	1,290,336	17	$	2,589	$	35,508	451	$	54,386	$	1,325,844


	Less than 12 months					12 months or more
December 31, 2021	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	1	$	37	$	49,719	-	$	-	$	-	1	$	37	$	49,719
U.S. government agencies	5		592		56,879	4		107		5,008	9		699		61,887
U.S. government agencies mortgage-backed	63		505		78,711	1		65		1,663	64		570		80,374
States and political subdivisions	7		55		8,430	1		617		4,051	8		672		12,481
Corporate bonds	2		113		9,887	-		-		-	2		113		9,887
Collateralized mortgage obligations	133		2,285		381,658	-		-		-	133		2,285		381,658
Asset-backed securities	20		608		103,819	3		53		3,276	23		661		107,095
Collateralized loan obligations	10		35		45,132	2		43		10,628	12		78		55,760
Total securities available-for-sale	241	$	4,230	$	734,235	11	$	885	$	24,626	252	$	5,115	$	758,861

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. No credit losses were determined to be present as of March 31, 2022, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the first quarter of 2022.

There were no securities sold for the three months ended March 31, 2022 or March 31, 2021.

As of March 31, 2022, securities valued at $478.2 million were pledged to secure deposits and borrowings, and for other purposes, a decrease from $501.3 million of securities pledged at year-end 2021.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Note 4 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:


	****	March 31, 2022		****	December 31, 2021
Commercial ^1^		$	695,545		$	771,474
Leases			211,132			176,031
Commercial real estate - Investor			965,767			957,389
Commercial real estate - Owner occupied			655,792			574,384
Construction			165,558			206,132
Residential real estate - Investor			62,846			63,399
Residential real estate - Owner occupied			203,118			213,248
Multifamily			298,686			309,164
HELOC			110,688			115,664
HELOC - Purchased			9,553			10,626
Other ^2^			23,685			24,437
Total loans			3,402,370			3,421,948
Allowance for credit losses on loans			(44,308)			(44,281)
Net loans^3^		$	3,358,062		$	3,377,667

^1^ Includes $11.2 million and $38.4 million of Paycheck Protection Program (“PPP”) loans at March 31, 2022 and December 31, 2021, respectively.

^2^ The “Other” segment includes consumer and overdrafts in this table and in subsequent tables within Note 4 - Loans and Allowance for Credit Losses on Loans.

^3^ Excludes accrued interest receivable of $9.6 million and $9.2 million at March 31, 2022 and December 31, 2021, respectively, that is recorded in other assets on the consolidated balance sheet.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to assure access to collateral, in the event of borrower default, through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. Although the Bank makes loans primarily within its market area, there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector. The real estate related categories listed above represent 72.7% and 71.6% of the portfolio at March 31, 2022, and December 31, 2021, respectively, and include a mix of owner and non-owner occupied, residential, construction and multifamily loans.

The following tables represent the activity in the allowance for credit losses for loans, or the ACL, for the three months ended March 31, 2022 and 2021:



				Provision for
	Beginning			(Release of)									Ending
Allowance for credit losses	Balance		****	Credit Losses		****	Charge-offs		****	Recoveries		****	Balance
Three months ended March 31, 2022
Commercial	$	11,751		$	825		$	30		$	30		$	12,576
Leases		3,480			(907)			-			-			2,573
Commercial real estate - Investor		13,093			2,679			236			23			15,559
Commercial real estate - Owner occupied		2,615			768			121			8			3,270
Construction		3,373			(515)			-			-			2,858
Residential real estate - Investor		760			(67)			-			10			703
Residential real estate - Owner occupied		2,832			(965)			-			83			1,950
Multifamily		3,675			(698)			-			-			2,977
HELOC		2,379			(820)			-			35			1,594
HELOC - Purchased		131			(50)			-			-			81
Other		192			70			127			32			167
	$	44,281		$	320		$	514		$	221		$	44,308

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)



				Provision for
	Beginning			(Release of)									Ending
Allowance for credit losses	Balance		****	Credit Losses		****	Charge-offs		****	Recoveries		****	Balance
Three months ended March 31, 2021
Commercial	$	2,812		$	446		$	2		$	20		$	3,276
Leases		3,888			(506)			-			-			3,382
Commercial real estate - Investor		9,205			(1,317)			-			20			7,908
Commercial real estate - Owner occupied		2,251			(734)			3			208			1,722
Construction		4,054			(335)			-			-			3,719
Residential real estate - Investor		1,740			(203)			-			266			1,803
Residential real estate - Owner occupied		2,714			(235)			-			49			2,528
Multifamily		3,625			640			-			-			4,265
HELOC		1,749			(48)			12			24			1,713
HELOC - Purchased		199			96			-			-			295
Other		1,618			(1,274)			25			37			356
	$	33,855		$	(3,470)		$	42		$	624		$	30,967

The ACL on loans excludes $4.2 million, $4.5 million and $3.5 million of allowance for unfunded commitments as of March 31, 2022, December 31, 2021 and March 31, 2021, respectively, recorded within Other Liabilities. The total ACL on unfunded commitments listed as of March 31, 2022 and December 31, 2021 excludes the purchase accounting adjustment of $1.5 million and $1.7 million, respectively, recorded due to our acquisition of West Suburban, which is also recorded within Other Liabilities, and is being accreted in interest income over the estimated life of the unused commitments.

The following tables presents the collateral dependent loans and the related ACL allocated by segment of loans as of March 31, 2022 and December 31, 2021:


			Accounts								ACL
March 31, 2022	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	1,955	$	9,022	$	-	$	-	$	10,977	$	2,432
Leases		-		-		2,641		-		2,641		475
Commercial real estate - Investor		4,379		-		-		-		4,379		288
Commercial real estate - Owner occupied		7,414		-		-		2,457		9,871		554
Construction		2,098		-		-		-		2,098		1,007
Residential real estate - Investor		1,391		-		-		-		1,391		-
Residential real estate - Owner occupied		3,941		-		-		-		3,941		260
Multifamily		938		-		-		-		938		-
HELOC		914		-		-		-		914		32
HELOC - Purchased		173		-		-		-		173		-
Other		-		-		-		-		-		-
Total	$	23,203	$	9,022	$	2,641	$	2,457	$	37,323	$	5,048


			Accounts								ACL
December 31, 2021	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	1,986	$	9,901	$	-	$	-	$	11,887	$	2,677
Leases		-		-		3,249		505		3,754		811
Commercial real estate - Investor		5,693		-		-		-		5,693		-
Commercial real estate - Owner occupied		9,147		-		-		2,490		11,637		362
Construction		2,104		-		-		-		2,104		992
Residential real estate - Investor		925		-		-		-		925		-
Residential real estate - Owner occupied		4,271		-		-		-		4,271		276
Multifamily		1,845		-		-		-		1,845		75
HELOC		826		-		-		-		826		190
HELOC - Purchased		180		-		-		-		180		-
Other		-		-		-		7		7		4
Total	$	26,977	$	9,901	$	3,249	$	3,002	$	43,129	$	5,387

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

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


																			90 days or
							90 Days or												Greater Past
	30-59 Days			60-89 Days			Greater Past			Total Past									Due and
March 31, 2022	Past Due		****	Past Due		****	Due		****	Due		****	Current		****	Total Loans		****	Accruing
Commercial	$	4,904		$	548		$	7,124		$	12,576		$	682,969		$	695,545		$	-
Leases		401			-			1,536			1,937			209,195			211,132			-
Commercial real estate - Investor		3,399			-			1			3,400			962,367			965,767			-
Commercial real estate - Owner occupied		9,764			100			2,956			12,820			642,972			655,792			-
Construction		117			-			7			124			165,434			165,558			7
Residential real estate - Investor		269			-			1,001			1,270			61,576			62,846			2
Residential real estate - Owner occupied		1,805			98			2,589			4,492			198,626			203,118			20
Multifamily		-			-			691			691			297,995			298,686			691
HELOC		354			93			319			766			109,922			110,688			23
HELOC - Purchased		-			-			173			173			9,380			9,553			-
Other		66			-			2			68			23,617			23,685			-
Total	$	21,079		$	839		$	16,399		$	38,317		$	3,364,053		$	3,402,370		$	743


																			90 days or
							90 Days or												Greater Past
	30-59 Days			60-89 Days			Greater Past			Total Past									Due and
December 31, 2021^1^	Past Due		****	Past Due		****	Due		****	Due		****	Current		****	Total Loans		****	Accruing
Commercial	$	3,407		$	1,413		$	1,828		$	6,648		$	764,826		$	771,474		$	1,396
Leases		125			-			1,571			1,696			174,335			176,031			-
Commercial real estate - Investor		-			267			1,107			1,374			956,015			957,389			-
Commercial real estate - Owner occupied		2,324			500			4,848			7,672			566,712			574,384			1,594
Construction		854			-			-			854			205,278			206,132			-
Residential real estate - Investor		395			470			792			1,657			61,742			63,399			23
Residential real estate - Owner occupied		1,994			591			3,077			5,662			207,586			213,248			97
Multifamily		-			1,046			-			1,046			308,118			309,164			-
HELOC		193			23			218			434			115,230			115,664			-
HELOC - Purchased		-			-			180			180			10,446			10,626			-
Other		50			46			23			119			24,318			24,437			-
Total	$	9,342		$	4,356		$	13,644		$	27,342		$	3,394,606		$	3,421,948		$	3,110

^1^ Loans modified under the CARES Act are considered current if they are in compliance with the modified terms.

The table presents all nonaccrual loans as of March 31, 2022, and December 31, 2021:


Nonaccrual loan detail	****	March 31, 2022		****	With no ACL		****	December 31, 2021		****	With no ACL
Commercial		$	9,029		$	1,496		$	11,894		$	9,217
Leases			2,641			464			3,754			2,943
Commercial real estate - Investor			6,335			2,858			5,694			5,694
Commercial real estate - Owner occupied			9,871			6,791			11,637			11,205
Construction			155			-			160			160
Residential real estate - Investor			1,391			881			876			876
Residential real estate - Owner occupied			4,321			4,065			4,898			4,622
Multifamily			938			938			1,573			1,573
HELOC			1,116			1,116			862			672
HELOC - Purchased			173			173			180			180
Other			3			3			3			3
Total		$	35,973		$	18,785		$	41,531		$	37,145

The Company recognized $17,000 of interest on nonaccrual loans during the three months ended March 31, 2022.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Credit Quality Indicators

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

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

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

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

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

Credit quality indicators by loan segment and loan origination date at March 31, 2022 were as follows:

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)


																Revolving
																Loans
																Converted
														Revolving		To Term
	****	2022		2021		2020		2019		2018		Prior		Loans		Loans		Total
Commercial
Pass		$	39,944	$	112,254	$	42,384	$	22,145	$	15,024	$	8,914	$	420,642	$	-	$	661,307
Special Mention			162		398		653		623		-		-		3,135		-		4,971
Substandard			-		9,819		3,377		13,814		49		63		2,145		-		29,267
Total commercial			40,106		122,471		46,414		36,582		15,073		8,977		425,922		-		695,545

Leases
Pass			49,340		79,901	$	39,973		28,478		7,891		2,605		-		-		208,188
Special Mention			-		-		-		303		-		-		-		-		303
Substandard			-		-		-		2,015		367		259		-		-		2,641
Total leases			49,340		79,901		39,973		30,796		8,258		2,864		-		-		211,132

Commercial real estate - Investor
Pass			110,946		309,370		210,682		86,228		61,532		92,627		19,558		-		890,943
Special Mention			-		106		12,970		51,656		-		1,283		-		-		66,015
Substandard			-		2,883		-		492		-		3,478		1,956		-		8,809
Total commercial real estate - investor			110,946		312,359		223,652		138,376		61,532		97,388		21,514		-		965,767

Commercial real estate - Owner occupied
Pass			58,243		198,978		119,597		74,853		55,681		115,207		1,697		-		624,256
Special Mention			-		15,314		-		2,963		-		-		-		-		18,277
Substandard			-		6,793		706		1,686		-		4,074		-		-		13,259
Total commercial real estate - owner occupied			58,243		221,085		120,303		79,502		55,681		119,281		1,697		-		655,792

Construction
Pass			7,304		74,396		46,389		11,964		2,792		1,561		1,462		-		145,868
Special Mention			-		922		5,235		10,348		-		-		-		-		16,505
Substandard			1,214		-		-		-		1,971		-		-		-		3,185
Total construction			8,518		75,318		51,624		22,312		4,763		1,561		1,462		-		165,558

Residential real estate - Investor
Pass			9,367		10,468		7,951		11,330		6,734		14,482		970		-		61,302
Special Mention			-		-		-		-		-		-		-		-		-
Substandard			-		119		-		510		153		762		-		-		1,544
Total residential real estate - investor			9,367		10,587		7,951		11,840		6,887		15,244		970		-		62,846

Residential real estate - Owner occupied
Pass			2,425		47,217		30,623		17,882		12,967		84,522		1,982		-		197,618
Special Mention			-		638		-		-		-		-		-		-		638
Substandard			-		301		244		719		303		3,295		-		-		4,862
Total residential real estate - owner occupied			2,425		48,156		30,867		18,601		13,270		87,817		1,982		-		203,118

Multifamily
Pass			16,859		115,523		43,970		37,815		59,557		16,643		59		-		290,426
Special Mention			-		-		-		6,891		-		-		-		-		6,891
Substandard			-		329		-		-		730		310		-		-		1,369
Total multifamily			16,859		115,852		43,970		44,706		60,287		16,953		59		-		298,686

HELOC
Pass			117		1,878		2,052		1,972		736		676		101,653		-		109,084
Special Mention			-		-		-		-		-		-		108		-		108
Substandard			-		-		2		-		27		350		1,117		-		1,496
Total HELOC			117		1,878		2,054		1,972		763		1,026		102,878		-		110,688

HELOC - Purchased

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Pass		-		-		-		-		-		2,499		6,881		-		9,380
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		173		-		-		173
Total HELOC - purchased		-		-		-		-		-		2,672		6,881		-		9,553

Other
Pass		497		9,143		1,106		131		117		6,323		6,365		-		23,682
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		3		-		-		-		-		-		3
Total other		497		9,143		1,109		131		117		6,323		6,365		-		23,685

Total loans
Pass		295,042		959,128		544,727		292,798		223,031		346,059		561,269		-		3,222,054
Special Mention		162		17,378		18,858		72,784		-		1,283		3,243		-		113,708
Substandard		1,214		20,244		4,332		19,236		3,600		12,764		5,218		-		66,608
Total loans	$	296,418	$	996,750	$	567,917	$	384,818	$	226,631	$	360,106	$	569,730	$	-	$	3,402,370

Credit quality indicators by loan segment and loan origination date at December 31, 2021, were as follows:


																Revolving
																Loans
																Converted
														Revolving		To Term
	****	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total
Commercial
Pass		$	192,258	$	50,638	$	38,614	$	28,177	$	5,176	$	10,945	$	408,394	$	30	$	734,232
Special Mention			44		84		694		-		-		-		3,708		-		4,530
Substandard			9,498		4,048		14,121		326		-		75		4,644		-		32,712
Total commercial			201,800		54,770		53,429		28,503		5,176		11,020		416,746		30		771,474

Leases
Pass			83,402		44,129	$	32,259		8,950		1,170		2,367		-		-		172,277
Special Mention			-		-		-		-		-		-		-		-		-
Substandard			-		-		2,834		623		-		297		-		-		3,754
Total leases			83,402		44,129		35,093		9,573		1,170		2,664		-		-		176,031

Commercial real estate - Investor
Pass			315,247		233,964		147,511		85,049		64,810		55,523		18,602		-		920,706
Special Mention			15,466		-		10,550		-		-		-		-		-		26,016
Substandard			2,238		2,378		451		181		3,612		1,807		-		-		10,667
Total commercial real estate - investor			332,951		236,342		158,512		85,230		68,422		57,330		18,602		-		957,389

Commercial real estate - Owner occupied
Pass			220,324		96,607		61,511		60,915		54,236		59,887		2,522		-		556,002
Special Mention			-		-		2,953		-		-		-		-		-		2,953
Substandard			8,318		942		1,686		-		1,251		3,232		-		-		15,429
Total commercial real estate - owner occupied			228,642		97,549		66,150		60,915		55,487		63,119		2,522		-		574,384

Construction
Pass			88,620		65,629		37,169		2,727		477		1,193		1,143		-		196,958
Special Mention			-		2,138		4,932		-		-		-		-		-		7,070
Substandard			160		-		-		1,944		-		-		-		-		2,104
Total construction			88,780		67,767		42,101		4,671		477		1,193		1,143		-		206,132

Residential real estate - Investor
Pass			13,371		9,758		13,084		6,392		7,059		10,602		1,868		-		62,134
Special Mention			-		-		-		-		-		-		-		-		-
Substandard			121		144		-		197		385		418		-		-		1,265
Total residential real estate - investor			13,492		9,902		13,084		6,589		7,444		11,020		1,868		-		63,399

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Residential real estate - Owner occupied
Pass		48,009		31,912		20,990		13,304		30,562		60,661		2,052		-		207,490
Special Mention		659		-		-		-		-		-		-		-		659
Substandard		322		183		6		1,219		176		3,193		-		-		5,099
Total residential real estate - owner occupied		48,990		32,095		20,996		14,523		30,738		63,854		2,052		-		213,248

Multifamily
Pass		109,175		71,748		39,293		61,190		11,399		7,117		64		-		299,986
Special Mention		-		-		6,900		-		-		-		-		-		6,900
Substandard		433		-		-		1,543		302		-		-		-		2,278
Total multifamily		109,608		71,748		46,193		62,733		11,701		7,117		64		-		309,164

HELOC
Pass		907		2,091		2,131		805		1,667		1,869		104,843		-		114,313
Special Mention		-		-		-		-		-		-		108		-		108
Substandard		-		-		-		17		12		196		1,018		-		1,243
Total HELOC		907		2,091		2,131		822		1,679		2,065		105,969		-		115,664

HELOC - Purchased
Pass		-		-		-		-		-		10,446		-		-		10,446
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		180		-		-		180
Total HELOC - purchased		-		-		-		-		-		10,626		-		-		10,626

Other
Pass		8,659		1,099		437		254		1,414		5,358		7,206		-		24,427
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		3		-		7		-		-		-		-		10
Total other		8,659		1,102		437		261		1,414		5,358		7,206		-		24,437

Total loans
Pass		1,079,972		607,575		392,999		267,763		177,970		225,968		546,694		30		3,298,971
Special Mention		16,169		2,222		26,029		-		-		-		3,816		-		48,236
Substandard		21,090		7,698		19,098		6,057		5,738		9,398		5,662		-		74,741
Total loans	$	1,117,231	$	617,495	$	438,126	$	273,820	$	183,708	$	235,366	$	556,172	$	30	$	3,421,948

The Company had $623,000 and $488,000 in residential real estate loans in the process of foreclosure as of March 31, 2022, and December 31, 2021, respectively.

Troubled debt restructurings (“TDRs”) are loans for which the contractual terms have been modified and both of these conditions exist: (1) there is a concession to the borrower and (2) the borrower is experiencing financial difficulties. Loans are restructured on a case-by-case basis during the loan collection process with modifications generally initiated at the request of the borrower. These modifications may include reduction in interest rates, extension of term, deferrals of principal, and other modifications. The Bank participates in the U.S. Department of the Treasury’s (the “Treasury”) Home Affordable Modification Program (“HAMP”) which gives qualifying homeowners an opportunity to refinance into more affordable monthly payments. Additionally, in accordance with interagency guidance, short-term deferrals granted due to the COVID-19 pandemic were not considered TDRs, if modified prior to January 1, 2022, unless the borrower was experiencing financial difficulty prior to the pandemic.

The specific allocation of the allowance for credit losses for TDRs is determined by calculating the present value of the TDR cash flows by discounting the original payment less an assumption for probability of default at the original note’s issue rate, and adding this amount to the present value of collateral less selling costs. If the resulting amount is less than the recorded book value, the Bank either establishes a valuation allowance (i.e., specific reserve) as a component of the allowance for credit losses or charges off the impaired balance if it determines that such amount is a confirmed loss. This method is used consistently for all segments of the portfolio. The allowance for credit losses also includes an allowance based on a loss migration analysis for each loan category on loans and leases that are not individually evaluated for specific impairment. All loans charged-off, including TDRs charged-off, are factored into this calculation by portfolio segment.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

There was one TDR loan modification of $1.1 million for the three months ended March 31, 2022, and no TDR activity for the three months ended March 31, 2021. TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There was no TDR default activity for the periods ended March 31, 2022, and March 31, 2021, for loans that were restructured within the prior 12 month period.

Note 5 – Other Real Estate Owned

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


		Three Months Ended
	****	March 31,					****
Other real estate owned	****	2022		****	2021		****
Balance at beginning of period		$	2,356		$	2,474
Property additions, net of acquisition adjustments			87			-
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses			69			305
Period valuation write-down			-			6
Balance at end of period		$	2,374		$	2,163

Activity in the valuation allowance was as follows:


	****	Three Months Ended
	****	March 31,					****
		2022		****	2021		****
Balance at beginning of period		$	1,179		$	1,643
Provision for unrealized losses			-			6
Balance at end of period		$	1,179		$	1,649

Expenses related to OREO, net of lease revenue includes:


		Three Months Ended
		March 31,					****
	****	2022		****	2021		****
Gain on sales, net		$	(49)		$	(20)
Provision for unrealized losses			-			6
Operating expenses			37			54
Less:
Lease revenue			-			4
Net OREO (gain) expense		$	(12)		$	36

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Note 6 – Deposits

Major classifications of deposits were as follows:


	March 31, 2022		December 31, 2021
Noninterest bearing demand	$	1,461,712	$	1,428,055
Savings		1,884,352		1,826,346
NOW accounts		622,606		605,056
Money market accounts		1,098,499		1,102,965
Certificates of deposit of less than $100,000		277,135		287,238
Certificates of deposit of $100,000 through $250,000		144,663		147,854
Certificates of deposit of more than $250,000		55,758		68,718
Total deposits	$	5,544,725	$	5,466,232

Note 7 – Borrowings

The following table is a summary of borrowings as of March 31, 2022, and December 31, 2021. Junior subordinated debentures are discussed in more detail in Note 8:


	****	March 31, 2022		December 31, 2021		****
Securities sold under repurchase agreements		$	33,521	$	50,337
Junior subordinated debentures			25,773		25,773
Subordinated debentures			59,233		59,212
Senior notes			44,506		44,480
Notes payable and other borrowings			17,992		19,074
Total borrowings		$	181,025	$	198,876

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities. These transactions consistently mature overnight from the transaction date and are governed by sweep repurchase agreements. All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities and had a carrying amount of $33.5 million at March 31, 2022, and $50.3 million at December 31, 2021. The fair value of the pledged collateral was $107.3 million at March 31, 2022, and $113.0 million at December 31, 2021. At March 31, 2022, there were no customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC. Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans. As of March 31, 2022, and December 31, 2021, the Bank had no short-term advances outstanding under the FHLBC. The Bank assumed $23.4 million of long-term FHLBC advances with our ABC Bank acquisition in 2018. At March 31, 2022, one advance remains in long-term status, with a total outstanding balance of $6.0 million, at a 2.83% interest rate, and is scheduled to mature on February 2, 2026. FHLB stock held as of March 31, 2022 was valued at $7.1 million, and any potential FHLBC advances were collateralized by loans with a principal balance of $545.0 million, which carried a FHLBC-calculated combined collateral value of $396.9 million. The Company had excess collateral of $315.9 million available to secure borrowings at March 31, 2022.

The Company also had $44.5 million of senior notes outstanding, net of deferred issuance costs, as of March 31, 2022 and December 31, 2021. The senior notes were issued in December 2016 with a ten year maturity, and terms include interest payable semiannually at 5.75% for five 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 are 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. As of March 31, 2022, and December 31, 2021, unamortized debt issuance costs related to the senior notes were $494,000 and $520,000, respectively, and are 23

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

included as a reduction of the balance of the senior notes on the Consolidated Balance Sheet. These deferred issuance costs will be amortized to interest expense over the ten year term of the notes and are included in the Consolidated Statements of Income.

On February 24, 2020, the Company originated a $20.0 million term note, of which $12.0 million is outstanding as of March 31, 2022, with a correspondent bank. The term note was issued for a three year term at one-month LIBOR plus 175 basis points, requires principal and interest payments quarterly, and the balance of this note is included within Notes Payable and Other Borrowings on the Consolidated Balance Sheet. 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.

On April 6, 2021, we sold and 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 Notes were offered and sold to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended and the provisions of Regulation D promulgated thereunder. The Company intends to use the net proceeds from the offering for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions. 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 SOFR (as defined in the Note) plus 273 basis points, payable quarterly in arrears.

Note 8 – 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 LIBOR. Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.41% for the quarters ended March 31, 2022 and March 31, 2021. The Company issued a new $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 Sheet, and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of March 31, 2022, and December 31, 2021, the remaining unamortized debt issuance costs related to the junior subordinated debentures were $1,000 and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheet. 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 9 – 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 plan by 1,200,000 shares, from 600,000 shares to 1,800,000 shares. Following the approval of the 2019 Plan, no further awards will be granted under any other prior plan.

The 2019 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”). Awards may be granted to selected directors, officers, employees or eligible service providers under the 2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors. As of March 31, 2022, 1,144,926 shares remained available for issuance under the 2019 Plan

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Under the 2019 Plan, unless otherwise provided in an award agreement, upon the occurrence of a change in control, all stock options and SARs 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 units 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 Generally, restricted stock and restricted stock units granted under the Plans vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until the vest date.

There were 251,055 and 217,964 restricted stock units issued under the 2019 Plan during the three months ended March 31, 2022 and March 31, 2021, 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 Plan was $795,000 in the first three months of 2022 and $125,000 for the first three months of 2021.

A summary of changes in the Company’s unvested restricted awards for the three months ended March 31, 2022, is as follows:


		March 31, 2022
			Weighted
		Restricted	Average
		Stock Shares	Grant Date
	****	and Units	Fair Value
Unvested at January 1		540,306	$	12.04
Granted		251,055		14.28
Vested		-		-
Forfeited		-		-
Unvested at March 31		791,361	$	12.75

Total unrecognized compensation cost of restricted awards was $5.8 million as of March 31, 2022, which is expected to be recognized over a weighted-average period of 1.1 years.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Note 10 – Earnings Per Share

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


		Three Months Ended March 31,
	****	2022		2021
Basic earnings per share:
Weighted-average common shares outstanding			44,461,045		29,225,775
Net income		$	12,020	$	11,879
Basic earnings per share		$	0.27	$	0.41

Diluted earnings per share:
Weighted-average common shares outstanding			44,461,045		29,225,775
Dilutive effect of unvested restricted awards ^1^			700,670		558,982
Diluted average common shares outstanding			45,161,715		29,784,757

Net Income		$	12,020	$	11,879
Diluted earnings per share		$	0.27	$	0.40


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

Note 11 – Regulatory & Capital Matters

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies. In connection with the current risk-based capital regulatory guidelines, the Bank’s Board of Directors has established an internal guideline requiring the Bank to maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%). At March 31, 2022, the Bank exceeded those thresholds.

At March 31, 2022, the Bank’s Tier 1 capital leverage ratio was 8.61%, a decrease of 97 basis points from December 31, 2021, but is above the 8.00% objective. The Bank’s total capital ratio was 13.83%, an increase of 37 basis points from December 31, 2021, and also above the objective of 12.00%.

Bank holding companies are generally required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System. The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of March 31, 2022, and December 31, 2021.

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015. 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, 2021, under the heading “Supervision and Regulation.”

At March 31, 2022 and December 31, 2021, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

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 applicable^1^					Action Provisions^2^
	Amount		****	Ratio		Amount		****	Ratio		Amount		****	Ratio
March 31, 2022
Common equity tier 1 capital to risk weighted assets
Consolidated	$	404,444		9.73	%	$	290,967		7.00	%		N/A		N/A
Old Second Bank		528,655		12.74			290,470		7.00		$	269,722		6.50	%
Total capital to risk weighted assets
Consolidated		533,984		12.85			436,329		10.50			N/A		N/A
Old Second Bank		573,949		13.83			435,753		10.50			415,003		10.00
Tier 1 capital to risk weighted assets
Consolidated		429,444		10.33			353,366		8.50			N/A		N/A
Old Second Bank		528,655		12.74			352,713		8.50			331,965		8.00
Tier 1 capital to average assets
Consolidated		429,444		7.00			245,397		4.00			N/A		N/A
Old Second Bank		528,655		8.61			245,600		4.00			307,001		5.00

December 31, 2021
Common equity tier 1 capital to risk weighted assets
Consolidated	$	394,421		9.46	%	$	291,855		7.00	%		N/A		N/A
Old Second Bank		514,992		12.41			290,487		7.00		$	269,738		6.50	%
Total capital to risk weighted assets
Consolidated		522,932		12.55			437,513		10.50			N/A		N/A
Old Second Bank		558,503		13.46			435,682		10.50			414,935		10.00
Tier 1 capital to risk weighted assets
Consolidated		419,421		10.06			354,382		8.50			N/A		N/A
Old Second Bank		514,992		12.41			352,734		8.50			331,985		8.00
Tier 1 capital to average assets
Consolidated		419,421		7.81			214,812		4.00			N/A		N/A
Old Second Bank		514,992		9.58			215,028		4.00			268,785		5.00

^1^Amounts 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 CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition. As of March 31, 2022, the capital measures of the Company exclude $2.9 million, which is the modified CECL transition adjustment.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

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 previous two years, subject to the capital requirements described above. Pursuant to the Basel III rules that came into effect January 1, 2015, and were fully phased in as of January 1, 2019, the Bank must keep a capital conservation buffer of 2.50% above the new 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 12 – 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.

Transfers between levels are deemed to have occurred at the end of the reporting period. At March 31, 2022 and 2021, there were no transfers between levels.

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, 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.
---	---

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

●	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 impaired 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 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, an impairment loss is recognized.
---	---

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

The tables below present the balance of assets and liabilities at March 31, 2022, and December 31, 2021, respectively, measured by the Company at fair value on a recurring basis:


	March 31, 2022
	Level 1		****	Level 2		****	Level 3		****	Total
Assets:
Securities available-for-sale
U.S. Treasury	$	220,563		$	-		$	-		$	220,563
U.S. government agencies		-			59,036			-			59,036
U.S. government agencies mortgage-backed		-			153,148			-			153,148
States and political subdivisions		-			222,575			13,833			236,408
Corporate bonds		-			9,683			-			9,683
Collateralized mortgage obligations		-			696,513			-			696,513
Asset-backed securities		-			274,941			-			274,941
Collateralized loan obligations		-			166,158			-			166,158
Loans held-for-sale		-			8,075			-			8,075
Mortgage servicing rights		-			-			10,376			10,376
Interest rate swap agreements		-			952			-			952
Mortgage banking derivatives		-			930			-			930
Total	$	220,563		$	1,592,011		$	24,209		$	1,836,783

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-		$	3,663		$	-		$	3,663
Total	$	-		$	3,663		$	-		$	3,663

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)


	December 31, 2021
	Level 1		****	Level 2		****	Level 3		****	Total
Assets:
Securities available-for-sale
U.S. Treasury	$	202,339		$	-		$	-		$	202,339
U.S. government agencies		-			61,888			-			61,888
U.S. government agencies mortgage-backed		-			172,302			-			172,302
States and political subdivisions		-			242,373			14,092			256,465
Corporate bonds		-			9,887			-			9,887
Collateralized mortgage obligations		-			672,967			-			672,967
Asset-backed securities		-			236,877			-			236,877
Collateralized loan obligations		-			79,763			-			79,763
Loans held-for-sale		-			4,737			-			4,737
Mortgage servicing rights		-			-			7,097			7,097
Interest rate swap agreements		-			3,494			-			3,494
Mortgage banking derivatives		-			508			-			508
Total	$	202,339		$	1,484,796		$	21,189		$	1,708,324

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-		$	6,809		$	-		$	6,809
Total	$	-		$	6,809		$	-		$	6,809

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


	Three Months Ended March 31, 2022
	Securities available-for-sale
	States and			Mortgage
	Political			Servicing
	Subdivisions		****	Rights
Beginning balance January 1, 2022	$	14,092		$	7,097
Total gains or losses
Included in earnings		(33)			3,228
Included in other comprehensive income		(938)			-
Purchases, issuances, sales, and settlements
Purchases		1,076			-
Issuances		-			301
Settlements		(364)			(250)
Ending balance March 31, 2022	$	13,833		$	10,376

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)


	Three Months Ended March 31, 2021
	Securities available-for-sale
	States and			Mortgage
	Political			Servicing
	Subdivisions		****	Rights
Beginning balance January 1, 2021	$	4,319		$	4,224
Total gains or losses
Included in earnings		(3)			1,485
Included in other comprehensive income		299			-
Purchases, issuances, sales, and settlements
Purchases		58			-
Issuances		-			552
Settlements		(32)			(372)
Ending balance March 31, 2021	$	4,641		$	5,889

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of March 31, 2022:


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

Mortgage servicing rights		$	10,376		Discounted Cash Flow		Discount Rate		9.0 - 11.0%		9.0	%
							Prepayment Speed		5.7 - 28.9%		6.2	%

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, 2021:


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

Mortgage servicing rights		$	7,097		Discounted Cash Flow		Discount Rate		11.0 - 15.0%		11.0	%
							Prepayment Speed		0.0 - 36.6%		11.9	%

In addition to the above, Level 3 fair value measurement included $13.8 million for state and political subdivisions representing various local municipality securities at March 31, 2022. These securities were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input. The state and political subdivisions securities balance in Level 3 fair value at March 31, 2021, was $4.6 million. These securities were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.

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 (formerly, impaired) loans and OREO. For assets measured at fair value on a nonrecurring basis at March 31, 2022, and December 31, 2021, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)


		March 31, 2022
	****	Level 1		****	Level 2		****	Level 3		****	Total
Individually evaluated loans^1^		$	-		$	-		$	21,990		$	21,990
Other real estate owned, net^2^			-			-			2,374			2,374
Total		$	-		$	-		$	24,364		$	24,364

^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 $33.6 million and a valuation allowance of $11.6 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $6.2 million for the three months ended March 31, 2022.

^2^ OREO is measured at fair value, less costs to sell, and had a net carrying amount of $2.4 million at March 31, 2022, which is made up of the outstanding balance of $3.7 million, net of a purchase accounting adjustment of $131,000 and a valuation allowance of $1.2 million.


	December 31, 2021
	Level 1		****	Level 2		****	Level 3		****	Total
Individually evaluated loans^1^	$	-		$	-		$	13,138		$	13,138
Other real estate owned, net^2^		-			-			2,356			2,356
Total	$	-		$	-		$	15,494		$	15,494

^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 $18.5 million and a valuation allowance of $5.4 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $2.7 million for the year December 31, 2021.

^2^ OREO is measured at fair value, less costs to sell, and had a net carrying amount of $2.4 million at December 31, 2021, which is made up of the outstanding balance of $3.7 million , net of a purchase accounting adjustment of $131,000 and a valuation allowance of $1.2 million.

The Company has estimated the fair values of these assets based primarily on Level 3 inputs. OREO and impaired 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 13 – 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. FHLBC stock is carried at cost and considered a Level 2 fair value. March 31, 2022 and December 31, 2021, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The fair value of time deposits is 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 is not considered material.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

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


	March 31, 2022
	Carrying			Fair
	Amount		****	Value		****	Level 1		****	Level 2		****	Level 3
Financial assets:
Cash and due from banks	$	41,511		$	41,511		$	41,511		$	-		$	-
Interest earning deposits with financial institutions		593,166			593,166			593,166			-			-
Securities available-for-sale		1,816,450			1,692,488			220,563			1,582,054			13,833
FHLBC and FRBC stock		21,974			21,974			-			21,974			-
Loans held-for-sale		8,075			8,075			-			8,075			-
Net loans		3,358,062			3,386,123			-			-			3,386,123
Mortgage servicing rights		10,376			10,376			-			-			10,376
Interest rate swap agreements		952			952			-			952			-
Interest rate lock commitments and forward contracts		930			930			-			930			-
Interest receivable on securities and loans		14,910			14,910			-			14,910			-

Financial liabilities:
Noninterest bearing deposits	$	1,461,712		$	1,461,712		$	1,461,712		$	-		$	-
Interest bearing deposits		4,083,013			4,083,279			-			4,083,279			-
Securities sold under repurchase agreements		33,521			33,521			-			33,521			-
Junior subordinated debentures		25,773			23,711			-			23,711			-
Subordinated debentures		59,233			56,233						56,233
Senior notes		44,506			44,466			44,466			-			-
Note payable and other borrowings		17,992			18,034			-			18,034			-
Interest rate swap agreements		3,657			3,657			-			3,657			-
Interest payable on deposits and borrowings		1,854			1,854			-			1,854			-

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)


	December 31, 2021
	Carrying			Fair
	Amount		****	Value		****	Level 1		****	Level 2		****	Level 3
Financial assets:
Cash and due from banks	$	38,565		$	38,565		$	38,565		$	-		$	-
Interest earning deposits with financial institutions		713,542			713,542			713,542			-			-
Securities available-for-sale		1,692,488			1,692,488			202,339			1,476,057			14,092
FHLBC and FRBC stock		13,257			13,257			-			13,257			-
Loans held-for-sale		4,737			4,737			-			4,737			-
Net loans		3,377,667			3,408,199			-			-			3,408,199
Mortgage servicing rights		7,097			7,097			-			-			7,097
Interest rate swap agreements		3,494			3,494			-			3,494			-
Interest rate lock commitments and forward contracts		508			508			-			508			-
Interest receivable on securities and loans		13,431			13,431			-			13,431			-

Financial liabilities:
Noninterest bearing deposits	$	1,428,055		$	1,428,055		$	1,428,055		$	-		$	-
Interest bearing deposits		4,038,177			4,041,369			-			4,041,369			-
Securities sold under repurchase agreements		50,377			50,377			-			50,377			-
Junior subordinated debentures		25,773			18,557			-			18,557			-
Subordinated debentures		59,212			60,111						60,111
Senior notes		44,480			44,480			44,480			-
Note payable and other borrowings		19,074			19,411			-			19,411			-
Interest rate swap agreements		6,788			6,788			-			6,788			-
Interest payable on deposits and borrowings		1,706			1,706			-			1,706			-

Note 14 – 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 expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In December of 2019, the Company also executed a loan pool hedge of $50 million to convert variable rate loans to a fixed rate index for a five year term.

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/expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will 34

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional $178,000 will be reclassified as an increase to interest income and an additional $162,000 will be reclassified as an increase to interest expense.

Non-designated Hedges

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

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. 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.

Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017. This transaction had a notional amount totaling $25.8 million as of March 31, 2022, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in 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. The Company expects the hedge to remain fully effective during the remaining term of the swap. The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR. The trust preferred securities changed from fixed rate to floating rate on June 15, 2017. The cash flow hedge has a maturity date of June 15, 2037.

In December 2019, the Company also executed a loan pool hedge of $50.0 million to convert variable rate loans to a fixed rate index for a five year term. This transaction falls under hedge accounting standards and is paired against a pool of the Bank’s LIBOR-based loans. Overall, the new swap only bolsters income in down rate scenarios by a modest degree. We consider the current level of interest rate risk to be moderate but intend to continue looking for market opportunities to hedge further.

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments. These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. The Bank held no cash collateral and $180,000 of cash collateral related to one correspondent financial institution to cover the loan pool hedge mark to market valuation at March 31, 2022, and December 31, 2021, respectively. The Bank had $18.5 million and $17.2 million of cash collateral held by one correspondent financial institution to support interest rate swap activity and no investment securities were required to be pledged to any correspondent financial institution at March 31, 2022 and December 31, 2021, respectively. At March 31, 2022, the notional amount of non-hedging interest rate swaps was $150.7 million with a weighted average maturity of 5.9 years. At December 31, 2021, the notional amount of non-hedging interest rate swaps was $165.0 million with a weighted average maturity of 3.9 years. The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2022 and December 31, 2021.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

Fair Value of Derivative Instruments


			March 31, 2022
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	2	75,774	Other Assets	-	Other Liabilities	2,705
Total derivatives designated as hedging instruments				-		2,705

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	23	150,712	Other Assets	952	Other Liabilities	952
Interest rate lock commitments and forward contracts	81	32,994	Other Assets	930	Other Liabilities	-
Other contracts	3	17,050	Other Assets	-	Other Liabilities	6
Total derivatives not designated as hedging instruments				1,882		958


			December 31, 2021
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	2	75,774	Other Assets	808	Other Liabilities	4,102
Total derivatives designated as hedging instruments				808		4,102

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	26	165,005	Other Assets	2,686	Other Liabilities	2,686
Interest rate lock commitments and forward contracts	87	34,414	Other Assets	508	Other Liabilities	-
Other contracts	3	17,173	Other Assets	-	Other Liabilities	21
Total derivatives not designated as hedging instruments				3,194		2,707

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

The fair value and cash flow hedge accounting related to derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other Comprehensive Income (“AOCI”) and the Income Statement. The loss recognized in AOCI on derivatives totaled $1.9 million as of March 31, 2022, and $705,000 as of March 31, 2021. The amount of the gain reclassified from AOCI to interest income or interest expense on the income statement totaled $16,000 and $12,000 for the three months ended March 31, 2022, and March 31, 2021, respectively.

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.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share data, unaudited)

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

●	If the Company either defaults or is capable of being declared in default on any of its indebtedness (exclusive of deposit obligations), then the Company could also be declared in default on its derivative obligations.
●	If a merger occurs that materially changes the Company's creditworthiness in an adverse manner.
---	---
●	If certain specified adverse regulatory actions occur, such as the issuance of a Cease and Desist Order, or citations for actions considered Unsafe and Unsound or that may lead to the termination of deposit insurance coverage by the FDIC.
---	---

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers. In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO. The following table represents the Company’s contractual commitments due to letters of credit as of March 31, 2022, and December 31, 2021.

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


	March 31, 2022						December 31, 2021
	Fixed		Variable		Total		Fixed		Variable		Total		****
Letters of credit:
Borrower:
Financial standby	$	384	$	19,416	$	19,800	$	384	$	17,474	$	17,858
Commercial standby		-		-		-		-		-		-
Performance standby		308		15,683		15,991		456		14,907		15,363
		692		35,099		35,791		840		32,381		33,221
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	692	$	35,166	$	35,858	$	840	$	32,448	$	33,288

Unused loan commitments:	$	107,085	$	910,602	$	1,017,687	$	84,225	$	895,665	$	979,890

As of March 31, 2022, the Company evaluated current market conditions, including any impacts related to COVID-19, market interest rate changes, and unused line of credit utilization trends during the first quarter of 2022, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments totaled $4.2 million, excluding a $1.5 million purchase accounting adjustment on unfunded commitments recorded from our West Suburban acquisition, which is being accreted to interest income over the estimated life of the unused commitments. The resultant decrease in the ACL for unfunded commitments of $320,000 for the first quarter of 2022, compared to the prior quarter end, is primarily related to a decrease in the commercial unfunded commitments funding rate assumptions based on our analysis of the last 12 months of utilization. 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 Sheet, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following discussion provides additional information regarding our operations for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, and our financial condition at March 31, 2022, compared to December 31, 2021. This discussion should be read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our Form 10-K for the year ended December 31, 2021. The results of operations for the three months ended March 31, 2022, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and March 31, 2022 and 2021 amounts are unaudited.

In this report, unless the context suggests otherwise, references to the “Company,” “we,” “us,” and “our” mean the combined business of Old Second Bancorp, Inc. and its subsidiary bank, Old Second National Bank (the “Bank”).

We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” on page 3 of this report.

Business Overview

The Company is a bank holding company headquartered in Aurora, Illinois. Through our wholly-owned subsidiary bank, Old Second National Bank, a national banking organization also headquartered in Aurora, Illinois, we offer a wide range of financial services through our 62 banking centers located in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle and Will counties in Illinois. These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services. We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to provide for the financial services needs of the communities in which we operate. We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area. We also have extensive wealth management services, which includes a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts and employee benefit plan administration services.

Merger with West Suburban Bancorp, Inc.

On December 1, 2021, we completed our merger with West Suburban Bancorp, Inc. (“West Suburban”), the holding company for West Suburban Bank. Under the terms of the merger agreement, each share of West Suburban common stock was converted into 42.413 shares of our common stock and $271.15 in cash. Total cash and stock consideration paid was approximately $295.2 million. With the acquisition of West Suburban, we acquired 34 branches in DuPage, Kane, Kendall and Will counties in Illinois. The transaction is discussed in more detail in Note 2 to our Consolidated Financial Statements included in this report.

COVID-19 Update

Our historically careful underwriting practices and diverse loan portfolio has helped minimize the adverse impact of the pandemic on the Company. In addition, the combination of the vaccine rollout, government stimulus payments, and reduced spending during the pandemic are likely contributing factors mitigating the impact of the pandemic on our business, financial condition, results of operations, and our customers as of March 31, 2022. While vaccine availability and uptake has increased, the longer term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the vaccine along with concerns related to new strains of the virus; supply chain issues remaining unresolved longer than anticipated; labor shortages and wage increases continuing to impact many industries; consumer confidence and spending falls; and rising geopolitical tensions. Given the ongoing and dynamic nature of the circumstances surrounding the pandemic, it is difficult to predict its future adverse financial impact to the Company, although we expect to continue to be impacted by the pandemic throughout the remainder of 2022.

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Results of Operation and Financial Condition

We continue to monitor the impact of the COVID-19 pandemic on our results of operations and financial condition. For the year ended December 31, 2020, we determined it prudent to increase our allowance for credit losses to $33.9 million, driven by both our adoption of the Current Expected Credit Losses (“CECL”) methodology and the expected impact of the COVID-19 pandemic and market interest rate reductions in anticipation of continued market risk and uncertainty. In 2021, due to the lack of significant net charge-offs projected with the 2020 forecast, and a more favorable forecast for the estimated life of loans, we reversed $9.5 million of our legacy allowance for credit losses, but recorded $12.1 million of Day One credit marks to the allowance for credit losses, as well as $12.2 million of Day Two adjustments on non-purchase credit deteriorated life of loan loss estimates, each stemming from the West Suburban acquisition. In the first quarter of 2022, we recorded provision expense of $320,000 based on our assessment of nonperforming loan metrics and trends and estimated future credit losses. We recorded net charge-offs of $293,000 in the first quarter of 2022, which reduced the ACL.

We also adjust our investment securities portfolio to fair value each period end and review for any impairment that would require a provision for credit losses. At this time, we have determined there is no need for a provision for credit losses related to our investment securities portfolio. Because of changing economic and market conditions affecting issuers, we may be required to recognize impairments in the future on the securities we hold as well as experience reductions in other comprehensive income. We cannot currently determine the ultimate impact of the pandemic on the long-term value of our portfolio.

As of March 31, 2022 and December 31, 2021, we had $86.3 million of goodwill. At November 30, 2021, we performed our recurring annual review for any goodwill impairment. We determined no goodwill impairment existed, however, continued delayed recovery or further deterioration in market conditions related to the general economy, financial markets, and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our results of operations and financial condition.

Lending Operations and Accommodations to Borrowers

To more fully support our customers during the pandemic, we established client assistance programs, including offering commercial, consumer, and mortgage loan payment deferrals for certain clients. During 2020 and 2021, we executed 509 of these deferrals on loan balances of $242.7 million. As of March 31, 2022, over 97% of the loan balances previously in deferral status had resumed payments or paid off.

During 2020 and 2021, as part of the SBA Paycheck Protection Program (“PPP”), we processed 1,320 PPP loan applications, representing a total of $199.0 million, and we acquired $20.8 million PPP loans from our acquisition of West Suburban. We started the application process for loan forgiveness for PPP loans in October 2020, and we continued to receive funds for forgiven loans from both the first and second round of PPP loans through March 2022. As of March 31, 2022, we had 80 loans, which totaled $11.2 million, still outstanding under the PPP program. We expect the application process for loan forgiveness to continue through the third quarter of 2022, with funds to be received from the SBA for the forgiven loans through the remainder of 2022.

Capital and Liquidity

As of March 31, 2022, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by credit losses.

We believe there could be potential stresses on liquidity management as a result of the COVID-19 pandemic. For instance, as customers manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit. However, to date, due in part to federal government stimulus funds received by our customers, as well as a higher volume of loan paydowns than periods prior to COVID-19, our liquidity has increased.

Financial Overview

Net income for the first quarter of 2022 was $12.0 million, or $0.27 per diluted share, compared to $11.9 million, or $0.40 per diluted share, for the first quarter of 2021. Our 2022 net income increased primarily as a result of the impact of a full quarter of earnings, following our acquisition of West Suburban, which resulted in growth in net interest income and noninterest income, partially offset by higher noninterest expense, which included $5.6 million in acquisition-related costs in the first quarter of 2022. Adjusted net income, a non-GAAP financial measure that excludes acquisition-related costs, was $16.1 million for the first quarter of 2022. See the discussion 39

Table of Contents entitled “Non-GAAP Financial Measures” on page 41, as well as the table below, which provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalents.


	Quarters Ended
	March 31,			December 31,		March 31,
	2022		****	2021		2021
Net Income
Income (loss) before income taxes (GAAP)	$	16,443		$	(11,539)	$	11,879
Pre-tax income adjustments:
Provision for credit losses - Day Two		-			14,625		-
Merger-related costs		5,604			12,765		-
Adjusted net income before taxes		22,047			15,851		11,879
Taxes on adjusted net income		5,930			3,396		-
Adjusted net income (non-GAAP)	$	16,117		$	12,455	$	11,879

Basic earnings (loss) per share (GAAP)	$	0.27		$	(0.27)	$	0.41
Diluted earnings (loss) per share (GAAP)		0.27			(0.26)		0.40
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP)		0.36			0.37		0.41
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP)		0.36			0.36		0.40

The following provides an overview of some of the factors impacting our financial performance for the three month period ended March 31, 2022, compared to the like period ended March 31, 2021:

●	Net interest and dividend income was $41.2 million for the first quarter of 2022, compared to $23.5 million for the first quarter of 2021. Growth in interest and dividend income in the first quarter of 2022 reflected a full quarter of West Suburban loan and securities income.

●	We did not record a net provision for credit losses or a release of provision expense in the first quarter of 2022, as an assessment of the portfolio resulted in a reduction in our allowance for unfunded commitments, which was offset by a like increase in the allowance for credit losses on loans. We recorded a $3.0 million release of provision expense in the first quarter of 2021.

●

Noninterest income was $13.5 million for the first quarter of 2022, compared to $11.3 million for the first quarter of 2021. Growth in wealth management, service charges on deposits, and card related income resulted primarily from the West Suburban acquisition and resultant additional fee income. In addition, an increase of $1.9 million was reflected in the mark to market gain on mortgage servicing rights (“MSRs”) in the first quarter of 2022, compared to the first quarter of 2021, due to an increase in market interest rates in the 2022 period. These increases were partially offset by a $2.2 million decrease in net gain on sales of mortgage loans in the first quarter of 2022, compared to the first quarter of 2021.

●

Noninterest expense was $38.3 million for the first quarter of 2022, compared to $21.7 million for the first quarter of 2021, an increase of $16.5 million, or 76.1%. The increase was due to growth in salaries and employee benefits and occupancy, furniture and equipment expenses in the first quarter of 2022, primarily stemming from the additional employees and branches due to the West Suburban acquisition. In addition, we recorded $5.6 million of acquisition-related costs in the first quarter of 2022, primarily within computer and data processing, consulting and management fees and other expense related to the West Suburban acquisition.

●	We had a provision for income tax expense of $4.4 million for the first quarter of 2022, compared to a provision for income tax expense of $4.2 million for the first quarter of 2021. The increase in tax expense for the first quarter of 2022 was due to an increase in pre-tax income, compared to the year over year quarter.

●

Our community-focused banking franchise experienced a $19.6 million decrease in total loans in the first quarter of 2022, compared to the year ended December 31, 2021, but an increase of $1.44 billion in total loans compared to the first quarter of 2021, as we acquired $1.50 billion of loans in the West Suburban acquisition. We believe we are positioned for moderate loan growth as we continue to serve our customers’ needs in a competitive economic environment. We are continuing to seek to provide value to our customers and the communities in which we operate, by executing on growth opportunities in our local markets and developing new banking relationships, while ensuring the safety and soundness of our Bank, our customers and our employees during the COVID-19 pandemic.

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●

Nonaccrual loans decreased $5.6 million as of March 31, 2022, compared to December 31, 2021, due to the upgrade or payoff of various credits in the first quarter of 2022. Nonperforming loans as a percent of total loans was 1.1% as of March 31, 2022, compared to 1.3% as of December 31, 2021, and 1.1% at March 31, 2021. Classified assets decreased to $69.0 million as of March 31, 2022, which is $8.1 million, or 10.5%, less than December 31, 2021, but $27.0 million more than March 31, 2021, due to the West Suburban acquisition in late 2021.

Critical Accounting Estimates

Our consolidated financial statements are prepared based on the application of accounting policies in accordance with generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry. These policies require the reliance on estimates and assumptions, which may prove inaccurate or are subject to variations. 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. Changes in underlying factors, assumptions, or estimates could have a material impact on our future financial condition and results of operations.

Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to our critical accounting policies or the estimates made pursuant to those policies during the most recent quarter from those disclosed in our 2021 Annual Report in Form 10-K.

Non-GAAP Financial Measures

This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the presentation of net interest income and net interest margin on a tax equivalent (“TE”) basis, adjusted net income, adjusted basic and diluted earnings per share, our adjusted efficiency ratio, and our tangible common equity to tangible assets ratio. Management believes that the presentation of these non-GAAP financial measures (a) provides important supplemental information that contributes to a proper understanding of our operating performance, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These disclosures should not be considered an alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below or alongside the first instance where each non-GAAP financial measure is used.

Results of Operations

Overview

Three months ended March 31, 2022 and 2021

Our income before taxes was $16.4 million in the first quarter of 2022 compared to $16.1 million in the first quarter of 2021. This increase in pretax income was primarily due to a $17.9 million increase in interest and dividend income, and a $2.2 million increase in noninterest income, primarily due to a full quarter of West Suburban loan, securities and fee income being included. These increases were partially offset by a $16.5 million increase in noninterest expense, primarily due to an increase in salaries and employee benefits, occupancy, furniture and equipment expense, computer and data processing expense and other expense. The majority of these increases were due to the inclusion of a full quarter of operating costs of the legacy West Suburban staff and branches, as well as $5.6 million of West Suburban acquisition-related costs in the first quarter of 2022, primarily within computer and data processing, consulting fees and other expense. Our net income was $12.0 million, or $0.27 per diluted share, for the first quarter of 2022, compared to net income of $11.9 million, or $0.40 per diluted share, for the first quarter of 2021. 41

Table of Contents Net interest and dividend income was $41.2 million in the first quarter of 2022, compared to $23.5 million in the first quarter of 2021. The $17.7 million increase was primarily driven by growth in all interest and dividend income categories due to a full quarter of West Suburban related loan and securities income being reflected. Partially offsetting this increase to net interest and dividend income was a $251,000 increase in interest expense in the first quarter of 2022, compared to the first quarter of 2021, primarily due to the issuance of subordinated debt in April 2021, partially offset by a decrease in the rate paid on our senior notes in the first quarter of 2022, as the interest rate payable on these notes became floating as of January 1, 2022, at three month LIBOR plus 385 basis points, compared to the prior 5.75% fixed rate.

Average loans, including loans held for sale, increased $1.01 billion in the first quarter of 2022, compared to the fourth quarter of 2021, stemming primarily from the inclusion of a full quarter of average loans related to the $1.50 billion of loans acquired with the West Suburban acquisition, less PPP loans forgiven or repaid, and loan paydowns due to growth in our borrowers’ continued liquidity.

Net Interest Income

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

Three months ended March 31, 2022 and 2021

Our net interest and dividend income increased by $17.7 million to $41.2 million, for the first quarter of 2022, from $23.5 million for the first quarter of 2021. This increase was primarily attributable to a $17.9 million increase in total interest and dividend income due to the acquisition of West Suburban in December 2021. Partially offsetting this increase in interest and dividend income was an increase of $251,000 in total interest expense, primarily due to a full quarter of West Suburban deposit interest expense and an increase in subordinated debt interest expense based on the issuance in April 2021. Net interest and dividend income for the first quarter of 2022 reflected an increase of $12.6 million, or 43.9%, compared to the fourth quarter of 2021.

Average earning assets for the first quarter of 2022 totaled $5.86 billion, reflecting an increase of $1.84 billion, or 45.7%, compared to the fourth quarter of 2021, and an increase of $2.95 billion, or 101.1%, compared to the first quarter of 2021. Average interest earning deposits with financial institutions totaled $635.3 million for the first quarter of 2022, which reflected an increase of $47.6 million compared to the fourth quarter of 2021, and an increase of $275.7 million compared to the first quarter of 2021. The yield on average interest earning deposits was 17 basis points for the first quarter of 2022, seven basis points more than the first quarter of 2021. Securities reflected an increase in interest income year over year, primarily due to growth in volumes. Total average securities for the first quarter of 2022 increased $774.7 million from the fourth quarter of 2021, and increased $1.27 billion from the first quarter of 2021. The increase in our average securities year over year was primarily due to the $1.07 billion in securities acquired in our acquisition of West Suburban in December 2021. The yield on average securities declined to 1.54% for the first quarter of 2022, compared to 1.73% for the fourth quarter of 2021 and 2.49% for the first quarter of 2021. Total average loans, including loans held-for-sale, totaled $3.41 billion in the first quarter of 2022, which reflected an increase of $1.01 billion compared to the fourth quarter of 2021, and an increase of $1.39 billion compared to the first quarter of 2021. The rise in average loan balances year over year was primarily due to the $1.50 billion loan portfolio acquired in our acquisition of West Suburban in December 2021. This rise in loan volumes resulted in an increase in loan interest and fee income of $14.2 million in the year over year period. For the first quarter of 2022, the yield on average loans decreased to 4.34%, compared to 4.37% for the fourth quarter of 2021, and 4.48% for the first quarter of 2021.

Table of Contents Average interest bearing liabilities increased $1.57 billion, or 59.0%, in the first quarter of 2022, compared to the fourth quarter of 2021, and increased $2.43 billion compared to the first quarter of 2021. The year over year increase in average interest bearing liabilities was primarily driven by a $2.41 billion increase in interest bearing deposits and a $59.2 million increase in subordinated debentures. The year over year and linked quarter increases in interest bearing deposits were primarily due to the West Suburban acquisition, as well as continued deposit growth of our legacy customers. The cost of interest bearing liabilities for the first quarter of 2022 decreased by 13 basis points from the fourth quarter of 2021, and decreased 21 basis points from the first quarter of 2021. Growth in our average noninterest bearing demand deposits of $500.8 million in the year over year period has assisted us in controlling our cost of funds stemming from average interest bearing deposits and borrowings, which totaled 0.20% for the first quarter of 2022, 0.33% for the fourth quarter of 2021, and 0.41% for the first quarter of 2021.

In the second quarter of 2021, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers pursuant to which we sold and issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). We sold the Notes to eligible purchasers in a private offering, and the proceeds of this issuance are intended to be used for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions. The Notes bear interest at a fixed annual rate of 3.50% through April 14, 2026, payable semi-annually in arrears. As of April 15, 2026 forward, the interest rate on the Notes will generally reset quarterly to a rate equal to Three-Month Term SOFR (as defined by the Note) plus 273 basis points, payable quarterly in arrears. The Notes have a stated maturity of April 15, 2031, and are redeemable, in whole are in part, on April 15, 2026, or any interest payment date thereafter, and at any time upon the occurrence of certain events.

Due to the significant increase in interest earning deposits with financial institutions in 2020 and 2021 stemming from federal stimulus funds received and PPP loan forgiveness, we had no average other short-term borrowings, which typically consist of FHLBC advances, in the first quarter of 2022, in the fourth quarter of 2021 or the first quarter of 2021. As of March 31, 2022, notes payable and other borrowings consisted of one long-term FHLBC advance of $5.9 million, and $12.0 million outstanding on a term note with a correspondent bank originated in the first quarter of 2020.

Our net interest margin (GAAP) increased three basis points to 2.85% for the first quarter of 2022, compared to 2.82% for the fourth quarter of 2021, and decreased 42 basis points compared to 3.27% for the first quarter of 2021. Our net interest margin (TE) increased two basis points to 2.88% for the first quarter of 2022, compared to 2.86% for the fourth quarter of 2021, and decreased 44 basis points compared to 3.32% for the first quarter of 2021. The reductions year over year were due primarily to the lower level of market interest rates over the majority of the past twelve months, the related rate resets on loans and securities during the past year, and the increase in liquidity on the balance sheet.

We continue to observe competitive pressure to maintain reduced interest rates on loans retained at renewal. While our loan prices are targeted to achieve certain returns on equity, significant competition for commercial and industrial loans as well as commercial real estate loans has put pressure on loan yields, and our stringent underwriting standards limit our ability to make higher-yielding loans.

The following table sets forth certain information relating to our average consolidated balance sheet and reflect the yield on average earning assets and cost of average interest bearing liabilities for the periods indicated. These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period. Average balances are derived from daily balances. For purposes of discussion, net interest income and net interest income to total earning assets in the following tables have been adjusted to a non-GAAP TE basis using a marginal rate of 21% in 2022 and 2021 to more appropriately compare returns on tax-exempt loans and securities to other earning assets.

Table of Contents


Analysis of Average Balances,
Tax Equivalent Income / Expense and Rates
(Dollars in thousands - unaudited)

	Quarters Ended
	March 31, 2022						December 31, 2021						March 31, 2021
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	635,302		$	269	0.17	$	587,721		$	224	0.15	$	359,576		$	92	0.10
Securities:
Taxable		1,611,748			5,047	1.27		842,576			2,817	1.33		340,873			1,615	1.92
Non-taxable (TE)^1^		195,240			1,814	3.77		189,697			1,674	3.50		191,357			1,655	3.51
Total securities (TE)^1^		1,806,988			6,861	1.54		1,032,273			4,491	1.73		532,230			3,270	2.49
Dividends from FHLBC and FRBC		16,066			153	3.86		11,042			114	4.10		9,917			115	4.70
Loans and loans held-for-sale^1, 2^		3,405,421			36,448	4.34		2,393,017			26,368	4.37		2,014,773			22,266	4.48
Total interest earning assets		5,863,777			43,731	3.02		4,024,053			31,197	3.08		2,916,496			25,743	3.58
Cash and due from banks		42,941			-	-		34,225			-	-		28,461			-	-
Allowance for credit losses on loans		(44,341)			-	-		(34,567)			-	-		(34,540)			-	-
Other noninterest bearing assets		373,423			-	-		287,762			-	-		187,488			-	-
Total assets	$	6,235,800					$	4,311,473					$	3,097,905

Liabilities and Stockholders' Equity
NOW accounts	$	610,797		$	89	0.06	$	567,971		$	85	0.06	$	495,384		$	95	0.08
Money market accounts		1,098,913			170	0.06		611,632			142	0.09		329,050			77	0.09
Savings accounts		1,845,656			138	0.03		918,835			68	0.03		412,743			69	0.07
Time deposits		495,452			277	0.23		370,919			271	0.29		399,310			500	0.51
Interest bearing deposits		4,050,818			674	0.07		2,469,357			566	0.09		1,636,487			741	0.18
Securities sold under repurchase agreements		39,204			11	0.11		47,571			15	0.13		82,475			31	0.15
Junior subordinated debentures		25,773			280	4.41		25,773			283	4.36		25,773			280	4.41
Subordinated debentures		59,222			546	3.74		59,201			546	3.66		-			-	-
Senior notes		44,494			485	4.42		44,468			673	6.00		44,389			673	6.15
Notes payable and other borrowings		19,009			103	2.20		20,090			107	2.11		23,330			123	2.14
Total interest bearing liabilities		4,238,520			2,099	0.20		2,666,460			2,190	0.33		1,812,454			1,848	0.41
Noninterest bearing deposits		1,437,881			-	-		1,193,387			-	-		937,039			-	-
Other liabilities		60,601			-	-		68,314			-	-		37,801			-	-
Stockholders' equity		498,798			-	-		383,312			-	-		310,611			-	-
Total liabilities and stockholders' equity	$	6,235,800					$	4,311,473					$	3,097,905
Net interest income (GAAP)				$	41,236					$	28,649					$	23,543
Net interest margin (GAAP)						2.85						2.82						3.27

Net interest income (TE)^1^				$	41,632					$	29,007					$	23,895
Net interest margin (TE)^1^						2.88						2.86						3.32
Interest bearing liabilities to earning assets		72.28	%					66.26	%					62.14	%

^1^Represents a non-GAAP financial measure. See the discussion entitled “Non-GAAP Presentations” below that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent. Tax equivalent basis is calculated using a marginal tax rate of 21% in 2022 and 2021.

^2^ Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 45, and includes fees of $1.1 million for the first quarter of 2022, $1.4 million fourth quarter of 2021, and $1.3 million for the first quarter of 2021. Nonaccrual loans are included in the above-stated average balances.

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Reconciliation of Tax-Equivalent Non-GAAP Financial Measures

Net interest and dividend income (TE) and net interest income (TE) to average interest earning assets are non-GAAP measures that have been adjusted on a TE basis using a marginal rate of 21% for 2022 and 2021 to more appropriately compare returns on tax-exempt loans and securities to other earning assets. The table below provides a reconciliation of each non-GAAP (TE) measure to the GAAP equivalent for the periods indicated:


	Three Months Ended
	March 31,			December 31,			March 31,
Net Interest Margin	2022		****	2021			2021


Interest income (GAAP)	$	43,335		$	30,839		$	25,391
Taxable-equivalent adjustment:
Loans		15			7			4
Securities		381			351			348
Interest and dividend income (TE)		43,731			31,197			25,743
Interest expense (GAAP)		2,099			2,190			1,848
Net interest income (TE)	$	41,632		$	29,007		$	23,895
Net interest income (GAAP)	$	41,236		$	28,649		$	23,543
Average interest earning assets	$	5,863,777		$	4,024,053		$	2,916,496
Net interest margin (GAAP)		2.85	%		2.82	%		3.27	%
Net interest margin (TE)		2.88	%		2.86	%		3.32	%

Noninterest Income

Three months ended March 31, 2022 and 2021

The following table details the major components of noninterest income for the periods presented:


										1st Quarter 2022
Noninterest Income	Three Months Ended									Percent Change From
(Dollars in thousands)	March 31,			December 31,			March 31,			December 31,		March 31,
	2022		****	2021		****	2021		****	2021	****	2021
Wealth management	$	2,698		$	2,422		$	2,151		11.4		25.4
Service charges on deposits		2,090			1,624			1,195		28.7		74.9
Residential mortgage banking revenue
Secondary mortgage fees		139			210			322		(33.8)		(56.8)
MSRs mark to market gain		2,978			1,463			1,113		103.6		167.6
Mortgage servicing income		518			534			567		(3.0)		(8.6)
Net gain on sales of mortgage loans		1,495			1,498			3,721		(0.2)		(59.8)
Total residential mortgage banking revenue		5,130			3,705			5,723		38.5		(10.4)
Securities (losses) gains, net		-			(14)			-		N/M		N/M
Change in cash surrender value of BOLI		124			227			334		(45.4)		(62.9)
Card related income		2,550			1,967			1,447		29.6		76.2
Other income		901			740			450		21.8		100.2
Total noninterest income	$	13,493		$	10,671		$	11,300		26.4		19.4

N/M - Not meaningful

Noninterest income increased $2.8 million, or 26.4%, in the first quarter of 2022, compared to the fourth quarter of 2021, and increased $2.2 million, or 19.4%, compared to the first quarter of 2021. The increase from the linked quarter was primarily driven by a $1.4 million increase in residential mortgage banking revenue, attributable to a $1.5 million increase in mark to market gain on mortgage servicing 45

Table of Contents rights (MSRs) stemming from market interest rate changes, partially offset by a $71,000 decrease in secondary mortgage fees in the first quarter of 2022, compared to the fourth quarter of 2021. In addition, we had increases in wealth management fees of $276,000, service charges on deposit accounts of $466,000, and card related income of $583,000 in the first quarter of 2022, as compared to the linked quarter, due to the inclusion of a full quarter of West Suburban noninterest income in 2022. These increases were partially offset by a decrease in the cash surrender value of BOLI of $103,000 in the first quarter of 2022, compared to the fourth quarter of 2021.

The increase in noninterest income in the first quarter of 2022, compared to the first quarter of 2021, is primarily due to a $1.1 million increase in card related income, stemming from the inclusion of a full quarter of West Suburban card-related activity. Also contributing to the increase in noninterest income in the first quarter of 2022, compared to the first quarter of 2021, were increases in wealth management fees of $547,000, service charges on deposits of $895,000, and other income of $451,000, primarily due to the inclusion of a full quarter of West Suburban activity. Partially offsetting these increases to noninterest income in the year over year period was a $593,000 decrease in residential mortgage banking revenue, due to a decrease in mortgage origination volumes in the first quarter of 2022, and a $210,000 decrease in the cash surrender value of BOLI.

Noninterest Expense

Three months ended March 31, 2022 and 2021

The following table details the major components of noninterest expense for the periods presented:


										1st Quarter 2022
Noninterest Expense	Three Months Ended									Percent Change From
(Dollars in thousands)	March 31,			December 31,			March 31,			December 31,		March 31,
	2022		****	2021		****	2021		****	2021	****	2021
Salaries	$	15,598		$	14,164		$	9,216		10.1		69.2
Officers incentive		994			1,293			1,653		(23.1)		(39.9)
Benefits and other		3,375			2,868			2,637		17.7		28.0
Total salaries and employee benefits		19,967			18,325			13,506		9.0		47.8
Occupancy, furniture and equipment expense		3,733			6,395			2,467		(41.6)		51.3
Computer and data processing		6,228			3,859			1,298		61.4		379.8
FDIC insurance		410			371			201		10.5		104.0
General bank insurance		315			360			276		(12.5)		14.1
Amortization of core deposit intangible asset		665			296			120		124.7		454.2
Advertising expense		182			81			60		124.7		203.3
Card related expense		534			657			593		(18.7)		(9.9)
Legal fees		294			460			55		(36.1)		434.5
Consulting & management fees		605			4,091			416		(85.2)		45.4
Other real estate owned (gain) expense, net		(12)			29			36		(141.4)		(133.3)
Other expense		5,365			3,609			2,710		48.7		98.0
Total noninterest expense	$	38,286		$	38,533		$	21,738		(0.6)		76.1
Efficiency ratio (GAAP)^1^		72.72	%		100.89	%		63.98	%
Adjusted efficiency ratio (non-GAAP)^2^		61.38	%		66.45	%		63.16	%

^1^The efficiency ratio shown in the table above is a GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits and OREO expenses, divided by the sum of net interest income and total noninterest income less any BOLI death benefit recorded, net gains or losses on securities and mark to market gains or losses on MSRs.

^2^ The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses and merger-related costs, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” starting on page 47 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the first quarter of 2022 decreased $247,000, or 0.6%, compared to the fourth quarter of 2021, and increased $16.5 million, or 76.1%, compared to the first quarter of 2021. The linked quarter decrease was primarily attributable to $5.6 million of West Suburban acquisition-related costs for the first quarter of 2022, compared to $12.8 million for the fourth quarter of 2021. These 46

Table of Contents acquisition-related costs included a $2.4 million increase in computer and data processing expense in the first quarter of 2022, primarily due to acquisition-related core system conversion costs, and a $1.8 million increase in other expense due to ancillary teller and mobile banking systems conversion costs, compared to the linked quarter. Amortization of core deposits also increased $369,000 in the first quarter of 2022, compared to the prior quarter, as a full quarter of amortization on the newly acquired West Suburban deposits was recorded. These increases were offset by a $2.7 million decrease in occupancy, furniture and equipment expense, due to fixed asset writedowns in the fourth quarter of 2021, a $3.5 million decrease in consulting and management fees due to acquisition-related costs paid in late 2021, and a $166,000 decrease in legal fees due to costs incurred upon closing of the West Suburban acquisition. Of the $31.0 million in projected acquisition-related costs announced when we entered into the merger agreement with West Suburban in July 2021, we (or West Suburban) have cumulatively expensed $30.7 million as of March 31, 2022. Additional acquisition-related expenses are anticipated to be recorded in the second quarter of 2022, as we complete our data and systems conversions.

The year over year increase in noninterest expense is primarily attributable to a $6.5 million increase in salaries and employee benefits, a $1.3 million increase in occupancy, furniture and equipment, a $4.9 million increase in computer and data processing expense, and a $2.7 million increase in other expense. Salaries increased $6.4 million due to additional employees from our acquisition of West Suburban. Employee benefits expense increased $738,000 in the first quarter of 2022, compared to the first quarter of 2021, due to increases stemming from additional employees from our acquisition of West Suburban and increases in employee insurance costs as more employees returned to more routine medical appointments, many of which were on hold during the COVID-19 pandemic in 2020 and part of 2021. Partially offsetting these increases in salaries and employee benefits was a $659,000 decrease in officer incentive compensation in the first quarter of 2022, compared to the first quarter of 2021, as incentive accruals in 2021 were at a higher rate than the current year. The increase in occupancy, furniture and equipment expense year over year was due to the addition of 34 West Suburban branches in late 2021. The increase in computer and data processing expense was primarily due to core system conversion costs of $3.2 million, relating to the West Suburban acquisition. Finally, the increase in other expense was due primarily to growth in net teller banking and bill paying fees of $1.2 million, which was due to acquisition-related costs in the first quarter of 2022, as well as the impact of a full quarter of other expense from the inclusion of West Suburban activity.

Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures


	GAAP									Non-GAAP
		Three Months Ended									Three Months Ended
	March 31,			December 31,			March 31,			March 31,			December 31,			March 31,
	2022			2021			2021			2022			2021			2021
Efficiency Ratio / Adjusted Efficiency Ratio

Noninterest expense	$	38,286		$	38,533		$	21,738		$	38,286		$	38,533		$	21,738
Less amortization of core deposit		665			296			120			665			296			120
Less other real estate expense, net		(12)			29			36			(12)			29			36
Less merger related costs		N/A			N/A			N/A			5,604			12,766			-
Noninterest expense less adjustments	$	37,633		$	38,208		$	21,582		$	32,029		$	25,442		$	21,582

Net interest income	$	41,236		$	28,649		$	23,543		$	41,236		$	28,649		$	23,543
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			15			7			4
Securities		N/A			N/A			N/A			381			351			348
Net interest income including adjustments		41,236			28,649			23,543			41,632			29,007			23,895
Noninterest income		13,493			10,671			11,300			13,493			10,671			11,300
Less securities losses, net		-			(14)			-			-			(14)			-
Less MSRs mark to market gain		2,978			1,463			1,113			2,978			1,463			1,113
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			N/A			33			61			89
Noninterest income (less) / including adjustments		10,515			9,222			10,187			10,548			9,283			10,276

Net interest income including adjustments plus noninterest income (less) / including adjustments	$	51,751		$	37,871		$	33,730		$	52,180		$	38,290		$	34,171
Efficiency ratio / Adjusted efficiency ratio		72.72	%		100.89	%		63.98	%		61.38	%		66.45	%		63.16	%

Table of Contents

Income Taxes

We recorded income tax expense of $4.4 million for the first quarter of 2022 on $16.4 million of pretax income, compared to income tax benefit of $2.5 million on $11.5 million of pretax loss in the fourth quarter of 2021, and income tax expense of $4.2 million on $16.1 million of pretax income in the first quarter of 2021. The effective tax rate was 26.9% for the first quarter of 2022, 21.4% for the fourth quarter of 2021, and 26.2% for the first quarter of 2021.

Income tax expense reflected all relevant statutory tax rates and GAAP accounting. There were no significant changes in our ability to utilize our deferred tax assets during the quarter ended March 31, 2022. We had no valuation reserve on the deferred tax assets as of March 31, 2022.

Financial Condition

Total assets increased $11.6 million to $6.22 billion at March 31, 2022, from $6.21 billion at December 31, 2021, due primarily to an increase in securities available-for-sale of $124.0 million and deferred tax assets of $16.5 million, partially offset by reductions in cash and cash equivalents of $117.4 million and loans of $19.6 million. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were $5.54 billion at March 31, 2022, an increase of $78.5 million from December 31, 2021, primarily due to increases in noninterest bearing demand accounts, savings, money market and NOW accounts due to lower interest rates on time deposits in 2022.


											March 31, 2022
Securities		As of									Percent Change From
(Dollars in thousands)		March 31,			December 31,			March 31,			December 31,		March 31,
	****	2022		****	2021		****	2021		****	2021	****	2021
Securities available-for-sale, at fair value
U.S. Treasuries		$	220,563		$	202,339		$	4,102		9.0		N/M
U.S. government agencies			59,036			61,888			6,361		(4.6)		828.1
U.S. government agencies mortgage-backed			153,148			172,302			70,602		(11.1)		116.9
States and political subdivisions			236,408			256,465			242,146		(7.8)		(2.4)
Corporate bonds			9,683			9,887			34,843		(2.1)		(72.2)
Collateralized mortgage obligations			696,513			672,967			74,936		3.5		829.5
Asset-backed securities			274,941			236,877			130,368		16.1		110.9
Collateralized loan obligations			166,158			79,763			29,922		108.3		455.3
Total securities		$	1,816,450		$	1,692,488		$	593,280		7.3		206.2

N/M - Not meaningful

Securities available-for-sale increased $124.0 million as of March 31, 2022, compared to December 31, 2021, and increased $1.22 billion compared to March 31, 2021. The increase in the portfolio during the first quarter of 2022, compared to the linked quarter, was driven by the purchase of $266.3 million, which consisted of $25.2 million of U.S. treasuries, $1.1 million of state and political subdivisions, $98.3 million of collateralized mortgage obligations, $52.9 million of asset-backed securities, and $88.8 million of collateralized loan obligations. These purchases were partially offset by $75.7 million of calls, maturities and paydowns during the first quarter of 2022, and an unrealized mark to market loss adjustment of $64.8 million and net premium amortization of $1.8 million. We continue to seek to position our portfolio into higher credit quality, shorter duration issuances. The increase in the securities portfolio in the year over year period was primarily due to $1.07 billion of securities acquired in our acquisition of West Suburban, as well as $1.04 billion of purchases in the last twelve months, less $605.6 million of sales in that same period, to utilize our excess cash on hand. There were no security sales during the first quarter of 2022 or the first quarter of 2021. During the fourth quarter of 2021, there were $14,000 of security losses, net.

Table of Contents


							March 31, 2022
Loans	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,
	2022		2021		2021		2021	****	2021
Commercial	$	695,545	$	771,474	$	392,380	(9.8)		77.3
Leases		211,132		176,031		138,240	19.9		52.7
Commercial real estate - Investor		965,767		957,389		567,475	0.9		70.2
Commercial real estate - Owner occupied		655,792		574,384		326,857	14.2		100.6
Construction		165,558		206,132		93,745	(19.7)		76.6
Residential real estate - Investor		62,846		63,399		52,176	(0.9)		20.5
Residential real estate - Owner occupied		203,118		213,248		107,303	(4.8)		89.3
Multifamily		298,686		309,164		178,258	(3.4)		67.6
HELOC		110,688		115,664		75,604	(4.3)		46.4
HELOC - Purchased		9,553		10,626		17,078	(10.1)		(44.1)
Other ^(1)^		23,685		24,437		10,509	(3.1)		125.4
Total loans	$	3,402,370	$	3,421,948	$	1,959,625	(0.6)		73.6

^1^The “Other” segment includes consumer and overdrafts.

Total loans were $3.40 billion as of March 31, 2022, a decrease of $19.6 million from December 31, 2021. The decrease in total loans in the first three months of 2022, compared to December 31, 2021, was due primarily to forgiveness or payoff of 236 PPP loans that totaled $27.2 million within commercial loans, as well as reductions in construction, residential real estate-investor and residential real estate-owner occupied loans, due to paydowns as commercial and consumer liquidity continued to remain at a high level. Total loans increased $1.44 billion from March 31, 2021 to March 31, 2022, primarily due to the loan portfolio acquired from West Suburban. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) is carried on a gross basis (rather than net of the associated credit loss estimate), and the expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses, or ACL.

The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate. Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio. These categories comprised 72.7% of the portfolio as of March 31, 2022, compared to 71.6% of the portfolio as of December 31, 2021. We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

Asset Quality

Nonperforming loans consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or greater past due. Remediation work continues in all segments. Nonperforming loans decreased by $6.7 million to $38.0 million at March 31, 2022 from $44.7 million at December 31, 2021. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced a more-than-insignificant deterioration in credit quality since origination. PCD loans and their related deferred loan costs are included in our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan. Management continues to carefully monitor loans considered to be in a classified status. Nonperforming loans as a percent of total loans were 1.1% as of March 31, 2022, 1.3% as of December 31, 2021, and 1.1% as of March 31, 2021. The distribution of our nonperforming loans is shown in the following table.

Table of Contents


							March 31, 2022
Nonperforming Loans	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2022		2021		2021		2021	2021
Commercial	$	9,029	$	13,291	$	933	(32.1)	867.7
Leases		2,641		3,754		2,562	(29.6)	3.1
Commercial real estate - Investor		6,335		5,694		1,913	11.3	231.2
Commercial real estate - Owner occupied		9,871		13,231		7,427	(25.4)	32.9
Construction		1,250		160		128	681.3	876.6
Residential real estate - Investor		1,393		899		855	54.9	62.9
Residential real estate - Owner occupied		4,470		5,019		3,567	(10.9)	25.3
Multifamily		1,629		1,573		2,398	3.6	(32.1)
HELOC		1,164		862		1,000	35.0	16.4
HELOC - Purchased		173		180		-	(3.9)	N/M
Other ^1^		3		3		399	-	(99.2)
Total nonperforming loans	$	37,958	$	44,666	$	21,182	(15.0)	79.2

N/M - Not meaningful

^1^ The “Other” segment includes consumer and overdrafts.

The components of our nonperforming assets are shown in the following table.


										March 31, 2022
Nonperforming Assets	As of									Percent Change From
(Dollars in Thousands)	March 31,			December 31,			March 31,			December 31,	March 31,
	2022		****	2021		****	2021		****	2021	2021
Nonaccrual loans	$	35,973		$	41,531		$	20,379		(13.4)	76.5
Performing troubled debt restructured loans accruing interest		1,242			25			290		N/M	328.3
Loans past due 90 days or more and still accruing interest		743			3,110			513		(76.1)	44.8
Total nonperforming loans		37,958			44,666			21,182		(15.0)	79.2
Other real estate owned		2,374			2,356			2,163		0.8	9.8
Total nonperforming assets	$	40,332		$	47,022		$	23,345		(14.2)	72.8


30-89 days past due loans and still accruing interest	$	20,835		$	10,745		$	13,506
Nonaccrual loans to total loans		1.1	%		1.2	%		1.0	%
Nonperforming loans to total loans		1.1	%		1.3	%		1.1	%
Nonperforming assets to total loans plus OREO		1.2	%		1.4	%		1.2	%

Allowance for credit losses	$	44,308		$	44,281		$	30,967
Allowance for credit losses to total loans		1.3	%		1.3	%		1.6	%
Allowance for credit losses to nonaccrual loans		123.2	%		160.9	%		152.0	%

N/M - Not meaningful

Table of Contents

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


Loan Charge-offs, Net of Recoveries	Three Months Ended
(Dollars in thousands)	March 31,		% of	December 31,		% of	March 31,		% of
	2022		Total^1^	2021		Total^1^	2021		Total^1^
Commercial	$	-	-	$	441	9.3	$	(18)	3.1
Leases		-	-		37	0.8		-	-
Commercial real estate - Investor		213	72.7		2,603	55.1		(20)	3.4
Commercial real estate - Owner occupied		113	38.6		1,748	37.0		(205)	35.2
Residential real estate - Investor		(10)	(3.4)		(8)	(0.2)		(266)	45.7
Residential real estate - Owner occupied		(83)	(28.3)		(30)	(0.6)		(49)	8.4
HELOC		(35)	(11.9)		(105)	(2.2)		(12)	2.1
Other ^2^		95	32.3		38	0.8		(12)	2.1
Net charge-offs (recoveries)	$	293	100.0	$	4,724	100.0	$	(582)	100.0

^1^^^Represents the percentage of net charge-offs attributable to each category of loans.

^2^ The “Other” segment includes consumer and overdrafts.

Net charge-offs of $293,000 were recorded for the first quarter of 2022, compared to net charge-offs of $4.7 million for the fourth quarter of 2021, and net recoveries of $582,000 for the first quarter of 2021, reflecting continuing management attention to credit quality and remediation efforts. The net charge-offs for the fourth quarter of 2021 were primarily due to two larger credits, one commercial and one commercial real estate. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

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

Table of Contents

The following table shows classified assets by segment for the following periods.


							March 31, 2022
Classified Assets	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2022		2021		2021		2021	2021
Commercial	$	29,267	$	32,712	$	2,397	(10.5)	N/M
Leases		2,641		3,754		3,147	(29.6)	(16.1)
Commercial real estate - Investor		8,809		10,667		5,130	(17.4)	71.7
Commercial real estate - Owner occupied		13,259		15,429		8,652	(14.1)	53.2
Construction		3,185		2,104		5,366	51.4	(40.6)
Residential real estate - Investor		1,544		1,265		1,435	22.1	7.6
Residential real estate - Owner occupied		4,862		5,099		4,148	(4.6)	17.2
Multifamily		1,369		2,278		7,846	(39.9)	(82.6)
HELOC		1,496		1,243		1,303	20.4	14.8
HELOC - Purchased		173		180		-	(3.9)	N/M
Other ^1^		3		10		402	(70.0)	(99.3)
Total classified loans		66,608		74,741		39,826	(10.9)	67.2
Other real estate owned		2,374		2,356		2,163	0.8	9.8
Total classified assets	$	68,982	$	77,097	$	41,989	(10.5)	64.3

N/M - Not meaningful

^1^ The “Other” segment includes consumer and overdrafts.

Total classified loans and classified assets decreased as of March 31, 2022, from the levels at December 31, 2021 and increased from March 31, 2021, primarily due to the addition of the West Suburban loan portfolio in late 2021. We continue remediation efforts, and the high level of paydowns and payoffs we have experienced due to increased borrower liquidity stemming from federal stimulus funds received by borrowers and other COVID-19 relief funding, such as PPP loans, have contributed to the decrease in classified assets from December 31, 2021 to March 31, 2022. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ACL on loans as another measure of overall change in loan related asset quality, which is referred to as the “classified assets ratio.” The classified assets ratio was 12.04% for the period ended March 31, 2022, compared to 13.79% as of December 31, 2021, and 11.60% as of March 31, 2021. The increase in the classified assets ratio for the period ended March 31, 2022, compared to March 31, 2021, is also due to the acquisition of West Suburban Bank.

Allowance for Credit Losses on Loans

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date. As of January 1, 2020, we adopted ASU 2016-13, or CECL.

At March 31, 2022, our allowance for credit losses (“ACL”) on loans totaled $44.3 million, and our ACL on unfunded commitments, included in other liabilities, totaled $5.7 million. In the first quarter of 2022, we recorded provision expense on loans of $320,000, based on our assessment of nonperforming loan metrics and trends and estimated future credit losses, which was offset by a $320,000 reduction of our reserve on unfunded commitments, primarily due to an updated analysis of line utilization rates over the past twelve months, as well as the roll off of prior historical periods with lower losses within the CECL model. These two entries resulted in a zero net impact to the provision for credit losses for the first quarter of 2022.

The ACL on loans totaled $44.3 million as of both March 31, 2022 and December 31, 2021, and $31.0 million as of March 31, 2021. The ACL on loans increased in late 2021 due to the impact of the West Suburban acquisition Day One credit mark of $12.1 million, the Day Two non-PCD loan adjustment to ACL of $12.2 million, less a reversal of $2.3 million related to our legacy loan portfolio and net charge-offs of $4.7 million for the fourth quarter. The ACL for loans was reduced in the first quarter of 2021 due to a $3.0 million release of the provision for credit losses release, less net recoveries of $582,000.

Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loan, leases and unfunded commitments. Our ACL on loans to total loans was 1.3% as of March 31, 2022, and December 31, 2021. See Item 7 – Critical Accounting Estimates in the 52

Table of Contents Management Discussion and Analysis in our 2021 Annual Report in Form 10-K for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

Below is a reconciliation of the activity in the allowance for credit losses on loans for the periods indicated (dollars in thousands):


		Three Months Ended
	March 31,			December 31,			March 31,
	2022			2021			2021
Allowance at beginning of period	$	44,281		$	26,949		$	33,855
Charge-offs:
Commercial		30			731			2
Leases		-			37			-
Commercial real estate - Investor		236			2,623			-
Commercial real estate - Owner occupied		121			1,758			3
Construction		-			-			-
Residential real estate - Investor		-			-			-
Residential real estate - Owner occupied		-			-			-
Multifamily		-			-			-
HELOC		-			-			12
HELOC - Purchased		-			-			-
Other ^1^		127			72			25
Total charge-offs		514			5,221			42
Recoveries:
Commercial		30			290			20
Leases		-			-			-
Commercial real estate - Investor		23			20			20
Commercial real estate - Owner occupied		8			10			208
Construction		-			-			-
Residential real estate - Investor		10			8			266
Residential real estate - Owner occupied		83			30			49
Multifamily		-			-			-
HELOC		35			105			24
HELOC - Purchased		-			-			-
Other ^1^		32			34			37
Total recoveries		221			497			624
Net charge-offs (recoveries)		293			4,724			(582)
Day 1 PCD credit evaluation		-			12,075			-
Provision for (release of) credit losses on loans		320			9,981			(3,470)
Allowance at end of period	$	44,308		$	44,281		$	30,967

Average total loans (exclusive of loans held-for-sale)	$	3,398,714		$	2,388,746		$	2,006,157
Net charge-offs / (recoveries) to average loans		0.01	%		0.20	%		(0.03)	%
Allowance at period end to average loans		1.30	%		1.85	%		1.54	%

^1^ The “Other” segment includes consumer and overdrafts.

The coverage ratio of the ACL on loans to nonperforming loans was 116.7% as of March 31, 2022, which was an increase from the coverage ratio of 99.1% as of December 31, 2021 and a decrease from 146.2% as of March 31, 2021. When measured as a percentage of average loans, our total ACL on loans was 1.30% for the three months ended March 31, 2022, and 1.54% for the like period of March 31, 2021.

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at March 31, 2022, and general changes in lending policy, procedures and staffing, as well as other external factors, such as the impacts of the COVID-19 pandemic. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. Further delayed recovery or further deterioration in market conditions related to COVID-19 or other factors, such as the war in Ukraine, 53

Table of Contents and the associated impacts on our customers, changes in business climates and the condition of collateral at the time of default or repossession may revise our current expectations of future credit losses in future reporting periods.

Other Real Estate Owned

As of March 31, 2022, OREO totaled $2.4 million, reflecting an $18,000 increase from the $2.4 million at December 31, 2021, and a $211,000 increase from the $2.2 million at March 31, 2021. In the first quarter of 2022, there was one property disposal of $69,000 in net book value, which resulted in a gain on sale of OREO of $49,000, and one transfer to OREO for $87,000. In the fourth quarter of 2021, we acquired three OREO properties in our acquisition of West Suburban, with a total fair value of $5.6 million, and we sold two of these properties in December, which had a net book value of $5.2 million. In the first quarter of 2021, one property sale of $305,000 net book value and no transfers to OREO from loans were recorded. No OREO valuation reserve adjustments were recorded in the first quarter of 2022, compared to $14,000 of valuation reserves recorded in the fourth quarter of 2021, and $6,000 valuation reserves recorded in the first quarter of 2021.


							March 31, 2022
OREO	Three Months Ended						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2022		2021		2021		2021	2021
Balance at beginning of period	$	2,356	$	1,912	$	2,474	23.2	(4.8)
Property additions, net of acquisition adjustments		87		5,678		-	(98.5)	-
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		69		5,220		305	(98.7)	(77.4)
Period valuation (write-up)/write-down		-		14		6	(100.0)	(100.0)
Balance at end of period	$	2,374	$	2,356	$	2,163	0.8	9.8

In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future. Of note, properties valued in total at $1.1 million, or approximately 45.4% of total OREO at March 31, 2022, have been in OREO for five years or more. The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.



OREO Properties by Type
(Dollars in thousands)	March 31, 2022				December 31, 2021				March 31, 2021
		Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	576	24	%	$	645	27	%	$	430	20	%
Lots (single family and commercial)		1,411	59	%		1,411	56	%		1,381	64	%
Vacant land		387	17	%		300	17	%		352	16	%
Total other real estate owned	$	2,374	100	%	$	2,356	100	%	$	2,163	100	%

Table of Contents Deposits and Borrowings


							March 31, 2022
Deposits	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,
	2022		2021		2021		2021	****	2021
Noninterest bearing demand	$	1,461,712	$	1,428,055	$	982,664	2.4		48.7
Savings		1,884,352		1,826,346		429,256	3.2		339.0
NOW accounts		622,606		605,056		522,760	2.9		19.1
Money market accounts		1,098,499		1,102,965		338,921	(0.4)		224.1
Certificates of deposit of less than $100,000		277,135		287,238		193,291	(3.5)		43.4
Certificates of deposit of $100,000 through $250,000		144,663		147,854		132,514	(2.2)		9.2
Certificates of deposit of more than $250,000		55,758		68,718		57,136	(18.9)		(2.4)
Total deposits	$	5,544,725	$	5,466,232	$	2,656,542	1.4		108.7

Total deposits were $5.54 billion at March 31, 2022, which reflects a $78.5 million increase from total deposits of $5.47 billion at December 31, 2021, and an increase of $2.89 billion from total deposits of $2.66 billion at March 31, 2021. The increase in deposits at March 31, 2022, compared to December 31, 2021, was due to increases in noninterest bearing demand, savings and NOW accounts, with decreases noted in all maturity categories of certificates of deposit and money market accounts. The increase in deposits at March 31, 2022, compared to March 31, 2021 was primarily due to an increase of $2.69 billion of deposits from the West Suburban acquisition.

In addition to deposits, we obtained funding from other sources in all periods presented. Securities sold under repurchase agreements totaled $33.5 million at March 31, 2022, a $16.8 million, or 33.4%, decrease from $50.3 million at December 31, 2021. Our notes payable and other borrowings is comprised of one remaining $6.0 million long-term FHLBC advance, which matures on February 2, 2026, and $12.0 million outstanding on a $20.0 million term note originated with a correspondent bank in the first quarter of 2020, to facilitate the redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures, completed on March 2, 2020. Notes payable and other borrowings of $18.0 million as of March 31, 2022, decreased $1.1 million from December 31, 2021, and decreased $4.3 million from March 31, 2021.

The Company is indebted on senior notes originated in December 2016, totaling $44.5 million, net of deferred issuance costs, as of March 31, 2022. These notes mature in December 2026, and included interest payable semi-annually at 5.75% for five years. Beginning December 31, 2021, the interest became payable quarterly at three month LIBOR plus 385 basis points. The Company is also indebted on $25.8 million, net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust II (“Trust II”). The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of 4.41% as of March 31, 2022, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017, rate reset.

Capital

As of March 31, 2022, total stockholders’ equity was $466.3 million, which was a decrease of $35.7 million from $502.0 million as of December 31, 2021. This decrease is attributable to a decrease in accumulated other comprehensive income of $46.3 million in the first quarter of 2022 due to a net decrease in unrealized gains on available-for-sale securities, net of unrealized losses on swaps, due to the increase in market interest rates, as well as a reduction to retained earnings of $2.2 million for payment of dividends to our common stockholders in the first three months of 2022. Partially offsetting these decreases to total stockholders’ equity was $12.0 million of net income for the first quarter of 2022. Total stockholders’ equity as of March 31, 2022, increased $155.2 million compared to March 31, 2021, primarily due to the West Suburban acquisition in late 2021 and the resultant additional common stock issued, as well as net income year over year, less the reduction in accumulated other comprehensive income of $50.8 million year over year. 55

Table of Contents

The following table shows the regulatory capital ratios and the current well capitalized regulatory requirements for the Company and the Bank as of the dates indicated:


	Minimum Capital		Well Capitalized
	Adequacy with		Under Prompt
	Capital Conservation		Corrective Action		March 31,		December 31,		March 31,
	Buffer, if applicable^1^		Provisions^2^		2022		2021		2021
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		9.73	%	9.46	%	12.43	%
Total risk-based capital ratio	10.50	%	N/A		12.85	%	12.55	%	14.73	%
Tier 1 risk-based capital ratio	8.50	%	N/A		10.33	%	10.06	%	13.53	%
Tier 1 leverage ratio	4.00	%	N/A		7.00	%	7.81	%	10.02	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	12.74	%	12.41	%	14.59	%
Total risk-based capital ratio	10.50	%	10.00	%	13.83	%	13.46	%	15.80	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	12.74	%	12.41	%	14.59	%
Tier 1 leverage ratio	4.00	%	5.00	%	8.61	%	9.58	%	10.78	%

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

^2^ The prompt corrective action provisions are only applicable at the Bank level.

As of March 31, 2022, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the now fully phased-in capital conservation buffer requirements. In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, decreased from 8.08% at December 31, 2021, to 7.49% at March 31, 2022. Our GAAP tangible common equity to tangible assets ratio was 5.95% at March 31, 2022, compared to 6.54% as of December 31, 2021. Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, decreased from 6.59% at December 31, 2021, to 6.00% at March 31, 2022, primarily due to a decline in tangible common equity in the first quarter of 2022. The decline in tangible common equity was due to a decrease in accumulated other comprehensive income of $46.3 million primarily related to unrealized losses on available-for-sale securities stemming from the increase in market interest rates. The non-GAAP tangible common equity to tangible assets ratio was also negatively impacted by growth in total tangible assets in the first quarter of 2022.

Table of Contents

Reconciliation of Tangible Common Equity to Tangible Assets Ratio Non-GAAP Measure


	March 31, 2022						December 31, 2021
Tangible common equity	GAAP			Non-GAAP			GAAP			Non-GAAP
(Dollars in thousands)

Total Equity	$	466,318		$	466,318		$	502,027		$	502,027
Less: Goodwill and intangible assets		101,971			101,971			102,636			102,636
Add: Limitation of exclusion of core deposit intangible (80%)		N/A			3,128			N/A			3,261
Adjusted goodwill and intangible assets		101,971			98,843			102,636			99,375
Tangible common equity	$	364,347		$	367,475		$	399,391		$	402,652
Tangible assets
Total assets	$	6,223,746		$	6,223,746		$	6,212,189		$	6,212,189
Less: Adjusted goodwill and intangible assets		101,971			98,843			102,636			99,375
Tangible assets	$	6,121,775		$	6,124,903		$	6,109,553		$	6,112,814

Common equity to total assets		7.49	%		7.49	%		8.08	%		8.08	%
Tangible common equity to tangible assets		5.95	%		6.00	%		6.54	%		6.59	%

The non-GAAP intangible asset exclusion reflects the 80% core deposit limitation per Basel III guidelines within risk based capital calculations, and is useful for us when reviewing risk based capital ratios and equity performance metrics.

Liquidity

Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. We monitor our borrowing capacity at the FHLBC as part of our liquidity management process as supervised by our Asset and Liability Committee (“ALCO”) and reviewed by our Board of Directors. In addition, due to the potential impacts on our liquidity stemming from the COVID-19 pandemic, our senior management team monitors cash balances daily to ensure we have adequate liquidity to meet our operational and financing needs. As of March 31, 2022, our cash on hand liquidity totaled $634.7 million, a decrease of $117.4 million over cash balances held as of December 31, 2021.

Net cash inflows from operating activities were $278,000 during the first three months of 2022, compared with net cash inflows of $15.4 million in the same period of 2021. Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of outflows for the first three months of 2022 but were a source of inflows in the like period of 2021. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the three months ended March 31, 2022, and for the like period of 2021. The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash outflows from investing activities were $176.5 million in the three months ended March 31, 2022, compared to net cash outflows of $26.6 million in the same period in 2021. In the first three months of 2022, securities transactions accounted for net outflows of $190.6 million, and the principal change on loans accounted for net inflows of $21.9 million. In the first three months of 2021, securities transactions accounted for net outflows of $102.4 million, and net principal on loans funded accounted for net inflows of $75.9 million. Proceeds from sales of OREO accounted for $118,000 and $325,000 in investing cash inflows for the three months ended March 31, 2022 and 2021, respectively.

Net cash inflows from financing activities in the three months ended March 31, 2022, were $58.8 million, compared with net cash inflows of $122.3 million in the three months ended March 31, 2021. Net deposit inflows in the first three months of 2022 were $78.9 million compared to net deposit inflows of $119.5 million in the first three months of 2021. Other short-term borrowings had no net cash inflows or outflows in the first three months of 2022 or 2021. Changes in securities sold under repurchase agreements accounted for outflows of $16.8 million and inflows of $10.3 million for the three months ended March 31, 2022 and 2021, respectively. Dividends paid on our common stock totaled $2.2 million in the three months ended March 31, 2022, compared to dividends paid of $293,000 for the like 2021 period, as the per common share dividend was increased to five cents per share in the second quarter of 2021. The repurchase of treasury 57

Table of Contents stock in the first three months of 2021 resulted in outflows of $6.2 million; in the first three months of 2022, there was no stock repurchase program in place.

Cash and cash equivalents for the three months ended March 31, 2022, totaled $634.7 million, as compared to $440.9 million as of March 31, 2021. In addition to cash and cash equivalents on hand or held as deposits with other financial institutions, we rely on funding sources from customer deposits, cash flows from securities available-for-sale and loans, and a line of credit with the FHLBC to meet potential liquidity needs. These sources of liquidity are immediately available to satisfy any funding requirements due to depositor or borrower demands through the ordinary course of our business. Additional sources of funding include a $30.0 million undrawn line of credit held by the Company with a third party financial institution, as well as unpledged securities available-for-sale.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As part of our normal operations, we are subject to interest-rate risk on the assets we invest in (primarily loans and securities) and the liabilities we fund (primarily customer deposits and borrowed funds). Fluctuations in interest rates may result in changes in the fair market values of our financial instruments, cash flows, and net interest income. Like most financial institutions, we have an exposure to changes in both short-term and long-term interest rates.

The Federal Reserve raised rates by 0.25% in March 2022 and has set the baseline expectation of a 0.50% increase at the next meeting in May 2022. Rate forecasts have been changing week by week, with the expectation of faster rate hikes to combat inflation. The Federal Reserve balance sheet leveled off at $8.9 trillion earlier this year, and it is widely expected that the Federal Reserve will sell assets to trim its balance sheet assets in conjunction with raising rates. We manage interest rate risk within guidelines established by policy that are intended to limit the amount of rate exposure. In practice, we seek to manage our interest rate risk exposure well within our guidelines so that such exposure does not pose a material risk to our future earnings.

We manage various market risks in the normal course of our operations, including credit, liquidity risk, and interest-rate risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of our business activities and operations. In addition, since we do not hold a trading portfolio, we are not exposed to significant market risk from trading activities. Our interest rate risk exposures at March 31, 2022 and December 31, 2021 are outlined in the table below.

Our net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction. Our asset-liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 19 of our consolidated financial statements found in in our Annual Report on Form 10-K for the year ended December 31, 2021. We seek to monitor and manage interest rate risk within approved policy guidelines and limits.

We use simulation analysis to quantify the impact of various rate scenarios on our net interest income. Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by us are incorporated into the simulation model. Earnings at risk are calculated by comparing the net interest income of a stable interest rate environment to the net interest income of a different interest rate environment in order to determine the percentage change. As of March 31, 2022, our net interest income profile remained sensitive to earnings gains (in both dollars and percentage) should interest rates rise. We have a moderately lower sensitivity profile quarter-over-quarter due to a higher percentage and dollars of fixed rate loans compared to variable rate loans. Additionally, the index for reinvestment tied to a Libor index was changed to a SOFR index, this resulted in a lower index rate on reinvestments. In addition, we made changes to our asset liability management model to better reflect interest rate sensitivity of fed funds.

The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 0.5%, 1.0%, and 2.0% and no change in the slope of the yield curve. Down rate scenarios remained not meaningful as certain rates would still fall below zero in that scenario. Despite the rate hike in March 2022, certain market interest rates utilized in our model were still below 50 basis points.

Table of Contents


	Analysis of Net Interest Income Sensitivity
	Immediate Changes in Rates
(Dollars in thousands)		(2.0)	%	****	(1.0)	%	****	****	(0.5)	%	****	****	0.5	%	****	****	1.0	%	****	****	2.0	%
March 31, 2022
Dollar change		N/M			N/M				N/M			$	12,339			$	24,726			$	49,225
Percent change		N/M			N/M				N/M				7.7	%			15.4	%			30.6	%

December 31, 2021
Dollar change		N/M			N/M				N/M			$	13,404			$	27,689			$	54,007
Percent change		N/M			N/M				N/M				9.4	%			19.5	%			38.0	%

N/M - Not meaningful

The amounts and assumptions used in the simulation model should not be viewed as indicative of expected actual results. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies. The above results do not take into account any management action to mitigate potential risk.

Effects of Inflation

In management’s opinion, changes in interest rates affect our financial condition to a far greater degree than changes in the inflation rate; however, we monitor both. The annual inflation rate in the U.S. accelerated to 8.5% in March 2022, the highest since December 1981. Management believes the inflation rate will remain elevated in the near term, which is expected to be favorable for the Bank. In general, we anticipate that higher inflation will increase borrowers’ needs for credit as a result of GDP growth. In addition, as interest rates are expected to rise to combat inflation, we also expect our net interest margin to be favorably impacted. The downside risks of high inflation puts upwards pressure to our expenses, which could impact profits. Furthermore, higher costs of living weaken the financial condition of our borrowers which could affect our credit profile. A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today’s volatile economic environment. We seek to mitigate the impact of interest rate volatility on the Bank by seeking to ensure that rate sensitive assets and rate sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree. Overall, we expect the effects of higher inflation to be beneficial to us in the near term.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of March 31, 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2022, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Table of Contents PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The Company and its subsidiaries, from time to time, are involved in collection suits in the ordinary course of business against its debtors and are defendants in legal actions arising from normal business activities. Management, after consultation with legal counsel, believes that the ultimate liabilities, if any, resulting from these actions will not have a material adverse effect on the financial position of the Bank or on the consolidated financial position of the Company.

Item 1.A. Risk Factors

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as well as cautionary statements contained in this Quarterly Report, on Form 10-Q, including those under the caption “Cautionary Note Regarding Forward-Looking Statements.”

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 10, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Stock Repurchases

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

Table of Contents

Item 6. Exhibits

Exhibits:



31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a).

31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a).

32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at March 31, 2022 and December 31, 2021; (ii) Consolidated Statements of Income for the three months ended March 31, 2022 and 2021; (iii) Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2022 and 2021; (iv) Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.

104	Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document).

Table of Contents SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	OLD SECOND BANCORP, INC.


		BY:	/s/ James L. Eccher
			James L. Eccher
			President and Chief Executive Officer
			(principal executive officer)


		BY:	/s/ Bradley S. Adams
			Bradley S. Adams
			Executive Vice President and Chief Financial Officer
			(principal financial and accounting officer)


DATE: May 9, 2022

UNITED STATES

Exhibit 31.1

I, James L. Eccher, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Old Second Bancorp, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 9, 2022	/s/ James L. Eccher
	James L. Eccher
	President and Chief Executive Officer

UNITED STATES

Exhibit 31.2

I, Bradley S. Adams, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Old Second Bancorp, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 9, 2022	/s/ Bradley S. Adams
	Bradley S. Adams
	Executive Vice President and<br><br>Chief Financial Officer

UNITED STATES

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-Q, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James L. Eccher, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Ay 13
May 9, 2022	/s/ James L. Eccher
	James L. Eccher
	President and Chief Executive Officer<br>(principal executive officer)

UNITED STATES

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Old Second Bancorp, Inc. (the “Company”) on Form 10-Q, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Bradley S. Adams, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

May 9, 2022	/s/ Bradley S. Adams
	Bradley S. Adams
	Executive Vice President and<br>Chief Financial Officer<br>(principal financial and accounting officer)