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 June 30, 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 August 4, 2022, the Registrant has 44,563,376 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	39
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	62
Item 4.	Controls and Procedures	63
	PART II

Item 1.	Legal Proceedings	64
Item 1.A.	Risk Factors	64
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
Item 3.	Defaults Upon Senior Securities	64
Item 4.	Mine Safety Disclosure	64
Item 5.	Other Information	64
Item 6.	Exhibits	65

	Signatures	66

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,” “seeks to,” “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;
---	---
●	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)
		June 30,		December 31,
	****	2022		2021
Assets
Cash and due from banks		$	53,295	$	38,565
Interest earning deposits with financial institutions			228,040		713,542
Cash and cash equivalents			281,335		752,107
Securities available-for-sale, at fair value			1,734,416		1,693,632
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock			20,413		13,257
Loans held-for-sale			1,707		4,737
Loans			3,625,070		3,420,804
Less: allowance for credit losses on loans			45,388		44,281
Net loans			3,579,682		3,376,523
Premises and equipment, net			81,901		88,005
Other real estate owned			1,624		2,356
Mortgage servicing rights, at fair value			10,722		7,097
Goodwill			86,332		86,332
Core deposit intangible			14,980		16,304
Bank-owned life insurance ("BOLI")			105,496		105,300
Deferred tax assets, net			32,481		6,100
Other assets			54,454		60,439
Total assets		$	6,005,543	$	6,212,189

Liabilities
Deposits:
Noninterest bearing demand		$	2,078,272	$	2,093,494
Interest bearing:
Savings, NOW, and money market			2,803,201		2,868,928
Time			461,382		503,810
Total deposits			5,342,855		5,466,232
Securities sold under repurchase agreements			37,599		50,337
Junior subordinated debentures			25,773		25,773
Subordinated debentures			59,254		59,212
Senior notes			44,533		44,480
Notes payable and other borrowings			11,000		19,074
Other liabilities			35,625		45,054
Total liabilities			5,556,639		5,710,162

Stockholders’ Equity
Common stock			44,705		44,705
Additional paid-in capital			201,282		202,443
Retained earnings			271,831		252,011
Accumulated other comprehensive (loss) income			(65,244)		8,768
Treasury stock			(3,670)		(5,900)
Total stockholders’ equity			448,904		502,027
Total liabilities and stockholders’ equity		$	6,005,543	$	6,212,189


	June 30, 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		44,562,068		44,461,045
Treasury shares		143,082		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)						(unaudited)
		Three Months Ended June 30,						Six Months Ended June 30,
	****	2022		****	2021		****	2022		****	2021		****
Interest and dividend income
Loans, including fees		$	38,229		$	20,815		$	74,595		$	43,022
Loans held-for-sale			32			38			89			93
Securities:
Taxable			6,670			1,832			11,723			3,447
Tax exempt			1,413			1,259			2,846			2,566
Dividends from FHLBC and FRBC stock			263			113			416			228
Interest bearing deposits with financial institutions			782			137			1,051			229
Total interest and dividend income			47,389			24,194			90,720			49,585
Interest expense
Savings, NOW, and money market deposits			347			217			744			458
Time deposits			265			409			542			909
Securities sold under repurchase agreements			9			21			20			52
Junior subordinated debentures			284			284			564			564
Subordinated debentures			547			517			1,093			517
Senior notes			578			673			1,063			1,346
Notes payable and other borrowings			95			119			198			242
Total interest expense			2,125			2,240			4,224			4,088
Net interest and dividend income			45,264			21,954			86,496			45,497
Provision for (release of) credit losses			550			(3,500)			550			(6,500)
Net interest and dividend income after provision for (release of) credit losses			44,714			25,454			85,946			51,997
Noninterest income
Wealth management			2,506			2,389			5,204			4,540
Service charges on deposits			2,328			1,221			4,402			2,416
Secondary mortgage fees			50			272			189			594
Mortgage servicing rights mark to market gain (loss)			82			(1,033)			3,060			80
Mortgage servicing income			579			507			1,098			1,074
Net (loss) gain on sales of mortgage loans			(262)			1,895			1,233			5,616
Securities (losses) gains, net			(33)			2			(33)			2
Change in cash surrender value of BOLI			72			423			196			757
Card related income			2,965			1,666			5,532			3,113
Other income			924			577			1,793			1,027
Total noninterest income			9,211			7,919			22,674			19,219
Noninterest expense
Salaries and employee benefits			21,332			12,896			41,299			26,402
Occupancy, furniture and equipment			3,046			2,303			6,745			4,770
Computer and data processing			4,006			1,304			10,274			2,602
FDIC insurance			702			192			1,112			393
General bank insurance			351			277			666			553
Amortization of core deposit intangible			659			115			1,324			235
Advertising expense			194			95			376			155
Card related expense			1,057			626			1,591			1,219
Legal fees			179			135			436			190
Consulting & management fees			523			250			1,139			667
Other real estate expense, net			87			77			75			113
Other expense			5,113			3,131			10,464			5,840
Total noninterest expense			37,249			21,401			75,501			43,139
Income before income taxes			16,676			11,972			33,119			28,077
Provision for income taxes			4,429			3,152			8,852			7,378
Net income		$	12,247		$	8,820		$	24,267		$	20,699

Basic earnings per share		$	0.28		$	0.30		$	0.55		$	0.71
Diluted earnings per share			0.27			0.30			0.54			0.70
Dividends declared per share			0.05			0.05			0.10			0.06

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)					(unaudited)
		Three Months Ended June 30,					Six Months Ended June 30,
	****	2022		2021		****	2022		2021
Net Income		$	12,247	$	8,820		$	24,267	$	20,699

Unrealized holding (losses) gains on available-for-sale securities arising during the period			(40,485)		3,337			(105,314)		(1,476)
Related tax benefit (expense)			11,335		(935)			29,488		436
Holding (losses) gains, after tax, on available-for-sale securities			(29,150)		2,402			(75,826)		(1,040)

Less: Reclassification adjustment for the net (losses) gains realized during the period
Net realized (losses) gains			(33)		2			(33)		2
Related tax benefit (expense)			9		(1)			9		(1)
Net realized (losses) gains after tax			(24)		1			(24)		1
Other comprehensive (loss) income on available-for-sale securities			(29,126)		2,401			(75,802)		(1,041)

Changes in fair value of derivatives used for cash flow hedges			1,898		(1,714)			2,487		989
Related tax (expense) benefit			(532)		480			(697)		(277)
Other comprehensive income (loss) on cash flow hedges			1,366		(1,234)			1,790		712

Total other comprehensive (loss) income			(27,760)		1,167			(74,012)		(329)
Total comprehensive (loss) income		$	(15,513)	$	9,987		$	(49,745)	$	20,370



	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, March 31, 2021	$	13,971	$	(705)	$	13,266
Other comprehensive income (loss), net of tax		2,401		(1,234)		1,167
Balance, June 30, 2021	$	16,372	$	(1,939)	$	14,433

Balance, March 31, 2022	$	(35,537)	$	(1,947)	$	(37,484)
Other comprehensive (loss) income, net of tax		(29,126)		1,366		(27,760)
Balance, June 30, 2022	$	(64,663)	$	(581)	$	(65,244)

For the Six Months Ended
Balance, December 31, 2020	$	17,413	$	(2,651)	$	14,762
Other comprehensive (loss) income, net of tax		(1,041)		712		(329)
Balance, June 30, 2021	$	16,372	$	(1,939)	$	14,433

Balance, December 31, 2021	$	11,139	$	(2,371)	$	8,768
Other comprehensive (loss) income, net of tax		(75,802)		1,790		(74,012)
Balance, June 30, 2022	$	(64,663)	$	(581)	$	(65,244)

See accompanying notes to consolidated financial statements.

Table of Contents Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


	(Unaudited)
	Six Months Ended June 30,
	2022		2021		****
Cash flows from operating activities
Net income	$	24,267	$	20,699
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount amortization on securities		3,300		1,095
Securities losses (gains), net		33		(2)
Release of provision for credit losses		550		(6,500)
Originations of loans held-for-sale		(49,648)		(140,402)
Proceeds from sales of loans held-for-sale		53,204		150,571
Net gains on sales of mortgage loans		(1,233)		(5,616)
Mortgage servicing rights mark to market loss		(3,060)		(80)
Net accretion of discount on loans		(3,841)		(588)
Net change in cash surrender value of BOLI		(196)		(757)
Net gains on sale of other real estate owned		(130)		(35)
Provision for other real estate owned valuation losses		104		67
Depreciation of fixed assets and amortization of leasehold improvements		2,101		1,528
Net gains on disposal and transfer of fixed assets		(1,961)		-
Amortization of core deposit intangibles		1,324		235
Change in current income taxes receivable		(729)		(1,487)
Deferred tax expense (benefit)		2,400		1,585
Change in accrued interest receivable and other assets		7,000		4,186
Accretion of purchase accounting adjustment on time deposits		(821)		-
Change in accrued interest payable and other liabilities		(7,033)		(615)
Stock based compensation		1,469		611
Net cash provided by operating activities		27,100		24,495
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		148,429		68,122
Proceeds from sales of securities available-for-sale		3,303		8,202
Purchases of securities available-for-sale		(301,129)		(162,663)
Proceeds from sales of FHLBC/FRBC stock		1,561		-
Purchases of FHLBC/FRBC stock		(8,717)		-
Net change in loans		(199,955)		133,357
Proceeds from sales of other real estate owned, net of participations and improvements		845		565
Proceeds from disposition of fixed assets		7,490		-
Net purchases of premises and equipment		(1,526)		(595)
Net cash used in investing activities		(349,699)		46,988
Cash flows from financing activities
Net change in deposits		(122,556)		144,928
Net change in securities sold under repurchase agreements		(12,738)		1,586
Issuance of subordinated debentures, net of issuance costs		-		59,147
Repayment of term note		(2,000)		(2,000)
Net change in notes payable and other borrowings, excluding term note		(6,056)		(157)
Dividends paid on common stock		(4,423)		(1,742)
Purchase of treasury stock		(400)		(10,388)
Net cash provided by financing activities		(148,173)		191,374
Net change in cash and cash equivalents		(470,772)		262,857
Cash and cash equivalents at beginning of period		752,107		329,903
Cash and cash equivalents at end of period	$	281,335	$	592,760

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, March 31, 2021		$	34,957		$	120,075		$	248,165		$	13,266		$	(105,350)		$	311,113
Net income									8,820									8,820
Other comprehensive income, net of tax												1,167						1,167
Dividends declared and paid, ($0.05 per share)									(1,449)									(1,449)
Stock based compensation						497												497
Purchase of treasury stock from stock repurchase program															(4,210)			(4,210)
Balance, June 30, 2021		$	34,957		$	120,572		$	255,536		$	14,433		$	(109,560)		$	315,938

Balance, March 31, 2022		$	44,705		$	203,190		$	261,807		$	(37,484)		$	(5,900)		$	466,318
Net income									12,247									12,247
Other comprehensive loss, net of tax												(27,760)						(27,760)
Dividends declared and paid, ($0.05 per share)									(2,223)									(2,223)
Vesting of restricted stock						(2,630)									2,630			-
Stock based compensation						722												722
Purchase of treasury stock from taxes withheld on stock awards															(400)			(400)
Balance, June 30, 2022		$	44,705		$	201,282		$	271,831		$	(65,244)		$	(3,670)		$	448,904


For the Six Months Ended
Balance, December 31, 2020	$	34,957	$	122,212	$	236,579	$	14,762	$	(101,423)	$	307,087
Net income						20,699						20,699
Other comprehensive loss, net of tax								(329)				(329)
Dividends declared and paid, ($0.06 per share)						(1,742)						(1,742)
Vesting of restricted stock				(2,251)						2,251		-
Stock based compensation				611								611
Purchase of treasury stock from taxes withheld on stock awards										(577)		(577)
Purchase of treasury stock from stock repurchase program										(9,811)		(9,811)
Balance, June 30, 2021	$	34,957	$	120,572	$	255,536	$	14,433	$	(109,560)	$	315,938


Balance, December 31, 2021	$	44,705	$	202,443	$	252,011	$	8,768	$	(5,900)	$	502,027
Net income						24,267						24,267
Other comprehensive loss, net of tax								(74,012)				(74,012)
Dividends declared and paid, ($0.10 per share)						(4,447)						(4,447)
Vesting of restricted stock				(2,630)						2,630		-
Stock based compensation				1,469								1,469
Purchase of treasury stock from taxes withheld on stock awards										(400)		(400)
Balance, June 30, 2022	$	44,705	$	201,282	$	271,831	$	(65,244)	$	(3,670)	$	448,904

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 June 30, 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.

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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 2022-01 – On March 28, 2022, the FASB issued ASU 2022-01”Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method.” ASU 2022-01 is effective for public business entities for fiscal years beginning after December 15, 2022, and also interim periods within those fiscal years. Early adoption is permitted if an entity has adopted ASU No. 2017-12 concurrently or prior. The goal of this new hedging standard is to better align the economic results of risk management activities with hedge accounting, by allowing multiple layers of a single closed portfolio to be hedged, as compared to the single-layer, or last of layer method, allowed with the adoption of ASU 2017-12.

The Company is currently reviewing ASU 2022-01 for the impact to derivative measurement and disclosures, and will assess any revisions needed for reporting purposes in the next few quarters. We anticipate adopting ASU 2022-01 no later than January 1, 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 second quarter of 2022, the Company had no changes to significant accounting policies or estimates.

Subsequent Events

On July 19, 2022, our Board of Directors declared a cash dividend of $0.05 per share payable on August 8, 2022, to stockholders of record as of July 29, 2022; dividends of $2.2 million are scheduled to be paid to stockholders on August 8, 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 10

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 June 30, 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 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 June 30, 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		1,067,517
FHLBC stock		3,340
Loans, net of allowance for credit losses Day One PCD loan adjustment		1,500,974
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	$	1,070,980
Savings, NOW and money market		1,408,051
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 $3.3 million and $8.9 million for the three month and six month periods ended June 30, 2022 respectively, 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. 11

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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.


	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 June 30, 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 June 30, 2022						As of December 31, 2021
	PCD		Non-PCD		Total		PCD		Non-PCD		Total
West Suburban acquired loans	$	80,224	$	1,220,474	$	1,300,698	$	102,409	$	1,418,752	$	1,521,161
ABC Bank acquired loans		2,125		47,518		49,643		4,547		64,236		68,783
Talmer Bank acquired loans		-		44,034		44,034		-		45,858		45,858
Total acquired loans net book value	$	82,349	$	1,312,026	$	1,394,375	$	106,956	$	1,528,846	$	1,635,802
Accretion recorded on acquired loans year to date	$	566	$	3,342	$	3,908	$	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 $5.5 million at June 30, 2022, and $7.1 million at December 31, 2021. FRBC stock was recorded at $14.9 million at June 30, 2022, and $6.2 million at December 31, 2021.

The following tables summarize the amortized cost and fair value of the securities portfolio at June 30, 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
June 30, 2022	****	Cost^1^		****	Gains		****	Losses		Value
Securities available-for-sale
U.S. Treasury		$	223,768		$	-		$	(8,948)	$	214,820
U.S. government agencies			61,673			-			(3,777)		57,896
U.S. government agencies mortgage-backed			152,583			-			(10,747)		141,836
States and political subdivisions			244,864			912			(12,124)		233,652
Corporate bonds			10,000			-			(457)		9,543
Collateralized mortgage obligations			681,539			31			(40,072)		641,498
Asset-backed securities			268,682			87			(9,147)		259,622
Collateralized loan obligations			181,116			-			(5,567)		175,549
Total securities available-for-sale		$	1,824,225		$	1,030		$	(90,839)	$	1,734,416


			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		241,937		16,344		(672)		257,609
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	$	1,678,160	$	20,587	$	(5,115)	$	1,693,632

^1^ Excludes accrued interest receivable of $5.5 million and $4.3 million at June 30, 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 June 30, 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		$	8,229	1.15	%	$	8,017
Due after one year through five years			304,142	1.05			291,151
Due after five years through ten years			44,642	2.52			41,310
Due after ten years			183,292	3.00			175,433
			540,305	1.83			515,911
Mortgage-backed and collateralized mortgage obligations			834,122	1.81			783,334
Asset-backed securities			268,682	2.17			259,622
Collateralized loan obligations			181,116	3.10			175,549
Total securities available-for-sale		$	1,824,225	2.00	%	$	1,734,416

At June 30, 2022, the Company’s investments included $216.4 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

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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 June 30, 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 June 30, 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
June 30, 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	$	8,948	$	214,820	-	$	-	$	-	5	$	8,948	$	214,820
U.S. government agencies	5		3,691		53,781	4		86		4,116	9		3,777		57,897
U.S. government agencies mortgage-backed	127		9,681		136,686	6		1,066		5,149	133		10,747		141,835
States and political subdivisions	36		10,463		119,482	1		1,661		2,941	37		12,124		122,423
Corporate bonds	2		457		9,543	-		-		-	2		457		9,543
Collateralized mortgage obligations	221		38,780		617,153	2		1,292		12,739	223		40,072		629,892
Asset-backed securities	48		8,853		236,143	5		294		6,956	53		9,147		243,099
Collateralized loan obligations	32		5,378		165,068	2		189		10,481	34		5,567		175,549
Total securities available-for-sale	476	$	86,251	$	1,552,676	20	$	4,588	$	42,382	496	$	90,839	$	1,595,058


	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 June 30, 2022, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the second quarter of 2022.


			Three Months Ended					Six Months Ended
			June 30,					June 30,
Securities available-for-sale	****	2022		2021		****	2022		2021		****
Proceeds from sales of securities		$	3,303	$	8,202		$	3,303	$	8,202
Gross realized gains on securities		$	-	$	5		$	-	$	5
Gross realized losses on securities			(33)		(3)			(33)		(3)
Net realized (losses) gains		$	(33)	$	2		$	(33)	$	2
Income tax benefit (expense) on net realized (losses) gains		$	9	$	(1)		$	9	$	(1)

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Effective tax rate applied			27.3	%		N/M	%		27.3	%		N/M	%

As of June 30, 2022, securities valued at $511.4 million were pledged to secure deposits and borrowings, and for other purposes, an increase from $501.3 million of securities pledged at year-end 2021.

Note 4 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:


	****	June 30, 2022		****	December 31, 2021
Commercial ^1^		$	806,725		$	771,474
Leases			230,677			176,031
Commercial real estate – Investor			1,076,678			957,389
Commercial real estate – Owner occupied			627,898			574,384
Construction			170,037			206,132
Residential real estate – Investor			61,220			63,399
Residential real estate – Owner occupied			207,836			213,248
Multifamily			310,706			309,164
HELOC			111,072			115,664
HELOC – Purchased			9,066			10,626
Other ^2^			13,155			23,293
Total loans			3,625,070			3,420,804
Allowance for credit losses on loans			(45,388)			(44,281)
Net loans^3^		$	3,579,682		$	3,376,523

^1^ Includes $3.5 million and $38.4 million of Paycheck Protection Program (“PPP”) loans at June 30, 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 $11.0 million and $9.2 million at June 30, 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 71.0% and 71.6% of the portfolio at June 30, 2022, and December 31, 2021, respectively, and include a mix of owner and non-owner occupied, residential, construction and multifamily loans.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following tables represent the activity in the allowance for credit losses for loans, or the ACL, for the three and six months ended June 30, 2022 and 2021:



				Provision for
	Beginning			(Release of)									Ending
Allowance for credit losses	Balance		****	Credit Losses		****	Charge-offs		****	Recoveries		****	Balance
Three months ended June 30, 2022
Commercial	$	12,576		$	1,582		$	52		$	8		$	14,114
Leases		2,573			(837)			-			-			1,736
Commercial real estate – Investor		15,559			(1,400)			243			18			13,934
Commercial real estate – Owner occupied		3,270			3,703			-			7			6,980
Construction		2,858			(1,323)			-			-			1,535
Residential real estate – Investor		703			(47)			-			5			661
Residential real estate – Owner occupied		1,950			(103)			-			22			1,869
Multifamily		2,977			(543)			-			-			2,434
HELOC		1,594			(158)			-			31			1,467
HELOC – Purchased		81			(6)			-			-			75
Other		167			462			91			45			583
	$	44,308		$	1,330		$	386		$	136		$	45,388



				Provision for
	Beginning			(Release of)									Ending
Allowance for credit losses	Balance		****	Credit Losses		****	Charge-offs		****	Recoveries		****	Balance
Six months ended June 30, 2022
Commercial	$	11,751		$	2,407		$	82		$	38		$	14,114
Leases		3,480			(1,744)			-			-			1,736
Commercial real estate - Investor		13,093			1,280			480			41			13,934
Commercial real estate - Owner occupied		2,615			4,471			121			15			6,980
Construction		3,373			(1,838)			-			-			1,535
Residential real estate - Investor		760			(114)			-			15			661
Residential real estate - Owner occupied		2,832			(1,068)			-			105			1,869
Multifamily		3,675			(1,241)			-			-			2,434
HELOC		2,379			(979)			-			67			1,467
HELOC - Purchased		131			(56)			-			-			75
Other		192			532			217			76			583
	$	44,281		$	1,650		$	900		$	357		$	45,388



				(Release of)
	Beginning			Provision for									Ending
Allowance for credit losses	Balance		****	Credit Losses		****	Charge-offs		****	Recoveries		****	Balance
Three months ended June 30, 2021
Commercial	$	3,276		$	(485)		$	207		$	17		$	2,601
Leases		3,382			34			28			-			3,388
Commercial real estate – Investor		7,908			2,509			-			20			10,437
Commercial real estate – Owner occupied		1,722			(615)			31			10			1,086
Construction		3,719			(671)			-			-			3,048
Residential real estate – Investor		1,803			(838)			-			10			975
Residential real estate – Owner occupied		2,528			(723)			-			61			1,866
Multifamily		4,265			(999)			-			-			3,266
HELOC		1,713			(181)			5			77			1,604
HELOC – Purchased		295			(66)			-			-			229
Other		356			(228)			30			41			139
	$	30,967		$	(2,263)		$	301		$	236		$	28,639

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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



				(Release of)
Allowance for credit losses	Beginning			Provision for									Ending
Six months ended June 30, 2021	Balance		****	Credit Losses		****	Charge-offs		****	Recoveries		****	Balance
Commercial	$	2,812		$	(39)		$	209		$	37		$	2,601
Leases		3,888			(472)			28			-			3,388
Commercial real estate – Investor		9,205			1,192			-			40			10,437
Commercial real estate – Owner occupied		2,251			(1,349)			34			218			1,086
Construction		4,054			(1,006)			-			-			3,048
Residential real estate – Investor		1,740			(1,041)			-			276			975
Residential real estate – Owner occupied		2,714			(958)			-			110			1,866
Multifamily		3,625			(359)			-			-			3,266
HELOC		1,749			(229)			17			101			1,604
HELOC – Purchased		199			30			-			-			229
Other		1,618			(1,502)			55			78			139
	$	33,855		$	(5,733)		$	343		$	860		$	28,639

The ACL on loans excludes $3.4 million, $4.5 million and $2.2 million of allowance for unfunded commitments as of June 30, 2022, December 31, 2021 and June 30, 2021, respectively, recorded within Other Liabilities. The total ACL on unfunded commitments listed as of June 30, 2022 and December 31, 2021 excludes the purchase accounting adjustment of $1.3 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 June 30, 2022 and December 31, 2021:


			Accounts								ACL
June 30, 2022	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	907	$	9,067	$	-	$	1,091	$	11,065	$	2,610
Leases		-		-		2,002		-		2,002		323
Commercial real estate – Investor		5,293		-		-		-		5,293		-
Commercial real estate – Owner occupied		22,597		-		-		2,450		25,047		4,228
Construction		150		-		-		-		150		-
Residential real estate – Investor		965		-		-		-		965		-
Residential real estate – Owner occupied		3,112		-		-		-		3,112		254
Multifamily		1,010		-		-		-		1,010		-
HELOC		1,967		-		-		-		1,967		-
HELOC – Purchased		171		-		-		-		171		-
Other		-		-		-		-		-		-
Total	$	36,172	$	9,067	$	2,002	$	3,541	$	50,782	$	7,415


			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

Table of Contents

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
June 30, 2022	Past Due		****	Past Due		****	Due		****	Due		****	Current		****	Total Loans		****	Accruing
Commercial	$	1,093		$	1,628		$	2,134		$	4,855		$	801,870		$	806,725		$	979
Leases		-			-			1,508			1,508			229,169			230,677			-
Commercial real estate - Investor		17,732			3,489			3,143			24,364			1,052,314			1,076,678			3,150
Commercial real estate - Owner occupied		116			3,127			3,055			6,298			621,600			627,898			1,107
Construction		-			-			-			-			170,037			170,037			-
Residential real estate - Investor		-			69			1,011			1,080			60,140			61,220			38
Residential real estate - Owner occupied		2,365			717			2,149			5,231			202,605			207,836			-
Multifamily		985			-			-			985			309,721			310,706			-
HELOC		322			51			392			765			110,307			111,072			-
HELOC - Purchased		-			-			171			171			8,895			9,066			-
Other		607			-			-			607			12,548			13,155			-
Total	$	23,220		$	9,081		$	13,563		$	45,864		$	3,579,206		$	3,625,070		$	5,274


																			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			23,174			23,293			-
Total	$	9,342		$	4,356		$	13,644		$	27,342		$	3,393,462		$	3,420,804		$	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 June 30, 2022, and December 31, 2021:


Nonaccrual loan detail	****	June 30, 2022		****	With no ACL		****	December 31, 2021		****	With no ACL
Commercial		$	10,621		$	2,354		$	11,894		$	9,217
Leases			2,005			235			3,754			2,943
Commercial real estate - Investor			5,174			5,174			5,694			5,694
Commercial real estate - Owner occupied			9,563			6,975			11,637			11,205
Construction			150			150			160			160
Residential real estate - Investor			1,054			1,054			876			876
Residential real estate - Owner occupied			3,642			3,388			4,898			4,622
Multifamily			907			907			1,573			1,573
HELOC			2,422			2,422			862			672
HELOC - Purchased			171			171			180			180
Other			3			3			3			3
Total		$	35,712		$	22,833		$	41,531		$	37,145

The Company recognized $35,000 of interest on nonaccrual loans during the six months ended June 30, 2022. 18

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 June 30, 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		$	101,846	$	84,311	$	34,286	$	16,069	$	13,178	$	32,438	$	468,212	$	-	$	750,340
Special Mention			88		15,326		1,394		3,160		-		-		4,840		-		24,808
Substandard			8,825		3,594		3,309		13,395		22		60		2,372		-		31,577
Total commercial			110,759		103,231		38,989		32,624		13,200		32,498		475,424		-		806,725

Leases
Pass			85,782		74,574	$	34,929		24,334		7,054		1,713		-		-		228,386
Special Mention			-		-		-		286		-		-		-		-		286
Substandard			-		-		-		1,770		-		235		-		-		2,005
Total leases			85,782		74,574		34,929		26,390		7,054		1,948		-		-		230,677

Commercial real estate – investor
Pass			245,689		310,869		185,655		83,699		52,267		85,785		19,968		-		983,932
Special Mention			-		4,955		28,904		28,480		-		-		-		-		62,339
Substandard			-		3,979		-		23,240		-		3,188		-		-		30,407
Total commercial real estate – investor			245,689		319,803		214,559		135,419		52,267		88,973		19,968		-		1,076,678

Commercial real estate – owner occupied
Pass			71,396		178,903		97,521		63,526		53,156		107,040		1,640		-		573,182
Special Mention			8,405		-		8,766		8,830		-		-		-		-		26,001
Substandard			207		22,345		1,196		1,679		-		3,288		-		-		28,715
Total commercial real estate – owner occupied			80,008		201,248		107,483		74,035		53,156		110,328		1,640		-		627,898

Construction
Pass			21,503		70,850		49,606		2,596		2,828		1,678		2,806		-		151,867
Special Mention			-		1,497		5,224		10,211		-		-		-		-		16,932
Substandard			1,238		-		-		-		-		-		-		-		1,238
Total construction			22,741		72,347		54,830		12,807		2,828		1,678		2,806		-		170,037

Residential real estate – investor
Pass			12,597		11,037		7,308		9,722		5,623		12,613		1,074		-		59,974
Special Mention			-		-		-		-		-		-		-		-		-
Substandard			-		-		-		506		191		549		-		-		1,246
Total residential real estate – investor			12,597		11,037		7,308		10,228		5,814		13,162		1,074		-		61,220

Residential real estate – owner occupied
Pass			2,524		45,874		29,768		16,812		13,000		94,011		1,446		-		203,435
Special Mention			-		616		-		-		-		-		-		-		616
Substandard			-		254		241		712		132		2,446		-		-		3,785
Total residential real estate – owner occupied			2,524		46,744		30,009		17,524		13,132		96,457		1,446		-		207,836

Multifamily
Pass			56,793		109,808		43,793		28,315		54,875		8,868		54		-		302,506
Special Mention			-		-		-		6,864		-		-		-		-		6,864
Substandard			429		-		-		-		621		286		-		-		1,336
Total multifamily			57,222		109,808		43,793		35,179		55,496		9,154		54		-		310,706

HELOC
Pass			225		365		537		1,617		679		2,822		102,036		-		108,281
Special Mention			-		-		-		110		-		-		-		-		110
Substandard			-		378		1,010		31		71		873		318		-		2,681
Total HELOC			225		743		1,547		1,758		750		3,695		102,354		-		111,072

HELOC – purchased

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Pass		-		-		-		-		-		-		8,894		-		8,894
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		172		-		-		172
Total HELOC – purchased		-		-		-		-		-		172		8,894		-		9,066

Other
Pass		1,467		3,900		608		281		88		1,263		5,546		-		13,153
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		2		-		-		-		-		-		2
Total other		1,467		3,900		610		281		88		1,263		5,546		-		13,155

Total loans
Pass		599,822		890,491		484,011		246,971		202,748		348,231		611,676		-		3,383,950
Special Mention		8,493		22,394		44,288		57,941		-		-		4,840		-		137,956
Substandard		10,699		30,550		5,758		41,333		1,037		11,097		2,690		-		103,164
Total loans	$	619,014	$	943,435	$	534,057	$	346,245	$	203,785	$	359,328	$	619,206	$	-	$	3,625,070

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		4,214		7,206		-		23,283
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		3		-		7		-		-		-		-		10
Total other		8,659		1,102		437		261		1,414		4,214		7,206		-		23,293

Total loans
Pass		1,079,972		607,575		392,999		267,763		177,970		224,824		546,694		30		3,297,827
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	$	234,222	$	556,172	$	30	$	3,420,804

The Company had $659,000 and $488,000 in residential real estate loans in the process of foreclosure as of June 30, 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.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

There were two TDR loan modifications for an aggregate of $41,000 for the three months ended June 30, 2022 and three TDR loan modifications for an aggregate of $1.1 million for the six months ended June 30, 2022. There was no TDR activity for the three and six months ended June 30, 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 June 30, 2022, and June 30, 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						Six Months Ended
	****	June 30,					****	June 30,				****
Other real estate owned	****	2022		****	2021		****	2022		2021
Balance at beginning of period		$	2,374		$	2,163		$	2,356	$	2,474
Property additions, net of acquisition adjustments			-			-			87		-
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses			646			225			715		530
Period valuation write-down			104			61			104		67
Balance at end of period		$	1,624		$	1,877		$	1,624	$	1,877

Activity in the valuation allowance was as follows:


	****	Three Months Ended						Six Months Ended				****
	****	June 30,					****	June 30,				****
		2022		****	2021		****	2022		2021		****
Balance at beginning of period		$	1,179		$	1,649		$	1,179	$	1,643
(Release of) provision for unrealized losses			104			61			104		67
Reductions taken on sales			(363)			(414)			(363)		(414)
Balance at end of period		$	920		$	1,296		$	920	$	1,296

Expenses related to OREO, net of lease revenue includes:


		Three Months Ended						Six Months Ended
		June 30,					****	June 30,
	****	2022		****	2021		****	2022		****	2021
Gain on sales, net		$	(81)		$	(15)		$	(130)		$	(35)
(Release of) provision for unrealized losses			104			61			104			67
Operating expenses			64			31			101			85
Less:
Lease revenue			-			-			-			4
Net OREO expense		$	87		$	77		$	75		$	113

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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 6 – Deposits

Major classifications of deposits were as follows:


	June 30, 2022		December 31, 2021
Noninterest bearing demand	$	2,078,272	$	2,093,494
Savings		1,199,027		1,178,575
NOW accounts		609,558		587,381
Money market accounts		994,616		1,102,972
Certificates of deposit of less than $100,000		268,723		296,298
Certificates of deposit of $100,000 through $250,000		140,266		138,794
Certificates of deposit of more than $250,000		52,393		68,718
Total deposits	$	5,342,855	$	5,466,232

Note 7 – Borrowings

The following table is a summary of borrowings as of June 30, 2022, and December 31, 2021. Junior subordinated debentures are discussed in more detail in Note 8:


	****	June 30, 2022		December 31, 2021		****
Securities sold under repurchase agreements		$	37,599	$	50,337
Junior subordinated debentures			25,773		25,773
Subordinated debentures			59,254		59,212
Senior notes			44,533		44,480
Notes payable and other borrowings			11,000		19,074
Total borrowings		$	178,159	$	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 $37.6 million at June 30, 2022, and $50.3 million at December 31, 2021. The fair value of the pledged collateral was $102.6 million at June 30, 2022, and $113.0 million at December 31, 2021. At June 30, 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 June 30, 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. The remaining balance of $5.9 million was paid off in full during the second quarter of 2022. FHLB stock held as of June 30, 2022 was valued at $5.5 million, and any potential FHLBC advances were collateralized by loans with a principal balance of $820.3 million, which carried a FHLBC-calculated combined collateral value of $559.3 million. The Company had excess collateral of $479.3 million available to secure borrowings at June 30, 2022.

The Company also had $44.5 million of senior notes outstanding, net of deferred issuance costs, as of June 30, 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 June 30, 2022, and December 31, 2021, unamortized debt issuance costs related to the senior notes were $467,000 and $520,000, respectively, and are 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. 24

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

On February 24, 2020, the Company originated a $20.0 million term note, of which $11.0 million is outstanding as of June 30, 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.

In the second quarter of 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. As of June 30, 2022, we had $59.3 million of subordinated debentures outstanding, net of deferred issuance costs.

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 4.42% and 4.41% for the quarters ended June 30, 2022 and June 30, 2021, respectively. 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 June 30, 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 June 30, 2022, 1,176,029 shares remained available for issuance under the 2019 Plan

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 25

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 264,589 and 222,964 restricted stock units issued under the 2019 Plan during the six months ended June 30, 2022 and June 30, 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 $1.5 million in the first six months of 2022 and $644,000 for the first six months of 2021.

A summary of changes in the Company’s unvested restricted awards for the six months ended June 30, 2022, is as follows:


		June 30, 2022
			Weighted
		Restricted	Average
		Stock Shares	Grant Date
	****	and Units	Fair Value
Unvested at January 1		540,306	$	12.04
Granted		264,589		14.25
Vested		(128,516)		12.81
Forfeited		(17,144)		12.49
Unvested at June 30		659,235	$	12.77

Total unrecognized compensation cost of restricted awards was $5.2 million as of June 30, 2022, which is expected to be recognized over a weighted-average period of 2.20 years.

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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 10 – Earnings Per Share

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


		Three Months Ended June 30,				Six Months Ended June 30,
	****	2022		2021		2022		2021
Basic earnings per share:
Weighted-average common shares outstanding			44,499,395		28,849,015		44,480,326		29,036,354
Net income		$	12,247	$	8,820	$	24,267	$	20,699
Basic earnings per share		$	0.28	$	0.30	$	0.55	$	0.71

Diluted earnings per share:
Weighted-average common shares outstanding			44,499,395		28,849,015		44,480,326		29,036,354
Dilutive effect of unvested restricted awards ^1^			747,341		518,457		724,134		538,608
Diluted average common shares outstanding			45,246,736		29,367,472		45,204,460		29,574,962

Net Income		$	12,247	$	8,820	$	24,267	$	20,699
Diluted earnings per share		$	0.27	$	0.30	$	0.54	$	0.70


^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 June 30, 2022, the Bank exceeded those thresholds.

At June 30, 2022, the Bank’s Tier 1 capital leverage ratio was 8.94%, a decrease of 64 basis points from December 31, 2021, but is above the 8.00% objective. The Bank’s total capital ratio was 13.25%, a decrease of 21 basis points from December 31, 2021, but 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 June 30, 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 June 30, 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
June 30, 2022
Common equity tier 1 capital to risk weighted assets
Consolidated	$	415,443		9.35	%	$	311,027		7.00	%		N/A		N/A
Old Second Bank		543,518		12.24			310,835		7.00		$	288,633		6.50	%
Total capital to risk weighted assets
Consolidated		545,284		12.27			466,624		10.50			N/A		N/A
Old Second Bank		588,359		13.25			466,247		10.50			444,045		10.00
Tier 1 capital to risk weighted assets
Consolidated		440,443		9.91			377,777		8.50			N/A		N/A
Old Second Bank		543,518		12.24			377,443		8.50			355,241		8.00
Tier 1 capital to average assets
Consolidated		440,443		7.24			243,339		4.00			N/A		N/A
Old Second Bank		543,518		8.94			243,185		4.00			303,981		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 June 30, 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. As of June 30, 2022, the Bank had capacity to pay dividends of $11.1 million to the Company without prior regulatory approval. 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 June 30, 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.
---	---

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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.
---	---

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

The tables below present the balance of assets and liabilities at June 30, 2022, and December 31, 2021, respectively, measured by the Company at fair value on a recurring basis:


	June 30, 2022
	Level 1		****	Level 2		****	Level 3		****	Total
Assets:
Securities available-for-sale
U.S. Treasury	$	214,820		$	-		$	-		$	214,820
U.S. government agencies		-			57,896			-			57,896
U.S. government agencies mortgage-backed		-			141,836			-			141,836
States and political subdivisions		-			220,564			13,088			233,652
Corporate bonds		-			9,543			-			9,543
Collateralized mortgage obligations		-			641,498			-			641,498
Asset-backed securities		-			259,622			-			259,622
Collateralized loan obligations		-			175,549			-			175,549
Loans held-for-sale		-			1,707			-			1,707
Credit card portfolio, reported in other assets		-			4,956			-			4,956
Mortgage servicing rights		-			-			10,722			10,722
Interest rate swap agreements		-			2,770			-			2,770
Mortgage banking derivatives		-			153			-			153
Total	$	214,820		$	1,516,094		$	23,810		$	1,754,724

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-		$	3,580		$	-		$	3,580
Total	$	-		$	3,580		$	-		$	3,580


	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			15,236			257,609
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		$	22,333		$	1,709,468

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

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


	Six Months Ended June 30, 2022
	Securities available-for-sale
	States and			Mortgage
	Political			Servicing
	Subdivisions		****	Rights
Beginning balance January 1, 2022	$	15,236		$	7,097
Total gains or losses
Included in earnings		(65)			3,630
Included in other comprehensive loss		(1,562)			-
Purchases, issuances, sales, and settlements
Purchases		-			-
Issuances		-			565
Settlements		(521)			(570)
Ending balance June 30, 2022	$	13,088		$	10,722


	Six Months Ended June 30, 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		(6)			734
Included in other comprehensive income		735			-
Purchases, issuances, sales, and settlements
Purchases		220			-
Issuances		-			963
Settlements		(277)			(654)
Ending balance June 30, 2021	$	4,991		$	5,267

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of June 30, 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		$	10,722		Discounted Cash Flow		Discount Rate		9.0 - 11.0%		9.0	%
							Prepayment Speed		4.9 - 14.7%		6.3	%

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 $13.1 million for state and political subdivisions representing various local municipality securities at June 30, 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 June 30, 2021, was $5.0 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 June 30, 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:


		June 30, 2022
	****	Level 1		****	Level 2		****	Level 3		****	Total
Individually evaluated loans^1^		$	-		$	-		$	28,200		$	28,200
Other real estate owned, net^2^			-			-			1,624			1,624
Total		$	-		$	-		$	29,824		$	29,824

^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 $42.4 million and a valuation allowance of $14.2 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $8.8 million for the six months ended June 30, 2022.

^2^ OREO is measured at fair value, less costs to sell, and had a net carrying amount of $1.6 million at June 30, 2022, which is made up of the outstanding balance of $2.7 million, net of a purchase accounting adjustment of $131,000 and a valuation allowance of $920,000 .


	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.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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. The fair value of loans and leases at June 30, 2022 and December 31, 2021, was estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The fair value of time deposits was estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities. The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities. The fair value of off balance sheet volume was not considered material.

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


	June 30, 2022
	Carrying			Fair
	Amount		****	Value		****	Level 1		****	Level 2		****	Level 3
Financial assets:
Cash and due from banks	$	53,295		$	53,295		$	53,295		$	-		$	-
Interest earning deposits with financial institutions		228,040			228,040			228,040			-			-
Securities available-for-sale		1,734,416			1,734,416			214,820			1,506,508			13,088
FHLBC and FRBC stock		20,413			20,413			-			20,413			-
Loans held-for-sale		1,707			1,707			-			1,707			-
Credit card portfolio, reported in other assets		4,956			4,956			-			4,956			-
Net loans		3,579,682			3,491,324			-			-			3,491,324
Mortgage servicing rights		10,722			10,722			-			-			10,722
Interest rate swap agreements		2,770			2,770			-			2,770			-
Interest rate lock commitments and forward contracts		153			153			-			153			-
Interest receivable on securities and loans		16,495			16,495			-			16,495			-

Financial liabilities:
Noninterest bearing deposits	$	2,078,272		$	2,078,272		$	2,078,272		$	-		$	-
Interest bearing deposits		3,264,583			3,254,995			-			3,254,995			-
Securities sold under repurchase agreements		37,599			37,599			-			37,599			-
Junior subordinated debentures		25,773			22,938			-			22,938			-
Subordinated debentures		59,254			55,054			-			55,054			-
Senior notes		44,533			44,465			44,465			-			-
Note payable and other borrowings		11,000			10,950			-			10,950			-
Interest rate swap agreements		3,576			3,576			-			3,576			-
Interest payable on deposits and borrowings		1,359			1,359			-			1,359			-

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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		1,693,632			1,693,632			202,339			1,476,057			15,236
FHLBC and FRBC stock		13,257			13,257			-			13,257			-
Loans held-for-sale		4,737			4,737			-			4,737			-
Net loans		3,376,523			3,407,596			-			-			3,407,596
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	$	2,093,494		$	2,093,494		$	2,093,494		$	-		$	-
Interest bearing deposits		3,372,738			3,375,930			-			3,375,930			-
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 35

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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 $101,000 will be reclassified as an increase to interest income and an additional $117,000 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 June 30, 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 $3.0 million of 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 June 30, 2022 and December 31, 2021, respectively. The Bank had $1.8 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 June 30, 2022 and December 31, 2021, respectively. At June 30, 2022, the notional amount of non-hedging interest rate swaps was $147.8 million with a weighted average maturity of 3.6 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.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 June 30, 2022 and December 31, 2021.

Fair Value of Derivative Instruments


			June 30, 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	952	Other Liabilities	1,759
Total derivatives designated as hedging instruments				952		1,759

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	24	147,754	Other Assets	1,817	Other Liabilities	1,817
Interest rate lock commitments and forward contracts	42	11,088	Other Assets	153	Other Liabilities	-
Other contracts	3	16,927	Other Assets	-	Other Liabilities	4
Total derivatives not designated as hedging instruments				1,970		1,821


			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 $581,000 as of June 30, 2022, and $1.9 million as of June 30, 2021. The amount of the loss reclassified from AOCI to interest expense on the income statement was $16,000 and $26,000 for the six months ended June 30, 2022, and June 30, 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. 37

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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 June 30, 2022, and December 31, 2021.

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


	June 30, 2022						December 31, 2021
	Fixed		Variable		Total		Fixed		Variable		Total		****
Letters of credit:
Borrower:
Financial standby	$	5,504	$	14,145	$	19,649	$	384	$	17,474	$	17,858
Commercial standby		-		-		-		-		-		-
Performance standby		8,085		7,613		15,698		456		14,907		15,363
		13,589		21,758		35,347		840		32,381		33,221
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	13,589	$	21,825	$	35,414	$	840	$	32,448	$	33,288

Unused loan commitments:	$	148,591	$	701,707	$	850,298	$	84,225	$	895,665	$	979,890

As of June 30, 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 second quarter of 2022, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments totaled $3.4 million, excluding a $1.3 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 $1.0 million for the second quarter of 2022, compared to the prior quarter end, is primarily related to a $780,000 decrease in the commercial unfunded commitments funding rate assumptions based on our analysis of the last 12 months of utilization, as well as accretion of $223,000 to interest income of the purchase accounting adjustment. 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 and six months ended June 30, 2022, compared to the three and six months ended June 30, 2021, and our financial condition at June 30, 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 and six months ended June 30, 2022, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and June 30, 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 51 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.

As we continue to consolidate operations, five branches designated as held for sale with a net book value of $9.6 million are reported within fixed assets at June 30, 2022. During the six months ended June 30, 2022, we sold five branches, resulting in $1.4 million of net gains on sale, after closing costs.

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 June 30, 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. 39

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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. During the first six months of 2022, we recorded $1.3 million of provision for credit losses on loans primarily due to loan growth as well as our assessment of loan metrics and nonperforming loan trends. In addition, we also recorded a reduction of $780,000 in our allowance for credit losses on unfunded commitments, primarily due to a review of credit line utilization rates. These adjustments resulted in a net provision for credit losses expense of $550,000 in the second quarter of 2022.

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 June 30, 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, 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 June 30, 2022, all COVID-related loan deferrals 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 June 2022. As of June 30, 2022, we had 31 loans, which totaled $3.5 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 June 30, 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 second quarter of 2022 was $12.2 million, or $0.27 per diluted share, compared to $8.8 million, or $0.30 per diluted share, for the second quarter of 2021. The increase was primarily due to our acquisition of West Suburban, which resulted in growth in net interest income and noninterest income, partially offset by higher noninterest expense, which included $2.1 million in acquisition-related costs net of gain on sale of branches in the second quarter of 2022. Adjusted net income, a non-GAAP financial measure that 40

Table of Contents excludes merger-related costs, net of gains on branch sales, was $13.8 million for the second quarter of 2022. See the discussion entitled “Non-GAAP Financial Measures” on page 42, as well as the table below, which provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalents.


	Quarters Ended
	June 30,			March 31,		June 30,
	2022		****	2022		2021
Net Income
Income before income taxes (GAAP)	$	16,676		$	16,443	$	11,972
Pre-tax income adjustments:
Merger-related costs, net of gains on branch sales		2,131			5,335		-
Adjusted net income before taxes		18,807			21,778		11,972
Taxes on adjusted net income		4,995			5,858		3,152
Adjusted net income (non-GAAP)	$	13,812		$	15,920	$	8,820

Basic earnings per share (GAAP)	$	0.28		$	0.27	$	0.30
Diluted earnings per share (GAAP)		0.27			0.27		0.30
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP)		0.31			0.36		0.30
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP)		0.31			0.35		0.30

The following provides an overview of some of the factors impacting our financial performance for the three month period ended June 30, 2022, compared to the like period ended June 30, 2021:

●	Net interest and dividend income was $45.3 million for the second quarter of 2022, compared to $22.0 million for the second quarter of 2021. Growth in interest and dividend income in the second quarter of 2022 was primarily due to our acquisition of West Suburban resulting in additional loan and securities income.

●	We recorded a net provision for credit losses of $550,000 in the second quarter of 2022, driven by a $1.3 million increase in the allowance for credit losses on loans due to loan growth in the portfolio, partially offset by a $780,000 reduction in our allowance for unfunded commitments. We recorded a $3.5 million release of provision expense in the second quarter of 2021.

●

Noninterest income was $9.2 million for the second quarter of 2022, compared to $7.9 million for the second quarter of 2021, an increase of $1.3 million, or 16.3%. Contributing to the increase was growth in service charges on deposits and card related income resulting primarily from the West Suburban acquisition and resultant additional fee income. These increases were partially offset by a $262,000 net loss on sales of mortgage loans in the second quarter of 2022, compared to a $1.9 million net gain in the second quarter of 2021.

●

Noninterest expense was $37.2 million for the second quarter of 2022, compared to $21.4 million for the second quarter of 2021, an increase of $15.8 million, or 74.0%. Contributing to the increase was 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 $3.3 million of acquisition-related costs in the second quarter of 2022, primarily within computer and data processing, salaries and employee benefits, and other expense related to the West Suburban acquisition.

●	We had a provision for income tax expense of $4.4 million for the second quarter of 2022, compared to a provision for income tax expense of $3.2 million for the second quarter of 2021. The increase in tax expense for the second 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 growth of $204.3 million in total loans at June 30, 2022, compared to the year ended December 31, 2021, and an increase of $1.72 billion in total loans compared to the second quarter of 2021, as we acquired $1.50 billion of loans in the West Suburban acquisition. We believe we are positioned for continued 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 seeking to ensure the safety and soundness of our Bank, our customers and our employees during the COVID-19 pandemic.

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●

Nonaccrual loans decreased $5.8 million as of June 30, 2022, compared to December 31, 2021, due to the upgrade or payoff of various credits in the first and second quarter of 2022. Nonperforming loans as a percent of total loans was 1.2% as of June 30, 2022, compared to 1.3% as of December 31, 2021, and 1.2% at June 30, 2021. Classified assets increased to $103.2 million as of June 30, 2022, which is $28.4 million, or 38.0% more than December 31, 2021, and $61.1 million more than June 30, 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 June 30, 2022 and 2021

Our income before taxes was $16.7 million in the second quarter of 2022 compared to $12.0 million in the second quarter of 2021. This increase in pretax income was primarily due to a $23.2 million increase in interest and dividend income, and a $1.3 million increase in noninterest income, primarily due to the addition of West Suburban loan, securities and fee income in the second quarter of 2022. These increases were partially offset by a $15.8 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, other expense, and amortization of core deposit intangible. The majority of these increases were due to the inclusion of operating costs of the legacy West Suburban staff and branches, as well as $3.3 million of West Suburban acquisition-related costs in the second quarter of 2022, primarily within computer and data processing. Our net income was $12.2 million, or $0.27 per diluted share, for the second quarter of 2022, compared to net income of $8.8 million, or $0.30 per diluted share, for the second quarter of 2021.

Net interest and dividend income was $45.3 million in the second quarter of 2022, compared to $22.0 million in the second quarter of 2021. The $23.3 million increase was primarily driven by growth in all interest and dividend income categories due to West Suburban 42

Table of Contents related loan and securities income being reflected. In addition we experienced a decrease in interest expense in the second quarter of 2022, compared to the second quarter of 2021, primarily due to a reduction in deposit interest rates offset by increased balances from West Suburban, decreased outstanding balances of notes payable and other borrowings, and a decrease in the rate paid on our senior notes during 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 $1.58 billion in the second quarter of 2022, compared to the second quarter of 2021, primarily from $1.50 billion of average loans acquired in our acquisition of West Suburban. Also contributing to the increase was $104.3 million in average loan growth during the second quarter of 2022, less PPP loans forgiven or repaid and loan paydowns.

Six months ended June 30, 2022 and 2021

Our income before taxes was $33.1 million for the six months ended June 30, 2022 compared to $28.1 million for the six months ended June 30, 2021. This increase in pretax income was primarily due to a $41.1 million increase in interest and dividend income, and a $3.5 million increase in noninterest income, as West Suburban loan, securities and fee income are included in the six months ended June 30, 2022. These increases were partially offset by a $32.4 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, other expense, and amortization of core deposit intangible. The majority of these increases were due to the inclusion of operating costs of the legacy West Suburban staff and branches, as well as $8.8 million of West Suburban acquisition-related costs in the first six months of 2022, primarily within computer and data processing. Our net income was $24.3 million, or $0.54 per diluted share, for the six months ended June 30, 2022, compared to net income of $20.7 million, or $0.70 per diluted share, for the same period of 2021.

Net interest and dividend income was $86.5 million for the six months ended June 30, 2022, compared to $45.5 million for the same period of 2021. The $41.0 million increase was primarily driven by growth in all interest and dividend income categories due to West Suburban related loan and securities income being reflected. This increase was partially offset by a $136,000 increase in interest expense for the six months ended June 30, 2022, compared to the same period of 2021, primarily due to a full period of interest expense on the April 2021 issuance of subordinated debt, as well as higher average balances of deposits from the West Suburban acquisition, partially offset by a decrease in outstanding balances of notes payable and a decrease in the rate paid on our senior notes during 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.

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 June 30, 2022 and 2021

Our net interest and dividend income increased by $23.3 million to $45.3 million, for the second quarter of 2022, from $22.0 million for the second quarter of 2021. This increase was primarily attributable to a $23.2 million increase in total interest and dividend income due to the acquisition of West Suburban in December 2021. In addition we experienced a decrease in interest expense in the second quarter of 2022, compared to the second quarter of 2021, primarily due to a reduction in deposit interest rates offset by increased balances from West Suburban, decreased outstanding balances of notes payable and other borrowings, and a decrease in the rate paid on our senior notes during 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 earning assets for the second quarter of 2022 totaled $5.75 billion, a decrease of $115.0 million, or 2.0%, compared to the first quarter of 2022, and an increase of $2.69 billion, or 88.2%, compared to the second quarter of 2021. Average interest earning deposits with financial institutions totaled $426.8 million for the second quarter of 2022, a decrease of $208.5 million, compared to the first quarter of 2022, and a decrease of $72.7 million compared to the second quarter of 2021. The yield on average interest earning deposits was 73 43

Table of Contents basis points for the second quarter of 2022, an increase of 56 basis points from the first quarter of 2022, and an increase of 62 basis points from the second quarter of 2021. Interest income on securities increased year over year, primarily due to growth in volumes and higher interest rates. Total average securities for the second quarter of 2022 decreased $15.8 million from the first quarter of 2022, and increased $1.28 billion from the second 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. The yield on average securities increased to 1.89% for the second quarter of 2022, compared to 1.54% for the first quarter of 2022 and decreased from 2.24% for the second quarter of 2021. Total average loans, including loans held-for-sale, totaled $3.51 billion in the second quarter of 2022, an increase of $104.3 million from the first quarter of 2022, and an increase of $1.58 billion from the second 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, as well as loan growth of $108.0 million in the second quarter of 2022. This rise in loan volumes resulted in an increase in loan interest and fee income of $17.4 million in the year over year period. For the second quarter of 2022, the yield on average loans increased to 4.37%, compared to 4.34% for the first quarter of 2022, and 4.33% for the second quarter of 2021.

Average interest bearing liabilities decreased $58.7 million, or 1.6%, in the second quarter of 2022, compared to the first quarter of 2022, and increased $1.64 billion compared to the second quarter of 2021. The year over year increase was primarily driven by a $1.68 billion increase in interest bearing deposits primarily due to our acquisition of West Suburban, as well as continued deposit activity of our legacy customers, offset by a $33.2 million decrease in securities sold under repurchase agreements and a $9.1 million decrease in notes payable and other borrowings. The linked quarter decrease was primarily the result of maturing higher cost time deposits and declines in money market accounts. The cost of interest bearing liabilities for the second quarter of 2022 remained consistent with the linked period, and decreased 24 basis points from the second quarter of 2021. Growth in our average noninterest bearing demand deposits of $1.11 billion 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 0.15% for both the second and first quarters of 2022, and 0.31% for the second 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 and second quarters of 2022 or the second quarter of 2021. As of June 30, 2022, we paid off our long-term FHLBC advance of $5.9 million and notes payable and other borrowings now consists of $11.0 million outstanding on a term note with a correspondent bank originated in the first quarter of 2020.

Our net interest margin (GAAP) increased 31 basis points to 3.16% for the second quarter of 2022, compared to 2.85% for the first quarter of 2022, and increased 28 basis points compared to 2.88% for the second quarter of 2021. Our net interest margin (TE) increased 30 basis points to 3.18% for the second quarter of 2022, compared to 2.88% for the first quarter of 2022, and increase 25 basis points compared to 2.93% for the second quarter of 2021. The increase year over year was due primarily to the increasing 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 elevated liquidity on our 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.

Six months ended June 30, 2022 and 2021

Our net interest and dividend income increased by $41.0 million, to $86.5 million for the six months ended June 30, 2022, compared to $45.5 million for the six months ended June 30, 2021. This increase was attributable to a $41.1 million increase in total interest income primarily from the acquisition of West Suburban as well as general loan growth, partially offset by a $136,000 increase in interest expense for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. Increased balances on interest earning assets related to the West Suburban acquisition drove the increase in net interest income, along with the reduction in the cost of interest bearing deposits, despite lower yields on interest earning assets and the increased average balance of subordinated debt. 44

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Average earning assets for the six months ended June 30, 2022 were $5.81 billion, an increase of $2.82 billion, or 94.4%, compared to the six months ended June 30, 2021. The yield on average earning assets for the six months ended June 30, 2022 was 3.18%, compared to 3.40% for the six months ended June 30, 2021. Total average loans, including loans held-for-sale, totaled $3.46 billion for the six months ended June 30, 2022, an increase of $1.48 billion, compared to the six months ended June 30, 2021. The increase in average loan balances, partially offset by market interest rate reductions, resulted in a $31.6 million increase in loan interest income for the six months ended June 30, 2022, compared to the like period in 2021. For the six months ended June 30, 2022, yields on average securities decreased by 63 basis points and yields on average loans decreased by five basis points, each as compared to the six months ended June 30, 2021, due primarily to the addition of the lower yielding legacy West Suburban security and loan portfolios in late 2021, as well as the timing of rate resets on loans and securities as interest rates began to rise in 2022, compared to 2021. Average interest earning deposits with financial institutions increased $100.5 million in the six months ended June 30, 2022, compared to the prior year like period driven primarily by the acquisition of West Suburban, as well as remaining federal stimulus funds received by our depositors.

Average interest bearing liabilities increased $1.70 billion, or 92.3%, in the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase was primarily due to the acquisition of West Suburban in late 2021 resulting in an increase of $2.27 billion of interest earning deposits. In addition, average subordinated debt increased $31.0 million, due to the $60.0 million subordinated note issuance on April 6, 2021, as discussed above. Partially offsetting this increase was a $6.7 million decrease in average notes payable and other borrowings. Average noninterest bearing deposits increased $1.13 billion in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, due to the acquisition of West Suburban, as well as remaining federal stimulus funds received from our depositors. The cost of interest bearing liabilities decreased 21 basis points, to 24 basis points, for the six months ended June 30, 2022, from 45 basis points for the six months ended June 30, 2021.

Our net interest margin (GAAP) for the six months ended June 30, 2021 was 3.00% compared to 3.07% for the six months ended June 30, 2022, reflecting a decrease of seven basis points. Our net interest margin (TE) for the six months ended June 30, 2022 was 3.03% compared to 3.12% for the six months ended June 30, 2021, a decrease of nine basis points. The decrease in net interest margin for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was primarily due to the addition of the lower yielding legacy West Suburban security and loan portfolios in late 2021. These reductions to the net interest margin were partially offset by reductions in rates paid on deposits, and growth in noninterest bearing deposits, which drove down our overall cost of funds.

The following tables set 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 compare returns more appropriately on tax-exempt loans and securities to other earning assets.

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

	Quarters Ended
	June 30, 2022						March 31, 2022						June 30, 2021
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	426,820		$	782	0.73	$	635,302		$	269	0.17	$	499,555		$	137	0.11
Securities:
Taxable		1,610,713			6,670	1.66		1,612,635			5,053	1.27		425,785			1,832	1.73
Non-taxable (TE)^1^		181,386			1,789	3.96		195,240			1,814	3.77		188,281			1,593	3.40
Total securities (TE)^1^		1,792,099			8,459	1.89		1,807,875			6,867	1.54		614,066			3,425	2.24
Dividends from FHLBC and FRBC		20,994			263	5.02		16,066			153	3.86		9,917			113	4.57
Loans and loans held-for-sale^1, 2^		3,508,856			38,267	4.37		3,404,534			36,428	4.34		1,930,965			20,856	4.33
Total interest earning assets		5,748,769			47,771	3.33		5,863,777			43,717	3.02		3,054,503			24,531	3.22
Cash and due from banks		53,371			-	-		42,972			-	-		29,985			-	-
Allowance for credit losses on loans		(44,354)			-	-		(44,341)			-	-		(31,024)			-	-
Other noninterest bearing assets		374,309			-	-		370,987			-	-		185,368			-	-
Total assets	$	6,132,095					$	6,233,395					$	3,238,832

Liabilities and Stockholders' Equity
NOW accounts	$	604,176		$	102	0.07	$	593,481		$	89	0.06	$	531,804		$	105	0.08
Money market accounts		1,054,552			155	0.06		1,098,941			170	0.06		330,536			59	0.07
Savings accounts		1,213,133			90	0.03		1,201,086			138	0.05		439,104			53	0.05
Time deposits		469,009			265	0.23		495,452			277	0.23		359,635			409	0.46
Interest bearing deposits		3,340,870			612	0.07		3,388,960			674	0.08		1,661,079			626	0.15
Securities sold under repurchase agreements		34,496			9	0.10		39,204			11	0.11		67,737			21	0.12
Other short-term borrowings		-			-	-		-			-	-		1			-	-
Junior subordinated debentures		25,773			284	4.42		25,773			280	4.41		25,773			284	4.42
Subordinated debentures		59,244			547	3.70		59,222			546	3.74		56,081			517	3.70
Senior notes		44,520			578	5.21		44,494			485	4.42		44,415			673	6.08
Notes payable and other borrowings		13,103			95	2.91		19,009			103	2.20		22,250			119	2.15
Total interest bearing liabilities		3,518,006			2,125	0.24		3,576,662			2,099	0.24		1,877,336			2,240	0.48
Noninterest bearing deposits		2,120,428			-	-		2,099,283			-	-		1,012,163			-	-
Other liabilities		32,636			-	-		60,818			-	-		36,553			-	-
Stockholders' equity		461,025			-	-		496,632			-	-		312,780			-	-
Total liabilities and stockholders' equity	$	6,132,095					$	6,233,395					$	3,238,832
Net interest income (GAAP)				$	45,264					$	41,232					$	21,954
Net interest margin (GAAP)						3.16						2.85						2.88

Net interest income (TE)^1^				$	45,646					$	41,618					$	22,291
Net interest margin (TE)^1^						3.18						2.88						2.93
Interest bearing liabilities to earning assets		61.20	%					61.00	%					61.46	%

^1^Represents a non-GAAP financial measure. See the discussion entitled “Reconciliation of Tax-Equivalent Non-GAAP Financial Measures” 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 48, and includes fees of $588,000 for the second quarter of 2022, $724,000 first quarter of 2022, and $1.3 million for the second quarter of 2021. Nonaccrual loans are included in the above-stated average balances.

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

	Six Months Ended June 30,
	2022						2021
	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	530,485		$	1,051	0.40	$	429,953		$	229	0.11
Securities:
Taxable		1,611,669			11,723	1.47		383,563			3,447	1.81
Non-taxable (TE)^1^		188,275			3,603	3.86		189,811			3,248	3.45
Total securities (TE)^1^		1,799,944			15,326	1.72		573,374			6,695	2.35
Dividends from FHLBC and FRBC		18,543			416	4.52		9,917			228	4.64
Loans and loans held-for-sale ^1 , 2^		3,456,984			74,695	4.36		1,972,638			43,122	4.41
Total interest earning assets		5,805,956			91,488	3.18		2,985,882			50,274	3.40
Cash and due from banks		48,200			-	-		29,227			-	-
Allowance for credit losses on loans		(44,348)			-	-		(32,773)			-	-
Other noninterest bearing assets		372,657			-	-		186,422			-	-
Total assets	$	6,182,465					$	3,168,758

Liabilities and Stockholders' Equity
NOW accounts	$	598,858		$	191	0.06	$	513,694		$	199	0.08
Money market accounts		1,076,624			325	0.06		329,797			137	0.08
Savings accounts		1,207,143			228	0.04		425,996			122	0.06
Time deposits		482,157			542	0.23		379,363			909	0.48
Interest bearing deposits		3,364,782			1,286	0.08		1,648,850			1,367	0.17
Securities sold under repurchase agreements		36,837			20	0.11		75,066			52	0.14
Other short-term borrowings		-			-	-		-			-	-
Junior subordinated debentures		25,773			564	4.41		25,773			564	4.41
Subordinated debentures		59,233			1,093	3.72		28,197			517	3.70
Senior note		44,507			1,063	4.82		44,402			1,346	6.11
Notes payable and other borrowings		16,040			198	2.49		22,787			242	2.14
Total interest bearing liabilities		3,547,172			4,224	0.24		1,845,075			4,088	0.45
Noninterest bearing deposits		2,109,914			-	-		974,809			-	-
Other liabilities		46,648			-	-		37,173			-	-
Stockholders' equity		478,731			-	-		311,701			-	-
Total liabilities and stockholders' equity	$	6,182,465					$	3,168,758
Net interest income (GAAP)				$	86,496					$	45,497
Net interest margin (GAAP)						3.00						3.07

Net interest income (TE)^1^				$	87,264					$	46,186
Net interest margin (TE)^1^						3.03						3.12
Interest bearing liabilities to earning assets		61.10	%					61.79	%

^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 48, and includes fees of $1.3 million and $2.6 million for the six months ended June 30, 2022 and 2021, respectively. 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 compare returns more appropriately 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									Six Months Ended
	June 30,			March 31,			June 30,			June 30,
Net Interest Margin	2022		****	2022			2021			2022			2021


Interest income (GAAP)	$	47,389		$	43,331		$	24,194		$	90,720		$	49,585
Taxable-equivalent adjustment:
Loans		6			5			3			11			7
Securities		376			381			334			757			682
Interest and dividend income (TE)		47,771			43,717			24,531			91,488			50,274
Interest expense (GAAP)		2,125			2,099			2,240			4,224			4,088
Net interest income (TE)	$	45,646		$	41,618		$	22,291		$	87,264		$	46,186
Net interest income (GAAP)	$	45,264		$	41,232		$	21,954		$	86,496		$	45,497
Average interest earning assets	$	5,748,769		$	5,863,777		$	3,054,503		$	5,805,956		$	2,985,882
Net interest margin (GAAP)		3.16	%		2.85	%		2.88	%		3.00	%		3.07	%
Net interest margin (TE)		3.18	%		2.88	%		2.93	%		3.03	%		3.12	%

Noninterest Income

Three months ended June 30, 2022 and 2021

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


										2nd Quarter 2022
Noninterest Income	Three Months Ended									Percent Change From
(Dollars in thousands)	June 30,			March 31,			June 30,			March 31,		June 30,
	2022		****	2022		****	2021		****	2022	****	2021
Wealth management	$	2,506		$	2,698		$	2,389		(7.1)		4.9
Service charges on deposits		2,328			2,074			1,221		12.2		90.7
Residential mortgage banking revenue
Secondary mortgage fees		50			139			272		(64.0)		(81.6)
MSRs mark to market gain (loss)		82			2,978			(1,033)		(97.2)		(107.9)
Mortgage servicing income		579			519			507		11.6		14.2
Net (loss) gain on sales of mortgage loans		(262)			1,495			1,895		(117.5)		(113.8)
Total residential mortgage banking revenue		449			5,131			1,641		(91.2)		(72.6)
Securities (losses) gains, net		(33)			-			2		N/M		N/M
Change in cash surrender value of BOLI		72			124			423		(41.9)		(83.0)
Card related income		2,965			2,567			1,666		15.5		78.0
Other income		924			869			577		6.3		60.1
Total noninterest income	$	9,211		$	13,463		$	7,919		(31.6)		16.3

N/M - Not meaningful

Noninterest income decreased $4.3 million, or 31.6%, in the second quarter of 2022, compared to the first quarter of 2022, and increased $1.3 million, or 16.3%, compared to the second quarter of 2021. The decrease from the linked quarter was primarily driven by a $4.7 million decline in residential mortgage banking revenue, attributable to a $2.9 million decline in mark to market gain on mortgage 48

Table of Contents servicing rights (MSRs) due to market interest rate changes in the first six months of 2022, and a $262,000 net loss on the sale of mortgage loans in the second quarter of 2022, compared to a $1.5 million net gain in the first quarter of 2022, due to the impact of interest rate locks in the rising interest rate environment during the period. In addition, wealth management income decreased $192,000 from the linked quarter due to a decline in assets under management as a result of global stock market losses. These decreases were partially offset by increases in card related income of $398,000 and service charges on deposits of $254,000 in the second quarter of 2022, compared to the first quarter of 2022.

The increase in noninterest income in the second quarter of 2022, compared to the second quarter of 2021, is primarily due to a $1.3 million increase in card related income, a $1.1 million increase in service charges on deposits, a $117,000 increase in wealth management fees, and a $347,000 increase in other income, each stemming from the inclusion of West Suburban activity in 2022. Partially offsetting these increases was a $1.2 million decline in residential mortgage banking revenue, due to a decrease in mortgage origination volume in the second quarter of 2022, as well as changes in interest rates effecting the mortgage banking derivative, and a $351,000 decrease in the cash surrender value of BOLI, due to market interest rate fluctuations.

Six months ended June 30, 2022 and 2021


Noninterest Income	Six Months Ended						YTD
(Dollars in thousands)	June 30,			June 30,			Percent
	2022		****	2021		****	Change
Wealth management	$	5,204		$	4,540		14.6
Service charges on deposits		4,402			2,416		82.2
Residential mortgage banking revenue
Secondary mortgage fees		189			594		(68.2)
MSRs mark to market gain (loss)		3,060			80		N/M
Mortgage servicing income		1,098			1,074		2.2
Net gain on sales of mortgage loans		1,233			5,616		(78.0)
Total residential mortgage banking revenue		5,580			7,364		(24.2)
Securities gains (losses) , net		(33)			2		N/M
Change in cash surrender value of BOLI		196			757		(74.1)
Card related income		5,532			3,113		77.7
Other income		1,793			1,027		74.6
Total noninterest income	$	22,674		$	19,219		18.0

Noninterest income increased $3.5 million, or 18.0%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. This increase was primarily driven by a $2.4 million increase in card related income, a $2.0 million increase in service charges on deposits, a $664,000 increase in wealth management fees, and a $766,000 increase in other income, each stemming from the inclusion of West Suburban related activity in our results for the six months ended June 30, 2022. Partially offsetting these increases was a $1.8 million decline in mortgage banking revenue year over year, comprised primarily of a $4.4 million decrease in net gain on sales of mortgage loans, partially offset by a $3.0 million mark to market gain on MSRs, both due to the increasing interest rate environment, and a $561,000 decline in the cash surrender value of BOLI.

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Noninterest Expense

Three months ended June 30, 2022 and 2021

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


										2nd Quarter 2022
Noninterest Expense	Three Months Ended									Percent Change From
(Dollars in thousands)	June 30,			March 31,			June 30,			March 31,		June 30,
	2022		****	2022		****	2021		****	2022	****	2021
Salaries	$	15,995		$	15,598		$	9,435		2.5		69.5
Officers incentive		1,662			994			1,194		67.2		39.2
Benefits and other		3,675			3,375			2,267		8.9		62.1
Total salaries and employee benefits		21,332			19,967			12,896		6.8		65.4
Occupancy, furniture and equipment expense		3,046			3,699			2,303		(17.7)		32.3
Computer and data processing		4,006			6,268			1,304		(36.1)		207.2
FDIC insurance		702			410			192		71.2		265.6
General bank insurance		351			315			277		11.4		26.7
Amortization of core deposit intangible asset		659			665			115		(0.9)		473.0
Advertising expense		194			182			95		6.6		104.2
Card related expense		1,057			534			626		97.9		68.8
Legal fees		179			257			135		(30.4)		32.6
Consulting & management fees		523			616			250		(15.1)		109.2
Other real estate owned expense (gain), net		87			(12)			77		(825.0)		13.0
Other expense		5,113			5,351			3,131		(4.4)		63.3
Total noninterest expense	$	37,249		$	38,252		$	21,401		(2.6)		74.1
Efficiency ratio (GAAP)^1^		67.07	%		72.70	%		68.63	%
Adjusted efficiency ratio (non-GAAP)^2^		62.69	%		61.89	%		67.65	%

^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, net of gain on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities 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 52 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the second quarter of 2022 decreased $1.0 million, or 2.6%, compared to the first quarter of 2022, and increased $15.8 million, or 74.1%, compared to the second quarter of 2021. The linked quarter decrease was primarily attributable to $3.3 million of West Suburban acquisition-related costs for the second quarter of 2022, compared to $5.6 million for the first quarter of 2022. These acquisition-related costs included a $3.2 million decrease in computer and data processing expense in the second quarter of 2022, primarily due to acquisition-related core system conversion costs, and a $489,000 decrease in other expense due to ancillary teller and mobile banking systems conversion costs occurring in the first quarter of 2022. Occupancy, furniture and equipment costs also decreased $850,000 in the second quarter of 2022, compared to the prior quarter, due to net gains on branch sales during the quarter. These decreases were partially offset by a $1.4 million increase in salaries and employee benefits, largely the result of bonuses paid to non-officer employees for efforts during the acquisition and conversion period, and a $523,000 increase in card related expense, due to the growth in customer transactions and related volume charges, as well as certain credits recorded in the first quarter of 2022.

The year over year increase in noninterest expense is primarily attributable to an $8.4 million increase in salaries and employee benefits, a $2.7 million increase in computer and data processing expense, a $2.0 million increase in other expense, and a $743,000 increase in occupancy, furniture and equipment expense. Salaries and officer incentive increased $6.6 million and $468,000, respectively, in the second quarter of 2022, compared to the like quarter of 2021, primarily due to additional employees from our acquisition of West Suburban, as well as growth in our commercial lending team. Employee benefits expense increased $1.4 million in the second quarter of 50

Table of Contents 2022, compared to the second 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. 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 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 $623,000, which was due to acquisition-related costs in the second quarter of 2022, as well as the impact of a quarter of other expense from the inclusion of West Suburban activity.

Six months ended June 30, 2022 and 2021


Noninterest Expense	Six Months Ended						YTD
(Dollars in thousands)	June 30,			June 30,			Percent
	2022		****	2021		****	Change
Salaries	$	31,593		$	18,651		69.4
Officers incentive		2,656			2,847		(6.7)
Benefits and other		7,050			4,904		43.8
Total salaries and employee benefits		41,299			26,402		56.4
Occupancy, furniture and equipment expense		6,745			4,770		41.4
Computer and data processing		10,274			2,602		294.9
FDIC insurance		1,112			393		183.0
General bank insurance		666			553		20.4
Amortization of core deposit intangible asset		1,324			235		463.4
Advertising expense		376			155		142.6
Card related expense		1,591			1,219		30.5
Legal fees		436			190		129.5
Consulting & management fees		1,139			667		70.8
Other real estate owned expense, net		75			113		(33.6)
Other expense		10,464			5,840		79.2
Total noninterest expense	$	75,501		$	43,139		75.0
Efficiency ratio (GAAP)^1^		69.81	%		66.21	%
Adjusted efficiency ratio (non-GAAP)^2^		62.30	%		65.31	%

^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, net of gain on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities 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 52 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent

Noninterest expense for the six months ended June 30, 2022, increased $32.4 million, or 75.0%, compared to the six months ended June 30, 2021, primarily due to an increase in salaries and employee benefits, occupancy, furniture and equipment, computer and data processing, and other expenses, which increases primarily resulted from our acquisition of West Suburban in December 2021. Salaries and employee benefits increased $14.9 million largely from the additional employees from West Suburban, as well as incentives and merit increases effective in the second quarter of 2022. Occupancy, furniture and equipment increased $2.0 million or 41.4% due to additional facilities acquired with our acquisition of West Suburban, net of gains from the sale of overlapping branches. Computer and data processing increased $7.7 million, or 294.9%, primarily related to costs of operating multiple systems prior to conversion as well as data conversion costs. Other expense increased $4.6 million or 79.2% primarily from a $2.4 million increase to net teller and bill paying expense, and $931,000 of other acquisition-related costs. In addition, FDIC insurance increased $719,000 due to our increased asset size, as well as the absence of assessment credits fully utilized in the 2021 year to date period. Amortization of core deposit intangible increased $1.1 million for the six months ended June 30, 2022, compared to the prior year like period, due to the West Suburban acquisition. Finally, consulting and management fees increased $472,000 due to $572,000 of acquisition-related costs and general ledger reclasses in the first six months of 2022. 51

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Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures


	GAAP									Non-GAAP
		Three Months Ended									Three Months Ended
	June 30,			March 31,			June 30,			June 30,			March 31,			June 30,
	2022			2022			2021			2022			2022			2021
Efficiency Ratio / Adjusted Efficiency Ratio

Noninterest expense	$	37,249		$	38,252		$	21,401		$	37,249		$	38,252		$	21,401
Less amortization of core deposit		659			665			115			659			665			115
Less other real estate expense, net		87			(12)			77			87			(12)			77
Less merger related costs, net of gain on branch sales		N/A			N/A			N/A			2,132			5,334			-
Noninterest expense less adjustments	$	36,503		$	37,599		$	21,209		$	34,371		$	32,265		$	21,209

Net interest income	$	45,264		$	41,232		$	21,954		$	45,264		$	41,232		$	21,954
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			6			5			3
Securities		N/A			N/A			N/A			376			381			334
Net interest income including adjustments		45,264			41,232			21,954			45,646			41,618			22,291
Noninterest income		9,211			13,463			7,919			9,211			13,463			7,919
Less securities (losses) gains		(33)			-			2			(33)			-			2
Less MSRs mark to market gain (loss)		82			2,978			(1,033)			82			2,978			(1,033)
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			N/A			19			33			112
Noninterest income (less) / including adjustments		9,162			10,485			8,950			9,181			10,518			9,062

Net interest income including adjustments plus noninterest income (less) / including adjustments	$	54,426		$	51,717		$	30,904		$	54,827		$	52,136		$	31,353
Efficiency ratio / Adjusted efficiency ratio		67.07	%		72.70	%		68.63	%		62.69	%		61.89	%		67.65	%

Income Taxes

We recorded income tax expense of $4.4 million for the second quarter of 2022 on $16.7 million of pretax income, compared to income tax expense of $4.4 million on $16.4 million of pretax income in the first quarter of 2022, and income tax expense of $3.2 million on $12.0 million of pretax income in the second quarter of 2021. Our effective tax rate was 26.6% in the second quarter of 2022, 26.9% for the first quarter of 2022, and 26.3% for the second quarter of 2021.

We recorded income tax expense of $8.9 million on $33.1 million of pretax income for the six months ended June 30, 2022, compared to income tax expense of $7.4 million on $28.1 million of pretax income in the like 2021 period. The effective tax rate was 26.7% and 26.3% for the second quarter of 2022 and the second quarter of 2021, respectively.

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 or six months ended June 30, 2022. We had no valuation reserve on the deferred tax assets as of June 30, 2022.

Financial Condition

Total assets decreased $206.6 million to $6.01 billion at June 30, 2022, from $6.21 billion at December 31, 2021, due primarily to a net decrease in cash and cash equivalents of $470.7 million, offset by increases of $203.2 million in net loans, $40.8 million in securities available-for-sale, and $26.4 million in deferred tax assets. The decrease in cash and cash equivalents was primarily due to the use of cash in the abovementioned asset increases, as well as the decrease in customer deposits of $123.4 million and loan growth. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were $5.3 billion at June 30, 2022, a decrease of $123.4 million from December 31, 2021, primarily due to seasonal decreases of municipal deposits, and to a lesser extent declines in interest bearing demand accounts, savings, money market, NOW, and time deposits in 2022. 52

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											June 30, 2022
Securities		As of									Percent Change From
(Dollars in thousands)		June 30,			December 31,			June 30,			December 31,		June 30,
	****	2022		****	2021		****	2021		****	2021	****	2021
Securities available-for-sale, at fair value
U.S. Treasuries		$	214,820		$	202,339		$	4,086		6.2		N/M
U.S. government agencies			57,896			61,888			6,038		(6.5)		858.9
U.S. government agencies mortgage-backed			141,836			172,302			18,939		(17.7)		648.9
States and political subdivisions			233,652			257,609			242,748		(9.3)		(3.7)
Corporate bonds			9,543			9,887			31,715		(3.5)		(69.9)
Collateralized mortgage obligations			641,498			672,967			101,912		(4.7)		529.5
Asset-backed securities			259,622			236,877			145,356		9.6		78.6
Collateralized loan obligations			175,549			79,763			29,154		120.1		502.1
Total securities		$	1,734,416		$	1,693,632		$	579,948		2.4		199.1

N/M - Not meaningful

Securities available-for-sale increased $40.8 million as of June 30, 2022, compared to December 31, 2021, and increased $1.15 billion compared to June 30, 2021. The increase in the portfolio during the second quarter of 2022 was driven by the purchase of $9.7 million of states and political subdivisions, $8.5 million of collateralized mortgage obligations, $3.7 million of asset-backed securities, and $14.0 million of collateralized loan obligations. These purchases were partially offset by $76.1 million of calls, maturities, sales and paydowns during the second quarter of 2022, and an unrealized mark to market loss adjustment of $40.5 million and net premium amortization of $1.5 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 $1.03 billion of purchases in the last twelve months, less $601.0 million of sales in that same period, to utilize our excess cash on hand. There was one security sale during the second quarter of 2022 and one during the second quarter of 2021, resulting in a loss of $33,000 and gain of $2,000 respectively.


							June 30, 2022
Loans	As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,		June 30,
	2022		2021		2021		2021	****	2021
Commercial	$	806,725	$	771,474	$	344,084	4.6		134.5
Leases		230,677		176,031		154,512	31.0		49.3
Commercial real estate – investor		1,076,678		957,389		569,745	12.5		89.0
Commercial real estate – owner occupied		627,898		574,384		318,259	9.3		97.3
Construction		170,037		206,132		100,544	(17.5)		69.1
Residential real estate – investor		61,220		63,399		50,127	(3.4)		22.1
Residential real estate – owner occupied		207,836		213,248		105,419	(2.5)		97.2
Multifamily		310,706		309,164		161,628	0.5		92.2
HELOC		111,072		115,664		72,475	(4.0)		53.3
HELOC – purchased		9,066		10,626		14,436	(14.7)		(37.2)
Other ^(1)^		13,155		23,293		12,137	(43.5)		8.4
Total loans	$	3,625,070	$	3,420,804	$	1,903,366	6.0		90.5

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

Table of Contents Total loans were $3.63 billion as of June 30, 2022, an increase of $204.3 million from December 31, 2021. The increase in total loans in the first six months of 2022, compared to December 31, 2021, was due primarily to growth in loan originations within commercial real estate – investor, which increased by $119.3 million, and leases, which increased by $54.6 million from December 31, 2021. Total loans increased $1.72 billion from June 30, 2021 to June 30, 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 71.0% of the portfolio as of June 30, 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 $2.6 million to $42.1 million at June 30, 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 1.2% as of June 30, 2022, 1.3% as of December 31, 2021, and 1.2% as of June 30, 2021. The distribution of our nonperforming loans is shown in the following table.


							June 30, 2022
Nonperforming Loans	As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,
	2022		2021		2021		2021	2021
Commercial	$	11,600	$	13,291	$	-	(12.7)	N/M
Leases		2,005		3,754		2,526	(46.6)	(20.6)
Commercial real estate – Investor		8,324		5,694		1,915	46.2	334.7
Commercial real estate – Owner occupied		10,670		13,231		7,078	(19.4)	50.7
Construction		1,238		160		3,470	673.8	(64.3)
Residential real estate – Investor		1,092		899		840	21.5	30.0
Residential real estate – Owner occupied		3,642		5,019		3,564	(27.4)	2.2
Multifamily		907		1,573		2,723	(42.3)	(66.7)
HELOC		2,442		862		810	183.3	201.5
HELOC – Purchased		171		180		-	(5.0)	N/M
Other ^1^		3		3		195	-	(98.5)
Total nonperforming loans	$	42,094	$	44,666	$	23,121	(5.8)	82.1

N/M - Not meaningful

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

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


										June 30, 2022
Nonperforming Assets	As of									Percent Change From
(Dollars in Thousands)	June 30,			December 31,			June 30,			December 31,	June 30,
	2022		****	2021		****	2021		****	2021	2021
Nonaccrual loans	$	35,712		$	41,531		$	22,784		(14.0)	56.7
Performing troubled debt restructured loans accruing interest		1,108			25			201		N/M	451.2
Loans past due 90 days or more and still accruing interest		5,274			3,110			136		69.6	N/M
Total nonperforming loans		42,094			44,666			23,121		(5.8)	82.1
Other real estate owned		1,624			2,356			1,877		(31.1)	(13.5)
Total nonperforming assets	$	43,718		$	47,022		$	24,998		(7.0)	74.9


30-89 days past due loans and still accruing interest	$	24,681		$	10,745		$	8,654
Nonaccrual loans to total loans		1.0	%		1.2	%		1.2	%
Nonperforming loans to total loans		1.2	%		1.3	%		1.2	%
Nonperforming assets to total loans plus OREO		1.2	%		1.4	%		1.3	%

Allowance for credit losses	$	45,388		$	44,281		$	28,639
Allowance for credit losses to total loans		1.3	%		1.3	%		1.5	%
Allowance for credit losses to nonaccrual loans		127.1	%		106.6	%		125.7	%

N/M - Not meaningful

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)	June 30,		% of	March 31,		% of	June 30,		% of
	2022		Total^1^	2022		Total^1^	2021		Total^1^
Commercial	$	44	17.6	$	-	-	$	190	292.3
Leases		-	-		-	-		28	43.1
Commercial real estate – investor		225	90.0		213	72.7		(20)	(30.8)
Commercial real estate – owner occupied		(7)	(2.8)		113	38.6		21	32.3
Residential real estate – investor		(5)	(2.0)		(10)	(3.4)		(10)	(15.4)
Residential real estate – owner occupied		(22)	(8.8)		(83)	(28.3)		(61)	(93.8)
HELOC		(31)	(12.4)		(35)	(11.9)		(72)	(110.8)
Other ^2^		46	18.4		95	32.3		(11)	(16.9)
Net charge–offs	$	250	100.0	$	293	100.0	$	65	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 $250,000 were recorded for the second quarter of 2022, compared to net charge-offs of $293,000 for the first quarter of 2022, and net charge-offs of $65,000 for the second quarter of 2021, reflecting continuing management attention to credit quality and remediation efforts. The net charge-offs for the second quarter of 2022 were primarily due to one commercial real estate - investor charge off for 243,000. 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.

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


							June 30, 2022
Classified Assets	As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,
	2022		2021		2021		2021	2021
Commercial	$	31,577	$	32,712	$	482	(3.5)	N/M
Leases		2,005		3,754		3,007	(46.6)	(33.3)
Commercial real estate – investor		30,407		10,667		5,063	185.1	500.6
Commercial real estate – owner occupied		28,715		15,429		8,702	86.1	230.0
Construction		1,238		2,104		5,393	(41.2)	(77.0)
Residential real estate – investor		1,246		1,265		1,082	(1.5)	15.2
Residential real estate – owner occupied		3,785		5,099		4,578	(25.8)	(17.3)
Multifamily		1,336		2,278		8,477	(41.4)	(84.2)
HELOC		2,681		1,243		1,090	115.7	146.0
HELOC – purchased		172		180		-	(4.4)	N/M
Other ^1^		2		10		2	(80.0)	-
Total classified loans		103,164		74,741		37,876	38.0	172.4
Other real estate owned		1,624		2,356		1,877	(31.1)	(13.5)
Total classified assets	$	104,788	$	77,097	$	39,753	35.9	163.6

N/M - Not meaningful

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

Total classified loans and classified assets increased $27.7 million as of June 30, 2022, from the levels at December 31, 2021. The increase is due to the addition of four commercial real estate – investor loans totaling $19.7 million and one commercial real estate – owner occupied loan for $15.4 million in the second quarter. The increase from June 30, 2021 is primarily due to the $15.4 million addition of the West Suburban loan portfolio in late 2021. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ACL on loans as another measure of overall change in loan related asset quality, which is referred to as the “classified assets ratio.” The classified assets ratio was 17.79% for the period ended June 30, 2022, compared to 13.79% as of December 31, 2021, and 10.75% as of June 30, 2021. The increase in the classified assets ratio for the period ended June 30, 2022, compared to June 30, 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 June 30, 2022, our allowance for credit losses (“ACL”) on loans totaled $45.4 million, and our ACL on unfunded commitments, included in other liabilities, totaled $4.7 million. In the second quarter of 2022, we recorded provision expense on loans of $1.3 million, based on our assessment of nonperforming loan metrics and trends and estimated future credit losses, which was offset by a $780,000 reduction in 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 $550,000 net impact to the provision for credit losses for the second quarter of 2022.

The ACL on loans totaled $44.3 million as of both March 31, 2022 and December 31, 2021, and $28.6 million as of June 30, 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 second quarter of 2021 due to a $2.3 million release of the provision for credit losses.

Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loans, leases and unfunded commitments. Our ACL on loans to total loans was 1.3% as of June 30, 2022, and December 31, 2021. See Item 7 – Critical Accounting Estimates in the Management Discussion and Analysis in our 2021 Annual Report in Form 10-K for discussion of our ACL methodology on loans. 56

Table of Contents 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								Six Months Ended
	June 30,			March 31,			June 30,			June 30,			June 30,
	2022			2022			2021			2022			2021
Allowance at beginning of period	$	44,308		$	44,281		$	30,967		$	44,281		$	33,855
Charge–offs:
Commercial		52			30			207			82			209
Leases		-			-			28			-			28
Commercial real estate – investor		243			236			-			480			-
Commercial real estate – owner occupied		-			121			31			121			34
Construction		-			-			-			-			-
Residential real estate – investor		-			-			-			-			-
Residential real estate – owner occupied		-			-			-			-			-
Multifamily		-			-			-			-			-
HELOC		-			-			5			-			17
HELOC – purchased		-			-			-			-			-
Other ^1^		91			127			30			217			55
Total charge–offs		386			514			301			900			343
Recoveries:
Commercial		8			30			17			38			37
Leases		-			-			-			-			-
Commercial real estate – investor		18			23			20			41			40
Commercial real estate – owner occupied		7			8			10			15			218
Construction		-			-			-			-			-
Residential real estate – investor		5			10			10			15			276
Residential real estate – owner occupied		22			83			61			105			110
Multifamily		-			-			-			-			-
HELOC		31			35			77			67			101
HELOC – purchased		-			-			-			-			-
Other ^1^		45			32			41			76			78
Total recoveries		136			221			236			357			860
Net charge-offs (recoveries)		250			293			65			543			(517)
Provision for (release of) credit losses on loans		1,330			320			(2,263)			1,650			(5,733)
Allowance at end of period	$	45,388		$	44,308		$	28,639		$	45,388		$	28,639

Average total loans (exclusive of loans held–for–sale)	$	3,505,806		$	3,397,827		$	1,926,105		$	3,452,115		$	1,965,911
Net charge–offs / (recoveries) to average loans		0.01	%		0.01	%		0.00	%		0.02	%		(0.03)	%
Allowance at period end to average loans		1.29	%		1.30	%		1.49	%		1.31	%		1.46	%

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

The coverage ratio of the ACL on loans to nonperforming loans was 107.8% as of June 30, 2022, which was a decrease from the coverage ratio of 116.7% as of March 31, 2021 and a decrease from 123.9% as of June 30, 2021. When measured as a percentage of average loans, our total ACL on loans was 1.31% for the six months ended June 30, 2022 and 1.46% for the like period of June 30, 2021

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at June 30, 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, 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.

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Other Real Estate Owned

As of June 30, 2022, OREO totaled $1.6 million, reflecting a $732,000 decrease from the $2.4 million at December 31, 2021, and a $254,000 decrease from the $1.9 million at June 30, 2021. In the second quarter of 2022, we disposed of three properties totaling $646,191 in net book value, which resulted in a gain on sale of OREO of $81,000 and no transfers to OREO. 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 second quarter of 2022, we recorded $104,000 of OREO valuation reserve adjustments, compared to $14,000 of valuation reserve adjustments recorded in the fourth quarter of 2021, and $61,000 of valuation reserve adjustments recorded in the second quarter of 2021.


							June 30, 2022
OREO	Three Months Ended						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,
	2022		2021		2021		2021	2021
Balance at beginning of period	$	2,374	$	1,912	$	2,163	24.2	9.8
Property additions, net of acquisition adjustments		-		5,678		-	(100.0)	-
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		646		5,220		225	(87.6)	187.1
Period valuation write-down		104		14		61	642.9	70.5
Balance at end of period	$	1,624	$	2,356	$	1,877	(31.1)	(13.5)

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 $930,000, or approximately 57.2% of total OREO at June 30, 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)	June 30, 2022				December 31, 2021				June 30, 2021
		Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	63	4	%	$	645	27	%	$	450	24	%
Lots (single family and commercial)		1,261	78	%		1,411	56	%		1,075	57	%
Vacant land		300	18	%		300	17	%		352	19	%
Total other real estate owned	$	1,624	100	%	$	2,356	100	%	$	1,877	100	%

Deposits and Borrowings


							June 30, 2022
Deposits	As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,		June 30,
	2022		2021		2021		2021	****	2021
Noninterest bearing demand	$	2,078,272	$	2,093,494	$	1,028,558	(0.7)		102.1
Savings		1,199,027		1,178,575		442,805	1.7		170.8
NOW accounts		609,558		587,381		531,231	3.8		14.7
Money market accounts		994,616		1,102,972		331,144	(9.8)		200.4
Certificates of deposit of less than $100,000		268,723		296,298		183,444	(9.3)		46.5
Certificates of deposit of $100,000 through $250,000		140,266		138,794		109,500	1.1		28.1
Certificates of deposit of more than $250,000		52,393		68,718		55,319	(23.8)		(5.3)
Total deposits	$	5,342,855	$	5,466,232	$	2,682,001	(2.3)		99.2

Total deposits were $5.34 billion at June 30, 2022, which reflects a $123.4 million decrease from total deposits of $5.47 billion at December 31, 2021, and an increase of $2.66 billion from total deposits of $2.68 billion at June 30, 2021. The decrease in deposits at June 30, 2022, compared to December 31, 2021, was primarily due to decreases in demand deposits of $15.2 million, money market 58

Table of Contents accounts of $108.3 million and time deposits of $42.4 million partially offset by increases in savings and NOW accounts of $42.6 million. The increase in deposits at June 30, 2022, compared to June 30, 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 $37.6 million at June 30, 2022, a $12.7 million, or 25.3%, decrease from $50.3 million at December 31, 2021. Our notes payable and other borrowings is comprised of $11.0 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 $11.0 million as of June 30, 2022, decreased $8.1 million from December 31, 2021, and decreased $10.2 million from June 30, 2021.

The Company is indebted on senior notes originated in December 2016, totaling $44.5 million, net of deferred issuance costs, as of June 30, 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 June 30, 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 June 30, 2022, total stockholders’ equity was $448.9 million, which was a decrease of $53.1 million from $502.0 million as of December 31, 2021. This decrease is primarily attributable to a decrease in accumulated other comprehensive income of $74.0 million in the first six months 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 $4.4 million for payment of dividends to our common stockholders in the first six months of 2022. Partially offsetting this decrease was $24.3 million of net income for the six months ended June 30, 2022. Total stockholders’ equity as of June 30, 2022, increased $133.0 million compared to June 30, 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 $79.7 million year over year.

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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		June 30,		December 31,		June 30,
	Buffer, if applicable^1^		Provisions^2^		2022		2021		2021
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		9.35	%	9.46	%	12.72	%
Total risk-based capital ratio	10.50	%	N/A		12.27	%	12.55	%	17.60	%
Tier 1 risk-based capital ratio	8.50	%	N/A		9.91	%	10.06	%	13.83	%
Tier 1 leverage ratio	4.00	%	N/A		7.24	%	7.81	%	9.68	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	12.24	%	12.41	%	15.23	%
Total risk-based capital ratio	10.50	%	10.00	%	13.25	%	13.46	%	16.33	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	12.24	%	12.41	%	15.23	%
Tier 1 leverage ratio	4.00	%	5.00	%	8.94	%	9.58	%	10.63	%

^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 June 30, 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 7.47% at June 30, 2022. Our GAAP tangible common equity to tangible assets ratio was 5.89% at June 30, 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 5.93% at June 30, 2022, primarily due to a decline in tangible common equity in the second quarter of 2022. The decline in tangible common equity was due to a decrease in accumulated other comprehensive income of $74.0 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 second quarter of 2022.

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


	June 30, 2022						December 31, 2021
Tangible common equity	GAAP			Non-GAAP			GAAP			Non-GAAP
(Dollars in thousands)

Total Equity	$	448,904		$	448,904		$	502,027		$	502,027
Less: Goodwill and intangible assets		101,312			101,312			102,636			102,636
Add: Limitation of exclusion of core deposit intangible (80%)		N/A			2,996			N/A			3,261
Adjusted goodwill and intangible assets		101,312			98,316			102,636			99,375
Tangible common equity	$	347,592		$	350,588		$	399,391		$	402,652
Tangible assets
Total assets	$	6,005,543		$	6,005,543		$	6,212,189		$	6,212,189
Less: Adjusted goodwill and intangible assets		101,312			98,316			102,636			99,375
Tangible assets	$	5,904,231		$	5,907,227		$	6,109,553		$	6,112,814

Common equity to total assets		7.47	%		7.47	%		8.08	%		8.08	%
Tangible common equity to tangible assets		5.89	%		5.93	%		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 June 30, 2022, our cash on hand liquidity totaled $281.3 million, a decrease of $470.8 million over cash balances held as of December 31, 2021.

Net cash inflows from operating activities were $27.1 million during the first six months of 2022, compared with net cash inflows of $24.5 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 inflows for the first six months of 2022, and for 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 six months ended June 30, 2022, but were a source of inflows 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 $349.7 million in the six months ended June 30, 2022, compared to net cash inflows of $47.0 million in the same period in 2021. In the first six months of 2022, securities transactions accounted for net outflows of $149.4 million, and the principal change on loans accounted for net outflows of $200.0 million. In the first six months of 2021, securities transactions accounted for net outflows of $86.3 million, and net principal on loans funded accounted for net inflows of $133.4 million. Proceeds from sales of OREO accounted for $845,000 and $565,000 in investing cash inflows for the six months ended June 30, 2022 and 2021, respectively.

Net cash outflows from financing activities in the six months ended June 30, 2022, were $148.2 million, compared with net cash inflows of $191.4 million in the six months ended June 30, 2021. Net deposit outflows in the first six months of 2022 were $122.6 million compared to net deposit inflows of $144.9 million in the first six months of 2021. Other short-term borrowings had no net cash inflows or outflows in the first six months of 2022 or 2021. Changes in securities sold under repurchase agreements accounted for outflows of $12.7 million and inflows of $1.6 million for the six months ended June 30, 2022 and 2021, respectively. Dividends paid on our common stock totaled $4.4 million in the six months ended June 30, 2022, compared to dividends paid of $1.7 million 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 stock in the first six months of 2022 resulted in outflows of $400,000, compared to cash outflows of $10.4 million in the first six months of 2021. 61

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Cash and cash equivalents for the six months ended June 30, 2022, totaled $281.3 million, as compared to $592.8 million as of June 30, 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 the federal funds target rate by 0.75% in June 2022 and by another 0.75% in July 2022. The current market expectation is a federal funds target rate of 3.50% by the end of the year, however the market sentiment has been evolving week by week. 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 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 June 30, 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 on-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 June 30, 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 mild mix change in repricing characteristics of new acquired loans.

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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 below -1.0% as certain rates would still fall below zero in those scenarios.


	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	%
June 30, 2022
Dollar change		N/M		$	26,377			$	12,906			$	12,416			$	24,720			$	48,081
Percent change		N/M			(13.3)	%			(6.5)	%			6.3	%			12.5	%			24.2	%

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 9.1% in June 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 June 30, 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 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 June 30, 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.

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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 June 30, 2022 and December 31, 2021; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021; (iii) Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2022 and 2021; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021; (v) Consolidated Statements of Stockholder’s Equity for the six months ended June 30, 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: August 8, 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: August 8, 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: August 8, 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
August 8, 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.

August 8, 2022	/s/ Bradley S. Adams
	Bradley S. Adams
	Executive Vice President and<br>Chief Financial Officer<br>(principal financial and accounting officer)