10-Q - OSBC - Equibles

Table of Contents I

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2023


☐	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)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

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

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 ☒

As of May 5, 2023, the Registrant has 44,665,127 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	36
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	54
Item 4.	Controls and Procedures	56
	PART II

Item 1.	Legal Proceedings	56
Item 1.A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosure	57
Item 5.	Other Information	57
Item 6.	Exhibits	58

	Signatures	59

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 “should,” “anticipate,” “expect,” “estimate,” “intend,” “believe,” “may,” “likely,” “will,” “forecast,” “project,” “looking forward,” “optimistic,” “hopeful,” “potential,” “progress,” “prospect,” “remain,” “continue,” “trend,” “momentum” 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;
●	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, 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;
---	---
●	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;
---	---
●	any increases in FDIC assessment which will increase our cost of doing business;
---	---
●	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, war or terrorist activities, such as the war in Ukraine, essential utility outages, deterioration in the global economy, instability in the credit markets, labor shortages, 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 2022 Annual Report on Form 10-K and in subsequent filings we make with the SEC.
---	---

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

Table of Contents PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)


		(unaudited)
		March 31,		December 31,
	****	2023		2022
Assets
Cash and due from banks		$	50,860	$	56,632
Interest earning deposits with financial institutions			52,162		58,545
Cash and cash equivalents			103,022		115,177
Securities available-for-sale, at fair value			1,455,068		1,539,359
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock			30,205		20,530
Loans held-for-sale			946		491
Loans			4,003,354		3,869,609
Less: allowance for credit losses on loans			53,392		49,480
Net loans			3,949,962		3,820,129
Premises and equipment, net			72,547		72,355
Other real estate owned			1,255		1,561
Mortgage servicing rights, at fair value			10,784		11,189
Goodwill			86,478		86,478
Core deposit intangible			13,054		13,678
Bank-owned life insurance ("BOLI")			106,850		106,608
Deferred tax assets, net			37,845		44,750
Other assets			52,267		56,012
Total assets		$	5,920,283	$	5,888,317

Liabilities
Deposits:
Noninterest bearing demand		$	1,950,144	$	2,051,702
Interest bearing:
Savings, NOW, and money market			2,516,170		2,617,100
Time			430,906		441,921
Total deposits			4,897,220		5,110,723
Securities sold under repurchase agreements			27,897		32,156
Other short-term borrowings			315,000		90,000
Junior subordinated debentures			25,773		25,773
Subordinated debentures			59,318		59,297
Senior notes			44,611		44,585
Notes payable and other borrowings			-		9,000
Other liabilities			53,594		55,642
Total liabilities			5,423,413		5,427,176

Stockholders’ Equity
Common stock			44,705		44,705
Additional paid-in capital			200,121		202,276
Retained earnings			331,890		310,512
Accumulated other comprehensive loss			(79,100)		(93,124)
Treasury stock			(746)		(3,228)
Total stockholders’ equity			496,870		461,141
Total liabilities and stockholders’ equity		$	5,920,283	$	5,888,317


	March 31, 2023		December 31, 2022
	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		44,665,127		44,582,311
Treasury shares		40,023		122,839

See accompanying notes to consolidated financial statements .

Table of Contents Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)


		(unaudited)
		Three Months Ended March 31,
	****	2023		****	2022		****
Interest and dividend income
Loans, including fees		$	57,210		$	36,366
Loans held-for-sale			12			57
Securities:
Taxable			10,735			5,169
Tax exempt			1,337			1,317
Dividends from FHLBC and FRBC stock			280			153
Interest bearing deposits with financial institutions			585			269
Total interest and dividend income			70,159			43,331
Interest expense
Savings, NOW, and money market deposits			1,149			397
Time deposits			664			277
Securities sold under repurchase agreements			9			11
Other short-term borrowings			2,345			-
Junior subordinated debentures			279			280
Subordinated debentures			546			546
Senior notes			994			485
Notes payable and other borrowings			87			103
Total interest expense			6,073			2,099
Net interest and dividend income			64,086			41,232
Provision for credit losses			3,501			-
Net interest and dividend income after provision for credit losses			60,585			41,232
Noninterest income
Wealth management			2,270			2,698
Service charges on deposits			2,424			2,074
Secondary mortgage fees			59			139
Mortgage servicing rights mark to market (loss) gain			(525)			2,978
Mortgage servicing income			516			519
Net gain on sales of mortgage loans			306			1,495
Securities losses, net			(1,675)			-
Change in cash surrender value of BOLI			242			124
Card related income			2,244			2,574
Other income			1,489			862
Total noninterest income			7,350			13,463
Noninterest expense
Salaries and employee benefits			22,248			19,967
Occupancy, furniture and equipment			3,475			3,699
Computer and data processing			1,774			6,268
FDIC insurance			584			410
Net teller & bill paying			502			1,907
General bank insurance			305			315
Amortization of core deposit intangible			624			665
Advertising expense			142			182
Card related expense			1,216			534
Legal fees			319			257
Consulting & management fees			790			616
Other real estate expense, net			306			(12)
Other expense			3,637			3,444
Total noninterest expense			35,922			38,252
Income before income taxes			32,013			16,443
Provision for income taxes			8,406			4,423
Net income		$	23,607		$	12,020

Basic earnings per share		$	0.53		$	0.27
Diluted earnings per share			0.52			0.27
Dividends declared per share			0.05			0.05

See accompanying notes to consolidated financial statements.

Table of Contents Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)


		(unaudited)
		Three Months Ended March 31,
	****	2023		2022		****
Net Income		$	23,607	$	12,020

Unrealized holding gains (losses) on available-for-sale securities arising during the period			16,210		(64,829)
Related tax (expense) benefit			(4,536)		18,153
Holding gains (losses), after tax, on available-for-sale securities			11,674		(46,676)

Less: Reclassification adjustment for the net losses realized during the period
Net realized losses			(1,675)		-
Related tax benefit			471		-
Net realized losses after tax			(1,204)		-
Other comprehensive income (loss) on available-for-sale securities			12,878		(46,676)

Changes in fair value of derivatives used for cash flow hedges			1,602		589
Related tax expense			(456)		(165)
Other comprehensive income on cash flow hedges			1,146		424

Total other comprehensive income (loss)			14,024		(46,252)
Total comprehensive income (loss)		$	37,631	$	(34,232)



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

Balance, January 1, 2023	$	(88,892)	$	(4,232)	$	(93,124)
Other comprehensive income, net of tax		12,878		1,146		14,024
Balance, March 31, 2023	$	(76,014)	$	(3,086)	$	(79,100)

See accompanying notes to consolidated financial statements.

Table of Contents Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


	(Unaudited)
	Three Months Ended March 31,
	2023		2022		****
Cash flows from operating activities
Net income	$	23,607	$	12,020
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount amortization on securities		799		1,809
Securities losses, net		1,675		-
Provision for credit losses		3,501		-
Originations of loans held-for-sale		(10,206)		(32,739)
Proceeds from sales of loans held-for-sale		9,957		30,791
Net gains on sales of mortgage loans		(306)		(1,495)
Mortgage servicing rights mark to market loss (gain)		525		(2,978)
Net accretion of discount on loans and unfunded commitments		(1,180)		(2,382)
Net change in cash surrender value of BOLI		(242)		(124)
Net losses (gains) on sale of other real estate owned		28		(49)
Provision for other real estate owned valuation losses		269		-
Depreciation of fixed assets and amortization of leasehold improvements		1,046		1,086
Net gains on disposal and transfer of fixed assets		(434)		-
Amortization of core deposit intangibles		624		665
Change in current income taxes receivable		7,043		2,955
Deferred tax expense		1,442		1,458
Change in accrued interest receivable and other assets		2,635		893
Accretion of purchase accounting adjustment on time deposits		(367)		(424)
Change in accrued interest payable and other liabilities		(6,344)		(11,739)
Stock based compensation		932		747
Net cash provided by operating activities		35,004		494
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		37,718		75,650
Proceeds from sales of securities available-for-sale		66,170		-
Purchases of securities available-for-sale		(4,186)		(266,250)
Purchases of FHLBC/FRBC stock		(9,675)		(8,717)
Net change in loans		(132,445)		21,900
Proceeds from sales of other real estate owned, net of participations and improvements		300		118
Proceeds from disposition of premises and equipment		756		1,250
Net purchases of premises and equipment		(1,560)		(487)
Net cash used in investing activities		(42,922)		(176,536)
Cash flows from financing activities
Net change in deposits		(213,136)		78,737
Net change in securities sold under repurchase agreements		(4,259)		(16,816)
Net change in other short-term borrowings		225,000		-
Repayment of term note		(9,000)		(1,000)
Net change in notes payable and other borrowings, excluding term note		-		(81)
Dividends paid on common stock		(2,237)		(2,192)
Purchase of treasury stock		(605)		-
Net cash (used in) provided by financing activities		(4,237)		58,648
Net change in cash and cash equivalents		(12,155)		(117,394)
Cash and cash equivalents at beginning of period		115,177		752,107
Cash and cash equivalents at end of period	$	103,022	$	634,713

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, January 1, 2022		$	44,705		$	202,443		$	252,011		$	8,768		$	(5,900)		$	502,027
Net income									12,020									12,020
Other comprehensive loss, net of tax												(46,252)						(46,252)
Dividends declared on common stock, ($0.05 per share)									(2,224)									(2,224)
Stock based compensation						747												747
Balance, March 31, 2022		$	44,705		$	203,190		$	261,807		$	(37,484)		$	(5,900)		$	466,318

Balance, January 1, 2023		$	44,705		$	202,276		$	310,512		$	(93,124)		$	(3,228)		$	461,141
Net income									23,607									23,607
Other comprehensive income, net of tax												14,024						14,024
Dividends declared on common stock, ($0.05 per share)									(2,229)									(2,229)
Vesting of restricted stock						(3,087)									3,087			-
Stock based compensation						932												932
Purchase of treasury stock from taxes withheld on stock awards															(605)			(605)
Balance, March 31, 2023		$	44,705		$	200,121		$	331,890		$	(79,100)		$	(746)		$	496,870

Table of Contents Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information. The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented. Results for the period ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. These interim consolidated financial statements and accompanying notes are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2022. Unless otherwise indicated, dollar amounts in the tables contained in the notes to the consolidated financial statements are in thousands. Certain items in prior periods have been reclassified to conform to the current presentation.

The Company’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles (“GAAP”) and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the consolidated financial statements. Future changes in information may affect these estimates, assumptions, and judgments, which, in turn, may affect amounts reported in the consolidated financial statements.

Recent Accounting Pronouncements

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

ASU 2018-16, ASU 2020-04, ASU 2021-01, and ASU 2022-06 – 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 was effective for annual and interim periods beginning after December 15, 2018, and did not 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. ASU 2022-06 further defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

The Company formed a LIBOR transition team in 2019 and 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 completed the ISDA protocol adherence for LIBOR fallback language for all commercial swaps, met with its commercial loan clients to also guide their swap fallback language adherence, and worked to revise all credit documents being issued by Old Second National Bank (the “Bank”) for new loans to ensure appropriate fallback language is included. We 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 were 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. 9

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

ASU 2022-01 – On March 28, 2022, the FASB issued ASU 2022-01 “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method.” 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. ASU 2022-01 is effective for public business entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, and was adopted by the Company as of January 1, 2023. There was no material impact of the pronouncement to the financial statements of the Company.

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.” 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. ASU 2022-02 was effective for fiscal years beginning after December 15, 2022, including interim periods within those years, and was adopted prospectively by the Company as of January 1, 2023. There was no material impact of the pronouncement to the financial statements of the Company. As of March 31, 2023, the Company has not modified the terms of any loans that are experiencing financial difficulty.

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, 2022. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. During the first quarter of 2023, the Company had no changes to significant accounting policies or estimates.

Subsequent Events

On April 18, 2023, our Board of Directors declared a cash dividend of $0.05 per share payable on May 8, 2023, to stockholders of record as of April 28, 2023; dividends of $2.2 million are scheduled to be paid to stockholders on May 8, 2023.

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. At closing, the Company acquired $2.94 billion of assets, $1.50 billion of loans, $1.07 billion of securities, and $2.69 billion of deposits, net of fair value adjustments. Under the terms of the merger agreement, each outstanding share of West Suburban common stock was exchanged for 42.413 shares of Company common stock, plus $271.15 of cash. This resulted in merger consideration of $295.2 million, based on the closing price of the Company’s common stock on the date of acquisition, which consisted of 15.7 million shares of the Company’s common stock and $100.7 million of cash. Goodwill of $67.9 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, and none of the $67.9 million of goodwill recorded is expected to be deductible for income tax purposes.

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 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)

will be adjusted from time to time. While a significant portion of the portfolio consists of readily marketable securities to address liquidity, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.

Investments are comprised of debt securities and non-marketable equity investments. Securities available-for-sale are carried at fair value. Unrealized gains and losses, net of tax, on securities available-for-sale are reported as a separate component of equity. This balance sheet component changes as interest rates and market conditions change. Unrealized gains and losses are not included in the calculation of regulatory capital.

Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments. FHLBC stock was recorded at $15.3 million at March 31, 2023, and $5.6 million at December 31, 2022. FRBC stock was recorded at $14.9 million at March 31, 2023 and December 31, 2022.

The following tables summarize the amortized cost and fair value of the securities portfolio at March 31, 2023, and December 31, 2022, and the corresponding amounts of gross unrealized gains and losses:


					Gross			Gross
		Amortized			Unrealized			Unrealized		Fair
March 31, 2023	****	Cost^1^		****	Gains		****	Losses		Value
Securities available-for-sale
U.S. Treasury		$	224,195		$	-		$	(9,461)	$	214,734
U.S. government agencies			60,952			-			(4,249)		56,703
U.S. government agencies mortgage-backed			135,504			-			(13,566)		121,938
States and political subdivisions			243,131			1,329			(10,954)		233,506
Corporate bonds			10,000			-			(238)		9,762
Collateralized mortgage obligations			510,992			-			(56,886)		454,106
Asset-backed securities			196,966			4			(7,217)		189,753
Collateralized loan obligations			178,903			-			(4,337)		174,566
Total securities available-for-sale		$	1,560,643		$	1,333		$	(106,908)	$	1,455,068


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2022	Cost^1^		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	224,054	$	-	$	(11,925)	$	212,129
U.S. government agencies		61,178		-		(5,130)		56,048
U.S. government agencies mortgage-backed		140,588		-		(15,598)		124,990
States and political subdivisions		239,999		363		(14,234)		226,128
Corporate bonds		10,000		-		(378)		9,622
Collateralized mortgage obligations		596,336		1		(62,569)		533,768
Asset-backed securities		210,388		6		(8,466)		201,928
Collateralized loan obligations		180,276		-		(5,530)		174,746
Total securities available-for-sale	$	1,662,819	$	370	$	(123,830)	$	1,539,359

^1^ Excludes accrued interest receivable of *$*7.2 million and *$*6.8 million at March 31, 2023 and December 31, 2022, respectively, that is recorded in other assets on the consolidated balance sheets. 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)

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2023, 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		$	64,076	0.72	%	$	62,639
Due after one year through five years			245,837	1.14			233,060
Due after five years through ten years			48,750	3.02			45,537
Due after ten years			179,615	3.06			173,469
			538,278	1.90			514,705
Mortgage-backed and collateralized mortgage obligations			646,496	2.41			576,044
Asset-backed securities			196,966	5.12			189,753
Collateralized loan obligations			178,903	6.45			174,566
Total securities available-for-sale		$	1,560,643	3.04	%	$	1,455,068

At March 31, 2023, the Company’s investments included $148.9 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 student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL securities are generally guaranteed by the U.S Department of Education (“DOE”) at not less than 97% of the outstanding principal amount of the loans. The guarantee will reduce to 85% if the DOE receives reimbursement requests in excess of 5% of insured loans; reimbursement will drop to 75% if reimbursement requests exceed 9% of insured loans. In addition to the DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $20.3 million, or 9.29%, of outstanding principal.

At March 31, 2023, the Company had no securities issued from any one originator, other than the U.S. Government and its agencies, which individually amounted to over 10% of the Company’s stockholders’ equity.

Securities with unrealized losses with no corresponding allowance for credit losses at March 31, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):


	Less than 12 months					12 months or more
March 31, 2023	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. Treasuries	-	$	-	$	-	5	$	9,461	$	214,734	5	$	9,461	$	214,734
U.S. government agencies	-		-		-	9		4,249		56,703	9		4,249		56,703
U.S. government agencies mortgage-backed	3		143		2,235	127		13,423		119,703	130		13,566		121,938
States and political subdivisions	14		434		47,760	24		10,520		82,401	38		10,954		130,161
Corporate bonds	-		-		-	2		238		9,762	2		238		9,762
Collateralized mortgage obligations	13		794		23,540	157		56,092		430,566	170		56,886		454,106
Asset-backed securities	11		745		45,309	39		6,472		144,132	50		7,217		189,441
Collateralized loan obligations	5		222		13,632	29		4,115		160,934	34		4,337		174,566
Total securities available-for-sale	46	$	2,338	$	132,476	392	$	104,570	$	1,218,935	438	$	106,908	$	1,351,411

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	Less than 12 months					12 months or more
December 31, 2022	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. Treasuries	1	$	1,025	$	24,121	4	$	10,900	$	188,008	5	$	11,925	$	212,129
U.S. government agencies	-		-		-	9		5,130		56,048	9		5,130		56,048
U.S. government agencies mortgage-backed	15		975		11,369	117		14,623		113,621	132		15,598		124,990
States and political subdivisions	45		5,800		128,770	15		8,434		48,877	60		14,234		177,647
Corporate bonds	-		-		-	2		378		9,622	2		378		9,622
Collateralized mortgage obligations	80		12,895		180,624	120		49,674		348,880	200		62,569		529,504
Asset-backed securities	30		3,030		121,915	21		5,436		79,659	51		8,466		201,574
Collateralized loan obligations	23		3,579		112,772	11		1,951		61,974	34		5,530		174,746
Total securities available-for-sale	194	$	27,304	$	579,571	299	$	96,526	$	906,689	493	$	123,830	$	1,486,260

Each quarter, we perform an analysis to determine if any of the unrealized losses on securities available-for-sale are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. Our assessment includes a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and our ability and intent to hold the security for a period of time sufficient for a recovery in value. We also consider the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. The portfolio continues to consist of a mix of fixed- and floating-rate, high quality securities, largely rated AA (or better), displaying an overall effective duration of approximately 3.2 years. No credit losses were determined to be present as of March 31, 2023, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the first quarter of 2023.


			Three Months Ended
			March 31,
Securities available-for-sale	****	2023			2022		****
Proceeds from sales of securities		$	66,170		$	-
Gross realized losses on securities			(1,675)			-
Net realized losses		$	(1,675)		$	-
Income tax benefit on net realized losses		$	471		$	-
Effective tax rate applied			28.1	%		N/M

N/M - Not meaningful

As of March 31, 2023, securities valued at $995.3 million were pledged for borrowings, and for other purposes, an increase from $547.8 million of securities pledged at year-end 2022.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 4 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:


	****	March 31, 2023		****	December 31, 2022
Commercial ^1^		$	851,737		$	840,964
Leases			285,831			277,385
Commercial real estate – investor			1,056,787			987,635
Commercial real estate – owner occupied			870,115			854,879
Construction			174,683			180,535
Residential real estate – investor			56,720			57,353
Residential real estate – owner occupied			217,855			219,718
Multifamily			358,991			323,691
HELOC			104,941			109,202
Other ^2^			25,694			18,247
Total loans			4,003,354			3,869,609
Allowance for credit losses on loans			(53,392)			(49,480)
Net loans ^3^		$	3,949,962		$	3,820,129

^1^ Includes $1.3 million and $1.6 million of Paycheck Protection Program (“PPP”) loans at March 31, 2023 and December 31, 2022, respectively.

^2^ The “Other” segment includes consumer loans 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 $17.0 million and $15.9 million at March 31, 2023 and December 31, 2022, respectively, that is recorded in other assets on the consolidated balance sheets.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to 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 70.9% and 70.6% of the portfolio at March 31, 2023, and December 31, 2022, respectively, and include a mix of owner occupied and non-owner occupied commercial real estate, residential, construction and multifamily loans.

The following tables represent the activity in the allowance for credit losses for loans, or the ACL, for the three months ended March 31, 2023 and 2022:



				Provision for
	Beginning			(Release of)									Ending
Allowance for credit losses	Balance		****	Credit Losses		****	Charge-offs		****	Recoveries		****	Balance
Three months ended March 31, 2023
Commercial	$	11,968		$	(581)		$	27		$	151		$	11,511
Leases		2,865			774			882			9			2,766
Commercial real estate – investor		10,674			4,569			-			17			15,260
Commercial real estate – owner occupied		15,001			573			-			2			15,576
Construction		1,546			(501)			-			-			1,045
Residential real estate – investor		768			(41)			-			19			746
Residential real estate – owner occupied		2,046			(334)			-			10			1,722
Multifamily		2,453			212			-			-			2,665
HELOC		1,806			(47)			-			29			1,788
Other		353			28			113			45			313
	$	49,480		$	4,652		$	1,022		$	282		$	53,392

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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



				Provision for
	Beginning			(Release of)									Ending
Allowance for credit losses	Balance		****	Credit Losses		****	Charge-offs		****	Recoveries		****	Balance
Three months ended March 31, 2022
Commercial	$	11,751		$	825		$	30		$	30		$	12,576
Leases		3,480			(907)			-			-			2,573
Commercial real estate – investor		10,795			108			236			23			10,690
Commercial real estate – owner occupied		4,913			3,339			121			8			8,139
Construction		3,373			(515)			-			-			2,858
Residential real estate – investor		760			(67)			-			10			703
Residential real estate – owner occupied		2,832			(965)			-			83			1,950
Multifamily		3,675			(698)			-			-			2,977
HELOC		2,510			(870)			-			35			1,675
Other		192			70			127			32			167
	$	44,281		$	320		$	514		$	221		$	44,308

At March 31, 2023, our allowance for credit losses (“ACL”) on loans totaled $53.4 million, and our ACL on unfunded commitments, included in other liabilities, totaled $3.8 million including related purchase accounting adjustments. In the first quarter of 2023, we recorded net provision expense of $3.5 million based on historical loss rate updates, loan growth, our assessment of nonperforming loan metrics and trends, and estimated future credit losses. The ACL on loans excludes $3.2 million, $4.3 million and $4.2 million of allowance for unfunded commitments as of March 31, 2023, December 31, 2022 and March 31, 2022, respectively, recorded within Other Liabilities. The total ACL on unfunded commitments listed as of March 31, 2023, December 31, 2022, and March 31, 2022 excludes the purchase accounting adjustment of $596,000, $819,000 and $1.5 million, respectively, recorded due to our acquisition of West Suburban, which is also recorded within Other Liabilities, and is being accreted in interest income over the estimated life of the unused commitments.

The following tables presents the collateral dependent loans and the related ACL allocated by segment of loans as of March 31, 2023 and December 31, 2022:


			Accounts								ACL
March 31, 2023	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	871	$	729	$	-	$	364	$	1,964	$	480
Leases		-		-		683		-		683		683
Commercial real estate – investor		30,368		-		-		-		30,368		7,654
Commercial real estate – owner occupied		16,000		-		-		2,293		18,293		5,510
Construction		116		-		-		-		116		-
Residential real estate – investor		675		-		-		-		675		-
Residential real estate – owner occupied		1,541		-		-		-		1,541		-
Multifamily		1,308		-		-		-		1,308		-
HELOC		231		-		-		-		231		47
Total	$	51,110	$	729	$	683	$	2,657	$	55,179	$	14,374


			Accounts								ACL
December 31, 2022	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	883	$	5,915	$	-	$	364	$	7,162	$	569
Leases		-		-		1,248		-		1,248		1,248
Commercial real estate – investor		16,576		-		-		-		16,576		2,875
Commercial real estate – owner occupied		19,188		-		-		2,310		21,498		5,808
Residential real estate – investor		675		-		-		-		675		-
Residential real estate – owner occupied		1,817		-		-		-		1,817		244
Multifamily		1,322		-		-		-		1,322		-
HELOC		180		-		-		-		180		-
Total	$	40,641	$	5,915	$	1,248	$	2,674	$	50,478	$	10,744

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
March 31, 2023	Past Due		****	Past Due		****	Due		****	Due		****	Current		****	Total Loans		****	Accruing
Commercial	$	2,640		$	-		$	1,422		$	4,062		$	847,675		$	851,737		$	460
Leases		789			51			-			840			284,991			285,831			-
Commercial real estate – investor		5,395			22,966			2,018			30,379			1,026,408			1,056,787			-
Commercial real estate – owner occupied		2,914			9,162			1,833			13,909			856,206			870,115			-
Construction		873			-			116			989			173,694			174,683			-
Residential real estate – investor		322			-			1,233			1,555			55,165			56,720			-
Residential real estate – owner occupied		3,044			177			2,622			5,843			212,012			217,855			420
Multifamily		217			-			1,662			1,879			357,112			358,991			-
HELOC		303			182			409			894			104,047			104,941			86
Other		558			1			-			559			25,135			25,694			-
Total	$	17,055		$	32,539		$	11,315		$	60,909		$	3,942,445		$	4,003,354		$	966


																			90 days or
							90 Days or												Greater Past
	30-59 Days			60-89 Days			Greater Past			Total Past									Due and
December 31, 2022	Past Due		****	Past Due		****	Due		****	Due		****	Current		****	Total Loans		****	Accruing
Commercial	$	3		$	1,012		$	825		$	1,840		$	839,124		$	840,964		$	460
Leases		447			22			614			1,083			276,302			277,385			-
Commercial real estate – investor		3,276			1,276			4,315			8,867			978,768			987,635			-
Commercial real estate – owner occupied		373			113			2,211			2,697			852,182			854,879			173
Construction		14			-			116			130			180,405			180,535			-
Residential real estate – investor		445			-			987			1,432			55,921			57,353			144
Residential real estate – owner occupied		1,191			-			2,232			3,423			216,295			219,718			485
Multifamily		267			361			1,322			1,950			321,741			323,691			-
HELOC		291			90			392			773			108,429			109,202			-
Other		19			-			-			19			18,228			18,247			-
Total	$	6,326		$	2,874		$	13,014		$	22,214		$	3,847,395		$	3,869,609		$	1,262

The table presents all nonaccrual loans as of March 31, 2023, and December 31, 2022:


Nonaccrual loan detail	****	March 31, 2023		****	With no ACL		****	December 31, 2022		****	With no ACL
Commercial		$	2,351		$	1,892		$	7,189		$	6,598
Leases			856			173			1,876			-
Commercial real estate – investor			30,397			11,210			4,346			4,244
Commercial real estate – owner occupied			19,691			4,560			8,050			3,813
Construction			241			241			251			-
Residential real estate – investor			1,555			1,379			1,528			675
Residential real estate – owner occupied			3,618			3,618			3,713			1,572
Multifamily			2,495			2,495			2,538			1,322
HELOC			2,355			2,177			2,109			180
Other			2			2			2			-
Total		$	63,561		$	27,747		$	31,602		$	18,404

The Company recognized $86,000 of interest on nonaccrual loans during the three months ended March 31, 2023.

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 16

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

residential mortgages. Loans with a classified risk rating are reviewed quarterly regardless of size or loan type. The Company uses the following definitions for classified risk ratings:

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

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

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

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

Credit quality indicators by loan segment and loan origination date at March 31, 2023 were as follows:


	****	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial
Pass		$	46,701	$	216,848	$	51,096	$	18,747	$	9,511	$	8,144	$	452,217	$	378	$	803,642
Special Mention			-		582		265		1,088		2,335		-		21,163		-		25,433
Substandard			-		4,770		1,880		2,897		11,570		2		1,543		-		22,662
Total commercial			46,701		222,200		53,241		22,732		23,416		8,146		474,923		378		851,737
Current Period Gross charge-offs			-		-		-		-		-		27						27

Leases
Pass			34,473		150,347	$	58,708		23,236		14,741		3,420		-		-		284,925
Special Mention			-		-		-		-		-		-		-		-		-
Substandard			-		684		-		-		222		-		-		-		906
Total leases			34,473		151,031		58,708		23,236		14,963		3,420		-		-		285,831
Current Period Gross charge-offs			-		870		-		-		12		-						882

Commercial real estate – investor
Pass			117,682		382,638		230,965		114,537		63,123		76,867		7,822		-		993,634
Special Mention			-		3,575		-		5,904		-		1,059		-		-		10,538
Substandard			-		14,106		3,388		5,124		20,878		9,119		-		-		52,615
Total commercial real estate – investor			117,682		400,319		234,353		125,565		84,001		87,045		7,822		-		1,056,787
Current Period Gross charge-offs			-		-		-		-		-		-						-

Commercial real estate – owner occupied
Pass			46,394		160,497		211,124		102,743		46,193		122,535		31,491		-		720,977
Special Mention			-		21,199		22,244		49,072		17,552		1,526		-		-		111,593
Substandard			-		2,524		16,460		1,177		16,822		562		-		-		37,545
Total commercial real estate – owner occupied			46,394		184,220		249,828		152,992		80,567		124,623		31,491		-		870,115
Current Period Gross charge-offs			-		-		-		-		-		-						-

Construction
Pass			1,837		65,640		52,420		31,388		1,895		1,298		1,895		-		156,373
Special Mention			307		7,577		-		10,185		-		-		-		-		18,069
Substandard			-		125		-		-		116		-		-		-		241
Total construction			2,144		73,342		52,420		41,573		2,011		1,298		1,895		-		174,683
Current Period Gross charge-offs			-		-		-		-		-		-						-

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	****	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Residential real estate – investor
Pass			1,314		14,371		9,806		6,790		8,147		12,739		1,782		-		54,949
Special Mention			-		-		69		-		-		-		-		-		69
Substandard			-		617		-		-		499		586		-		-		1,702
Total residential real estate – investor			1,314		14,988		9,875		6,790		8,646		13,325		1,782		-		56,720
Current Period Gross charge-offs			-		-		-		-		-		-						-

Residential real estate – owner occupied
Pass			2,876		42,607		43,687		27,668		15,777		80,086		1,536		-		214,237
Special Mention			-		-		-		-		-		-		-		-		-
Substandard			46		128		203		94		708		2,439		-		-		3,618
Total residential real estate – owner occupied			2,922		42,735		43,890		27,762		16,485		82,525		1,536		-		217,855
Current Period Gross charge-offs			-		-		-		-		-		-						-

Multifamily
Pass			32,158		83,074		116,721		59,094		12,976		44,737		294		-		349,054
Special Mention			-		375		3,632		341		1,683		558		-		-		6,589
Substandard			-		2,777		-		-		-		571		-		-		3,348
Total multifamily			32,158		86,226		120,353		59,435		14,659		45,866		294		-		358,991
Current Period Gross charge-offs			-		-		-		-		-		-						-

HELOC
Pass			438		2,891		490		1,480		1,667		2,937		92,403		-		102,306
Special Mention			-		-		-		-		-		-		-		-		-
Substandard			-		29		1		-		1		339		2,265		-		2,635
Total HELOC			438		2,920		491		1,480		1,668		3,276		94,668		-		104,941
Current Period Gross charge-offs			-		-		-		-		-		-						-

Other
Pass			1,914		3,434		1,955		346		120		144		17,779		-		25,692
Special Mention			-		-		-		-		-		-		-		-		-
Substandard			-		-		-		1		-		-		1		-		2
Total other			1,914		3,434		1,955		347		120		144		17,780		-		25,694
Current Period Gross charge-offs			-		3		16		-		-		94						113

Total loans
Pass			285,787		1,122,347		776,972		386,029		174,150		352,907		607,219		378		3,705,789
Special Mention			307		33,308		26,210		66,590		21,570		3,143		21,163		-		172,291
Substandard			46		25,760		21,932		9,293		50,816		13,618		3,809		-		125,274
Total loans		$	286,140	$	1,181,415	$	825,114	$	461,912	$	246,536	$	369,668	$	632,191	$	378	$	4,003,354
Total Current Period Gross charge-offs		$	-	$	873	$	16	$	-	$	12	$	121					$	1,022

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


	****	2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial
Pass		$	225,056	$	70,608	$	21,597	$	12,742	$	6,957	$	2,651	$	447,821	$	-	$	787,432
Special Mention			1,875		272		1,182		2,432		-		-		21,286		-		27,047
Substandard			4,958		2,447		2,981		12,176		7		-		3,916		-		26,485
Total commercial			231,889		73,327		25,760		27,350		6,964		2,651		473,023		-		840,964

Leases
Pass			161,379		64,203	$	26,995		17,653		4,449		830		-		-		275,509
Special Mention			-		-		-		-		-		-		-		-		-
Substandard			1,606		-		-		270		-		-		-		-		1,876
Total leases			162,985		64,203		26,995		17,923		4,449		830		-		-		277,385

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	****	2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial real estate – investor
Pass			416,094		228,686		118,491		63,845		46,935		46,406		7,113		-		927,570
Special Mention			5,349		1,417		5,490		10,206		1,070		9,123		-		-		32,655
Substandard			12,332		2,018		-		10,763		-		2,297		-		-		27,410
Total commercial real estate – investor			433,775		232,121		123,981		84,814		48,005		57,826		7,113		-		987,635

Commercial real estate – owner occupied
Pass			169,703		223,731		105,669		47,351		49,367		86,660		33,745		-		716,226
Special Mention			8,430		22,242		48,184		17,668		231		1,008		-		-		97,763
Substandard			2,546		17,129		1,191		16,962		-		3,062		-		-		40,890
Total commercial real estate – owner occupied			180,679		263,102		155,044		81,981		49,598		90,730		33,745		-		854,879

Construction
Pass			53,058		65,758		39,542		2,390		226		1,408		1,523		-		163,905
Special Mention			-		-		15,297		-		-		-		-		-		15,297
Substandard			1,217		-		-		116		-		-		-		-		1,333
Total construction			54,275		65,758		54,839		2,506		226		1,408		1,523		-		180,535

Residential real estate – investor
Pass			14,737		9,910		6,945		8,585		4,853		9,548		991		-		55,569
Special Mention			-		70		-		-		-		-		-		-		70
Substandard			621		-		-		499		186		408		-		-		1,714
Total residential real estate – investor			15,358		9,980		6,945		9,084		5,039		9,956		991		-		57,353

Residential real estate – owner occupied
Pass			41,885		44,884		28,418		16,146		12,152		70,741		1,638		-		215,864
Special Mention			-		-		-		-		-		-		-		-		-
Substandard			131		267		237		723		131		2,365		-		-		3,854
Total residential real estate – owner occupied			42,016		45,151		28,655		16,869		12,283		73,106		1,638		-		219,718

Multifamily
Pass			76,877		126,257		52,262		13,125		39,703		6,098		329		-		314,651
Special Mention			377		3,683		342		1,684		-		-		-		-		6,086
Substandard			2,100		-		-		-		587		267		-		-		2,954
Total multifamily			79,354		129,940		52,604		14,809		40,290		6,365		329		-		323,691

HELOC
Pass			2,760		517		1,497		1,703		657		2,288		97,258		-		106,680
Special Mention			-		-		-		-		-		-		111		-		111
Substandard			62		1		-		-		67		309		1,972		-		2,411
Total HELOC			2,822		518		1,497		1,703		724		2,597		99,341		-		109,202

Other
Pass			4,195		2,835		432		167		69		111		10,436		-		18,245
Special Mention			-		-		-		-		-		-		-		-		-
Substandard			-		-		1		-		-		-		1		-		2
Total other			4,195		2,835		433		167		69		111		10,437		-		18,247

Total loans
Pass			1,165,744		837,389		401,848		183,707		165,368		226,741		600,854		-		3,581,651
Special Mention			16,031		27,684		70,495		31,990		1,301		10,131		21,397		-		179,029
Substandard			25,573		21,862		4,410		41,509		978		8,708		5,889		-		108,929
Total loans		$	1,207,348	$	886,935	$	476,753	$	257,206	$	167,647	$	245,580	$	628,140	$	-	$	3,869,609

The Company had $547,000 and $600,000 in residential real estate loans in the process of foreclosure as of March 31, 2023, and December 31, 2022, respectively.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

As of January 1, 2023, the Company adopted ASU 2022-02, Topic 326 “Troubled Debt Restructuring (“TDRs”) and Vintage Disclosures”, see Note 1. No loans were modified that were in financial difficulty during the three-month period ending March 31, 2023. There was no TDR activity for the three months ended March 31, 2022. TDRs were classified as being in default on a case-by-case basis when they failed to be in compliance with the modified terms. There was no TDR default activity for the period ended March 31, 2022, for loans that were restructured within the prior 12-month period.

Note 5 – Other Real Estate Owned

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


		Three Months Ended
	****	March 31,					****
Other real estate owned	****	2023		****	2022		****
Balance at beginning of period		$	1,561		$	2,356
Property additions, net of acquisition adjustments			291			87
Less:
Proceeds from property disposals, net of participation purchase and gains/losses			328			69
Period valuation write-down			269			-
Balance at end of period		$	1,255		$	2,374

Activity in the valuation allowance was as follows:


	****	Three Months Ended
	****	March 31,					****
		2023		****	2022		****
Balance at beginning of period		$	856		$	1,179
Provision for unrealized losses			269			-
Reductions taken on sales			(272)			-
Balance at end of period		$	853		$	1,179

Expenses related to OREO, net of lease revenue includes:


		Three Months Ended
		March 31,					****
	****	2023		****	2022		****
Loss (Gain) on sales, net		$	28		$	(49)
Provision for unrealized losses			269			-
Operating expenses			9			37
Less:
Lease revenue			-			-
Net OREO expense		$	306		$	(12)

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 6 – Deposits

Major classifications of deposits were as follows:


	March 31, 2023		December 31, 2022
Noninterest bearing demand	$	1,950,144	$	2,051,702
Savings		1,108,610		1,145,592
NOW accounts		608,260		609,338
Money market accounts		799,300		862,170
Certificates of deposit of less than $100,000		238,257		244,017
Certificates of deposit of $100,000 through $250,000		147,887		157,438
Certificates of deposit of more than $250,000		44,762		40,466
Total deposits	$	4,897,220	$	5,110,723

Note 7 – Borrowings

The following table is a summary of borrowings as of March 31, 2023, and December 31, 2022. Junior subordinated debentures are discussed in more detail in Note 8.


	****	March 31, 2023		December 31, 2022		****
Securities sold under repurchase agreements		$	27,897	$	32,156
Other short-term borrowings			315,000		90,000
Junior subordinated debentures			25,773		25,773
Subordinated debentures			59,318		59,297
Senior notes			44,611		44,585
Notes payable and other borrowings			-		9,000
Total borrowings		$	472,599	$	260,811

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 $27.9 million at March 31, 2023, and $32.2 million at December 31, 2022. The fair value of the pledged collateral was $65.9 million at March 31, 2023, and $71.4 million at December 31, 2022. At March 31, 2023, there were no customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC. Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans. As of March 31, 2023, the Bank had $315.0 million in short-term advances outstanding under the FHLBC. There were $90.0 million in short-term advances as of December 31, 2022. The Bank assumed $23.4 million of long-term FHLBC advances with our ABC Bank acquisition in 2018, which were recorded in notes payable and other borrowings. The remaining balance of $5.9 million was paid off in full during the second quarter of 2022. FHLBC stock held at March 31, 2023 was valued at $15.3 million, and any potential FHLBC advances were collateralized by loans with a principal balance of $1.50 billion, which carried a FHLBC-calculated combined collateral value of $1.06 billion. The Company had excess collateral of $743.6 million available to secure borrowings at March 31, 2023.

In the second quarter of 2021, we issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). The 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 used the net proceeds from the offering for general corporate purposes. The Notes bear interest at a fixed annual rate of 3.50%, from and including the date of issuance to but excluding April 15, 2026, payable semi-annually in arrears. From and including April 15, 2026 to, but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to Three-Month Term SOFR (as defined by the Note) plus 273 basis points, payable 21

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

quarterly in arrears. As of March 31, 2023 and December 31, 2022, we had $59.3 million of subordinated debentures outstanding, net of deferred issuance costs.

The Company also had $44.6 million of senior notes outstanding, net of deferred issuance costs, as of March 31, 2023 and December 31, 2022. 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 interest rate at March 31, 2023 and December 31, 2022 was 9.01% and 8.62%, respectively. The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. As of March 31, 2023, and December 31, 2022, unamortized debt issuance costs related to the senior notes were $389,000 and $415,000, respectively, and are included as a reduction of the balance of the senior notes on the Consolidated Balance Sheets. These deferred issuance costs will be amortized to interest expense over the ten-year term of the notes and are included in the Consolidated Statements of Income.

On February 24, 2020, the Company originated a $20.0 million three-year term note with a correspondent bank. The term note was issued at one-month LIBOR plus 175 basis points, and required principal payments quarterly and interest payments monthly. This note was included within Notes Payable and Other Borrowings on the Consolidated Balance Sheets, and the remaining $9.0 million balance of the note was paid off as of February 24, 2023. The Company also has an undrawn line of credit of $30.0 million with a correspondent bank to be used for short-term funding needs; advances under this line can be outstanding up to 360 days from the date of issuance. This line of credit has not been utilized since early 2019.

Note 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 4.39% and 4.41% for the quarters ended March 31, 2023 and March 31, 2022, 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 Sheets, and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of March 31, 2023 and December 31, 2022, 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 Sheets. The remaining deferred issuance costs on the junior subordinated debentures related to the issuance of Old Second Capital Trust II will be amortized to interest expense over the remainder of the 30-year term of the notes and are included in the Consolidated Statements of Income.

Note 9 – Equity Compensation Plans

Stock-based awards are outstanding under the Company’s 2019 Equity Incentive Plan, as amended and restated (the “2019 Plan”). The 2019 Plan was originally approved at the May 2019 annual stockholders’ meeting and authorized 600,000 shares, and at the May 2021 annual stockholders’ meeting, the Company obtained stockholder approval to increase the number of shares of common stock authorized for issuance under the plan by 1,200,000 shares, from 600,000 shares to 1,800,000 shares. Following the approval of the 2019 Plan, no further awards will be granted under any other prior plan.

The 2019 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”). Awards may be granted to selected directors, officers, employees or eligible service providers under the 2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors. As of March 31, 2023, 970,271 shares remained available for issuance under the 2019 Plan. The Company has granted only restricted stock units under the 2019 Equity Plan.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Generally, restricted stock and restricted stock units granted under the 2019 Plan vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change the terms of particular awards including the vesting schedule.

Under the 2019 Plan, unless otherwise provided in an award agreement, upon the occurrence of a change in control, all stock options and SARs then held by the participant will become fully exercisable immediately if, and all stock awards and cash incentive awards will become fully earned and vested immediately if, (i) the 2019 Plan is not an obligation of the successor entity following a change in control or (ii) the 2019 Plan is an obligation of the successor entity following a change in control and the participant incurs a termination of service without cause or for good reason following the change in control. Notwithstanding the immediately preceding sentence, if the vesting of an award is conditioned upon the achievement of performance measures, then such vesting will generally be subject to the following: if, at the time of the change in control, the performance measures are less than 50% attained (pro rata based upon the time of the period through the change in control), the award will become vested and exercisable on a fractional basis with the numerator being equal to the percentage of attainment and the denominator being 50%; and if, at the time of the change in control, the performance measures are at least 50% attained (pro rata based upon the time of the period through the change in control), the award will become fully earned and vested immediately upon the change in control.

Awards of restricted stock units under the 2019 Plan generally entitle holders to voting and dividend rights upon grant and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period. Awards of restricted stock units under the 2019 Plan are also subject to forfeiture until certain restrictions have lapsed including employment for a specific period, but do not entitle holders to voting rights until the restricted period ends and shares are transferred in connection with the units.

There were 230,399 and 251,055 restricted stock units issued under the 2019 Plan during the three months ended March 31, 2023 and March 31, 2022, respectively. Compensation expense is recognized over the vesting period of the restricted stock units based on the market value of the award on the issue date. Total compensation cost that has been recorded for the 2019 Plan was $948,000 in the first three months of 2023 and $795,000 for the first three months of 2022.

A summary of changes in the Company’s unvested restricted awards for the three months ended March 31, 2023, is as follows:


		March 31, 2023
			Weighted
		Restricted	Average
		Stock Shares	Grant Date
	****	and Units	Fair Value
Unvested at January 1		649,210	$	12.84
Granted		230,399		17.21
Vested		(117,674)		12.26
Unvested at March 31		761,935	$	14.25

Total unrecognized compensation cost of restricted awards was $6.8 million as of March 31, 2023, which is expected to be recognized over a weighted-average period of 2.25 years.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 10 – Earnings Per Share

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


		Three Months Ended March 31,
	****	2023		2022
Basic earnings per share:
Weighted-average common shares outstanding			44,619,118		44,461,045
Net income		$	23,607	$	12,020
Basic earnings per share		$	0.53	$	0.27

Diluted earnings per share:
Weighted-average common shares outstanding			44,619,118		44,461,045
Dilutive effect of unvested restricted awards ^1^			697,480		700,670
Diluted average common shares outstanding			45,316,598		45,161,715

Net Income		$	23,607	$	12,020
Diluted earnings per share		$	0.52	$	0.27


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

Note 11 – Regulatory & Capital Matters

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies. In connection with the current risk-based capital regulatory guidelines, the Bank’s Board of Directors has established an internal guideline requiring the Bank to maintain a Tier 1 leverage capital ratio at or above eight percent (8%) and a total risk-based capital ratio at or above twelve percent (12%). At March 31, 2023, the Bank exceeded those thresholds.

At March 31, 2023, the Bank’s Tier 1 capital leverage ratio was 9.83%, an increase of 51 basis points from December 31, 2022, and is above the 8.00% objective. The Bank’s total capital ratio was 13.10%, an increase of 35 basis points from December 31, 2022, and also above the objective of 12.00%.

Bank holding companies are generally required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System. The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of March 31, 2023, and December 31, 2022.

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, 2022, under the heading “Supervision and Regulation.”

At March 31, 2023 and December 31, 2022, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Capital levels and industry defined regulatory minimum required levels are as follows:



						Minimum Capital					Well Capitalized
						Adequacy with Capital					Under Prompt Corrective
	Actual					Conservation Buffer, if applicable^1^					Action Provisions^2^
	Amount		****	Ratio		Amount		****	Ratio		Amount		****	Ratio
March 31, 2023
Common equity tier 1 capital to risk weighted assets
Consolidated	$	478,610		9.91	%	$	338,070		7.00	%		N/A		N/A
Old Second Bank		577,986		11.98			337,721		7.00		$	313,598		6.50	%
Total capital to risk weighted assets
Consolidated		617,527		12.79			506,961		10.50			N/A		N/A
Old Second Bank		631,903		13.10			506,487		10.50			482,369		10.00
Tier 1 capital to risk weighted assets
Consolidated		503,610		10.43			410,420		8.50			N/A		N/A
Old Second Bank		577,986		11.98			410,090		8.50			385,967		8.00
Tier 1 capital to average assets
Consolidated		503,610		8.56			235,332		4.00			N/A		N/A
Old Second Bank		577,986		9.83			235,193		4.00			293,991		5.00

December 31, 2022
Common equity tier 1 capital to risk weighted assets
Consolidated	$	457,206		9.67	%	$	330,966		7.00	%		N/A		N/A
Old Second Bank		552,404		11.70			330,498		7.00		$	306,891		6.50	%
Total capital to risk weighted assets
Consolidated		592,039		12.52			496,518		10.50			N/A		N/A
Old Second Bank		602,237		12.75			495,960		10.50			472,343		10.00
Tier 1 capital to risk weighted assets
Consolidated		482,206		10.20			401,838		8.50			N/A		N/A
Old Second Bank		552,404		11.70			401,319		8.50			377,712		8.00
Tier 1 capital to average assets
Consolidated		482,206		8.14			236,956		4.00			N/A		N/A
Old Second Bank		552,404		9.32			237,083		4.00			296,354		5.00

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

^2^ The prompt corrective action provisions are only applicable at the Bank level. The Bank exceeded the general minimum regulatory requirements to be considered “well capitalized.”

As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition. As of March 31, 2023, the capital measures of the Company exclude $1.9 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 March 31, 2023, the Bank had capacity to pay dividends of $51.2 million to the Company without prior regulatory approval. Pursuant to the Basel III rules, the Bank must keep a capital conservation buffer of 2.50% above the regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

Note 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.

At March 31, 2023, $14.9 million of asset-backed securities and $6.8 million of collateralized mortgage obligations were transferred to Level 2 from Level 3. There were no transfers between levels at March 31, 2022.

The majority of securities available-for-sale are valued by external pricing services or dealer market participants and are classified in Level 2 of the fair value hierarchy. Both market and income valuation approaches are utilized. Quarterly, the Company evaluates the methodologies used by the external pricing services or dealer market participants to develop the fair values to determine whether the results of the valuations are representative of an exit price in the Company’s principal markets and an appropriate representation of fair value. The Company uses the following methods and significant assumptions to estimate fair value:

●	Government-sponsored agency debt securities are primarily priced using available market information through processes such as benchmark spreads, market valuations of like securities, like securities groupings and matrix pricing.
●	Other government-sponsored agency securities, MBS and some of the actively traded real estate mortgage investment conduits and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment speeds, spreads, volatility of similar securities and trade date.
---	---
●	State and political subdivisions are largely grouped by characteristics (e.g., geographical data and source of revenue in trade dissemination systems). Because some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities.
---	---
●	Auction rate securities are priced using market spreads, cash flows, prepayment speeds, and loss analytics. Therefore, the valuations of auction rate asset-backed securities are considered Level 2 valuations.
---	---
●	Asset-backed collateralized loan obligations were priced using data from a pricing matrix supported by our bond accounting service provider and are therefore considered Level 2 valuations.
---	---
●	Annually every security holding is priced by a pricing service independent of the regular and recurring pricing services used. The independent service provides a measurement to indicate if the price assigned by the regular service is within or outside of a reasonable range. Management reviews this report and applies judgment in adjusting calculations at year end related to securities pricing.
---	---

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

●	Residential mortgage loans available for sale in the secondary market are carried at fair market value. The fair value of loans held-for-sale is determined using quoted secondary market prices.
●	Lending related commitments to fund certain residential mortgage loans, e.g., residential mortgage loans with locked interest rates to be sold in the secondary market and forward commitments for the future delivery of mortgage loans to third party investors, as well as forward commitments for future delivery of MBS are considered derivatives. Fair values are estimated based on observable changes in mortgage interest rates including prices for MBS from the date of the commitment and do not typically involve significant judgments by management.
---	---
●	The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income to derive the resultant value. The Company is able to compare the valuation model inputs, such as the discount rate, prepayment speeds, weighted average delinquency and foreclosure/bankruptcy rates to widely available published industry data for reasonableness.
---	---
●	Interest rate swap positions, both assets and liabilities, are based on valuation pricing models using an income approach reflecting readily observable market parameters such as interest rate yield curves.
---	---
●	The fair value of individually evaluated loans with specific allocations of the allowance for credit losses is essentially based on recent real estate appraisals or the fair value of the collateralized asset. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are made in the appraisal process by the appraisers to reflect differences between the available comparable sales and income data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
---	---
●	Nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO are measured at fair value, less costs to sell. Fair values are based on third party appraisals of the property, resulting in a Level 3 classification, or an executed pending sales contract. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.
---	---

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

The tables below present the balance of assets and liabilities at March 31, 2023, and December 31, 2022, respectively, measured by the Company at fair value on a recurring basis:


	March 31, 2023
	Level 1		****	Level 2		****	Level 3		****	Total
Assets:
Securities available-for-sale
U.S. Treasury	$	214,734		$	-		$	-		$	214,734
U.S. government agencies		-			56,703			-			56,703
U.S. government agencies mortgage-backed		-			121,938			-			121,938
States and political subdivisions		-			218,527			14,979			233,506
Corporate bonds		-			9,762			-			9,762
Collateralized mortgage obligations		-			454,106			-			454,106
Asset-backed securities		-			189,753			-			189,753
Collateralized loan obligations		-			174,566			-			174,566
Loans held-for-sale		-			946			-			946
Mortgage servicing rights		-			-			10,784			10,784
Interest rate swap agreements, including risk participation agreement		-			5,885			-			5,885
Mortgage banking derivatives		-			28			-			28
Total	$	214,734		$	1,232,214		$	25,763		$	1,472,711

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-		$	10,007		$	-		$	10,007
Total	$	-		$	10,007		$	-		$	10,007

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	December 31, 2022
	Level 1		****	Level 2		****	Level 3		****	Total
Assets:
Securities available-for-sale
U.S. Treasury	$	212,129		$	-		$	-		$	212,129
U.S. government agencies		-			56,048			-			56,048
U.S. government agencies mortgage-backed		-			124,990			-			124,990
States and political subdivisions		-			211,899			14,229			226,128
Corporate bonds		-			9,622			-			9,622
Collateralized mortgage obligations		-			526,998			6,770			533,768
Asset-backed securities		-			186,916			15,012			201,928
Collateralized loan obligations		-			174,746			-			174,746
Loans held-for-sale		-			491			-			491
Mortgage servicing rights		-			-			11,189			11,189
Interest rate swap agreements		-			6,516			-			6,516
Mortgage banking derivatives		-			76			-			76
Total	$	212,129		$	1,298,302		$	47,200		$	1,557,631

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-		$	12,265		$	-		$	12,265
Total	$	-		$	12,265		$	-		$	12,265

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


	Three Months Ended March 31, 2023
	Securities available-for-sale
			Collateralized		States and			Mortgage
	Asset-backed		Mortgage		Political			Servicing
	Securities		Obligations		Subdivisions		****	Rights
Beginning balance January 1, 2023	$	15,012	$	6,770	$	14,229		$	11,189
Transfers into Level 3		-		-		-			-
Transfers out of Level 3		(14,885)		(6,764)		-			-
Total gains or losses
Included in earnings		(11)		-		(33)			(471)
Included in other comprehensive income		226		(6)		423			-
Purchases, issuances, sales, and settlements
Purchases		-		-		406			-
Issuances		-		-		-			120
Settlements		(342)		-		(46)			(54)
Ending balance March 31, 2023	$	-	$	-	$	14,979		$	10,784

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


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

The following table and commentary present quantitative and qualitative information about Level 3 fair value measurements as of March 31, 2023:


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

States and political subdivisions		$	14,979		Discounted Cash Flow		Discount Rate		2.8 - 4.8%		4.4	%
							Liquidity Premium		0.3 - 0.5%		0.5	%

Mortgage servicing rights		$	10,784		Discounted Cash Flow		Discount Rate		9.0 - 11.0%		9.0	%
							Prepayment Speed		4.2 - 29.1%		6.3	%

The following table and commentary present quantitative and qualitative information about Level 3 fair value measurements as December 31, 2022:


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

States and political subdivisions		$	14,229		Discounted Cash Flow		Discount Rate		2.3 - 5.8%		4.4	%
							Liquidity Premium		0.3 - 0.5%		0.5	%

Collateralized mortgage obligations		$	6,770		Discounted Cash Flow		Discount Rate		7.0 - 7.0%		7.0	%

Asset-backed securities		$	15,012		Discounted Cash Flow		Discount Rate		6.2 - 6.5%		6.3	%

Mortgage servicing rights		$	11,189		Discounted Cash Flow		Discount Rate		9.0 - 11.0%		9.0	%
							Prepayment Speed		3.6 - 27.3%		6.2	%

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 Nonrecurring Basis:

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of individually evaluated loans and OREO. For assets measured at fair value on a nonrecurring basis at March 31, 2023, and December 31, 2022, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:


		March 31, 2023
	****	Level 1		****	Level 2		****	Level 3		****	Total
Individually evaluated loans^1^		$	-		$	-		$	48,285		$	48,285
Other real estate owned, net^2^			-			-			1,255			1,255
Total		$	-		$	-		$	49,540		$	49,540

^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 $69.6 million and a valuation allowance of $21.4 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $3.8 million for the three months ended March 31, 2023.

^2^ OREO is measured at fair value, less costs to sell, and had a net carrying amount of $1.3 million at March 31, 2023, which is made up of the outstanding balance of $2.2 million, net of a purchase accounting adjustment of $131,000 and a valuation allowance of $853,000 .


	December 31, 2022
	Level 1		****	Level 2		****	Level 3		****	Total
Individually evaluated loans^1^	$	-		$	-		$	47,700		$	47,700
Other real estate owned, net^2^		-			-			1,561			1,561
Total	$	-		$	-		$	49,261		$	49,261

^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 $65.3 million and a valuation allowance of $17.6 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $12.2 million for the year December 31, 2022.

^2^ OREO is measured at fair value, less costs to sell, and had a net carrying amount of $1.6 million at December 31, 2022, which is made up of the outstanding balance of $2.5 million, net of a purchase accounting adjustment of $131,000 and a valuation allowance of $856,000 .

The Company has estimated the fair values of these assets based primarily on Level 3 inputs. OREO and individually evaluated loans are generally valued using the fair value of collateral provided by third party appraisals. These valuations include assumptions related to cash flow projections, discount rates, and recent comparable sales. The numerical ranges of unobservable inputs for these valuation assumptions are not meaningful.

Note 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. For March 31, 2023 and December 31, 2022, the fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The fair value of time deposits was estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities. The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities. The fair value of off balance sheet volume was not considered material.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


	March 31, 2023
	Carrying			Fair
	Amount		****	Value		****	Level 1		****	Level 2		****	Level 3
Financial assets:
Cash and due from banks	$	50,860		$	50,860		$	50,860		$	-		$	-
Interest earning deposits with financial institutions		52,162			52,162			52,162			-			-
Securities available-for-sale		1,455,068			1,455,068			214,734			1,225,355			14,979
FHLBC and FRBC stock		30,205			30,205			-			30,205			-
Loans held-for-sale		946			946			-			946			-
Net loans		4,003,354			3,842,384			-			-			3,842,384
Mortgage servicing rights		10,784			10,784			-			-			10,784
Interest rate swap agreements		5,735			5,735			-			5,735			-
Interest rate lock commitments and forward contracts		28			28			-			28			-
Interest receivable on securities and loans		24,214			24,214			-			24,214			-

Financial liabilities:
Noninterest bearing deposits	$	1,950,144		$	1,950,144		$	1,950,144		$	-		$	-
Interest bearing deposits		2,947,076			2,932,989			-			2,932,989			-
Securities sold under repurchase agreements		27,897			27,897			-			27,897			-
Other short-term borrowings		315,000			315,000			-			315,000			-
Junior subordinated debentures		25,773			19,330			-			19,330			-
Subordinated debentures		59,318			46,118			-			46,118			-
Senior notes		44,611			41,011			41,011			-			-
Interest rate swap agreements		10,006			10,006			-			10,006			-
Interest payable on deposits and borrowings		2,029			2,029			-			2,029			-

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	December 31, 2022
	Carrying			Fair
	Amount		****	Value		****	Level 1		****	Level 2		****	Level 3
Financial assets:
Cash and due from banks	$	56,632		$	56,632		$	56,632		$	-		$	-
Interest earning deposits with financial institutions		58,545			58,545			58,545			-			-
Securities available-for-sale		1,539,359			1,539,359			212,129			1,291,219			36,011
FHLBC and FRBC stock		20,530			20,530			-			20,530			-
Loans held-for-sale		491			491			-			491			-
Net loans		3,820,129			3,681,387			-			-			3,681,387
Mortgage servicing rights		11,189			11,189			-			-			11,189
Interest rate swap agreements		6,391			6,391			-			6,391			-
Interest rate lock commitments and forward contracts		76			76			-			76			-
Interest receivable on securities and loans		22,661			22,661			-			22,661			-

Financial liabilities:
Noninterest bearing deposits	$	2,051,702		$	2,051,702		$	2,051,702		$	-		$	-
Interest bearing deposits		3,059,021			3,042,740			-			3,042,740			-
Securities sold under repurchase agreements		32,156			32,156			-			32,156			-
Other short-term borrowings		90,000			90,000			-			90,000			-
Junior subordinated debentures		25,773			21,907			-			21,907			-
Subordinated debentures		59,297			52,322			-			52,322			-
Senior notes		44,585			44,248			44,248			-			-
Note payable and other borrowings		9,000			8,984			-			8,984			-
Interest rate swap agreements		12,264			12,264			-			12,264			-
Interest payable on deposits and borrowings		1,657			1,657			-			1,657			-

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 income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. The aggregate fair value of the swaps are recorded in other assets or other liabilities with changes in fair value recorded in other comprehensive income, net of tax. The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest income or interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts 32

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income or expense as interest payments are received on the variable rate loan pools or paid on the Company’s fixed-rate borrowings.

Interest rate swaps with notional amounts totaling $300.0 million and $250.0 million as of March 31, 2023 and December 31, 2022, respectively, were designated as cash flow hedges of certain variable rate commercial and commercial real estate loan pools. Each of these hedges were executed to pay variable and receive fixed rate cash flows. Each of these hedges was determined to be effective during all periods presented and the Company expects the hedges to remain effective during the remaining terms of the swaps.

An interest rate swap with a notional amount of $25.8 million as of March 31, 2023 and December 31, 2022, is designated as a cash flow hedge of junior subordinated debentures and was executed to pay fixed and receive variable rate cash flows. The hedge was determined to be effective during all periods presented and the Company expects the hedge to remain effective during the remaining terms of the swap.

During the next twelve months, the Company estimates that an additional $5.0 million will be reclassified as an increase to interest income and an additional $511,000 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. The notional amounts of interest rate swaps with its loan customers as of March 31, 2023 and December 31, 2022 were $108.2 million and $110.6 million, respectively. 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 are recognized directly in earnings.

At March 31, 2023 and December 31, 2022, the Company had $8.1 million of cash collateral pledged with two correspondent financial institutions and $11.2 million of cash collateral pledged with two correspondent financial institution, respectively. The Company held $2.8 million and $5.3 million of cash pledged from one correspondent financial institution to support the interest rate swap activity during the years presented, respectively. No investment securities were required to be pledged to any correspondent financial institution during first quarter of 2023 and in year of 2022. The Company offsets derivative assets and liabilities that are subject to a master netting arrangement.

The Company also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards. The interest rate risk associated with these loan interest rate lock commitments is managed with contracts for future deliveries of loans as well as selling forward mortgage-backed securities contracts. Loan interest rate lock commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The notional amount of these commitments at March 31, 2023 and December 31, 2022 were $10.9 million and $5.3 million, respectively. Commitments to originate residential mortgage loans held-for-sale and forward commitments to sell residential mortgage loans or forward MBS contracts are considered derivative instruments and changes in the fair value are recorded to mortgage banking revenue. Fair values are estimated based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.

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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 Sheets as of March 31, 2023 and December 31, 2022.

Fair Value of Derivative Instruments


			March 31, 2023
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	5	325,774	Other Assets	1,824	Other Liabilities	6,095
Total derivatives designated as hedging instruments				1,824		6,095

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	19	108,150	Other Assets	3,911	Other Liabilities	3,911
Interest rate lock commitments and forward contracts	41	10,930	Other Assets	28	Other Liabilities	-
Other contracts	4	44,097	Other Assets	150	Other Liabilities	1
Total derivatives not designated as hedging instruments				4,089		3,912


			December 31, 2022
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	4	275,774	Other Assets	2,737	Other Liabilities	8,610
Total derivatives designated as hedging instruments				2,737		8,610

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	21	110,647	Other Assets	3,654	Other Liabilities	3,654
Interest rate lock commitments and forward contracts	28	5,298	Other Assets	76	Other Liabilities	-
Other contracts	4	43,699	Other Assets	125	Other Liabilities	1
Total derivatives not designated as hedging instruments				3,855		3,655

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 $3.1 million as of March 31, 2023, and $1.9 million as of March 31, 2022. The amount of the loss reclassified from AOCI to interest income on the income statement was $1.0 million for the three months ended March 31, 2023 and $16,000 of gain for three months ended March 31, 2022.

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. 34

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers. In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO. The following table represents the Company’s contractual commitments due to letters of credit as of March 31, 2023, and December 31, 2022.

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


	March 31, 2023						December 31, 2022
	Fixed		Variable		Total		Fixed		Variable		Total		****
Letters of credit:
Borrower:
Financial standby	$	3,456	$	15,390	$	18,846	$	3,514	$	15,365	$	18,879
Performance standby		1,913		11,799		13,712		3,161		13,989		17,150
		5,369		27,189		32,558		6,675		29,354		36,029
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	5,369	$	27,256	$	32,625	$	6,675	$	29,421	$	36,096

Unused loan commitments:	$	138,829	$	800,693	$	939,522	$	139,070	$	860,255	$	999,325

As of March 31, 2023, the Company evaluated current market conditions, including any impacts related to market interest rate changes and unused line of credit utilization trends during the first quarter of 2023, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments totaled $3.2 million, excluding a $596,000 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 $1.4 million for the first quarter of 2023, compared to the prior quarter end, is primarily related to a $1.2 million decrease in construction unfunded commitment levels as well as the loss rate associated with those commitments, a commercial substandard portfolio reduction primarily due to two upgraded credits, and a $224,000 decrease by accretion 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 Sheets, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

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

Overview

The following discussion provides additional information regarding our operations for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, and our financial condition at March 31, 2023, compared to December 31, 2022. 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, 2022. The results of operations for the three months ended March 31, 2023, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and March 31, 2023 and 2022 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 48 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.

Our results of operations depend generally on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Net interest income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. In addition, we are subject to interest rate risk to the degree that our interest-earning assets mature or reprice at different times, or at different speeds, than our interest-bearing liabilities. Our results of operations are also affected by non-interest income, such as service charges, loan fees, gains from the sale of newly originated loans, gains or losses on investments and certain other non-interest related items. Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, professional fees, data processing expenses and provision for credit losses.

We are significantly impacted by prevailing economic conditions, including federal monetary and fiscal policies, and federal regulations of financial institutions. Deposit balances are influenced by numerous factors such as competing investments, the level of income and the personal rate of savings within our market areas. Factors influencing lending activities include the demand for housing and the interest rate pricing competition from other lending institutions.

As of March 31, 2023, 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, our reported and regulatory capital ratios could be adversely impacted by credit losses.

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.

Table of Contents Recent Banking Events

There were three significant bank failures in the first five months of 2023, primarily due to the failed banks’ lack of liquidity as depositors sought to withdraw their deposits. Due to rising interest rates, the failed banks were unable to sell investment securities held to meet liquidity needs without realizing substantial losses. As a result of the March 2023 bank closures and in an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of our FDIC insurance assessment. Additionally, the Federal Reserve announced the creation of a new Bank Term Funding Program in an effort to minimize the need for banks to sell securities at a loss in times of stress. The future impact of these failures on the economy, financial institutions and their depositors, as well as any governmental regulatory responses or actions resulting from the same, is difficult to predict at this time.

Financial Overview

Net income for the first quarter of 2023 was $23.6 million, or $0.52 per diluted share, compared to $12.0 million, or $0.27 per diluted share, for the first quarter of 2022. The increase was primarily due to growth in our loan portfolio and higher loan and security yields, which resulted in growth in net interest income, partially offset by lower noninterest income from reductions in mortgage banking revenues primarily due to higher market interest rates, and losses recognized on securities sold. Also contributing to the increase in net income in the first quarter of 2023 compared to the first quarter of 2022, were acquisition costs, net of gains on branch sales, of $5.3 million incurred in the prior year like quarter, compared to $306,000 of net gains on branch sales in the first quarter of 2023. Adjusted net income, a non-GAAP financial measure that excludes merger-related costs, net of (gains)/losses on branch sales, was $23.4 million for the first quarter of 2023, compared to $24.1 million for the fourth quarter of 2022, and $15.9 million for the first quarter of 2022. See the discussion entitled “Non-GAAP Financial Measures” on page 38, as well as the table below, which provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalents.


	Quarters Ended
	March 31,			December 31,		March 31,
	2023		****	2022		2022
Net Income
Income before income taxes (GAAP)	$	32,013		$	31,853	$	16,443
Pre-tax income adjustments:
Merger-related costs, net of gains/losses on branch sales		(306)			617		5,335
Adjusted net income before taxes		31,707			32,470		21,778
Taxes on adjusted net income		8,326			8,398		5,858
Adjusted net income (non-GAAP)	$	23,381		$	24,072	$	15,920

Basic earnings per share (GAAP)	$	0.53		$	0.53	$	0.27
Diluted earnings per share (GAAP)		0.52			0.52		0.27
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP)		0.52			0.54		0.36
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP)		0.52			0.53		0.36

The following provides an overview of some of the factors impacting our financial performance for the three month period ended March 31, 2023, compared to the like period ended March 31, 2022:

●	Net interest and dividend income was $64.1 million for the first quarter of 2023, compared to $41.2 million for the first quarter of 2022. Growth in interest and dividend income in the first quarter of 2023 was primarily due to loan growth and higher yields on loans and securities, partially offset by higher funding costs.

●

We recorded a net provision for credit losses of $3.5 million in the first quarter of 2023, driven by a $4.7 million increase in the allowance for credit losses on loans based on historical loss rate updates, loan growth, our assessment of nonperforming loan metrics and trends, and estimated future credit losses, net of a reversal of $1.2 million in our allowance for unfunded commitments based on a slight reduction in construction unfunded commitments combined with changes in the construction loss rate. We recorded no net provision for credit loss expense in the first quarter of 2022.

●	Noninterest income was $7.4 million for the first quarter of 2023, compared to $13.5 million for the first quarter of 2022. Contributing to the decrease was a $3.5 million decline in mortgage servicing rights mark to market gains, a $1.2 million decrease

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of net gain on sales of mortgage loans, and security losses of $1.7 million due to strategic sales in 2023. These decreases were partially offset by an increase of $350,000 of service charges on deposits and a $627,000 increase in other income.

●

Noninterest expense was $36.0 million for the first quarter of 2023, compared to $38.3 million for the first quarter of 2022, a decrease of $2.3 million, or 6.09%. Contributing to the decrease was a reduction in computer and data processing and net teller & bill paying expenses in the first quarter of 2023, primarily stemming from acquisition costs incurred in the first quarter of 2022 from our West Suburban acquisition in the fourth quarter of 2021. In addition, we recorded net gains on branch sales of $306,000 in the first quarter of 2023, compared to $5.3 million of acquisition-related cost, net of gains on branch sales, in the first quarter of 2022, primarily from $4.9 million of computer and data processing and net teller & bill paying expenses related to the West Suburban acquisition.

●	We had a provision for income tax expense of $8.4 million for the first quarter of 2023, compared to a provision for income tax expense of $4.4 million for the first quarter of 2022. The increase in tax expense for the first quarter of 2023 was due to the increase in pre-tax income, compared to the year over year quarter.

●

Our community-focused banking franchise experienced growth of $133.7 million in total loans in the first quarter of 2023, compared to the year ended December 31, 2022, and an increase of $601.0 million in total loans compared to the first quarter of 2022. We believe we are positioned for continued loan growth, though likely at a slower pace, as we continue to serve our customers’ needs in a competitive economic environment. We continue 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.

●

Nonaccrual loans increased $32.0 million as of March 31, 2023, compared to December 31, 2022, primarily due to a few larger credits moved from substandard accrual to substandard nonaccrual in the first quarter of 2023, which include two office buildings and one health care facility. Nonperforming loans as a percent of total loans was 1.6% as of March 31, 2023, compared to 0.9% as of December 31, 2022, and 1.1% as of March 31, 2022. Classified assets increased to $126.5 million as of March 31, 2023, which is $16.0 million, or 14.5% more than December 31, 2022, and $57.5 million, or 83.4%, more than March 31, 2022.

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, 2022. 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 2022 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 of our performance to investors. 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. 38

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Overview

Three months ended March 31, 2023 and 2022

Our income before taxes was $32.0 million in the first quarter of 2023 compared to $16.4 million in the first quarter of 2022. This increase in pretax income was primarily due to a $26.8 million increase in interest and dividend income and a $2.3 million decrease in noninterest expenses. The increase in pretax income was partially offset by a $4.0 million increase in interest expense, a $3.5 million increase in provision for credit losses, and a $6.1 million decrease in noninterest income, mainly due to $1.7 million of security losses in the first quarter of 2023 and a $4.8 million decrease in mortgage banking revenues. Our net income was $23.6 million, or $0.52 per diluted share, for the first quarter of 2023, compared to net income of $12.0 million, or $0.27 per diluted share, for the first quarter of 2022. The Bank remains well positioned to navigate uncertain macroeconomics; we have mitigated interest rate risk, tightened expenses in a recessionary environment, and actively managed daily liquidity. Furthermore, we continue to possess strong liquidity metrics and an outsized securities portfolio for funding needs.

Net interest and dividend income was $64.1 million in the first quarter of 2023, compared to $41.2 million in the first quarter of 2022. The $22.9 million increase was primarily driven by significant growth in our loan portfolio as well as the effect of higher market interest rates on our loan and securities portfolios. Higher interest and dividend income was partially offset by an increase in interest expense in the first quarter of 2023, compared to the first quarter of 2022, primarily due to a rise in deposit interest rates, an increase in other short-term borrowing expense due to additional FHLB advances, and an increase in the rate paid on our senior notes during the first quarter of 2023, as the senior debt issuance is at LIBOR plus 385 basis points, and the floating interest rate of the three month LIBOR increased 462 basis points since the first quarter of 2022.

Net Interest Income

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

Three months ended March 31, 2023 and 2022

The increased yield of 30 basis points on interest earning assets compared to the linked period was driven by new higher yield originations than those in previous periods as well as repricing within the existing variable rate portfolio. Average balances of interest earning assets totaled $5.51 billion for the quarter ended March 31, 2023, compared to $5.86 billion for the quarter ended March 31, 2022. The increase in interest income for the current quarter, as compared to the prior year like quarter, was the result of replacing older, lower yielding securities with higher rate securities through a mix of maturities, and strategic purchases and sales, as well as loan growth year over year. Changes in the market interest rate environment impact the portfolio at varying intervals depending on the repricing timeline of loans, as well as the securities maturity and purchase activity.

The year over year increase of 217 basis points on interest earning assets was driven by significant increases to benchmark interest rates as well as strong loan growth throughout the period specifically within the commercial and commercial real estate portfolios. The increases in benchmark interest rates impacted yields on the securities portfolio through the inverse relationship between interest rates and market value coupled with maturities and strategic sales of lower yielding assets and timely purchase of higher yielding securities as we work to increase the weighted average yield in the portfolio. Average securities available-for-sale decreased $304.3 million in the first quarter of 2023, compared to the first quarter of 2022, due to paydowns and strategic sales. Due to market interest rate increases year over year, securities available-for-sale interest income was $12.4 million in the first quarter of 2023, compared to $6.8 million for the like 2022 quarter. Average loans, including loans held for sale, increased $528.0 million in the first quarter of 2023, compared to the first quarter of 2022, primarily driven by the growth in commercial, commercial real estate-investor, and multifamily portfolios. Growth in the loan portfolio, as well as the rising interest rate environment, resulted in $57.2 million of loan interest income in the first quarter of 2023, compared to $36.4 million in the first quarter of 2022. 39

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Average balances of interest bearing deposit accounts have decreased steadily since the first quarter of 2022 through the first quarter of 2023 from $3.40 billion to $3.00 billion, with these decreases reflected in all categories aside from NOW accounts which increased nominally. We have continued to control the cost of funds over the periods reflected, with the rate of overall interest bearing deposits increasing by 17 basis points to 25 basis points from eight basis points as of March 31, 2022. A 19 basis point increase in the cost of money market funds as of March 31, 2023 compared to December 31, 2022, and 34 basis points increase compared to March 31, 2022 were both due to select exception pricing and drove a significant portion of the overall increase. Time deposits saw the next largest increase of 12 basis points and 39 basis points in the quarter to date and year over year periods ending March 31, 2023, respectively, primarily due to CD rate specials we offered.

Borrowing costs increased in the first quarter of 2023 primarily due to the increase in average short term borrowings stemming from average FHLB advance growth of $156.5 million since year end 2022, and average growth of $201.0 million year over year based on daily liquidity needs. Subordinated and junior subordinated debt interest expense remained flat over each of the periods presented. Senior notes interest expense had the most significant interest expense increase, as this issuance references three month LIBOR, and rising market interest rates resulted in a 111 basis point increase to 9.04%, from 7.93% as of December 31, 2022, and a 462 basis point increase from 4.42% as of March 31, 2022. In the first quarter of 2023, we paid off the remaining balance of $9.0 million on the original $20.0 term note issued in 2020, recorded within notes payable and other borrowings.

Our net interest margin (GAAP) increased 12 basis points to 4.72% for the first quarter of 2023, compared to 4.60% for the fourth quarter of 2022, and increased 187 basis points compared to 2.85% for the first quarter of 2022. Our net interest margin (TE) increased 11 basis points to 4.74% for the first quarter of 2023, compared to 4.63% for the fourth quarter of 2022 and increased 186 basis points compared to 2.88% for the first quarter of 2022. The increase in the current quarter, compared to both prior quarters, is primarily due to an increase in market interest rates, and the related rate resets on loans and securities during the past year, as well as continuing loan growth relative to a more modest increase in the cost of interest bearing liabilities.

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

The following tables set forth certain information relating to our average consolidated balance sheets 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 2023 and 2022 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
	March 31, 2023						December 31, 2022						March 31, 2022
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	49,310		$	585	4.81	$	50,377		$	461	3.63	$	635,302		$	269	0.17
Securities:
Taxable		1,330,295			10,735	3.27		1,404,437			10,495	2.96		1,612,635			5,169	1.30
Non-taxable (TE)^1^		173,324			1,693	3.96		171,567			1,697	3.92		195,240			1,667	3.47
Total securities (TE)^1^		1,503,619			12,428	3.35		1,576,004			12,192	3.07		1,807,875			6,836	1.53
FHLBC and FRBC Stock		24,905			280	4.56		19,534			259	5.26		16,066			153	3.86
Loans and loans held-for-sale^1, 2^		3,932,492			57,228	5.90		3,878,228			55,195	5.65		3,404,534			36,428	4.34
Total interest earning assets		5,510,326			70,521	5.19		5,524,143			68,107	4.89		5,863,777			43,686	3.02
Cash and due from banks		55,140			-	-		56,531			-	-		42,972			-	-
Allowance for credit losses on loans		(49,398)			-	-		(48,778)			-	-		(44,341)			-	-
Other noninterest bearing assets		382,579			-	-		395,726			-	-		370,987			-	-
Total assets	$	5,898,647					$	5,927,622					$	6,233,395

Liabilities and Stockholders' Equity
NOW accounts	$	601,030		$	242	0.16	$	623,408		$	225	0.14	$	599,481		$	89	0.06
Money market accounts		833,823			828	0.40		901,950			477	0.21		1,098,941			170	0.06
Savings accounts		1,126,040			79	0.03		1,155,409			74	0.03		1,201,075			138	0.05
Time deposits		434,655			664	0.62		450,111			571	0.50		495,452			277	0.23
Interest bearing deposits		2,995,548			1,813	0.25		3,130,878			1,347	0.17		3,394,949			674	0.08
Securities sold under repurchase agreements		31,080			9	0.12		33,275			10	0.12		39,204			11	0.11
Other short-term borrowings		200,833			2,345	4.74		44,293			436	3.91		-			-	-
Junior subordinated debentures		25,773			279	4.39		25,773			287	4.42		25,773			280	4.41
Subordinated debentures		59,308			546	3.73		59,286			546	3.65		59,222			546	3.74
Senior notes		44,599			994	9.04		44,572			891	7.93		44,494			485	4.42
Notes payable and other borrowings		5,400			87	6.53		9,978			137	5.45		19,009			103	2.20
Total interest bearing liabilities		3,362,541			6,073	0.73		3,348,055			3,654	0.43		3,582,651			2,099	0.24
Noninterest bearing deposits		2,002,801			-	-		2,083,503			-	-		2,093,293			-	-
Other liabilities		51,279			-	-		51,753			-	-		60,819			-	-
Stockholders' equity		482,026			-	-		444,311			-	-		496,632			-	-
Total liabilities and stockholders' equity	$	5,898,647					$	5,927,622					$	6,233,395
Net interest income (GAAP)				$	64,086					$	64,091					$	41,232
Net interest margin (GAAP)						4.72						4.60						2.85

Net interest income (TE)^1^				$	64,448					$	64,453					$	41,587
Net interest margin (TE)^1^						4.74						4.63						2.88
Interest bearing liabilities to earning assets		61.02	%					60.61	%					61.10	%

^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 2023 and 2022.

^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 42, and includes fee expense of $730,000 for the first quarter of 2023, and loan fee income of $917,000 for the fourth quarter of 2022, and $1.6 million for the first quarter of 2022, respectively. Nonaccrual loans are included in the above-stated average balances.

Table of Contents

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 2023 and 2022 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
	March 31,			December 31,			March 31,
Net Interest Margin	2023		****	2022			2022


Interest income (GAAP)	$	70,159		$	67,745		$	43,331
Taxable-equivalent adjustment:
Loans		6			6			5
Securities		356			356			350
Interest and dividend income (TE)		70,521			68,107			43,686
Interest expense (GAAP)		6,073			3,654			2,099
Net interest income (TE)	$	64,448		$	64,453		$	41,587
Net interest income (GAAP)	$	64,086		$	64,091		$	41,232
Average interest earning assets	$	5,510,326		$	5,524,143		$	5,863,777
Net interest margin (GAAP)		4.72	%		4.60	%		2.85	%
Net interest margin (TE)		4.74	%		4.63	%		2.88	%

Noninterest Income

Three months ended March 31, 2023 and 2022

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


										First Quarter 2023
Noninterest Income	Three Months Ended									Percent Change From
(Dollars in thousands)	March 31,			December 31,			March 31,			December 31,		March 31,
	2023		****	2022		****	2022		****	2022	****	2022
Wealth management	$	2,270		$	2,403		$	2,698		(5.5)		(15.9)
Service charges on deposits		2,424			2,499			2,074		(3.0)		16.9
Residential mortgage banking revenue
Secondary mortgage fees		59			62			139		(4.8)		(57.6)
MSRs mark to market (loss) gain		(525)			(431)			2,978		21.8		(117.6)
Mortgage servicing income		516			518			519		(0.4)		(0.6)
Net gain on sales of mortgage loans		306			340			1,495		(10.0)		(79.5)
Total residential mortgage banking revenue		356			489			5,131		(27.2)		(93.1)
Securities losses, net		(1,675)			(910)			-		84.1		N/M
Change in cash surrender value of BOLI		242			376			124		(35.6)		95.2
Card related income		2,244			2,795			2,574		(19.7)		(12.8)
Other income		1,489			1,294			862		15.1		72.7
Total noninterest income	$	7,350		$	8,946		$	13,463		(17.8)		(45.4)

N/M - Not meaningful

Noninterest income decreased $1.6 million, or 17.8%, in the first quarter of 2023, compared to the fourth quarter of 2022, and decreased $6.1 million, or 45.4%, compared to the first quarter of 2022. The decrease from the fourth quarter of 2022 was primarily driven by a 42

Table of Contents $765,000 increase in securities losses, net, based on strategic sales and a $551,000 decline in card related income primarily due to decreased activity. These decreases in noninterest income in the first quarter of 2023, compared to the fourth quarter of 2022, were partially offset by a $195,000 increase in other income driven by credits received from a few vendors related to prior year service discounts.

The decrease in noninterest income of $6.1 million in the first quarter of 2023, compared to the first quarter of 2022, is primarily due to a decrease of $4.8 million in residential mortgage banking revenue due to increases in market interest rates in the year over year period, reducing mortgage banking origination volume and related derivative revenue, as well as an increase in security losses of $1.7 million based on strategic sales in the quarter ended March 31, 2023. These decreases were partially offset by a $350,000 increase in service charges on deposits, and a $627,000 increase in other income driven by a few vendor credits related to prior year billings and volumes of activity.

Noninterest Expense

Three months ended March 31, 2023 and 2022

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


										First Quarter 2023
Noninterest Expense	Three Months Ended									Percent Change From
(Dollars in thousands)	March 31,			December 31,			March 31,			December 31,		March 31,
	2023		****	2022		****	2022		****	2022	****	2022
Salaries	$	16,087		$	17,487		$	15,598		(8.0)		3.1
Officers incentive		1,827			3,876			994		(52.9)		83.8
Benefits and other		4,334			2,900			3,375		49.4		28.4
Total salaries and employee benefits		22,248			24,263			19,967		(8.3)		11.4
Occupancy, furniture and equipment expense		3,475			4,128			3,699		(15.8)		(6.1)
Computer and data processing		1,774			2,978			6,268		(40.4)		(71.7)
FDIC insurance		584			630			410		(7.3)		42.4
Net teller & bill paying		502			485			1,907		3.5		(73.7)
General bank insurance		305			298			315		2.3		(3.2)
Amortization of core deposit intangible asset		624			645			665		(3.3)		(6.2)
Advertising expense		142			130			182		9.2		(22.0)
Card related expense		1,216			1,304			534		(6.7)		127.7
Legal fees		319			225			257		41.8		24.1
Consulting & management fees		790			679			616		16.3		28.2
Other real estate owned expense, net		306			34			(12)		N/M		N/M
Other expense		3,637			3,885			3,444		(6.4)		5.6
Total noninterest expense	$	35,922		$	39,684		$	38,252		(9.5)		(6.1)
Efficiency ratio (GAAP)^1^		47.52	%		52.44	%		72.70	%
Adjusted efficiency ratio (non-GAAP)^2^		47.66	%		51.29	%		61.92	%

N/M - Not meaningful

^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, 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 44 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the first quarter of 2023 decreased $3.8 million, or 9.5%, compared to the fourth quarter of 2022, and decreased $2.3 million, or 6.1%, compared to the first quarter of 2022. The decrease in the first quarter of 2023 compared to the fourth quarter of 43

Table of Contents 2022 was attributable to a $2.0 million decrease in salaries and employee benefits, primarily due to reductions in the officer incentive accrual, partially offset by an increase in employee benefits and other stemming from payroll taxes and 401k matching expense related to annual bonus payments made in the first quarter of 2023. In addition, a $1.2 million decrease in computer and data processing costs was recorded in the first quarter of 2023, compared to the linked quarter, primarily due to the timing of software contracts and incentives. Noninterest expense was further increased by a $269,000 OREO valuation reserve recorded on two properties in the first quarter of 2023; no OREO valuation reserve was recorded in the fourth quarter of 2022.

The year over year decrease in noninterest expense is primarily attributable to a $4.5 million decrease in computer and data processing expenses and a $1.4 million decrease in net teller & bill paying expense, both stemming from acquisition related costs in the first quarter of 2022 from our West Suburban acquisition. Partially offsetting the decrease in noninterest expense in the first quarter of 2023, compared to the first quarter of 2022, was a $2.3 million increase in salaries and employee benefits and a $682,000 increase in card related expenses. Officer incentive compensation increased $833,000 in the first quarter of 2023, compared to the first quarter of 2022, as incentive accruals increased in the current year due to growth in our commercial and sponsored finance lending teams year over year.

Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures


	GAAP									Non-GAAP
		Three Months Ended									Three Months Ended
	March 31,			December 31,			March 31,			March 31,			December 31,			March 31,
	2023			2022			2022			2023			2022			2022
Efficiency Ratio / Adjusted Efficiency Ratio

Noninterest expense	$	35,922		$	39,684		$	38,252		$	35,922		$	39,684		$	38,252
Less amortization of core deposit		624			645			665			624			645			665
Less other real estate expense, net		306			34			(12)			306			34			(12)
Less acquisition related costs, net of gain on branch sales		N/A			N/A			N/A			(306)			617			5,335
Noninterest expense less adjustments	$	34,992		$	39,005		$	37,599		$	35,298		$	38,388		$	32,264

Net interest income	$	64,086		$	64,091		$	41,232		$	64,086		$	64,091		$	41,232
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			6			6			5
Securities		N/A			N/A			N/A			356			356			350
Net interest income including adjustments		64,086			64,091			41,232			64,448			64,453			41,587
Noninterest income		7,350			8,946			13,463			7,350			8,946			13,463
Less securities losses		(1,675)			(910)			-			(1,675)			(910)			-
Less MSRs mark to market (loss) gain		(525)			(431)			2,978			(525)			(431)			2,978
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			N/A			64			100			33
Noninterest income (excluding) / including adjustments		9,550			10,287			10,485			9,614			10,387			10,518

Net interest income including adjustments plus noninterest income (excluding) / including adjustments	$	73,636		$	74,378		$	51,717		$	74,062		$	74,840		$	52,105
Efficiency ratio / Adjusted efficiency ratio		47.52	%		52.44	%		72.70	%		47.66	%		51.29	%		61.92	%

N/A - not applicable

Income Taxes

We recorded income tax expense of $8.4 million for the first quarter of 2023 on $32.0 million of pretax income, compared to income tax expense of $8.2 million on $31.9 million of pretax income in the fourth quarter of 2022, and income tax expense of $4.4 million on $16.4 million of pretax income in the first quarter of 2022. Our effective tax rate was 26.3% in the first quarter of 2023, 25.9% for the fourth quarter of 2022, and 26.9% for the first quarter of 2022.

Income tax expense reflected all relevant statutory tax rates and GAAP accounting. There were no significant changes in our ability to utilize our deferred tax assets during the quarter ended March 31, 2023. We had no valuation reserve on the deferred tax assets as of March 31, 2023. 44

Table of Contents Financial Condition

Total assets increased $32.0 million to $5.92 billion at March 31, 2023, from $5.89 billion at December 31, 2022, due primarily to an increase in net loans of $129.8 million and FHLB and FRB stock held of $9.7 million, partially offset by decreases of $12.2 million in cash and cash equivalents, $84.3 million in securities available-for-sale, and $6.9 million in deferred tax assets. The decrease in cash and cash equivalents was primarily due to the use of cash for loan growth, as well as the decrease in customer deposits. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were $4.90 billion at March 31, 2023, a decrease of $213.5 million from December 31, 2022, 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 the first quarter of 2023.


											March 31, 2023
Securities		As of									Percent Change From
(Dollars in thousands)		March 31,			December 31,			March 31,			December 31,		March 31,
	****	2023		****	2022		****	2022		****	2022	****	2022
Securities available-for-sale, at fair value
U.S. Treasuries		$	214,734		$	212,129		$	220,563		1.2		(2.6)
U.S. government agencies			56,703			56,048			59,036		1.2		(4.0)
U.S. government agencies mortgage-backed			121,938			124,990			153,148		(2.4)		(20.4)
States and political subdivisions			233,506			226,128			236,408		3.3		(1.2)
Corporate bonds			9,762			9,622			9,683		1.5		0.8
Collateralized mortgage obligations			454,106			533,768			696,513		(14.9)		(34.8)
Asset-backed securities			189,753			201,928			274,941		(6.0)		(31.0)
Collateralized loan obligations			174,566			174,746			166,158		(0.1)		5.1
Total securities		$	1,455,068		$	1,539,359		$	1,816,450		(5.5)		(19.9)

Securities available-for-sale decreased $84.3 million as of March 31, 2023, compared to December 31, 2022, and decreased $361.4 million compared to March 31, 2022. The decrease in the portfolio during 2023 was driven by securities sales totaling $66.2 million and paydowns totaling $37.4 million, partially offset by $4.0 million in purchases and a $17.9 million increase in market value. We continue to seek to position the portfolio in higher credit quality, shorter duration securities with an appropriate mix of fixed- and floating-rate exposures.


							March 31, 2023
Loans	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,
	2023		2022		2022		2022	****	2022
Commercial ^1^	$	851,737	$	840,964	$	695,545	1.3		22.5
Leases		285,831		277,385		211,132	3.0		35.4
Commercial real estate – investor		1,056,787		987,635		748,267	7.0		41.2
Commercial real estate – owner occupied		870,115		854,879		873,292	1.8		(0.4)
Construction		174,683		180,535		165,558	(3.2)		5.5
Residential real estate – investor		56,720		57,353		62,846	(1.1)		(9.7)
Residential real estate – owner occupied		217,855		219,718		203,118	(0.8)		7.3
Multifamily		358,991		323,691		298,686	10.9		20.2
HELOC		104,941		109,202		120,241	(3.9)		(12.7)
Other ^2^		25,694		18,247		23,685	40.8		8.5
Total loans	$	4,003,354	$	3,869,609	$	3,402,370	3.5		17.7

^1^ Includes $1.3 million, $1.6 million, and $11.2 million of Paycheck Protection Program (“PPP”) loans at March 31, 2023, December 31, 2022, and March 31, 2022, respectively.

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

Table of Contents Total loans were $4.0 billion as of March 31, 2023, an increase of $133.7 million from December 31, 2022. The increase in total loans in the first three months of 2023, compared to December 31, 2022, was due primarily to growth in loan originations within commercial real estate – investor of $69.2 million, multifamily of $35.3 million, and commercial real estate – owner occupied of $15.2 million from December 31, 2022. Total loans increased $601.0 million from March 31, 2022 to March 31, 2023, primarily due to growth in loan originations within commercial real estate – investor of $308.5 million, commercial of $156.2 million, leases of $74.7 million, and multifamily of $60.3 million. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) is carried on a gross basis (rather than net of the associated credit loss estimate), and the expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses, or ACL.

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 70.9% of the portfolio as of March 31, 2023, compared to 70.6% of the portfolio as of December 31, 2022. 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, and loans 90 days or greater past due. Prior to January 1, 2023, nonperforming loans also included performing troubled debt restructured loans accruing interest. Nonperforming loans increased by $31.6 million to $64.5 million at March 31, 2023 from $32.9 million at December 31, 2022, and increased $26.6 million from $38.0 million at March 31, 2022. 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 1.6% as of March 31, 2023, 0.9% as of December 31, 2022, and 1.1% as of March 31, 2022. The distribution of our nonperforming loans is shown in the following table.


							March 31, 2023
Nonperforming Loans	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2023		2022		2022		2022	2022
Commercial	$	2,811	$	7,649	$	9,029	(63.3)	(68.9)
Leases		856		1,876		2,641	(54.4)	(67.6)
Commercial real estate – investor		30,397		4,346		6,335	599.4	379.8
Commercial real estate – owner occupied		19,691		8,223		9,871	139.5	99.5
Construction		241		251		1,250	(4.0)	(80.7)
Residential real estate – investor		1,555		1,672		1,393	(7.0)	11.6
Residential real estate – owner occupied		4,038		4,198		4,470	(3.8)	(9.7)
Multifamily		2,495		2,538		1,629	(1.7)	53.2
HELOC		2,441		2,158		1,337	13.1	82.6
Other ^1^		2		2		3	-	(33.3)
Total nonperforming loans	$	64,527	$	32,913	$	37,958	96.1	70.0

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

Table of Contents

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


										March 31, 2023
Nonperforming Assets	As of									Percent Change From
(Dollars in Thousands)	March 31,			December 31,			March 31,			December 31,	March 31,
	2023		****	2022		****	2022		****	2022	2022
Nonaccrual loans	$	63,561		$	31,602		$	35,973		101.1	76.7
Performing troubled debt restructured loans accruing interest ^1^		N/A			49			1,242		N/A	N/A
Loans past due 90 days or more and still accruing interest		966			1,262			743		(23.5)	30.0
Total nonperforming loans		64,527			32,913			37,958		96.1	70.0
Other real estate owned		1,255			1,561			2,374		(19.6)	(47.1)
Total nonperforming assets	$	65,782		$	34,474		$	40,332		90.8	63.1


30-89 days past due loans and still accruing interest	$	24,770		$	7,508		$	20,835
Nonaccrual loans to total loans		1.6	%		0.8	%		1.1	%
Nonperforming loans to total loans		1.6	%		0.9	%		1.1	%
Nonperforming assets to total loans plus OREO		1.6	%		0.9	%		1.2	%

Allowance for credit losses	$	53,392		$	49,480		$	44,308
Allowance for credit losses to total loans		1.3	%		1.3	%		1.3	%
Allowance for credit losses to nonaccrual loans		84.0	%		156.6	%		123.2	%

N/A – Not applicable

^1^As of January 1, 2023, the Company prospectively adopted ASU 2022-02 Topic 326 “Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures”, which eliminated the need for recognition, measurement and disclosure of TDRs going forward. See Note 1 for further details of ASU 2022-02 adoption.

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


Loan Charge–offs, Net of Recoveries	Three Months Ended
(Dollars in thousands)	March 31,		% of	December 31,		% of	March 31,		% of
	2023		Total^1^	2022		Total^1^	2022		Total^1^
Commercial	$	(124)	(16.8)	$	(8)	(0.9)	$	-	-
Leases		873	118.00		191	20.3		-	-
Commercial real estate – investor		(17)	(2.3)		776	82.6		213	72.7
Commercial real estate – owner occupied		(2)	(0.3)		(2)	(0.2)		113	38.6
Residential real estate – investor		(19)	(2.6)		(7)	(0.7)		(10)	(3.4)
Residential real estate – owner occupied		(10)	(1.4)		-	-		(83)	(28.3)
Multifamily		-	-		(6)	(0.6)		-	-
HELOC		(29)	(3.9)		(38)	(4.0)		(35)	(11.9)
Other ^2^		68	9.3		34	3.5		95	32.3
Net charge–offs	$	740	100.0	$	940	100.0	$	293	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 $740,000 were recorded for the first quarter of 2023, compared to net charge-offs of $940,000 for the fourth quarter of 2022, and net charge-offs of $293,000 for the first quarter of 2022, reflecting continuing management attention to credit quality and remediation efforts. The net charge-offs for the first quarter of 2023 were primarily due to six lease charge offs of $882,000 in aggregate. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

Classified loans include nonaccrual loans and all other loans considered substandard. Classified assets include both classified loans and OREO. Loans classified as substandard are inadequately protected by either the current net worth and ability to meet payment obligations 47

Table of Contents 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.

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


							March 31, 2023
Classified Assets	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2023		2022		2022		2022	2022
Commercial	$	22,662	$	26,485	$	29,267	(14.4)	(22.6)
Leases		906		1,876		2,641	(51.7)	(65.7)
Commercial real estate – investor		52,615		27,410		8,809	92.0	497.3
Commercial real estate – owner occupied		37,545		40,890		13,259	(8.2)	183.2
Construction		241		1,333		3,185	(81.9)	(92.4)
Residential real estate – investor		1,702		1,714		1,544	(0.7)	10.2
Residential real estate – owner occupied		3,618		3,854		4,862	(6.1)	(25.6)
Multifamily		3,348		2,954		1,369	13.3	144.6
HELOC		2,635		2,411		1,669	9.3	57.9
Other ^1^		2		2		3	-	(33.3)
Total classified loans		125,274		108,929		66,608	15.0	88.1
Other real estate owned		1,255		1,561		2,374	(19.6)	(47.1)
Total classified assets	$	126,529	$	110,490	$	68,982	14.5	83.4

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

Total classified loans and classified assets increased $16.0 million as of March 31, 2023, from the levels at December 31, 2022. The increase is due to the addition of $25.2 million classified loans in commercial real estate – investor, primarily due to three large credits, two of which are office buildings and one is an assisted living facility in the first quarter of 2023. The increase from March 31, 2022 is primarily due to additions to commercial real estate – investor and commercial real estate – owner occupied, increases of $43.8 million driven by six larger credits and $24.3 million primarily from the addition of two large credits, respectively. 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 20.04% for the period ended March 31, 2023, compared to 18.36% as of December 31, 2022, and 12.04% as of March 31, 2022.

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 allowance for credit losses (“ACL”) at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheets date.

At March 31, 2023, our ACL on loans totaled $53.4 million, and our ACL on unfunded commitments, included in other liabilities, totaled $3.8 million. In the first quarter of 2023, we recorded provision expense on loans of $4.7 million, based on our assessment of nonperforming loan metrics and trends and estimated future credit losses, and a $1.2 million decrease in our reserve on unfunded commitments, primarily due to a reduction in construction unfunded commitments and the construction historical loss rates, as well as a reduction in the commercial substandard portfolio due to two large upgraded credits. These two entries resulted in a $3.5 million net impact to the provision for credit losses for the first quarter of 2023.

Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loans, leases and unfunded commitments. The ACL on loans totaled $53.4 million as of March 31, 2023, $49.5 million as of December 31, 2022, and $44.3 million as of March 31, 2022. Our ACL on loans to total loans was 1.3% as of March 31, 2023, December 31, 2022 and March 31, 2022. See Item 7 – Critical Accounting Estimates in the Management Discussion and Analysis in our 2022 Annual Report in Form 10-K for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off. 48

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


		Three Months Ended
	March 31,			December 31,			March 31,
	2023			2022			2022
Allowance at beginning of period	$	49,480		$	48,847		$	44,281
Charge–offs:
Commercial		27			2			30
Leases		882			193			-
Commercial real estate – investor		-			797			236
Commercial real estate – owner occupied		-			-			121
Construction		-			-			-
Residential real estate – investor		-			-			-
Residential real estate – owner occupied		-			-			-
Multifamily		-			2			-
HELOC		-			-			-
Other ^1^		113			82			127
Total charge–offs		1,022			1,076			514
Recoveries:
Commercial		151			10			30
Leases		9			2			-
Commercial real estate – investor		17			21			23
Commercial real estate – owner occupied		2			2			8
Construction		-			-			-
Residential real estate – investor		19			7			10
Residential real estate – owner occupied		10			-			83
Multifamily		-			8			-
HELOC		29			38			35
Other ^1^		45			48			32
Total recoveries		282			136			221
Net charge-offs		740			940			293
Provision for credit losses on loans		4,652			1,573			320
Allowance at end of period	$	53,392		$	49,480		$	44,308

Average total loans (exclusive of loans held–for–sale)	$	3,931,679		$	3,877,004		$	3,397,827
Net charge–offs to average loans		0.08	%		0.10	%		0.04	%
Allowance at period end to average loans		1.36	%		1.28	%		1.30	%

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

The coverage ratio of the ACL on loans to nonperforming loans was 82.7% March 31, 2023, which was a decrease from the coverage ratio of 150.3% as of December 31, 2022 and a decrease from 116.7% as of March 31, 2022. When measured as a percentage of average loans, our total ACL on loans was 1.36% for the three months ended 2023 and 1.30% for the like period of March 31, 2022.

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at March 31, 2023, and general changes in lending policy, procedures and staffing, as well as other external factors. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. Continued volatility in the economic environment stemming from the impacts of and response to inflation, potential recession, and the war in Ukraine, and the associated effects on our customers, or other factors, such as changes in business climates and the condition of collateral at the time of default or repossession, may revise our current expectations of future credit losses in future reporting periods.

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Other Real Estate Owned

As of March 31, 2023, OREO totaled $1.3 million, reflecting a $306,000 decrease from the $1.6 million at December 31, 2022, and a $1.1 million decrease from the $2.4 million at March 31, 2022. In the first quarter of 2023, we disposed of one property totaling $328,000 in net book value, which resulted in a loss on sale of OREO of $28,000. We transferred in two properties which increased total OREO net book value by $291,000. In the first quarter of 2023, we recorded two write-downs totaling $273,000 as well as a write-up for $4,000, totaling a $269,000 increase in valuation reserve, compared to no valuation reserve adjustments recorded in the fourth quarter of 2022 and the first quarter of 2022.


							March 31, 2023
OREO	Three Months Ended						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2023		2022		2022		2022	2022
Balance at beginning of period	$	1,561	$	1,561	$	2,356	-	(33.7)
Property additions, net of acquisition adjustments		291		-		87	N/M	234.5
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		328		-		69	N/M	375.4
Period valuation write-down		269		-		-	N/M	N/M
Balance at end of period	$	1,255	$	1,561	$	2,374	(19.6)	(47.1)

N/M - Not meaningful

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 $431,000, or approximately 34.3% of total OREO at March 31, 2023, have been in OREO for five years or more. The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.



OREO Properties by Type
(Dollars in thousands)	March 31, 2023				December 31, 2022				March 31, 2022
		Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	291	23	%	$	-	-	%	$	576	24	%
Lots (single family and commercial)		767	61	%		1,261	81	%		1,411	59	%
Vacant land		197	16	%		300	19	%		387	17	%
Total other real estate owned	$	1,255	100	%	$	1,561	100	%	$	2,374	100	%

Deposits and Borrowings

88
							March 31, 2023
Deposits	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,		March 31,
	2023		2022		2022		2022	****	2022
Noninterest bearing demand	$	1,950,144	$	2,051,702	$	2,132,606	(4.9)		(8.6)
Savings		1,108,610		1,145,592		1,228,783	(3.2)		(9.8)
NOW accounts		608,260		609,338		607,019	(0.2)		0.2
Money market accounts		799,300		862,170		1,098,581	(7.3)		(27.2)
Certificates of deposit of less than $100,000		238,257		244,017		286,116	(2.4)		(16.7)
Certificates of deposit of $100,000 through $250,000		147,887		157,438		135,682	(6.1)		9.0
Certificates of deposit of more than $250,000		44,762		40,466		55,758	10.6		(19.7)
Total deposits	$	4,897,220	$	5,110,723	$	5,544,545	(4.2)		(11.7)

Table of Contents Total deposits were $4.90 billion at March 31, 2023, which reflects a $213.5 million decrease from total deposits of $5.11 billion at December 31, 2022, and a decrease of $647.3 million from total deposits of $5.54 billion at March 31, 2022. The decrease in deposits at March 31, 2023, compared to December 31, 2022, was primarily due to decreases in non-interest bearing deposits of $101.6 million, savings accounts of $37.0 million and money market accounts of $62.9 million. The decrease in deposits at March 31, 2023, compared to March 31, 2022 was primarily due to decreases in non-interest bearing deposits of $182.5 million, savings accounts of $120.2 million, and money market accounts of $299.3 million. The bulk of the linked quarter decline in deposit balances occurred in January 2023 and is consistent with seasonal historical trends. Deposit trends in February and March were essentially unchanged and net account growth improved significantly in the first quarter relative to trends throughout 2022 following the close of the West Suburban acquisition. Total average deposits decreased $489.9 million, or 8.9%, in the year over year period, driven by declines in our average demand deposits of $90.5 million, and savings, NOW and money markets combined of $338.6 million. In general, the bulk of the decline in deposits year over year can be characterized as rate sensitive account attrition with significant flows and transfers into investing activities following significant expansion in those same accounts in the immediate aftermath of the pandemic.

In addition to deposits, we used other liquidity sources for our funding needs in all periods presented, such as repurchase agreements and other short-term borrowings with the FHLBC. Securities sold under repurchase agreements totaled $27.9 million at March 31, 2023, a $4.3 million, or 13.2%, decrease from $32.2 million at December 31, 2022. Our excess liquidity on hand during much of 2022 allowed us to fund our short-term liquidity needs with cash on hand. During the third quarter of 2022, we began utilizing short-term borrowings from the FHLBC again. The outstanding balance of our short-term FHLBC borrowings was $315.0 million as of March 31, 2023 and $90.0 million as of December 31, 2022; there were no short-term borrowings outstanding as of March 31, 2022.

We are 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 4.39% as of March 31, 2023, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017 rate reset.

In the second quarter of 2021, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers pursuant to which we issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). We sold the Notes to eligible purchasers in a private offering, and the proceeds of this issuance were used for general corporate purposes. 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. As of March 31, 2023, we had $59.3 million of subordinated debentures outstanding, net of deferred issuance costs.

In December 2016, we completed a $45.0 million senior note issuance. The notes have a ten-year term, and include interest payable semiannually at 5.75% for five years. Beginning December 31, 2021, the interest became payable quarterly at three month LIBOR plus 385 basis points. As of March 31, 2023, we had $44.6 million of senior debt outstanding, net of deferred issuance costs. At March 31, 2023, we were in compliance with all of the financial covenants outlined within the senior debt agreement.

On February 24, 2023, we paid off the $9.0 million balance in notes payable and other borrowings, resulting in no balance in this line item as of March 31, 2023, compared to $9.0 million as of December 31, 2022, and $18.0 million as of March 31, 2022. The balance in notes payable was related to a $20.0 million dollar 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.

Capital

As of March 31, 2023, total stockholders’ equity was $496.9 million, which was an increase of $35.7 million from $461.1 million as of December 31, 2022. This increase is primarily attributable to an increase in retained earnings of $21.4 million due to net income of $23.6 million in the first quarter of 2023, partially offset by $2.2 million of dividends paid to our common stockholders. In addition, total stockholders’ equity as of March 31, 2023 increased over December 31, 2022, due to a reduction in unrealized net losses on available-for-sale securities, which increased accumulated other comprehensive income by $14.0 million in the first three months of 2023, due to changes in market interest rates. Total stockholders’ equity as of March 31, 2023 increased $30.6 million compared to March 31, 2022 net income year over year, less the reduction in accumulated other comprehensive income of $41.6 million year over year.

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


	Minimum Capital		Well Capitalized
	Adequacy with		Under Prompt
	Capital Conservation		Corrective Action		March 31,		December 31,		March 31,
	Buffer, if applicable^1^		Provisions^2^		2023		2022		2022
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		9.91	%	9.67	%	9.73	%
Total risk-based capital ratio	10.50	%	N/A		12.79	%	12.52	%	12.85	%
Tier 1 risk-based capital ratio	8.50	%	N/A		10.43	%	10.20	%	10.33	%
Tier 1 leverage ratio	4.00	%	N/A		8.56	%	8.14	%	7.00	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	11.98	%	11.70	%	12.74	%
Total risk-based capital ratio	10.50	%	10.00	%	13.10	%	12.75	%	13.83	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	11.98	%	11.70	%	12.74	%
Tier 1 leverage ratio	4.00	%	5.00	%	9.83	%	9.32	%	8.61	%

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

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

As of March 31, 2023, 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, increased from 7.83% at December 31, 2022, to 8.39% at March 31, 2023. Our GAAP tangible common equity to tangible assets ratio was 6.83% at March 31, 2023, compared to 6.24% as of December 31, 2022. Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, increased from 6.28% at December 31, 2022, to 6.87% at March 31, 2023, primarily due to an increase in tangible common equity in the first quarter of 2023. The increase in tangible common equity was due to an increase in retained earnings of $21.4 million and an increase in accumulated other comprehensive income of $14.0 million primarily related to a decline in unrealized losses on available-for-sale securities stemming from the changes in market interest rates.

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


	March 31, 2023						December 31, 2022
Tangible common equity	GAAP			Non-GAAP			GAAP			Non-GAAP
(Dollars in thousands)

Total Equity	$	496,870		$	496,870		$	461,141		$	461,141
Less: Goodwill and intangible assets		99,532			99,532			100,156			100,156
Add: Limitation of exclusion of core deposit intangible (80%)		N/A			2,611			N/A			2,736
Adjusted goodwill and intangible assets		99,532			96,921			100,156			97,420
Tangible common equity	$	397,338		$	399,949		$	360,985		$	363,721
Tangible assets
Total assets	$	5,920,283		$	5,920,283		$	5,888,317		$	5,888,317
Less: Adjusted goodwill and intangible assets		99,532			96,921			100,156			97,420
Tangible assets	$	5,820,751		$	5,823,362		$	5,788,161		$	5,790,897

Common equity to total assets		8.39	%		8.39	%		7.83	%		7.83	%
Tangible common equity to tangible assets		6.83	%		6.87	%		6.24	%		6.28	%

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. In the first quarter of 2023, we experienced strong loan growth, while deposits have trended down as clients moved balances to pursue higher yields as well as due to seasonal declines. We managed the change in our funding through borrowing from the Federal Home Loan Bank of Chicago (“FHLBC”) and sale of securities, which resulted in minimal losses and mitigated our interest rate risk profile. The bank failures in the first five months of 2023 exemplify the potentially serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. 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, our senior management team monitors cash balances daily to ensure we have adequate liquidity to meet our operational and financing needs. As of March 31, 2023, our cash on hand liquidity totaled $103.0 million, a decrease of $12.2 million over cash balances held as of December 31, 2022.

Net cash inflows from operating activities were $35.0 million during the first three months of 2023, compared with net cash inflows of $494,000 in the same period of 2022. Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of outflows for the first three months of 2023 though to a lesser extent than the like period of 2022. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the three months ended March 31, 2023 and for the like period of 2022. 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 $42.9 million in the three months ended March 31, 2023, compared to net cash outflows of $176.5 million in the same period in 2022. In the first three months of 2023, securities transactions accounted for net inflows of $90.0 million, and the principal change on loans accounted for net outflows of $132.4 million. In the first three months of 2022, securities transactions accounted for net outflows of $199.3 million, and principal on loans funded, net of paydowns, accounted for net inflows of $21.9 million. Proceeds from sales of OREO accounted for $300,000 and $118,000 in investing cash inflows for the three months ended March 31, 2023 and 2022, respectively.

Net cash outflows from financing activities in the three months ended March 31, 2023, were $4.2 million, compared with net cash inflows of $58.6 million in the three months ended March 31, 2022. Net deposit outflows in the first three months of 2023 were $213.1 million 53

Table of Contents compared to net deposit inflows of $78.7 million in the first three months of 2022. Other short-term borrowings had $225.0 million of net cash inflows in the first three months of 2023, compared to no cash inflows or outflows in the first three months of 2022. Changes in securities sold under repurchase agreements accounted for outflows of $4.3 million and outflows of $16.8 million for the three months ended March 31, 2023 and 2022, respectively. Dividends paid on our common stock totaled $2.2 million in the three months ended March 31, 2023, and March 31, 2022. The purchase of treasury stock in the first three months of 2023 due to shares acquired with restricted stock award vestings resulted in outflows of $605,000, compared to no cash inflows or outflows in the first three months of 2022.

Cash and cash equivalents for the three months ended March 31, 2023, totaled $103.0 million, as compared to $115.2 million as of December 31, 2022 and $634.7 million as of March 31, 2022. The decrease in cash and cash equivalents for the three months ended March 31, 2023 was mainly attributable to loan growth and the payoff of the remaining balance of the term note, as well as seasonal deposit outflows, partially offset by security sales during the first quarter of 2023. The year over year decrease is again driven by loan growth, as well as increased customer use of deposits. 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 has slowed its pace of rate hikes to 0.25% at the March meeting – resulting in a federal funds rate target from 4.75% to 5.00%. We believe the current market expectation is one 25 basis points rate hike at the May meeting and the federal funds target rate to level off at 5.25%. The market has priced in rate cuts near the end of 2023. The Federal Reserve’s objective of shrinking its balance sheet has been slower than planned due to slower prepayments on mortgage-backed securities from the lack of refinancing activity. The Federal Reserve also provided additional liquidity facilities to financial institutions in March 2023, as a result its balance sheet remains at $8.6 trillion.

We manage interest rate risk within guidelines established by policy which 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 March 31, 2023 and December 31, 2022 are outlined in the table below. 54

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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, 2022. We seek to monitor and manage interest rate risk within approved policy guidelines and limits.

We use simulation analysis to quantify the impact of various rate scenarios on our net interest income. Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by us are incorporated into the simulation model. Earnings at risk are calculated by comparing the net interest income of a stable interest rate environment to the net interest income of a different interest rate environment in order to determine the percentage change. As of March 31, 2023, our net interest income profile remained sensitive to earnings gains (in both dollars and percentage) should interest rates rise. However, we continue to have a lower sensitivity profile relative to December 31, 2022 from interest rate swaps and increase in variable rate funding.

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%, with no change in the slope of the yield curve.


	Analysis of Net Interest Income Sensitivity
	Immediate Changes in Rates
(Dollars in thousands)		(2.0)	%	****	(1.0)	%	****	****	(0.5)	%	****	****	0.5	%	****	****	1.0	%	****	****	2.0	%
March 31, 2023
Dollar change	$	(42,566)		$	(21,044)			$	(10,322)			$	10,476			$	21,117			$	41,629
Percent change		(16.3)	%		(8.1)	%			(4.0)	%			4.0	%			8.1	%			15.9	%

December 31, 2022
Dollar change	$	(46,800)		$	(22,963)			$	(11,327)			$	11,278			$	22,593			$	44,482
Percent change		(18.2)	%		(8.9)	%			(4.4)	%			4.4	%			8.8	%			17.3	%

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 US inflation rate continues to slow to 5.0% from its peak of 9.1% in June 2022. Management believes the inflation rate will continue to trend down in response to monetary policy. In general, we expect higher inflation to increase borrowers’ needs for credit which drives GDP growth. As interest rates are expected to continue to move up modestly, we expect our net interest margin to correlate in this direction. The downside risks of high inflation put upwards pressure to our expenses, which could impact our 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 a 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.

Table of Contents Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of March 31, 2023. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2023, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2023, 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.

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, 2022, 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.”

We are providing these additional risk factors to supplement the risk factors contained in Item 1A. of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March 9, 2023.

Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, may have a material adverse effect on the Company’s operations.

The recent high-profile bank failures involving Silicon Valley Bank, Signature Bank, and First Republic Bank have caused general uncertainty and concern regarding the liquidity adequacy of the banking sector. Although we were not directly affected by these bank failures, the resulting speed and ease in which news, including social media commentary, led depositors to withdraw or attempt to withdraw their funds from these and other financial institutions caused the stock prices of many financial institutions to become volatile. Additional bank failures could have an adverse effect on our financial condition and results of operations, either directly or through an adverse impact on certain of our customers.

In response to the recent bank failures and the resulting market reaction, in March 2023 the Secretary of the Treasury approved actions enabling the FDIC to complete its resolutions of the failed banks in a manner that fully protects depositors by utilizing the Deposit Insurance Fund, including the use of Bridge Banks to assume all of the deposit obligations of the failed banks, while leaving unsecured lenders and equity holders of such institutions exposed to losses. In addition, the Federal Reserve announced it would make available additional funding to eligible depository institutions under a Bank Term Funding Program to help assure banks have the ability to meet the needs of all their depositors. In an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which will increase our FDIC insurance assessment and will increase our costs of doing business. However, it is uncertain whether these steps by the government will be sufficient to calm the financial markets, reduce the risk of significant depositor withdrawals at other institutions and thereby reduce the risk of additional bank failures. As a result of this uncertainty, we face the 56

Table of Contents potential for reputational risk, deposit outflows, increased costs and competition for liquidity, and increased credit risk which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

Rapidly rising interest rates will impact the value of our investment securities and the cost of our funding sources, including deposits.

Our profitability is highly dependent on our net interest income, which is the difference between the interest income paid to us on our loans and investments and the interest we pay to third parties such as our depositors, lenders and debt holders. Changes in interest rates can impact our profits and the fair values of certain of our assets and liabilities. Higher market interest rates and increased competition for deposits may result in higher interest expense, as we may offer higher rates to attract or retain customer deposits. Increases in interest rates also may increase the amount of interest expense we pay to creditors on short and long-term debt. Interest rate risk can also result from mismatches between the dollar amounts of re-pricing or maturing assets and liabilities and from mismatches in the timing and rates at which our assets and liabilities re-price. Changes in market values of investment securities classified as available for sale are impacted by higher rates and can negatively impact our other comprehensive income and equity levels through accumulated other comprehensive income, which includes net unrealized gains and losses on those securities. Further, such losses could be realized into earnings should liquidity and/or business strategy necessitate the sales of securities in a loss position. In March 2023, the Federal Reserve announced the creation of a new Bank Term Funding Program in an effort to minimize the need for banks to sell securities at a loss in times of stress. We may elect to use the Bank Term Funding Program on an as needed basis. We actively monitor and manage the balances of our maturing and re-pricing assets and liabilities to reduce the adverse impact of changes in interest rates, but there can be no assurance that we will be able to avoid material adverse effects on our net interest margin in all market conditions.

Inflationary pressures present a potential threat to our results of operation and financial condition.

The United States generally and the regions in which we operate specifically have recently experienced, for the first time in decades, significant inflationary pressures, evidenced by higher gas prices, higher food prices and other consumer items. Inflation represents a loss in purchasing power because the value of investments does not keep up with inflation and erodes the purchasing power of money and the potential value of investments over time. Accordingly, inflation can result in material adverse effects upon our customers, their businesses and, as a result, our financial position and results of operation.

Inflationary pressures have caused the Federal Reserve to recently increase interest rates. Increases in interest rates in the past have led to recessions of various lengths and intensities and might lead to such a recession in the near future. Such a recession or any other adverse changes in business and economic conditions generally or specifically in the markets in which we operate could affect our business, including causing one or more of the following negative developments:

•	an increase in our deposit and funding costs;
•	a decrease in the demand for loans, mortgage banking products and services and other products and services we offer;
---	---
•	a decrease in our deposit account balances as customers move funds to seek to obtain maximum federal deposit insurance coverage or to seek higher interest rates;
---	---
•	a decrease in the value of the collateral securing our residential or commercial real estate loans;
---	---
•	a permanent impairment of our assets; or
---	---
•	an increase in the number of customers or other counterparties who default on their loans or other obligations to us, which could result in a higher level of NPAs, net charge-offs and provision for loan losses.
---	---

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

Table of Contents

Item 6. Exhibits

Exhibits:



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

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

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

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

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at March 31, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three months ended March 31, 2023 and 2022; (iii) Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2023 and 2022; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022; (v) Consolidated Statements of Stockholder’s Equity for the three months ended March 31, 2023 and 2022; 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
			Chairman and Chief Executive Officer
			(principal executive officer)


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


DATE: May 9, 2023

UNITED STATES

Exhibit 31.1

I, James L. Eccher, certify that:

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

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

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

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

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

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

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

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

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

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

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


Date: May 9, 2023	/s/ James L. Eccher
	James L. Eccher
	Chairman and Chief Executive Officer

UNITED STATES

Exhibit 31.2

I, Bradley S. Adams, certify that:

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

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

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

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

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

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

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

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

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

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

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


Date: May 9, 2023	/s/ Bradley S. Adams
	Bradley S. Adams
	Executive Vice President and<br><br>Chief Financial Officer

UNITED STATES

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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

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

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

Ay 13
May 9, 2023	/s/ James L. Eccher
	James L. Eccher
	Chairman and Chief Executive Officer<br>(principal executive officer)

UNITED STATES

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

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

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

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

May 9, 2023	/s/ Bradley S. Adams
	Bradley S. Adams
	Executive Vice President and<br>Chief Financial Officer<br>(principal financial and accounting officer)