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 ~~September 30, 2020~~March 31, 2021


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

For transition period from to

Commission File Number 0-10537

(Exact name of Registrant as specified in its charter)


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

37 South River Street, Aurora, Illinois 60507

(Address of principal executive offices) (Zip Code)

(630) 892-0202

(Registrant’s telephone number, including area code)

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

Yes ☒ No ☐

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

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

Large accelerated filer☐Accelerated filer☒

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

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

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

Yes ☐ No ☒


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

As of ~~November~~May 4, ~~2020,~~2021, the Registrant has ~~29,355,022~~28,859,521 shares of common stock outstanding at $1.00 par value per share.

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OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

Cautionary Note Regarding Forward-Looking Statements

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 with respect to management’s expectations regarding future plans, strategies and financial performance, including regulatory developments, industry and economic trends, and other matters. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, can be identified by the inclusion of such qualifications as “expects,” “intends,” “believes,” “may,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “estimate,” “possible,” “likely” or other indications that the particular statements are not historical facts and refer to future periods. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and may be outside of the Company’s control. Actual events and results may differ materially from those described in such forward-looking statements due to numerous factors, including:

●

our ability to execute our growth strategy;

●

the impact of the outbreak of the novel coronavirus, or COVID-19, on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act), and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

●

negative economic conditions that 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;

●

~~impairment of goodwill, other intangible assets or deferred tax assets;~~

●

~~our ability~~risks related to ~~achieve anticipated results from~~future acquisitions, if any, ~~bank acquisition depends on the state of the economic~~including execution and financial markets going forward. Specifically, we may incur more credit losses than expected, cost savings may be less than expected, anticipated strategic gains may be significantly harder or take longer to achieve than expected or may not be achieved in their entirety, and customer attrition may be greater than expected;integration risks;

●

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;~~statements, including assumptions surrounding the ongoing impact of CECL, which are subject to change based on a number of factors including changes in our macroeconomic forecasts, credit quality, loan composition and other factors;

●

our ability to receive dividends from our subsidiaries;

●

a decrease in our regulatory capital ratios;

●

adverse federal or state tax ~~assessments;~~assessments, or changes in tax laws or policies;

●

risks associated with actual or potential litigation or investigations by customers, regulatory agencies or others;

●

legislative or regulatory changes, particularly changes in regulation of financial services companies;

●

increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including changes as a result of the ~~Dodd-Frank Act;~~new presidential administration and Democratic control of Congress;

●

negative changes in our capital position;

●

the adverse effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as ~~outbreaks of contagious disease,~~epidemics and pandemics (including COVID-19), war or terrorist activities, or essential utility outages, ~~including~~ deterioration in the global economy, instability in the credit markets, ~~and~~ disruptions in our customers’ supply chains ~~and~~or disruption in transportation;

●

changes in trade policy and any related tariffs; and

~~Tableof Contents~~

●

each of the factors and risks under the heading “Risk Factors” in our ~~2019~~2020 Annual Report on Form 10-K, ~~Part II, Item 1A, Risk Factors,~~ in ~~our Quarterly Reports on~~this Form 10-Q, and in subsequent filings we make with the ~~SEC.~~SEC.

Tableof Contents

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.

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)


	(unaudited)				(unaudited)
	September 30,		December 31,		March 31,		December 31,
	2020		2019		2021		2020
Assets
Cash and due from banks	$	29,489	$	34,096	$	25,448	$	24,306
Interest earning deposits with financial institutions		283,651		16,536		415,497		305,597
Cash and cash equivalents		313,140		50,632		440,945		329,903
Securities available-for-sale, at fair value		448,421		484,648		593,280		496,178
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		9,917		9,917		9,917		9,917
Loans held-for-sale		10,229		3,061		7,842		12,611
Loans		2,030,327		1,930,812		1,959,625		2,034,851
Less: allowance for credit losses on loans		32,918		19,789		30,967		33,855
Net loans		1,997,409		1,911,023		1,928,658		2,000,996
Premises and equipment, net		44,914		44,354		45,055		45,477
Other real estate owned		2,686		5,004		2,163		2,474
Mortgage servicing rights, net		5,010		5,935
Mortgage servicing rights, at fair value						5,889		4,224
Goodwill and core deposit intangible		20,901		21,275		20,661		20,781
Bank-owned life insurance ("BOLI")		62,222		61,763		63,436		63,102
Deferred tax assets, net		9,626		11,459		8,067		8,121
Other assets		50,349		26,474		40,739		47,053
Total assets	$	2,974,824	$	2,635,545	$	3,166,652	$	3,040,837

Liabilities
Deposits:
Noninterest bearing demand	$	889,085	$	669,795	$	982,664	$	909,505
Interest bearing:
Savings, NOW, and money market		1,185,731		1,015,285		1,290,937		1,202,134
Time		404,427		441,669		382,941		425,434
Total deposits		2,479,243		2,126,749		2,656,542		2,537,073
Securities sold under repurchase agreements		59,268		48,693		77,321		66,980
Other short-term borrowings		6,125		48,500
Junior subordinated debentures		25,773		57,734		25,773		25,773
Senior notes		44,349		44,270		44,402		44,375
Notes payable and other borrowings		24,469		6,673		22,314		23,393
Other liabilities		39,329		25,062		29,187		36,156
Total liabilities		2,678,556		2,357,681		2,855,539		2,733,750

Stockholders’ Equity
Common stock		34,957		34,854		34,957		34,957
Additional paid-in capital		121,746		120,657		120,075		122,212
Retained earnings		228,825		213,723		248,165		236,579
Accumulated other comprehensive income		11,044		4,562		13,266		14,762
Treasury stock		(100,304)		(95,932)		(105,350)		(101,423)
Total stockholders’ equity		296,268		277,864		311,113		307,087
Total liabilities and stockholders’ equity	$	2,974,824	$	2,635,545	$	3,166,652	$	3,040,837


	September 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
	Common		Common		Common		Common
	Stock		Stock		Stock		Stock
Par value	$	1.00	$	1.00	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000		60,000,000		60,000,000
Shares issued		34,957,384		34,853,757		34,957,384		34,957,384
Shares outstanding		29,451,585		29,931,809		29,018,637		29,328,723
Treasury shares		5,505,799		4,921,948		5,938,747		5,628,661

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)


		(unaudited)			(unaudited)					(unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Interest and dividend income
Loans, including fees	$	21,980	$	25,109	$	67,924	$	74,132	$	22,207	$	23,597
Loans held-for-sale		95		47		241		100		55		36
Securities:
Taxable		1,458		2,296		5,315		6,933		1,615		2,163
Tax exempt		1,327		1,719		4,178		5,958		1,307		1,455
Dividends from FHLBC and FRBC stock		118		154		366		459		115		125
Interest bearing deposits with financial institutions		68		119		185		344		92		75
Total interest and dividend income		25,046		29,444		78,209		87,926		25,391		27,451
Interest expense
Savings, NOW, and money market deposits		299		724		1,319		2,254		241		635
Time deposits		1,084		1,672		4,292		4,931		500		1,766
Securities sold under repurchase agreements		28		135		167		431		31		116
Other short-term borrowings		24		429		167		1,611		-		109
Junior subordinated debentures		285		933		1,932		2,791		280		1,364
Senior notes		673		682		2,019		2,026		673		673
Notes payable and other borrowings		144		89		439		312		123		130
Total interest expense		2,537		4,664		10,335		14,356		1,848		4,793
Net interest and dividend income		22,509		24,780		67,874		73,570		23,543		22,658
Provision for credit losses		300		550		10,413		1,450
Net interest and dividend income after provision for credit losses		22,209		24,230		57,461		72,120
(Release of) provision for credit losses										(3,000)		7,984
Net interest and dividend income after (release of) provision for credit losses										26,543		14,674
Noninterest income
Trust income		1,506		1,730		4,702		4,955
Wealth management										2,151		1,906
Service charges on deposits		1,322		2,020		4,168		5,841		1,195		1,726
Secondary mortgage fees		492		282		1,267		621		322		270
Mortgage servicing rights mark to market loss		(160)		(946)		(2,739)		(2,902)
Mortgage servicing rights mark to market gain (loss)										1,113		(2,134)
Mortgage servicing income		521		460		1,447		1,408		567		468
Net gain on sales of mortgage loans		5,246		2,074		12,123		3,999		3,721		2,246
Securities (losses) gains , net		(1)		3,463		(25)		4,476
Securities losses, net										-		(24)
Change in cash surrender value of BOLI		459		267		942		1,045		334		(49)
Death benefit realized on BOLI		(2)		-		57		-
Card related income		1,499		1,595		4,097		4,433		1,447		1,287
Other income		803		988		2,663		2,682		450		626
Total noninterest income		11,685		11,933		28,702		26,558		11,300		6,322
Noninterest expense
Salaries and employee benefits		12,586		12,062		36,846		35,261		13,506		12,918
Occupancy, furniture and equipment		2,003		2,235		6,239		6,149		2,467		2,301
Computer and data processing		1,226		1,490		3,808		4,346		1,298		1,335
FDIC insurance		191		(114)		403		176		201		57
General bank insurance		281		270		764		756		276		246
Amortization of core deposit intangible		122		157		374		410		120		128
Advertising expense		62		360		228		975		60		109
Card related expense		566		531		1,612		1,360		593		532
Legal fees		169		111		476		480		55		131
Other real estate expense, net		125		26		505		324		36		237
Other expense		2,935		2,826		8,909		9,037		3,126		3,008
Total noninterest expense		20,266		19,954		60,164		59,274		21,738		21,002
Income before income taxes		13,628		16,209		25,999		39,404
Provision for income taxes		3,363		4,036		6,221		9,485
Income (loss) before income taxes										16,105		(6)
Provision (benefit) for income taxes										4,226		(281)
Net income	$	10,265	$	12,173	$	19,778	$	29,919	$	11,879	$	275

Basic earnings per share	$	0.35	$	0.41	$	0.67	$	1.00	$	0.41	$	0.01
Diluted earnings per share		0.34		0.40		0.65		0.98		0.40		0.01
Dividends declared per share		0.01		0.01		0.03		0.03		0.01		0.01

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)


	(unaudited)				(unaudited)				(unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Net Income	$	10,265	$	12,173	$	19,778	$	29,919	$	11,879	$	275

Unrealized holding gains on available-for-sale securities arising during the period		5,812		5,824		10,455		23,661
Related tax expense		(1,633)		(1,638)		(2,932)		(6,657)
Holding gains after tax on available-for-sale securities		4,179		4,186		7,523		17,004
Unrealized holding losses on available-for-sale securities arising during the period										(4,813)		(6,376)
Related tax benefit										1,371		1,797
Holding losses after tax on available-for-sale securities										(3,442)		(4,579)

Less: Reclassification adjustment for the net (losses) gains realized during the period
Net realized (losses) gains		(1)		3,463		(25)		4,476
Related tax (expense) benefit		-		(973)		7		(1,257)
Net realized gains (losses) after tax		(1)		2,490		(18)		3,219
Other comprehensive income on available-for-sale securities		4,180		1,696		7,541		13,785
Less: Reclassification adjustment for the net losses realized during the period
Net realized losses										-		(24)
Related tax benefit										-		7
Net realized losses after tax										-		(17)
Other comprehensive loss on available-for-sale securities										(3,442)		(4,562)

Changes in fair value of derivatives used for cash flow hedges		615		(1,996)		(1,472)		(4,638)		2,703		(2,530)
Related tax (expense) benefit		(173)		559		413		1,303		(757)		711
Other comprehensive income (loss) on cash flow hedges		442		(1,437)		(1,059)		(3,335)		1,946		(1,819)

Total other comprehensive income		4,622		259		6,482		10,450
Total other comprehensive loss										(1,496)		(6,381)
Total comprehensive income	$	14,887	$	12,432	$	26,260	$	40,369	$	10,383	$	(6,106)


	Accumulated		Accumulated		Total		Accumulated		Accumulated		Total
	Unrealized Gain		Unrealized Gain		Accumulated Other		Unrealized Gain		Unrealized Gain		Accumulated Other
	(Loss) on Securities		(Loss) on Derivative		Comprehensive		(Loss) on Securities		(Loss) on Derivative		Comprehensive
	Available-for -Sale		Instruments		Income/(Loss)		Available-for -Sale		Instruments		Income/(Loss)
For the Three Months Ended
Balance, June 30, 2019	$	8,051	$	(1,939)	$	6,112
Other comprehensive income (loss), net of tax		1,696		(1,437)		259
Balance, September 30, 2019	$	9,747	$	(3,376)	$	6,371
Balance, December 31, 2019							$	6,827	$	(2,265)	$	4,562
Other comprehensive loss, net of tax								(4,562)		(1,819)		(6,381)
Balance, March 31, 2020							$	2,265	$	(4,084)	$	(1,819)

Balance, June 30, 2020	$	10,188	$	(3,766)	$	6,422
Other comprehensive income, net of tax		4,180		442		4,622
Balance, September 30, 2020	$	14,368	$	(3,324)	$	11,044
Balance, December 31, 2020							$	17,413	$	(2,651)	$	14,762
Other comprehensive (loss) income, net of tax								(3,442)		1,946		(1,496)
Balance, March 31, 2021							$	13,971	$	(705)	$	13,266



For the Nine Months Ended
Balance, December 31, 2018	$	(4,038)	$	(41)	$	(4,079)
Other comprehensive income (loss), net of tax		13,785		(3,335)		10,450
Balance, September 30, 2019	$	9,747	$	(3,376)	$	6,371

Balance, December 31, 2019	$	6,827	$	(2,265)	$	4,562
Other comprehensive income (loss), net of tax		7,541		(1,059)		6,482
Balance, September 30, 2020	$	14,368	$	(3,324)	$	11,044

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


	(Unaudited)					(Unaudited)
	Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2021		2020
Cash flows from operating activities
Net income	$	19,778	$	29,919	$	11,879	$	275
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount from amortization on securities		1,712		2,128		534		506
Securities losses (gains), net		25		(4,476)
Provision for credit losses		10,413		1,450
Securities losses , net						-		24
(Release of) provision for credit losses						(3,000)		7,984
Originations of loans held-for-sale		(296,388)		(126,929)		(78,284)		(50,418)
Proceeds from sales of loans held-for-sale		300,045		127,455		85,914		45,706
Net gains on sales of mortgage loans		(12,123)		(3,999)		(3,721)		(2,246)
Mortgage servicing rights mark to market loss		2,739		2,902
Mortgage servicing rights mark to market (gain) loss						(1,113)		2,134
Net discount from accretion on loans		(841)		(1,052)		(520)		(409)
Net change in cash surrender value of BOLI		(942)		(1,045)		(334)		49
Net gains on sale of other real estate owned		(188)		(254)		(20)		(23)
Provision for other real estate owned valuation losses		264		399		6		158
Depreciation of fixed assets and amortization of leasehold improvements		2,075		1,869		765		662
Net gains on disposal and transfer of fixed assets		-		(32)
Amortization of core deposit intangibles		374		410		120		128
Change in current income taxes receivable		(781)		3,319		3,557		(1,430)
(Benefit from) / Provision for deferred tax expense		(693)		4,493
Deferred tax expense (benefit)						668		(333)
Change in accrued interest receivable and other assets		(19,144)		(7,441)		2,200		(4,081)
Accretion of purchase accounting adjustment on time deposits		-		(38)
Amortization of purchase accounting adjustment on notes payable and other borrowings		25		75
Amortization of junior subordinated debentures issuance costs		643		36
Amortization of senior notes issuance costs		79		86
Change in accrued interest payable and other liabilities		8,060		6,366		(3,375)		9,607
Stock based compensation		1,623		1,905		114		729
Net cash provided by operating activities		16,755		37,546		15,390		9,022
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		41,645		32,631		7,259		16,046
Proceeds from sales of securities available-for-sale		18,006		177,824		-		18,126
Purchases of securities available-for-sale		(14,681)		(136,096)		(109,708)		(6,100)
Net proceeds from sales of FHLBC stock		-		2,722
Net change in loans		(100,370)		(2,833)		75,858		(27,716)
Proceeds from claims on BOLI, net of claims receivable		483		-
Proceeds from sales of other real estate owned, net of participation purchase		3,140		2,644
Proceeds from disposition of fixed assets		-		32
Proceeds from sales of other real estate owned, net of participations and improvements						325		311
Net purchases of premises and equipment		(2,635)		(2,330)		(343)		(887)
Net cash (used in) provided by investing activities		(54,412)		74,594
Net cash used in investing activities						(26,609)		(220)
Cash flows from financing activities
Net change in deposits		352,494		(42,144)		119,469		68,893
Net change in securities sold under repurchase agreements		10,575		2,238		10,341		2,543
Net change in other short-term borrowings		(42,375)		(65,500)		-		(42,125)
Redemption of junior subordinated debentures		(32,604)		-		-		(32,604)
Issuance of term note		20,000		-		-		20,000
Repayment of term note		(2,000)		-		(1,000)		-
Net change in notes payable and other borrowings, excluding term note		(229)		(6,598)		(78)		(76)
Proceeds from exercise of stock options		-		32
Dividends paid on common stock		(893)		(896)		(293)		(300)
Purchase of treasury stock		(4,803)		(470)		(6,178)		(2,627)
Net cash provided by (used in) financing activities		300,165		(113,338)
Net cash provided by financing activities						122,261		13,704
Net change in cash and cash equivalents		262,508		(1,198)		111,042		22,506
Cash and cash equivalents at beginning of period		50,632		55,235		329,903		50,632
Cash and cash equivalents at end of period	$	313,140	$	54,037	$	440,945	$	73,138

See accompanying notes to consolidated financial statements.

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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, June 30, 2019

$
34,825

$
119,762

$
192,612

$
6,112

$
(96,047)

$
257,264
Net income

12,173

12,173
Other comprehensive income, net of tax

259

259
Dividends declared and paid, ($0.01 per share)

(299)

(299)
Vesting of restricted stock

(135)

135

-
Stock based compensation

664

664
Purchase of treasury stock

(40)

(40)
Balance, September 30, 2019

$
34,825

$
120,291

$
204,486

$
6,371

$
(95,952)

$
270,021

Balance, June 30, 2020

$
34,957

$
121,437

$
218,856

$
6,422

$
(99,156)

$
282,516
Net income

10,265

10,265
Other comprehensive income, net of tax

4,622

4,622
Dividends declared and paid, ($0.01 per share)

(296)

(296)
Stock based compensation

309

309
Purchase of treasury stock from stock repurchase program

(1,148)

(1,148)
Balance, September 30, 2020

$
34,957

$
121,746

$
228,825

$
11,044

$
(100,304)

$
296,268


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

Balance, December 31, 2018	$	34,720	$	119,081	$	175,463	$	(4,079)	$	(96,104)	$	229,081
For the Three Months Ended
Balance, December 31, 2019														$	34,854	$	120,657	$	213,723	$	4,562	$	(95,932)	$	277,864
Adoption of ASU 2016-13																			(3,783)						(3,783)
Net income						29,919						29,919							275						275
Other comprehensive income, net of tax								10,450				10,450
Dividends declared and paid, ($0.03 per share)						(896)						(896)
Vesting of restricted stock		103		(389)						286		-
Stock option exercised		2		7						23		32
Stock warrants exercised				(313)						313		-
Stock based compensation				1,905								1,905
Purchase of treasury stock										(470)		(470)
Balance, September 30, 2019	$	34,825	$	120,291	$	204,486	$	6,371	$	(95,952)	$	270,021


Balance, December 31, 2019	$	34,854	$	120,657	$	213,723	$	4,562	$	(95,932)	$	277,864
Net income						19,778						19,778
Other comprehensive income, net of tax								6,482				6,482
Adoption of ASU 2016-13						(3,783)						(3,783)
Dividends declared and paid, ($0.03 per share)						(893)						(893)
Other comprehensive loss, net of tax																					(6,381)				(6,381)
Dividends declared and paid, ($0.01 per share)																			(300)						(300)
Vesting of restricted stock		103		(534)						431		-			103		(305)						202		-
Stock based compensation				1,623								1,623					729								729
Purchase of treasury stock from taxes withheld on stock awards										(423)		(423)											(411)		(411)
Purchase of treasury stock from stock repurchase program										(4,380)		(4,380)											(2,216)		(2,216)
Balance, September 30, 2020	$	34,957	$	121,746	$	228,825	$	11,044	$	(100,304)	$	296,268
Balance, March 31, 2020														$	34,957	$	121,081	$	209,915	$	(1,819)	$	(98,357)	$	265,777

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

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

~~Except as set forth below in this Note 1, the~~The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information. The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented. Results for the period ended ~~September 30, 2020,~~March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2020.~~2021. These interim consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, ~~2019.~~2020. 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

In June 2016, the Financial Standards Board, or FASB, issued ~~ASU~~Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – ~~Credit~~ Measurement of Credit Losses on Financial Instruments (Topic 326),” also known as Current Expected Credit Losses, or CECL. ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process. The new methodology reflects expected credit losses based on relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the collectability of the reported amounts. This new methodology also requires available-for-sale debt securities to have a credit loss recorded through an allowance rather than write-downs through an other than temporary impairment analysis. In addition, an allowance must be established for the credit risk related to unfunded commitments. ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and was adopted as of January 1, 2020, by the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” and Note 1 – Summary of Significant Accounting Policies, both found in our Annual Report on Form 10-K for the year ended December 31, 2020 for further discussion of our Allowance for Credit Losses methodology and assessment as a critical accounting policy.

Upon issuance of ASU 2016-13, the Company set up a CECL committee, with the goal of establishing a timeline for CECL data collection, implementation, parallel runs, testing, and model validation. The Company has implemented a software solution provided by a third party vendor to assist in the determination of the allowance for credit losses (“ACL”), and the third party validation process was completed in the fourth quarter of 2019. The Company accumulated historical data by loan pools and collateral classifications. All historical data, model assumptions and calculation parameters were analyzed by the third party validation team, and management made enhancements to the software model used based on their recommendations.

~~Our approach for estimating expected life-time credit losses for loans includes the following components:~~

●

An initial forecast period of one year for all portfolio segments and off-balance-sheet credit exposures. This period reflects management’s expectation of losses based on forward-looking economic scenarios over that time.

●

~~A historical reversion loss forecast period covering the remaining contractual life, adjusted for prepayments, by portfolio segment based on the historical loss rate of loans within those segments.~~

●

~~The initial loss forecast period and historical reversion loss rate is based on economic conditions at the measurement date.~~

●

We primarily utilized the static pool and migration analysis methods to estimate credit losses. Such methods would obtain estimated life-time credit losses using the conceptual components described above.

Based on our portfolio composition at December 31, 2019, and the economic environment at that time, we recorded an overall increase in our ACL for loans and leases of $5.9 million and an ACL for unfunded commitments of $1.7 million. Approximately $2.5 million of the increase to the ACL on loans resulted from the transfer of the non-accretable purchase accounting adjustments on purchased credit impaired loans. There was no impact from adoption of CECL on securities available-for sale. As a result of the adoption of this new standard on January 1, 2020, we recorded a reduction to retained earnings of approximately $3.7 million, which was net of the $1.4

~~Tableof Contents~~

~~Old Second Bancorp, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

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

million deferred tax asset impact stemming from adoption. The Company finalized internal control processes and disclosure documentation related to adoption of this standard during the first quarter of 2020.

As of March 31, 2020, a provision for credit losses of $8.0 million was recorded, comprised of $5.2 million of ACL related to loans and leases and $2.5 million of ACL related to unfunded commitments, based on the uncertainty experienced in the macroeconomic environment, primarily due to falling interest rates and the impact of COVID-19. This additional ACL was not considered part of the ASU 2016-13 adoption, as these changes in the assessment of the ACL occurred after the January 1, 2020, adoption. We recorded a provision for credit losses of $2.1 million during the second quarter of 2020, comprised of $1.4 million of ACL related to loans and leases, and $734,000 of ACL related to unfunded commitments. We recorded a provision for credit losses of $300,000 during the third quarter of 2020, comprised of $1.3 million of ACL related to loans and leases, and a $980,000 reversal of ACL related to unfunded commitments due to a reduction in the funding rate assumptions based on analysis of the twelve month utilization rate on commercial commitments. We will continue to assess and evaluate the estimated future credit loss impact of current market conditions in subsequent reporting periods, which will be highly dependent on credit quality, macroeconomic forecasts and conditions, the local and national response to the COVID-19 pandemic, as well as the composition of our loans and available-for-sale securities portfolio.

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, ~~2019.~~2020. 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.

~~In addition~~ During the first quarter of 2021, the Company had no changes to ~~the~~ significant accounting policies presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, on January 1, 2020, as discussed above, the Company adopted CECL, an expected loss methodology which replaces the incurred loss methodology for determining the Company’s provision for loan losses and allowance for loan and lease losses. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). In addition, CECL made changes to the accounting for available-for-sale debt securities. The allowance for credit losses under CECL is discussed below.

~~Allowance for Credit Losses~~

~~The ACL is an estimate of the expected credit losses on the loans held for investment, unfunded loan commitments, and available-for-sale debt securities portfolios.~~

~~Allowance for Credit Losses on Loans~~

The ACL is calculated according to GAAP standards and is maintained by management at a level believed adequate to absorb estimated credit losses that are expected to occur within the existing loan portfolio through their contractual terms. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans. Determination of the ACL is inherently subjective in nature since it requires significant estimates and management judgment, and includes a level of imprecision given the difficulty of identifying and assessing the factors impacting loan repayment and estimating the timing and amount of losses. While management utilizes its best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond the Company’s direct control, including, but not limited to, the performance of the loan portfolio, consideration of current economic trends, changes in interest rates and property values, estimated losses on pools of homogeneous loans based on an analysis that uses historical loss experience for prior periods that are determined to have like characteristics with the current period such as pre-recessionary, recessionary, or recovery periods, portfolio growth and concentration risk, management and staffing changes, the interpretation of loan risk classifications by regulatory authorities and other credit market factors. While each component of the ACL is determined separately, the entire balance is available for the entire loan portfolio.

The ACL methodology consists of measuring loans on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following loan portfolios and measures the ACL using the following methods:

~~Tableof Contents~~

~~Old Second Bancorp, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

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

●

~~Commercial loans~~ – the Company uses a migration analysis, and within this segment classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative factor adjustment in addition to the loss rates applied, as discussed below.

●

~~Leases~~ – the Company uses a remaining life methodology, also known as WARM (weighted average remaining maturity), as this segment is relatively new to the Company and more than four years of the Company’s own historical loss data is not available. In accordance with accounting standards, we used an identified peer group to estimate losses for this portfolio.

●

~~Real estate – commercial~~ ~~(“CRE”) – this loan portfolio is segregated into two segments:~~

~~CRE owner occupied~~ – the Company uses a migration analysis, and within this segment classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative adjustment in addition to the loss rates applied, as discussed below.

~~CRE investor~~ – the Company uses a migration analysis, and within this segment classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative adjustment in addition to the loss rates applied, as discussed below.

●

~~Real estate-construction~~ ~~– the Company uses a static segment analysis, which relies on the Company’s historical loss rates, as well as a qualitative adjustment in addition to the loss rates applied.~~

●

~~Real estate-residential~~ ~~– this loan portfolio is segregated into two segments:~~

~~Residential owner occupied~~ ~~and~~ ~~Residential investor~~ – the Company uses a static segment analysis, applying historical loss rates from periods with like characteristics as the current period, and also a qualitative adjustment in addition to the loss rates applied.

●

~~Multifamily~~ – the Company uses a migration analysis, and within this segment, the Company classifies six different risk levels to assign a loss rate based on historical losses, as well as applying a qualitative adjustment in addition to the loss rates applied.

●

~~HELOCs~~ ~~– this portfolio is segregated into two segments, a~~ ~~HELOC legacy~~ ~~segment which uses a static pool analysis, and a~~ ~~HELOC purchased~~ ~~segment, which uses the WARM method, and applies loss rates from the institutions from which the Company purchased the HELOCs, if available.~~

Purchased credit deteriorated loans (“PCD loans”), are purchased loans that, as of the date of acquisition, the Company determined had experienced a more-than-insignificant deterioration in credit quality since origination. The Company records acquired PCD loans by adding the expected credit losses (i.e., the ACL) to the purchase price of the financial assets rather than recording it through the provision for credit losses in the income statement; thus, the sum of the loans’ purchase price and initial ALLL estimate represents the initial amortized cost basis. The difference between the initial amortized cost basis and the unpaid principal balance is the non-credit discount or premium. Subsequent changes in the ACL on PCD loans is recognized through the provision for credit losses.

The non-credit discount or premium is accreted or amortized into interest income over the remaining life of the PCD loan on a level-yield basis. In accordance with the transition requirements within the CECL standard, the Company’s purchased credit impaired loans (“PCI loans”) are now treated as PCD loans. Before January 1, 2020, PCI loans that met the definition of nonperforming loans were excluded from the Company’s nonperforming disclosures, as long as their cash flows and the timing of such cash flows continued to be estimable and probable of collection. As a result of CECL implementation on January 1, 2020, PCD loans that meet the definition of nonperforming loans are now included in the Company’s nonperforming disclosures.

~~The qualitative factors applied to eachloan~~portfolio consist of the impact of other internal and external qualitative and credit market factors as assessed by management through a detailed loan review, ACL analysis and credit discussions. These internal and external qualitative and credit market factors include:

●

~~changes in lending policies and procedures, including changes in underwriting standards and collections, charge-offs and recovery practices;~~

●

changes in international, national, regionally and local conditions (specific factors which impact portfolios or discrepancies with national economic factors which are utilized within the economic forecast);

●

~~changes in the experience, depth and ability of lending management;~~

●

~~changes in the volume and severity of past due loans and other similar loan conditions;~~

●

~~changes in the nature and volume of the loan portfolio and terms of loans;~~

●

the existence and effect of any concentrations of credit and changes in the levels of such concentrations (this characteristic requires any portfolio exceeding 25% of capital to have a factor considered unless the pool is otherwise well diversified or holds a relatively low inherent risk);

~~Tableof Contents~~

~~Old Second Bancorp, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

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

●

~~effects of other external factors, such as competition, legal or regulatory factors, on the level of estimated credit losses;~~

●

~~changes in the quality of our loan review functions; and~~

●

~~changes in the value of underlying collateral for collateral dependent loans.~~

~~The impact of the above listed internal and external qualitative and credit market risk factors is assessed within predetermined ranges to adjust the ACL totals calculated.~~

In addition to the pooled analysis performed for the majority of our loan and commitment balances, we also individually review those loans that have collateral dependency or are nonperforming. Finally, we maintain a component of the ACL for those factors that cannot be quantified in the above analysis or are as yet unknown to us, due to changing economic conditions and other aspects of credit risk; which is known as the Company’s “Other Reserves.”

Loans are charged off against the ACL when management believes the uncollectibility of a loan balance is confirmed, while recoveries of amounts previously charged-off are credited to the ACL. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged off. Approved releases from previously established ACL reserves authorized under our ACL methodology also reduce the ACL. Additions to the ACL are established through the provision for credit losses on loans, which is charged to expense.

The Company’s ACL methodology is intended to reflect all loan portfolio risk, but management recognizes the inability to accurately depict all future credit losses in a current ACL estimate, as the impact of various factors cannot be fully known. Accrued interest receivable on loans is excluded from the amortized cost basis of financing receivables for the purpose of determining the allowance for credit losses. All calculations conform to GAAP.

~~Allowance for Credit Losses on Unfunded Loan Commitments~~

The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk by a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL related to off-balance sheet credit exposures, which is within other liabilities on the Company’s balance sheet, is estimated at each balance sheet date under the CECL model, and is adjusted as determined necessary through the provision for credit losses on the income statement. The estimate for ACL on unfunded loan commitments includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life.

~~Allowance for Credit Losses on Securities Available-for-Sale~~

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will sell, the security before recovery of its amortized cost basis. If either of the aforementioned criteria exists, the Company will record an ACL related to securities available-for-sale with an offsetting entry to the provision for credit losses on securities on the income statement. If either of these criteria does not exist, the Company will evaluate the securities individually to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors, such as market interest rate fluctuations.

In evaluating securities available-for sale for potential impairment, the Company considers many factors, including the financial condition and near-term prospects of the issuer, which for debt securities considers external credit ratings and recent downgrades; and its ability and intent to hold the security for a period of time sufficient for a recovery in value. The Company also considers 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 amount of the impairment related to other factors is recognized in other comprehensive income (loss).

Accrued interest receivable on securities available-for-sale is excluded from the amortized cost basis of those securities for the purpose of determining the allowance for credit losses. All calculations conform to GAAP. policies.

~~Tableof Contents~~

~~Old Second Bancorp, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

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

Risks and Uncertainties

The coronavirus (COVID-19) pandemic, which was declared a national emergency in the United States in March 2020, continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. In particular, the COVID-19 pandemic has severely restricted the level of economic activity in the Company’s markets. Federal and state governments have taken, and may continue to take, unprecedented actions to contain the spread of the disease, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief to businesses and individuals impacted by the pandemic. Although in various locations certain activity restrictions have been relaxed and businesses and schools have reopened with some level of success, in many states and localities the

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

number of individuals diagnosed with COVID-19 has increased significantly, which may cause a freezing or, in certain cases, a reversal of previously announced relaxation of activity restrictions and may prompt the need for additional aid and other forms of relief.

The impact of the COVID-19 pandemic is fluid and continues to evolve. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower bank equity market valuations and significant volatility and disruption in financial markets. In addition, due to the COVID-19 pandemic, market interest rates ~~have~~ declined significantly, with the 10-year Treasury bond falling ~~below 1.00% on~~to a low of 0.52% in early August 2020, but increasing significantly since that time to 1.75% at March ~~3, 2020, for the first time, and declining further to 0.65% as of June 30, 2020. On~~31, 2021. In March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range ~~by 50 basis points to 1.00% to 1.25%. This range was further reduced~~ to 0% to 0.25% percent, onand this low rate was still in effect as of March ~~16, 2020.~~31, 2021. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on the Company’s business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on ~~the Company’s~~our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including ~~among others,~~ the ~~duration and scope~~effect of ~~the pandemic, as well as~~ governmental, ~~regulatory~~ and private sector ~~responses to~~initiatives, the ~~pandemic,~~effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strains, and the ~~associated impacts on the economy, financial markets~~ability for customers and ~~the Company’s customers, employees and vendors.~~businesses to return to their pre-pandemic routine.

As of ~~September 30, 2020,~~March 31, 2021, our consolidated balance sheet included goodwill of $18.6 million. For each quarter end of 2020, we considered whether a quantitative assessment of goodwill was required as a result of the significant economic disruption caused by the COVID-19 pandemic. In addition, we performed the annual analysis to assess if any goodwill impairment existed as of November 30, 2020. Impacts of the economic disruptions were noted from the latter half of March through the ~~third quarter,~~remainder of 2020, specifically, the decline in the trading price of our common stock and an increase in the U.S. unemployment rate. After considering qualitative factors regarding the expected impacts of the pandemic on our business, operations and financial condition, we determined that these conditions did not indicate that it is more likely than not that the Company’s carrying value exceeded our fair value as of ~~September 30,~~December 31, 2020. However, further delayed recovery or further deterioration in market conditions related to the general economy, financial markets, and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our results of operations and financial condition.

Subsequent Events

On ~~October 19, 2020,~~April 6, 2021, we sold and issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). The Notes were offered and sold to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended and the provisions of Regulation D promulgated thereunder. The Company intends to use the net proceeds from the offering for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions. The Notes will bear interest at a fixed annual rate of 3.50%, from and including the date of issuance to but excluding April 15, 2026, payable semi-annually in arrears. From and including April 15, 2026 to, but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to Three-Month Term SOFR (as defined in the Note) plus 273 basis points, payable quarterly in arrears.

On April 20, 2021, the Company’s Board of Directors declared a cash dividend of ~~$0.01~~$0.05 per share payable on ~~November 9, 2020,~~May 10, 2021, to stockholders of record as of ~~October~~April 30, ~~2020;~~2021; dividends of ~~$295,000~~$1.5 million are scheduled to be paid to stockholders on ~~November 9, 2020.~~

~~Note 2 – Acquisitions~~

On April 20, 2018, the Company acquired Greater Chicago Financial Corp. (“GCFC”) and its wholly-owned subsidiary, ABC Bank, which operated 4 branches in the Chicago metro area. In addition to the acquisition price of $41.1 million, the Company retired the convertible and nonconvertible debentures held by GCFC upon acquisition, which totaled $6.6 million, including interest due. The purchase and the retirement of the debentures were funded with the Company’s cash on hand, and all GCFC common stock was retired and cancelled simultaneous with the close of the transaction. The Company acquired $227.6 million of loans, net of purchase accounting adjustments, and $248.5 million of deposits, net of purchase accounting adjustments for time deposits. Purchase accounting adjustments recorded include a loan valuation mark of $11.2 million, a core deposit intangible of $3.1 million, a fixed asset valuation adjustment of $1.5 million, and goodwill of $10.2 million. In addition, a deferred tax asset of $3.5 million was recorded as of the date of acquisition

~~Tableof Contents~~

~~Old Second Bancorp, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

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

based on analysis of the fair value of assets acquired, less liabilities assumed. None of the $10.2 million recorded as goodwill is expected to be deductible for tax purposes. These fair value estimates were considered final as of March 31, 2019, and no further refinements to the values recorded are anticipated.

May 10, 2021.

Note 32 – Securities

Investment Portfolio Management

Our investment portfolio serves the liquidity needs and income objectives of the Company. While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio also serve as income producing assets. The size and composition of the portfolio reflects liquidity needs, loan demand and interest income objectives. Portfolio size and composition will be adjusted from time to time. While a significant portion of the portfolio consists of readily marketable securities to address

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 $3.7 million at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019.~~2020. FRBC stock was recorded at $6.2 million at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019.~~2020.

The following tables summarize the amortized cost and fair value of the securities portfolio at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, and the corresponding amounts of gross unrealized gains and losses:

~~Tableof Contents~~

~~Old Second Bancorp, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

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


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
September 30, 2020	Cost¹		Gains		Losses		Value
March 31, 2021									Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,013	$	121	$	-	$	4,134	$	4,015	$	87	$	-	$	4,102
U.S. government agencies		7,169		-		(164)		7,005		6,506		-		(145)		6,361
U.S. government agencies mortgage-backed		17,056		1,165		(2)		18,219		69,427		1,476		(301)		70,602
States and political subdivisions		232,416		18,316		(955)		249,777		227,336		16,189		(1,379)		242,146
Corporate bonds										34,750		108		(15)		34,843
Collateralized mortgage obligations		54,597		2,839		(423)		57,013		72,801		2,386		(251)		74,936
Asset-backed securities		81,986		905		(1,306)		81,585		129,118		1,389		(139)		130,368
Collateralized loan obligations		31,202		19		(533)		30,688		29,923		71		(72)		29,922
Total securities available-for-sale	$	428,439	$	23,365	$	(3,383)	$	448,421	$	573,876	$	21,706	$	(2,302)	$	593,280


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
December 31, 2019	Cost¹		Gains		Losses		Value
December 31, 2020									Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,010	$	26	$	-	$	4,036	$	4,014	$	103	$	-	$	4,117
U.S. government agencies		8,502		-		(165)		8,337		6,811		-		(154)		6,657
U.S. government agencies mortgage-backed		16,164		443		(19)		16,588		16,098		1,112		(1)		17,209
States and political subdivisions		240,399		11,207		(2,431)		249,175		229,352		21,269		(1,362)		249,259
Collateralized mortgage obligations		57,059		963		(38)		57,984		53,999		2,866		(280)		56,585
Asset-backed securities		82,114		617		(887)		81,844		130,959		1,370		(511)		131,818
Collateralized loan obligations		66,898		29		(243)		66,684		30,728		15		(210)		30,533
Total securities available-for-sale	$	475,146	$	13,285	$	(3,783)	$	484,648	$	471,961	$	26,735	$	(2,518)	$	496,178

¹ Excludes accrued interest receivable of $2.6 million and $~~3.2~~2.7 million at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020 respectively, that is recorded in other assets on the consolidated balance sheet.

The fair value, amortized cost and weighted average yield of debt securities at September 30, 2020, by contractual maturity, were as follows 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

$
413

2.01
%

$
415

Due after one year through five years

6,056

2.11

6,309

Due after five years through ten years

28,014

2.31

28,993

Due after ten years

209,115

3.03

225,199

243,598

2.92

260,916

Mortgage-backed and collateralized mortgage obligations

71,653

3.08

75,232

Asset-backed securities

81,986

1.51

81,585

Collateralized loan obligations

31,202

2.12

30,688

Total securities available-for-sale

$
428,439

2.62
%

$
448,421

At September 30, 2020, the Company’s investments included $55.9 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

1612

Table of Contents

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, 2021, 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	$	420	2.09	%	$	422
Due after one year through five years		7,025	2.50			7,318
Due after five years through ten years		61,065	1.79			61,813
Due after ten years		204,097	3.02			217,899
		272,607	2.73			287,452
Mortgage-backed and collateralized mortgage obligations		142,228	2.08			145,538
Asset-backed securities		129,118	1.35			130,368
Collateralized loan obligations		29,923	1.93			29,922
Total securities available-for-sale	$	573,876	2.22	%	$	593,280

At March 31, 2021, the Company’s investments included $103.3 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 ~~$5.1~~$9.7 million, or ~~9.00%~~9.26% of outstanding principal.

At ~~September 30, 2020,~~March 31, 2021, the Company had invested in securities issued from ~~1 originator~~2 originators that individually amounted to over 10% of the Company’s stockholders’ equity. Information regarding ~~this issuer~~these issuers and the value of the securities issued follows:


	September 30, 2020				March 31, 2021
	Amortized		Fair		Amortized		Fair
Issuer	Cost		Value		Cost		Value
Towd Point Mortgage Trust	$	33,242	$	35,477	$	33,107	$	34,955
Village Capital & Investment LLC						50,700		51,409

Securities with unrealized losses with no corresponding allowance for credit losses at ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):

Less than 12 months

12 months or more

September 30, 2020

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. government agencies

-

$
-

$
-

4

$
164

$
7,005

4

$
164

$
7,005
U.S. government agencies mortgage-backed

1

2

260

-

-

-

1

2

260
States and political subdivisions

-

-

-

1

955

3,872

1

955

3,872
Collateralized mortgage obligations

4

421

8,027

1

2

279

5

423

8,306
Asset-backed securities

5

425

22,603

3

881

33,069

8

1,306

55,672
Collateralized loan obligations

1

123

7,376

4

410

21,245

5

533

28,621
Total securities available-for-sale

11

$
971

$
38,266

13

$
2,412

$
65,470

24

$
3,383

$
103,736

Less than 12 months

12 months or more

December 31, 2019

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. government agencies

-

$
-

$
-

4

$
165

$
8,337

4

$
165

$
8,337
U.S. government agencies mortgage-backed

3

10

3,018

2

9

843

5

19

3,861
States and political subdivisions

6

1,665

41,043

2

766

6,593

8

2,431

47,636
Collateralized mortgage obligations

2

26

9,054

2

12

1,209

4

38

10,263
Asset-backed securities

4

839

54,540

1

48

3,238

5

887

57,778
Collateralized loan obligations

4

62

21,927

4

181

25,020

8

243

46,947
Total securities available-for-sale

19

$
2,602

$
129,582

15

$
1,181

$
45,240

34

$
3,783

$
174,822

As required upon the adoption of ASU 2016-13, we performed an analysis to determine if any of the unrealized losses on securities available-for-sale were comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. Our assessment included 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. The Company also considered the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. No credit losses were determined to be present as of the date of CECL adoption or as of the quarter ended September 30, 2020, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the third quarter end.

~~The following table presents net realized gains (losses) on securities available-for-sale for the three and nine months ended September 30, 2020 and 2019.~~


	Less than 12 months					12 months or more
March 31, 2021	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	-	$	-	$	-	4	$	145	$	6,361	4	$	145	$	6,361
U.S. government agencies mortgage-backed	5		301		5,912	-		-		-	5		301		5,912
States and political subdivisions	2		304		14,036	1		1,075		3,689	3		1,379		17,725
Corporate bonds	1		15		1,931	-		-		-	1		15		1,931
Collateralized mortgage obligations	2		52		17,988	1		199		7,397	3		251		25,385
Asset-backed securities	1		28		1,622	1		111		3,202	2		139		4,824
Collateralized loan obligations	-		-		-	2		72		10,601	2		72		10,601
Total securities available-for-sale	11	$	700	$	41,489	9	$	1,602	$	31,250	20	$	2,302	$	72,739

~~Table~~13~~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

Nine Months Ended

September 30,

September 30,

Securities available-for-sale

2020

2019

2020

2019

Proceeds from sales of securities

$
-

$
57,228

$
18,006

$
177,824

Gross realized gains on securities

$
-

$
3,841

$
17

$
5,432

Gross realized losses on securities

(1)

(378)

(42)

(956)

Net realized (losses) gains

$
(1)

$
3,463

$
(25)

$
4,476

Income tax (expense) benefit on net realized gains (losses)

$
-

$
(973)

$
7

$
(1,257)

Effective tax rate applied

0.0
%

28.1
%

28.0
%

28.1
%

~~Securities valued at $353.2 million as of September 30, 2020, an increase from $320.8 million at year-end 2019, were pledged to secure deposits and borrowings, and for other purposes.~~

~~Note 4 – Loans and Allowance for Credit Losses on Loans~~

~~Major segments of loans were as follows:~~

September 30, 2020

December 31, 2019
Commercial

$
436,277

$
332,842
Leases

133,676

119,751
Commercial real estate - Investor

548,970

520,095
Commercial real estate - Owner occupied

335,978

345,504
Construction

91,856

69,617
Residential real estate - Investor

61,923

71,105
Residential real estate - Owner occupied

114,283

136,023
Multifamily

188,398

189,773
HELOC

85,882

91,605
HELOC - Purchased

22,312

31,852
Other ¹

10,772

12,258
Total loans, excluding deferred loan costs and PCI loans ²

2,030,327

1,920,425
Net deferred loan costs

-

1,786
Total loans, excluding PCI loans ²

2,030,327

1,922,211
PCI loans

-

8,601
Total loans, including deferred loan costs and PCI loans ²

$
2,030,327

$
1,930,812
Allowance for credit losses on loans

(32,918)

(19,789)
Net loans³

$
1,997,409

$
1,911,023

¹ ~~The “Other” segment for 2020 includes consumer and overdrafts in this table and in subsequent tables within Note 4 - Loans and Allowance for Credit Losses on Loans.~~

²As noted in the paragraph below, for periods before the Company’s adoption of CECL on January 1, 2020, PCI loans and their related deferred loan costs (now PCD loans) were excluded from nonperforming loan disclosures and were therefore separately reported. After the adoption of CECL, all PCD loans are now included within each relevant loan type and are not separately reported as PCI loans, because such loans are now included within the Company’s nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan.

³ ~~Excludes accrued interest receivable of~~ ~~$7.1~~ ~~million and~~ ~~$6.5~~ ~~million at September 30, 2020 and December 31, 2019, respectively, that is recorded in other assets on the consolidated balance sheet.~~

Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, the Company determined had experienced a more-than-insignificant deterioration in credit quality since origination. Before the Company adopted CECL on January 1, 2020, PCD loans were referred to as purchased credit impaired loans, or PCI loans, and such PCI loans and their related

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

deferred loan costs were excluded from the Company’s nonperforming loan disclosures, as long as the cash flows on such loans and the timing of such cash flows continued to be estimable and probable of collection. However, after the Company adopted CECL on January 1, 2020, PCD loans and their related deferred loan costs are now included in the Company’s nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan.


	Less than 12 months					12 months or more
December 31, 2020	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. government agencies	-	$	-	$	-	4	$	154	$	6,657	4	$	154	$	6,657
U.S. government agencies mortgage-backed	1		1		141	-		-		-	1		1		141
States and political subdivisions	-		-		-	1		1,362		3,433	1		1,362		3,433
Collateralized mortgage obligations	4		279		8,142	1		1		146	5		280		8,288
Asset-backed securities	1		2		251	3		509		49,572	4		511		49,823
Collateralized loan obligations	1		31		7,468	4		179		21,477	5		210		28,945
Total securities available-for-sale	7	$	313	$	16,002	13	$	2,205	$	81,285	20	$	2,518	$	97,287

~~It is the policy of the Company to review each prospective credit prior to making a loan in order~~Each quarter we perform an analysis 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’s access to collateral, in the event of borrower default, is assured through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. Although the Bank makes loans primarily within its market area, there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector. The real estate related categories listed above represent 71.4% and 75.4%any of the ~~portfolio at September 30, 2020,~~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 ~~December~~near-term prospects of the issuer, including external credit ratings and recent downgrades; and our ability and intent to hold the security for a period of time sufficient for a recovery in value. We also consider the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. No credit losses were determined to be present as of March 31, ~~2019, respectively, and include a mix~~2021, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the first quarter of ~~owner and non-owner occupied, residential, construction and multifamily loans.~~ 2021.

The following table presents ~~the collateral dependent loans~~proceeds from sale and ~~the related ACL allocated by segment of loans as of September 30, 2020:~~

Accounts

ACL
September 30, 2020

Real Estate

Receivable

Equipment

Other

Total

Allocation
Commercial

$
-

$
1,543

$
64

$
-

$
1,607

$
65
Leases

-

-

3,744

-

3,744

911
Commercial real estate - Investor

4,580

-

-

-

4,580

92
Commercial real estate - Owner occupied

10,846

-

-

-

10,846

198
Construction

1,883

-

-

-

1,883

944
Residential real estate - Investor

935

-

-

-

935

-
Residential real estate - Owner occupied

3,559

-

-

-

3,559

11
Multifamily

2,305

-

-

-

2,305

384
HELOC

1,047

-

-

-

1,047

96
HELOC - Purchased

-

-

-

-

-

-
Other

-

-

-

10

10

6
Total

$
25,155

$
1,543

$
3,808

$
10

$
30,516

$
2,707

~~The following table presents the activity in the allowance for credit losses (“ACL”)~~net realized gains (losses) on securities available-for-sale for the three ~~and nine~~ months ended ~~September 30, 2020. The Company’s estimate of the ACL reflects losses over the expected remaining contractual life of the loans.~~March 31, 2021 and 2020:

Impact of

Provision

Beginning

Adopting

for Credit

Ending
Allowance for credit losses

Balance

ASC 326

Losses

Charge-offs

Recoveries

Balance
Three months ended September 30, 2020

Commercial

$
2,292

$
-

$
98

$
5

$
12

$
2,397
Leases

2,012

-

1,965

119

-

3,858
Commercial real estate - Investor

7,725

-

783

-

102

8,610
Commercial real estate - Owner occupied

2,521

-

(535)

145

565

2,406
Construction

4,431

-

406

60

1

4,778
Real estate - Investor

2,217

-

(290)

3

18

1,942
Real estate - Owner occupied

3,204

-

(508)

-

25

2,721
Multifamily

3,518

-

(301)

-

-

3,217
HELOC

2,255

-

(359)

-

52

1,948
HELOC - Purchased

398

-

(43)

66

-

289
Other¹

700

-

64

53

41

752

$
31,273

$
-

$
1,280

$
451

$
816

$
32,918


		Three Months Ended
		March 31,
Securities available-for-sale	2021			2020
Proceeds from sales of securities	$	-		$	18,126
Gross realized gains on securities	$	-		$	17
Gross realized losses on securities		-			(41)
Net realized losses	$	-		$	(24)
Income tax benefit on net realized losses	$	-		$	7
Effective tax rate applied		0.0	%		29.2	%

As of March 31, 2021, securities valued at $313.9 million were pledged to secure deposits and borrowings, and for other purposes, a decrease from $335.8 million of securities pledged at year-end 2020.

1914

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Nine months ended September 30, 2020

Commercial

$
3,015

$
(292)

$
(250)

$
124

$
48

$
2,397
Leases

1,262

501

2,214

119

-

3,858
Commercial real estate - Investor

6,218

(741)

3,009

15

139

8,610
Commercial real estate - Owner occupied

3,678

(848)

556

1,546

566

2,406
Construction

513

1,334

2,990

60

1

4,778
Residential real estate - Investor

601

740

564

8

45

1,942
Residential real estate - Owner occupied

1,257

1,320

30

43

157

2,721
Multifamily

1,444

1,732

41

-

-

3,217
HELOC

1,161

1,526

(902)

85

248

1,948
HELOC - Purchased

-

-

355

66

-

289
Other

640

607

(433)

192

130

752

$
19,789

$
5,879

$
8,174

$
2,258

$
1,334

$
32,918

~~The ACL~~Note 3 – Loans and Allowance for Credit Losses on ~~loans excludes $4.0 million of allowance for unfunded commitments, recorded within Other Liabilities, as of September 30, 2020.~~Loans

~~The following table presents activity in the allowance for loan and lease losses for the three and nine months ended at September 30, 2019,~~Major segments of loans were as ~~determined in accordance with ASC 310 prior to the adoption of ASU 2016-13:~~follows:

Provision

Beginning

for Loan

Ending
Allowance for loan and lease losses:

Balance

Losses

Charge-offs

Recoveries

Balance
Three months ended September 30, 2019

Commercial

$
3,377

$
(49)

$
20

$
10

$
3,318
Leases

961

66

47

-

980
Commercial real estate - Investor

6,307

(431)

159

12

5,729
Commercial real estate - Owner occupied

2,973

428

-

-

3,401
Construction

820

(7)

7

-

806
Real estate - Investor

586

(6)

1

7

586
Real estate - Owner occupied

1,204

62

2

15

1,279
Multifamily

1,230

(78)

-

-

1,152
HELOC

1,304

(79)

19

21

1,227
HELOC - Purchased

38

(2)

-

-

36
Other¹

572

646

142

61

1,137

$
19,372

$
550

$
397

$
126

$
19,651


Nine months ended September 30, 2019
Commercial	$	2,832	$	539	$	99	$	46	$	3,318
											March 31, 2021		December 31, 2020
Commercial ¹											$	392,380	$	407,159
Leases		734		293		47		-		980		138,240		141,601
Commercial real estate - Investor		5,492		496		303		44		5,729		567,475		582,042
Commercial real estate - Owner occupied		3,835		(308)		129		3		3,401		326,857		333,070
Construction		969		(156)		8		1		806		93,745		98,486
Residential real estate - Investor		629		(62)		7		26		586		52,176		56,137
Residential real estate - Owner occupied		1,302		(61)		14		52		1,279		107,303		116,388
Multifamily		1,143		1		-		8		1,152		178,258		189,040
HELOC		1,449		(232)		69		79		1,227		75,604		80,908
HELOC - Purchased		-		265		229		-		36		17,078		19,487
Other¹		621		675		311		152		1,137
	$	19,006	$	1,450	$	1,216	$	411	$	19,651

Other ²												10,509		10,533
Total loans												1,959,625		2,034,851
Allowance for credit losses on loans												(30,967)		(33,855)
Net loans³											$	1,928,658	$	2,000,996

¹ Includes $104.5 million and $74.1 million of Paycheck Protection Program (“PPP”) loans at March 31, 2021 and December 31, 2020, respectively.

² The “Other” segment includes consumer and overdrafts in this table and ~~net deferred costs.~~in subsequent tables within Note 3 - Loans and Allowance for Credit Losses on Loans.

³ Excludes accrued interest receivable of $6.8 million and $7.0 million at March 31, 2021 and December 31, 2020, respectively, that is recorded in other assets on the consolidated balance sheet.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to assure access to collateral, in the event of borrower default, through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. Although the Bank makes loans primarily within its market area, there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector. The real estate related categories listed above represent 72.4% and 72.5% of the portfolio at March 31, 2021, and December 31, 2020, respectively, and include a mix of owner and non-owner occupied, residential, construction and multifamily loans.

The following tables represent the activity in the allowance for credit losses for loans, or the ACL, for the three months ended March 31, 2021 and March 31, 2020:


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

2015

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						Provision
					90 Days or								Greater Past				Impact of		(Release)
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and		Beginning		Adopting		for Loan						Ending
September 30, 2020¹	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Allowance for credit losses															Balance		ASC 326		Losses		Charge-offs		Recoveries		Balance
Three months ended March 31, 2020
Commercial	$	56	$	-	$	1,368	$	1,424	$	434,853	$	436,277	$	-	$	3,015	$	(292)	$	539	$	97	$	12	$	3,177
Leases		64		105		339		508		133,168		133,676		169		1,262		501		127		-		-		1,890
Commercial real estate - Investor		6		128		1,655		1,789		547,181		548,970		-		6,218		(741)		536		13		21		6,021
Commercial real estate - Owner occupied		1,965		-		7,618		9,583		326,395		335,978		207		3,678		(848)		329		1,109		1		2,051
Construction		-		-		-		-		91,856		91,856		-		513		1,334		2,184		-		-		4,031
Residential real estate - Investor		63		-		324		387		61,536		61,923		-
Residential real estate - Owner occupied		220		500		391		1,111		113,172		114,283		44
Real estate - Investor																601		740		534		-		21		1,896
Real estate - Owner occupied																1,257		1,320		769		1		23		3,368
Multifamily		2,664		-		707		3,371		185,027		188,398		-		1,444		1,732		674		-		-		3,850
HELOC		313		19		175		507		85,375		85,882		2		1,161		1,526		(485)		83		141		2,260
HELOC - Purchased		-		-		-		-		22,312		22,312		-		-		-		850		-		-		850
Other²		14		-		-		14		10,758		10,772		-
Total	$	5,365	$	752	$	12,577	$	18,694	$	2,011,633	$	2,030,327	$	422
Other																640		607		(558)		98		60		651
															$	19,789	$	5,879	$	5,499	$	1,401	$	279	$	30,045

¹ ~~Loans modified under the CARES Act are considered current if they are in compliance with the modified terms. There were~~ ~~468~~The ACL on loans ~~which totaled~~ ~~$226.2~~excludes $3.5 million, ~~modified under the CARES Act. As~~$3.0 million and $4.2 million of ~~September 30,~~allowance for unfunded commitments, recorded within Other Liabilities, as of March 31, 2021, December 31, 2020 96 ~~loans of the original~~ ~~468~~ ~~loans deferred, or~~ ~~$54.1~~ ~~million, had an active deferral request~~ and ~~were in compliance with modified terms;~~ ~~372~~ ~~loans which totaled~~ ~~$172.1~~ ~~million had resumed payments.~~

² ~~The “Other” segment includes consumer and overdrafts.~~March 31, 2020, respectively.

Recorded

Investment

90 days or

90 Days or

Greater Past

30-59 Days

60-89 Days

Greater Past

Total Past

Due and
December 31, 2019

Past Due

Past Due

Due

Due

Current

Nonaccrual

Total Loans

Accruing
Commercial

$
1,271

$
925

$
2,103

$
4,299

$
328,399

$
144

$
332,842

$
2,132
Leases

362

-

81

443

118,979

329

119,751

128
Commercial real estate - Investor

626

95

343

1,064

517,336

1,695

520,095

348
Commercial real estate - Owner occupied

2,469

1,026

-

3,495

336,829

5,180

345,504

-
Construction

26

-

-

26

69,498

93

69,617

-
Residential real estate - Investor

141

125

-

266

70,051

788

71,105

-
Residential real estate - Owner occupied

3,450

1,351

-

4,801

128,650

2,572

136,023

-
Multifamily

10

1,700

-

1,710

187,995

68

189,773

-
HELOC

735

50

18

803

89,438

1,364

91,605

20
HELOC - Purchased

-

-

-

-

31,672

180

31,852

-
Other ¹

28

-

-

28

13,997

19

14,044

-
Total, excluding PCI

9,118

5,272

2,545

16,935

1,892,844

12,432

1,922,211

2,628
PCI loans, net of purchase accounting adjustments

261

-

-

261

5,377

2,963

8,601

-
Total

$
9,379

$
5,272

$
2,545

$
17,196

$
1,898,221

$
15,395

$
1,930,812

$
2,628

¹The ~~“Other”~~following tables presents the collateral dependent loans and the related ACL allocated by segment ~~includes consumer, overdrafts~~of loans as of March 31, 2021 and ~~net deferred costs.~~December 31, 2020:


			Accounts								ACL
March 31, 2021	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	1,646	$	-	$	2	$	1,648	$	300
Leases		-		-		2,380		307		2,687		791
Commercial real estate - Investor		4,085		-		-		-		4,085		39
Commercial real estate - Owner occupied		7,201		-		-		-		7,201		1
Construction		2,046		-		-		-		2,046		966
Residential real estate - Investor		855		-		-		-		855		-
Residential real estate - Owner occupied		4,412		-		-		50		4,462		36
Multifamily		3,790		-		-		-		3,790		513
HELOC		948		-		-		-		948		51
Other		-		-		-		402		402		209
Total	$	23,337	$	1,646	$	2,380	$	761	$	28,124	$	2,906


			Accounts								ACL
December 31, 2020	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	1,070	$	-	$	55	$	1,125	$	56
Leases		-		-		2,377		597		2,974		880
Commercial real estate - Investor		4,179		-		-		-		4,179		84
Commercial real estate - Owner occupied		9,726		-		-		-		9,726		195
Construction		1,891		-		-		-		1,891		952
Residential real estate - Investor		928		-		-		-		928		-
Residential real estate - Owner occupied		3,535		-		-		-		3,535		10
Multifamily		3,838		-		-		-		3,838		378
HELOC		1,053		-		-		-		1,053		78
Other		-		-		-		4		4		4
Total	$	25,150	$	1,070	$	2,377	$	656	$	29,253	$	2,637

2116

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, 2021¹	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	2	$	207	$	-	$	209	$	392,171	$	392,380	$	-
Leases		603		50		96		749		137,491		138,240		-
Commercial real estate - Investor		996		-		1,545		2,541		564,934		567,475		366
Commercial real estate - Owner occupied		1,092		-		2,973		4,065		322,792		326,857		-
Construction		3,340		-		-		3,340		90,405		93,745		-
Residential real estate - Investor		495		-		724		1,219		50,957		52,176		-
Residential real estate - Owner occupied		903		137		574		1,614		105,689		107,303		147
Multifamily		2,731		2,660		69		5,460		172,798		178,258		-
HELOC		517		-		201		718		74,886		75,604		-
HELOC - Purchased		399		-		-		399		16,679		17,078		-
Other		467		2		-		469		10,040		10,509		-
Total	$	11,545	$	3,056	$	6,182	$	20,783	$	1,938,842	$	1,959,625	$	513


													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
December 31, 2020¹	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	-	$	-	$	52	$	52	$	407,107	$	407,159	$	-
Leases		613		59		316		988		140,613		141,601		163
Commercial real estate - Investor		1,439		-		1,108		2,547		579,495		582,042		-
Commercial real estate - Owner occupied		1,848		958		7,309		10,115		322,955		333,070		-
Construction		1,237		-		-		1,237		97,249		98,486		-
Residential real estate - Investor		1,022		20		484		1,526		54,611		56,137		157
Residential real estate - Owner occupied		859		286		717		1,862		114,526		116,388		114
Multifamily		3,282		467		-		3,749		185,291		189,040		-
HELOC		549		50		206		805		80,103		80,908		-
HELOC - Purchased		47		-		-		47		19,440		19,487		-
Other		20		-		-		20		10,513		10,533		-
Total	$	10,916	$	1,840	$	10,192	$	22,948	$	2,011,903	$	2,034,851	$	434

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

There were 504 loans which totaled $237.7 million modified under the CARES Act. As of March 31, 2021, 40 loans of the original 504 loans deferred, or $19.2 million, had an active deferral request and were in compliance with modified terms; 464 loans which totaled $218.5 million had resumed payments or paid off. Details of loans in active deferral is below:


March 31, 2021	1st Deferral		2nd Deferral		3rd Deferral		Total
Loans modified under CARES Act, in deferral	$	5,782	$	8,927	$	4,526	$	19,235
Loans modified under CARES Act, in nonaccrual, within deferral above		183		1,731		2,416		4,330

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The table presents all nonaccrual loans ~~and loans on nonaccrual for which there was no related allowance for credit losses~~ as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019:~~2020:

September 30, 2020

December 31, 2019

Nonaccrual

Nonaccrual



Nonaccrual

With no ACL

Nonaccrual

With no ACL
Commercial

$
1,605

$
50

$
144

$
-
Leases

1,910

1,910

329

70
Commercial real estate - Investor

2,021

2,021

1,695

1,590
Commercial real estate - Owner occupied

8,428

5,944

5,180

2,366
Construction

-

-

93

93
Residential real estate - Investor

935

935

788

788
Residential real estate - Owner occupied

3,229

3,229

2,572

2,475
Multifamily

895

895

68

68
HELOC

1,047

835

1,364

1,154
HELOC - Purchased

-

-

180

180
Other

6

-

19

2
Total, excluding PCI loans

20,076

15,819

12,432

8,786
PCI loans, net of purchase accounting adjustments

-

-

2,963

2,963
Total

$
20,076

$
15,819

$
15,395

$
11,749


Nonaccrual loan detail	March 31, 2021		December 31, 2020
Commercial	$	933	$	1,125
Leases		2,562		2,638
Commercial real estate - Investor		1,547		1,632
Commercial real estate - Owner occupied		7,427		9,262
Construction		128		-
Residential real estate - Investor		855		928
Residential real estate - Owner occupied		3,182		3,206
Multifamily		2,398		2,437
HELOC		948		1,052
HELOC - Purchased		-		-
Other		399		-
Total	$	20,379	$	22,280

The Company recognized ~~$93,000~~$32,000 of interest on nonaccrual loans during the three months ended ~~September 30, 2020.~~

March 31, 2021.

Credit Quality Indicators

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

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

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

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

Credits that are not covered by the definitions above are pass credits, which are not considered to be adversely rated. The Company follows the guidance of ASC 310-20 when determining whether a modification, extension, or renewal of a loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period financing receivables. The following table summarizes loans held for investment by year of origination and the related credit

Credit quality indicators by loan segment and loan origination date at ~~September 30, 2020:~~March 31, 2021 were as follows:

~~Table~~18~~of Contents~~

~~Old Second Bancorp, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

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

Revolving

Loans

Converted

Revolving

To Term


2020

2019

2018

2017

2016

Prior

Loans

Loans

Total
Commercial

Pass

$
161,595

$
42,502

$
16,568

$
7,215

$
3,096

$
2,755

$
188,270

$
-

$
422,001
Special Mention

443

1,564

68

13

4

16

6,176

-

8,284
Substandard¹

2,252

52

2,036

-

-

13

1,639

-

5,992
Total commercial

164,290

44,118

18,672

7,228

3,100

2,784

196,085

-

436,277

Leases

Pass

39,333

55,923

18,937

7,755

6,463

1,196

-

-

129,607
Special Mention

-

799

-

-

-

-

-

-

799
Substandard¹

-

1,255

1,004

64

467

480

-

-

3,270
Total leases

39,333

57,977

19,941

7,819

6,930

1,676

-

-

133,676

Commercial real estate - Investor

Pass

128,123

168,503

92,140

70,566

56,666

24,362

868

-

541,228
Special Mention

1,816

-

231

-

99

-

-

-

2,146
Substandard¹

474

3,783

-

-

345

994

-

-

5,596
Total commercial real estate - investor

130,413

172,286

92,371

70,566

57,110

25,356

868

-

548,970

Commercial real estate - Owner occupied

Pass

55,107

54,702

78,655

45,928

51,895

30,174

1,083

-

317,544
Special Mention

925

-

464

2,141

5,246

-

-

-

8,776
Substandard¹

185

2,454

1,088

1,695

708

3,528

-

-

9,658
Total commercial real estate - owner occupied

56,217

57,156

80,207

49,764

57,849

33,702

1,083

-

335,978

Construction

Pass

28,182

40,302

6,972

589

245

1,283

9,136

-

86,709
Special Mention

39

-

-

-

-

-

-

-

39
Substandard¹

-

3,058

2,050

-

-

-

-

-

5,108
Total construction

28,221

43,360

9,022

589

245

1,283

9,136

-

91,856

Residential real estate - Investor

Pass

10,497

14,632

11,721

8,488

2,558

11,985

516

-

60,397
Special Mention

-

-

-

-

-

-

-

-

-
Substandard¹

340

-

614

-

99

473

-

-

1,526
Total residential real estate - investor

10,837

14,632

12,335

8,488

2,657

12,458

516

-

61,923

Residential real estate - Owner occupied

Pass

8,747

23,545

12,094

18,796

10,716

33,867

2,682

-

110,447
Special Mention

-

-

-

-

-

-

-

-

-
Substandard¹

48

-

412

221

535

2,620

-

-

3,836
Total residential real estate - owner occupied

8,795

23,545

12,506

19,017

11,251

36,487

2,682

-

114,283

Multifamily

Pass

27,856

37,940

45,291

45,516

13,143

10,514

202

-

180,462
Special Mention

-

-

1,544

552

7

-

-

-

2,103

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Substandard¹

69

-

2,687

901

119

2,057

-

-

5,833
Total multifamily

27,925

37,940

49,522

46,969

13,269

12,571

202

-

188,398

HELOC

Pass

2,185

2,287

1,697

2,471

694

1,197

73,772

-

84,303
Special Mention

-

-

-

-

-

-

13

-

13
Substandard¹

-

-

88

37

265

93

1,083

-

1,566
Total HELOC

2,185

2,287

1,785

2,508

959

1,290

74,868

-

85,882

HELOC - Purchased

Pass

-

-

-

-

-

22,312

-

-

22,312
Special Mention

-

-

-

-

-

-

-

-

-
Substandard¹

-

-

-

-

-

-

-

-

-
Total HELOC - purchased

-

-

-

-

-

22,312

-

-

22,312

Other

Pass

995

1,415

451

320

468

324

6,527

-

10,500
Special Mention

-

-

-

-

-

-

-

-

-
Substandard¹

-

-

266

6

-

-

-

-

272
Total other

995

1,415

717

326

468

324

6,527

-

10,772

Total loans

Pass

462,620

441,751

284,526

207,644

145,944

139,969

283,056

-

1,965,510
Special Mention

3,223

2,363

2,307

2,706

5,356

16

6,189

-

22,160
Substandard¹

3,368

10,602

10,245

2,924

2,538

10,258

2,722

-

42,657
Total loans

$
469,211

$
454,716

$
297,078

$
213,274

$
153,838

$
150,243

$
291,967

$
-

$
2,030,327

¹~~The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.~~

~~Credit quality indicators by loan segment at December 31, 2019 were as follows:~~

December 31, 2019

Special


Pass

Mention

Substandard²

Doubtful

Total
Commercial

$
307,948

$
13,206

$
11,688

$
-

$
332,842
Leases

119,045

377

329

-

119,751
Commercial real estate - Investor

510,640

4,529

4,926

520,095
Commercial real estate - Owner occupied

330,891

6,657

7,956

-

345,504
Construction

69,355

-

262

-

69,617
Residential real estate - Investor

69,715

-

1,390

-

71,105
Residential real estate - Owner occupied

132,258

134

3,631

-

136,023
Multifamily

187,560

1,710

503

-

189,773
HELOC

89,804

12

1,789

-

91,605
HELOC - Purchased

31,672

-

180

-

31,852
Other ¹

13,685

-

359

-

14,044
Total, excluding PCI loans

$
1,862,573

$
26,625

$
33,013

$
-

$
1,922,211
PCI loans, net of purchase accounting adjustments

573

261

7,767

-

8,601
Total

$
1,863,146

$
26,886

$
40,780

$
-

$
1,930,812

¹ ~~The “Other” segment includes consumer, overdrafts and net deferred costs.~~

²~~The substandard credit quality indicator includes both potential problem loans that are currently performing and nonperforming loans.~~

~~The Company had $541,000 and $831,000 in residential real estate loans in the process of foreclosure as of September 30, 2020, and December 31, 2019, respectively.~~


															Revolving
															Loans
															Converted
													Revolving		To Term
	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total
Commercial
Pass	$	73,345	$	70,268		33,301		13,439		5,467		2,969	$	187,576	$	-	$	386,365
Special Mention		-		2,772		399		-		-		-		447		-		3,618
Substandard		-		260		-		1,344		-		-		793		-		2,397
Total commercial		73,345		73,300		33,700		14,783		5,467		2,969		188,816		-		392,380

Leases
Pass		9,407		53,691		47,433		14,305		5,542		4,541		-		-		134,919
Special Mention		-		174		-		-		-		-		-		-		174
Substandard		-		-		1,429		798		51		869		-		-		3,147
Total leases		9,407		53,865		48,862		15,103		5,593		5,410		-		-		138,240

Commercial real estate - Investor
Pass		24,011		169,705		149,475		86,518		63,401		56,733		1,110		151		551,104
Special Mention		-		1,804		9,437		-		-		-		-		-		11,241
Substandard		2,155		424		1,131		195		-		1,225		-		-		5,130
Total commercial real estate - investor		26,166		171,933		160,043		86,713		63,401		57,958		1,110		151		567,475

Commercial real estate - Owner occupied
Pass		17,923		68,497		51,974		68,105		44,122		65,217		1,308		461		317,607
Special Mention		-		598		-		-		-		-		-		-		598
Substandard		-		4,077		1,748		80		1,469		1,278		-		-		8,652
Total commercial real estate - owner occupied		17,923		73,172		53,722		68,185		45,591		66,495		1,308		461		326,857

Construction
Pass		11,019		51,091		16,576		1,398		532		1,455		5,139		81		87,291
Special Mention		-		-		1,088		-		-		-		-		-		1,088
Substandard		-		-		3,283		2,083		-		-		-		-		5,366
Total construction		11,019		51,091		20,947		3,481		532		1,455		5,139		81		93,745

Residential real estate - Investor
Pass		358		8,660		12,654		7,769		7,635		12,510		1,155		-		50,741
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		334		-		598		-		503		-		-		1,435
Total residential real estate - investor		358		8,994		12,654		8,367		7,635		13,013		1,155		-		52,176

Residential real estate - Owner occupied
Pass		895		17,859		21,165		9,116		14,088		37,800		2,232		-		103,155
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		47		-		412		218		3,471		-		-		4,148
Total residential real estate - owner occupied		895		17,906		21,165		9,528		14,306		41,271		2,232		-		107,303

Multifamily
Pass		4,692		40,077		29,772		42,259		30,499		16,021		191		-		163,511
Special Mention		-		-		6,901		-		-		-		-		-		6,901
Substandard		-		69		-		4,491		933		2,353		-		-		7,846
Total multifamily		4,692		40,146		36,673		46,750		31,432		18,374		191		-		178,258

HELOC
Pass		-		2,403		2,138		1,241		1,652		1,268		65,586		-		74,288
Special Mention		-		-		-		-		-		-		13		-		13
Substandard		-		98		-		85		36		287		797		-		1,303
Total HELOC		-		2,501		2,138		1,326		1,688		1,555		66,396		-		75,604

HELOC - Purchased

2419

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Pass		-		-		-		-		-		17,078		-		-		17,078
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total HELOC - purchased		-		-		-		-		-		17,078		-		-		17,078

Other
Pass		685		1,197		533		240		164		535		6,753		-		10,107
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		399		-		3		-		-		-		-		402
Total other		685		1,596		533		243		164		535		6,753		-		10,509

Total loans
Pass		142,335		483,448		365,021		244,390		173,102		216,127		271,050		693		1,896,166
Special Mention		-		5,348		17,825		-		-		-		460		-		23,633
Substandard		2,155		5,708		7,591		10,089		2,707		9,986		1,590		-		39,826
Total loans	$	144,490	$	494,504	$	390,437	$	254,479	$	175,809	$	226,113	$	273,100	$	693	$	1,959,625

Credit quality indicators by loan segment and loan origination date at December 31, 2020 were as follows:


															Revolving
															Loans
															Converted
													Revolving		To Term
	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
Commercial
Pass	$	101,796	$	42,294	$	14,519	$	6,265	$	1,825	$	1,691	$	230,388	$	-	$	398,778
Special Mention		5,130		425		68		-		3		-		76		-		5,702
Substandard		273		52		1,524		-		-		-		830		-		2,679
Total commercial		107,199		42,771		16,111		6,265		1,828		1,691		231,294		-		407,159

Leases
Pass		56,605		52,168		16,830		6,545		5,242		651		-		-		138,041
Special Mention		175		163		-		-		-		-		-		-		338
Substandard		-		1,434		798		59		450		481		-		-		3,222
Total leases		56,780		53,765		17,628		6,604		5,692		1,132		-		-		141,601

Commercial real estate - Investor
Pass		173,781		158,677		92,156		66,762		55,963		15,966		1,319		-		564,624
Special Mention		2,394		9,592		220		-		95		-		-		-		12,301
Substandard		2,709		1,126		71		-		340		871		-		-		5,117
Total commercial real estate - investor		178,884		169,395		92,447		66,762		56,398		16,837		1,319		-		582,042

Commercial real estate - Owner occupied
Pass		72,605		52,809		73,719		45,315		50,000		25,507		1,324		-		321,279
Special Mention		604		-		-		-		-		-		-		-		604
Substandard		1,564		2,154		1,780		1,664		501		3,524		-		-		11,187
Total commercial real estate - owner occupied		74,773		54,963		75,499		46,979		50,501		29,031		1,324		-		333,070

Construction
Pass		50,170		24,163		7,203		539		218		1,261		9,702		-		93,256
Special Mention		38		-		-		-		-		-		-		-		38
Substandard		-		3,135		2,057		-		-		-		-		-		5,192
Total construction		50,208		27,298		9,260		539		218		1,261		9,702		-		98,486

Residential real estate - Investor
Pass		9,371		14,194		8,522		7,775		2,431		11,184		1,144		-		54,621
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		349		-		610		-		91		466		-		-		1,516
Total residential real estate - investor		9,720		14,194		9,132		7,775		2,522		11,650		1,144		-		56,137

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


Residential real estate - Owner occupied
Pass		18,308		23,450		10,808		15,409		10,394		31,325		2,654		-		112,348
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		47		-		412		219		526		2,836		-		-		4,040
Total residential real estate - owner occupied		18,355		23,450		11,220		15,628		10,920		34,161		2,654		-		116,388

Multifamily
Pass		40,671		30,849		44,301		38,133		12,147		7,735		197		-		174,033
Special Mention		-		6,901		-		548		-		-		-		-		7,449
Substandard		69		-		4,254		927		118		2,190		-		-		7,558
Total multifamily		40,740		37,750		48,555		39,608		12,265		9,925		197		-		189,040

HELOC
Pass		2,511		2,174		1,679		2,120		504		803		69,483		-		79,274
Special Mention		-		-		-		-		-		-		94		-		94
Substandard		-		-		86		37		271		91		1,055		-		1,540
Total HELOC		2,511		2,174		1,765		2,157		775		894		70,632		-		80,908

HELOC - Purchased
Pass		-		-		-		-		-		19,487		-		-		19,487
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total HELOC - purchased		-		-		-		-		-		19,487		-		-		19,487

Other
Pass		1,555		574		569		229		559		341		6,702		-		10,529
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		4		-		-		-		-		-		4
Total other		1,555		574		573		229		559		341		6,702		-		10,533

Total loans
Pass		527,373		401,352		270,306		189,092		139,283		115,951		322,913		-		1,966,270
Special Mention		8,341		17,081		288		548		98		-		170		-		26,526
Substandard		5,011		7,901		11,596		2,906		2,297		10,459		1,885		-		42,055
Total loans	$	540,725	$	426,334	$	282,190	$	192,546	$	141,678	$	126,410	$	324,968	$	-	$	2,034,851

The Company had $624,000 and $546,000 in residential real estate loans in the process of foreclosure as of March 31, 2021, and December 31, 2020, respectively.

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

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

~~TDRs that were modified during the period are as follows:~~

TDR Modifications

TDR Modifications

Three Months Ended September 30, 2020

Nine Months Ended September 30, 2020

# of

Pre-modification

Post-modification

# of

Pre-modification

Post-modification


contracts

recorded investment

recorded investment

contracts

recorded investment

recorded investment

Troubled debt restructurings

Residential real estate - Owner occupied

HAMP¹

1

$
154

$
153

3

$
410

$
404

Total

1

$
154

$
153

3

$
410

$
404

TDR Modifications

TDR Modifications

Three Months Ended September 30, 2019

Nine Months Ended September 30, 2019

# of

Pre-modification

Post-modification

# of

Pre-modification

Post-modification


contracts

recorded investment

recorded investment

contracts

recorded investment

recorded investment

Troubled debt restructurings

Commercial real estate - Investor

Other²

1

$
1,159

$
1,122

2

$
1,217

$
1,177

Residential real estate - Owner occupied

HAMP¹

-

-

-

3

399

297

HELOC

HAMP¹

-

-

-

1

39

34

Other²

-

-

-

1

39

38

Total

1

$
1,159

$
1,122

7

$
1,694

$
1,546

¹~~HAMP: Home Affordable Modification Program.~~

2521

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

²~~Other: Change of terms from bankruptcy court.~~

There was 0 TDR activity for the period ended March 31, 2021 and March 31, 2020. TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There was 0 TDR default activity for the periods ended ~~September 30,~~March 31, 2021, and March 31, 2020, ~~and September 30, 2019,~~ for loans that were restructured within the prior 12 month period.

Note 54 – 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 ~~table:~~tables:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
Other real estate owned	2020		2019		2020		2019		2021		2020
Balance at beginning of period	$	5,082	$	5,668	$	5,004	$	7,175	$	2,474	$	5,004
Property additions, net of acquisition adjustments		314		305		898		305		-		491
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		2,664		1,088		2,952		2,390		305		288
Period valuation adjustments		46		203		264		399		6		158
Other adjustments		-		-		-		9
Balance at end of period	$	2,686	$	4,682	$	2,686	$	4,682	$	2,163	$	5,049

Activity in the valuation allowance was as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Balance at beginning of period	$	6,464	$	8,061	$	6,712	$	8,027	$	1,643	$	6,712
Provision for unrealized losses		46		203		264		399		6		158
Reductions taken on sales		(4,897)		(798)		(5,363)		(960)		-		(466)
Balance at end of period	$	1,613	$	7,466	$	1,613	$	7,466	$	1,649	$	6,404

Expenses related to OREO, net of lease revenue includes:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2020		2019		2020		2019		2021		2020
Gain on sales, net	$	(165)	$	(104)	$	(188)	$	(254)	$	(20)	$	(23)
Provision for unrealized losses		46		203		264		399		6		158
Operating expenses		253		(73)		460		184		54		102
Less:
Lease revenue		9		-		31		5		4		-
Net OREO expense	$	125	$	26	$	505	$	324	$	36	$	237

2622

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 65 – Deposits

Major classifications of deposits were as follows:


	September 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Noninterest bearing demand	$	889,085	$	669,795	$	982,664	$	909,505
Savings		382,711		307,015		429,256		399,057
NOW accounts		492,407		425,792		522,760		486,612
Money market accounts		310,613		282,478		338,921		316,465
Certificates of deposit of less than $100,000		208,570		227,578		193,291		200,107
Certificates of deposit of $100,000 through $250,000		129,522		151,279		132,514		164,982
Certificates of deposit of more than $250,000		66,335		62,812		57,136		60,345
Total deposits	$	2,479,243	$	2,126,749	$	2,656,542	$	2,537,073

Note 76 – Borrowings

The following table is a summary of borrowings as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019.~~2020. Junior subordinated debentures are discussed in more detail in Note 8:7:

September 30, 2020

December 31, 2019

Securities sold under repurchase agreements

$
59,268

$
48,693

Other short-term borrowings ¹

6,125

48,500

Junior subordinated debentures

25,773

57,734

Senior notes

44,349

44,270

Notes payable and other borrowings

24,469

6,673

Total borrowings

$
159,984

$
205,870

¹~~Includes short-term FHLBC advances for both periods presented.~~


	March 31, 2021		December 31, 2020
Securities sold under repurchase agreements	$	77,321	$	66,980
Junior subordinated debentures		25,773		25,773
Senior notes		44,402		44,375
Notes payable and other borrowings		22,314		23,393
Total borrowings	$	169,810	$	160,521

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 ~~$59.3~~$77.3 million at ~~September 30, 2020,~~March 31, 2021, and ~~$48.7~~$67.0 million at December 31, ~~2019.~~2020. The fair value of the pledged collateral was ~~$79.3~~$114.8 million at ~~September 30, 2020,~~March 31, 2021, and ~~$70.7~~$94.4 million at December 31, ~~2019.~~2020. At ~~September 30, 2020,~~March 31, 2021, there were 0 customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC. Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans. As of ~~September 30,~~March 31, 2021 and December 31, 2020 the Bank had ~~$6.1 million in~~0 short-term advances outstanding under the ~~FHLBC compared to $48.5 million outstanding as of December 31, 2019; the remaining $6.1 million was issued at a rate of 2.19%.~~FHLBC. The Bank also assumed $23.4 million of long-term FHLBC advances with the ABC Bank acquisition in 2018. At ~~September 30, 2020,~~March 31, 2021, one advance remains in long-term status, with a total outstanding balance of ~~$6.5~~$6.3 million, at a 2.83% interest rate, and is scheduled to mature on February 2, 2026. FHLBC stock as of ~~September 30, 2020~~March 31, 2021, was valued at $3.7 million, and any potential FHLBC advances were collateralized by ~~securities with a fair value of $53.1 million and~~ loans with a principal balance of ~~$569.7~~$631.4 million, which carried a FHLBC-calculated combined collateral value of ~~$428.4~~$457.7 million. The Company had excess collateral of ~~$289.6~~$330.2 million available to secure borrowings at ~~September 30, 2020.~~March 31, 2021.

The Company also has ~~$44.3~~$44.4 million of senior notes outstanding, net of deferred issuance costs, as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020. 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 2021, the senior debt will pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points. The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. As of ~~September 30, 2020,~~March 31, 2021, and December 31,

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~~Old Second Bancorp, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

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

~~2019,~~ 2020, unamortized debt issuance costs related to the senior notes were ~~$651,000~~$598,000 and ~~$730,000,~~$625,000, respectively, and are included as a reduction of the balance of the senior notes on the Consolidated Balance Sheet. These deferred issuance costs will be amortized to interest expense over the ten year term of the notes and are included in the Consolidated Statements of Income.

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Notes to Consolidated Financial Statements

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

On February 24, 2020, the Company originated a $20.0 million term note, of which ~~$18.0~~$16.0 million is outstanding as of ~~September 30, 2020,~~March 31, 2021, with a correspondent bank related to the Company’s redemption of the 7.80% cumulative trust preferred securities issued by Old Second Capital Trust I and related junior subordinated debentures. See the discussion in Note 87 – Junior Subordinated Debentures. The term note was issued for a three year term at one-month Libor plus 175 basis points, requires principal and interest payments quarterly, and the balance of this note is included within Notes Payable and Other Borrowings on the Consolidated Balance Sheet. The Company also has an undrawn line of credit of $20.0 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 87 – Junior Subordinated Debentures

On March 2, 2020, the Company redeemed the 7.80% cumulative trust preferred securities issued by Old Second Capital Trust I (“OSBCP”) and related junior subordinated debentures, which totaled $32.6 million. These debentures were originally issued in 2003 for a term of 30 years at 7.80%, and subject to regulatory approval, were able to be called in whole or in part by the Company after June 30, 2008. The Company received regulatory approval to redeem the debentures in early 2020, and notified OSBCP stockholders of the redemption in late January 2020. Cash disbursed for the redemption, including accrued interest on the debentures, totaled $33.0 million, or $10.13 per OSBCP share. The OSBCP redemption was funded by cash on hand and the $20 million term note discussed in Note 76 – Borrowings. Upon redemption of the junior subordinated debentures related to OSBCP in March 2020, the Company recognized the remaining unamortized debt issuance costs of $635,000.

The Company issued $25.0 million of cumulative trust preferred securities through a private placement completed by another unconsolidated subsidiary, Old Second Capital Trust II, in April 2007. These trust preferred securities also mature in 30 years, but subject to the aforementioned 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 float at 150 basis points over ~~three-month~~three-month LIBOR thereafter. Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of ~~4.40%~~4.41% for the quarter ended ~~September 30, 2020,~~March 31, 2021, compared to the rate paid for the quarter ended ~~September 30, 2019,~~March 31, 2020, of 4.40%. The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering. The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

The junior subordinated debentures issued by the Company are disclosed on the Consolidated Balance Sheet, and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, the remaining unamortized debt issuance costs related to the junior subordinated debentures were $1,000 ~~and $644,000 respectively,~~ and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheet. The remaining deferred issuance costs on the junior subordinated debentures related to the issuance of Old Second Capital Trust II will be amortized to interest expense over the remainder of the 30-year term of the notes and are included in the Consolidated Statements of Income.

Note 98 – Equity Compensation Plans

Stock-based awards are outstanding under the Company’s ~~2014 Equity Incentive Plan, as amended (the “2014 Plan”), and the Company’s~~ 2019 Equity Incentive Plan (the “2019 Plan” ~~and together with the 2014 Plan, the “Plans”~~). The 2019 Plan was approved at the May 2019 annual stockholders’ meeting and the number of authorized shares under the 2019 Plan iswas fixed at 600,000. Following approval of the 2019 Plan, no further awards were to be granted under ~~the 2014 Plan or~~ any other prior Company equity compensation plan. The 2019 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”). Awards may be granted to selected directors, officers, employees or eligible service providers under the 2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors. As of ~~September 30, 2020, 343,602~~March 31, 2021, 225,020 shares remained available for issuance under the 2019 Plan.

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~~Old Second Bancorp, Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements~~

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

Under the 2019 Plan, unless otherwise provided in an award agreement, upon the occurrence of a change in control, all stock options and SARs then held by the participant will become fully exercisable immediately if, and all stock awards and cash incentive awards will become fully earned and vested immediately if, (i) the 2019 Plan is not an obligation of the successor entity following a change in control or (ii) the 2019 Plan is an obligation of the successor entity following a change in control and the participant incurs a termination of service without cause or for good reason following the change in control. Notwithstanding the immediately preceding sentence, if the

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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.

Generally, restricted stock and restricted stock units granted under the Plans vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until the vest date. ~~There were 0 stock options granted or exercised during the nine months ended September 30, 2020, and as of September 30, 2020, there were 0 stock options outstanding.~~

~~The Company granted restricted stock under its equity compensation plans beginning in 2005 and it began granting restricted stock units in February 2009.~~ Awards of restricted stock under the Plans 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 Plans 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 ~~137,944~~217,964 and ~~166,106~~137,944 restricted stock units issued under the 2019 Plan during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and March 31, 2020, ~~and September 30, 2019,~~ respectively. Compensation expense is recognized over the vesting period of the restricted stock units based on the market value of the award on the issue date. Total compensation cost that has been recorded for the Plan was ~~$1.6 million~~$125,000 in the first ~~nine~~three months of ~~2020~~2021 and ~~$1.9 million~~$735,000 for the first ~~nine~~three months of ~~2019.~~2020.

A summary of changes in the Company’s unvested restricted awards for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, is as follows:


	September 30, 2020			March 31, 2021
		Weighted			Weighted
	Restricted	Average		Restricted	Average
	Stock Shares	Grant Date		Stock Shares	Grant Date
	and Units	Fair Value		and Units	Fair Value
Unvested at January 1	555,283	$	12.85	532,609	$	13.15
Granted	137,944		12.26	217,964		11.32
Vested	(149,952)		11.16	(191,653)		13.95
Forfeited	-		-	(42,111)		14.15
Unvested at September 30	543,275	$	13.17
Unvested at March 31				516,809	$	11.99

Total unrecognized compensation cost of restricted awards was ~~$2.8~~$4.0 million as of ~~September 30, 2020,~~March 31, 2021, which is expected to be recognized over a weighted-average period of ~~1.75~~2.27 years.

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Notes to Consolidated Financial Statements

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

Note 109 – Earnings Per Share

The earnings per share, both basic and diluted, are ~~included below~~ as ~~of September 30:~~follows:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2020		2019		2020		2019		2021		2020
Basic earnings per share:
Weighted-average common shares outstanding		29,559,026		29,899,063		29,708,239		29,880,511		29,225,775		29,929,763
Net income	$	10,265	$	12,173	$	19,778	$	29,919	$	11,879	$	275
Basic earnings per share	$	0.35	$	0.41	$	0.67	$	1.00	$	0.41	$	0.01

Diluted earnings per share:
Weighted-average common shares outstanding		29,559,026		29,899,063		29,708,239		29,880,511		29,225,775		29,929,763
Dilutive effect of unvested restricted awards ¹		543,275		539,270		553,482		510,454		558,982		560,842
Diluted average common shares outstanding		30,102,301		30,438,333		30,261,721		30,390,965		29,784,757		30,490,605

Net Income	$	10,265	$	12,173	$	19,778	$	29,919	$	11,879	$	275
Diluted earnings per share	$	0.34	$	0.40	$	0.65	$	0.98	$	0.40	$	0.01


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

Note 1110 – 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 8 percent (8%) and a total risk-based capital ratio at or above 12 percent (12%). At ~~September 30, 2020,~~March 31, 2021, the Bank exceeded those thresholds.

At ~~September 30, 2020,~~March 31, 2021, the Bank’s Tier 1 capital leverage ratio was ~~10.90%~~10.78%, ~~a decrease~~an increase of ~~160~~4 basis points from December 31, ~~2019, but~~2020, and is well above the 8.00% objective. The ~~reduction in the Tier 1 capital leverage ratio is primarily due to a $30.0 million dividend the Bank paid the Company in March 2020.The~~ Bank’s total capital ratio was ~~15.49%~~15.80%, an increase of 2680 basis points from December 31, ~~2019,~~2020, and also well above the objective of 12.00%.

Bank holding companies are generally required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System. The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019.~~2020.

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” generally holding companies with consolidated assets of less than $3 billion. The Company is currently considered a “small bank holding company.” If we have total assets in excess of $3.0 billion as of June 30, 2021, we will no longer be considered a small bank holding company in March of 2022. 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, ~~2019,~~2020, under the heading “Supervision and Regulation.”

At ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

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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							Minimum Capital				Well Capitalized
					Adequacy with Capital				Under Prompt Corrective							Adequacy with Capital				Under Prompt Corrective
	Actual				Conservation Buffer, if applicable¹				Action Provisions²				Actual			Conservation Buffer, if applicable¹				Action Provisions²
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio	Amount		Ratio		Amount		Ratio
September 30, 2020
March 31, 2021
Common equity tier 1 capital to risk weighted assets
Consolidated	$	269,874	11.97	%	$	157,821	7.000	%		N/A	N/A		$	282,302	12.43	$	158,979	7.000	%		N/A	N/A
Old Second Bank		319,662	14.24			157,137	7.000		$	145,913	6.50	%		331,118	14.59		158,864	7.000		$	147,517	6.50	%
Total capital to risk weighted assets
Consolidated		323,041	14.33			236,701	10.500			N/A	N/A			334,614	14.73		238,523	10.500			N/A	N/A
Old Second Bank		347,723	15.49			235,706	10.500			224,482	10.00			358,430	15.80		238,197	10.500			226,854	10.00
Tier 1 capital to risk weighted assets
Consolidated		294,874	13.08			191,623	8.500			N/A	N/A			307,302	13.53		193,057	8.500			N/A	N/A
Old Second Bank		319,662	14.24			190,809	8.500			179,585	8.00			331,118	14.59		192,906	8.500			181,559	8.00
Tier 1 capital to average assets
Consolidated		294,874	10.07			117,130	4.00			N/A	N/A			307,302	10.02		122,675	4.00			N/A	N/A
Old Second Bank		319,662	10.90			117,307	4.00			146,634	5.00			331,118	10.78		122,864	4.00			153,580	5.00

December 31, 2019
December 31, 2020
Common equity tier 1 capital to risk weighted assets
Consolidated	$	251,477	11.14	%	$	158,020	7.000	%		N/A	N/A		$	277,199	11.94	$	162,512	7.000	%		N/A	N/A
Old Second Bank		322,496	14.35			157,315	7.000		$	146,078	6.50	%		318,466	13.75		162,128	7.000		$	150,548	6.50	%
Total capital to risk weighted assets
Consolidated		327,886	14.53			236,944	10.500			N/A	N/A			331,178	14.26		243,855	10.500			N/A	N/A
Old Second Bank		342,280	15.23			235,978	10.500			224,741	10.00			347,408	15.00		243,186	10.500			231,605	10.00
Tier 1 capital to risk weighted assets
Consolidated		308,102	13.65			191,858	8.500			N/A	N/A			302,199	13.01		197,440	8.500			N/A	N/A
Old Second Bank		322,496	14.35			191,026	8.500			179,789	8.00			318,466	13.75		196,870	8.500			185,289	8.00
Tier 1 capital to average assets
Consolidated		308,102	11.93			103,303	4.00			N/A	N/A			302,199	10.21		118,393	4.00			N/A	N/A
Old Second Bank		322,496	12.50			103,199	4.00			128,998	5.00			318,466	10.74		118,609	4.00			148,262	5.00

¹Amounts are shown inclusive of a capital conservation buffer of 2.50%. Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes.

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 ~~have~~ elected to utilize the five-year CECL transition. The cumulative amount that is not recognized in regulatory capital, in addition to the $3.8 million ~~Day 1 impact of CECL adoption, will be phased in at 25% per year beginning January 1, 2022. As of September 30, 2020, the capital~~

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Notes to Consolidated Financial Statements

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

Day 1 impact of CECL adoption, will be phased in at 25% per year beginning January 1, 2022. As of March 31, 2021, the capital measures of the Company exclude ~~$5.7~~$5.1 million, which is the ~~Day 1 impact to retained earnings and 25% of the $10.4 million increase in the allowance for credit losses in the first nine months of 2020, excluding PCD loans.~~modified CECL transition adjustment.

Dividend Restrictions

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a bank without prior regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above. Pursuant to the Basel III rules that came into effect January 1, 2015, and were fully phased in as of January 1, 2019, the Bank must keep a capital conservation buffer of 2.50% above the new regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

Stock Repurchase Program

In September 2019, our board of directors authorized the repurchase of up to 1,494,826 shares of our common stock (the “Repurchase Program”). The Repurchase Program expired on September 19, 2020, however, on October 20, 2020, the Company received notice of non-objection from the Federal Reserve Bank of Chicago to extend the Repurchase Program through October 20, 2021. Repurchases by us under the Repurchase Program may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means. During the first ~~second and third quarters~~quarter of ~~2020,~~2021, we repurchased ~~312,723 shares, 145,932 shares, and 137,756~~455,134 shares of our common stock at a weighted average ~~prices~~price of ~~$7.06~~$12.31 per share, ~~$6.97 per share,~~pursuant to the Repurchase Program. As of March 31, 2021, 1.2 million shares have been repurchased since the program’s inception, and ~~$8.34 per share, respectively, pursuant to~~320,419 shares remain available for repurchase under the Repurchase Program.

Note 1211 – 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.

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.

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Notes to Consolidated Financial Statements

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

●

Asset-backed collateralized loan obligations were priced using data from a pricing matrix supported by our bond accounting service provider and are therefore considered Level 2 valuations.

●

Annually every security holding is priced by a pricing service independent of the regular and recurring pricing services used. The independent service provides a measurement to indicate if the price assigned by the regular service is within or outside of a reasonable range. Management reviews this report and applies judgment in adjusting calculations at year end related to securities pricing.

●

Residential mortgage loans available for sale in the secondary market are carried at fair market value. The fair value of loans held-for-sale is determined using quoted secondary market prices.

●

Lending related commitments to fund certain residential mortgage loans, e.g., residential mortgage loans with locked interest rates to be sold in the secondary market and forward commitments for the future delivery of mortgage loans to third party investors, as well as forward commitments for future delivery of MBS are considered derivatives. Fair values are estimated based on observable changes in mortgage interest rates including prices for MBS from the date of the commitment and do not typically involve significant judgments by management.

●

The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income to derive the resultant value. The Company is able to compare the valuation model inputs, such as the discount rate, prepayment speeds, weighted average delinquency and foreclosure/bankruptcy rates to widely available published industry data for reasonableness.

●

Interest rate swap positions, both assets and liabilities, are based on valuation pricing models using an income approach reflecting readily observable market parameters such as interest rate yield curves.

●

The fair value of impaired loans with specific allocations of the allowance for credit losses is essentially based on recent real estate appraisals or the fair value of the collateralized asset. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are made in the appraisal process by the appraisers to reflect differences between the available comparable sales and income data. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

●

Nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO are measured at fair value, less costs to sell. Fair values are based on third party appraisals of the property, resulting in a Level 3 classification, or an executed pending sales contract. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

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Notes to Consolidated Financial Statements

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

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

The tables below present the balance of assets and liabilities at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively, measured by the Company at fair value on a recurring basis:


	September 30, 2020								March 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	4,134	$	-	$	-	$	4,134	$	4,102	$	-	$	-	$	4,102
U.S. government agencies		-		7,005		-		7,005		-		6,361		-		6,361
U.S. government agencies mortgage-backed		-		18,219		-		18,219		-		70,602		-		70,602
States and political subdivisions		-		244,987		4,790		249,777		-		237,505		4,641		242,146
Corporate bonds										-		34,843		-		34,843
Collateralized mortgage obligations		-		57,013		-		57,013		-		74,936		-		74,936
Asset-backed securities		-		81,585		-		81,585		-		130,368		-		130,368
Collateralized loan obligations		-		30,688		-		30,688		-		29,922		-		29,922
Loans held-for-sale		-		10,229		-		10,229		-		7,842		-		7,842
Mortgage servicing rights		-		-		5,010		5,010		-		-		5,889		5,889
Interest rate swap agreements		-		10,506		-		10,506		-		6,126		-		6,126
Mortgage banking derivatives		-		1,434		-		1,434		-		1,234		-		1,234
Total	$	4,134	$	461,666	$	9,800	$	475,600	$	4,102	$	599,739	$	10,530	$	614,371

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	15,231	$	-	$	15,231	$	-	$	7,147	$	-	$	7,147
Total	$	-	$	15,231	$	-	$	15,231	$	-	$	7,147	$	-	$	7,147


	December 31, 2019								December 31, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	4,036	$	-	$	-	$	4,036	$	4,117	$	-	$	-	$	4,117
U.S. government agencies		-		8,337		-		8,337		-		6,657		-		6,657
U.S. government agencies mortgage-backed		-		16,588		-		16,588		-		17,209		-		17,209
States and political subdivisions		-		243,756		5,419		249,175		-		244,940		4,319		249,259
Collateralized mortgage obligations		-		57,984		-		57,984		-		56,585		-		56,585
Asset-backed securities		-		81,844		-		81,844		-		131,818		-		131,818
Collateralized loan obligations		-		66,684		-		66,684		-		30,533		-		30,533
Loans held-for-sale		-		3,061		-		3,061		-		12,611		-		12,611
Mortgage servicing rights		-		-		5,935		5,935		-		-		4,224		4,224
Interest rate swap agreements		-		2,771		-		2,771		-		9,388		-		9,388
Mortgage banking derivatives		-		250		-		250		-		840		-		840
Total	$	4,036	$	481,275	$	11,354	$	496,665	$	4,117	$	510,581	$	8,543	$	523,241

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	5,974	$	-	$	5,974	$	-	$	13,159	$	-	$	13,159
Total	$	-	$	5,974	$	-	$	5,974	$	-	$	13,159	$	-	$	13,159

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Notes to Consolidated Financial Statements

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

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


	Nine Months Ended September 30, 2020				Three Months Ended March 31, 2021
	Securities available-for-sale				Securities available-for-sale
	States and		Mortgage		States and		Mortgage
	Political		Servicing		Political		Servicing
	Subdivisions		Rights		Subdivisions		Rights
Beginning balance January 1, 2020	$	5,419	$	5,935
Beginning balance January 1, 2021					$	4,319	$	4,224
Total gains or losses
Included in earnings		(16)		(2,463)		(3)		1,485
Included in other comprehensive income		(216)		-		299		-
Purchases, issuances, sales, and settlements
Purchases		12,900		-		58		-
Issuances		-		1,813		-		552
Settlements		(13,297)		(275)		(32)		(372)
Ending balance September 30, 2020	$	4,790	$	5,010
Ending balance March 31, 2021					$	4,641	$	5,889


	Nine Months Ended September 30, 2019				Three Months Ended March 31, 2020
	Securities available-for-sale				Securities available-for-sale
	States and		Mortgage		States and		Mortgage
	Political		Servicing		Political		Servicing
	Subdivisions		Rights		Subdivisions		Rights
Beginning balance January 1, 2019	$	8,165	$	7,357
Beginning balance January 1, 2020					$	5,419	$	5,935
Total gains or losses
Included in earnings		(25)		(2,384)		(6)		(1,859)
Included in other comprehensive income		898		-		(325)		-
Purchases, issuances, sales, and settlements
Purchases		17,643		-		6,100		-
Issuances		-		906		-		307
Settlements		(20,808)		(518)		(31)		(275)
Ending balance September 30, 2019	$	5,873	$	5,361
Ending balance March 31, 2020					$	11,157	$	4,108

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of ~~September 30, 2020:~~March 31, 2021:

Weighted

Measured at fair value

Unobservable

Average

Unobservable

Average

on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Mortgage servicing rights

5,010

Discounted Cash Flow

Discount Rate

11.0 - 15.0%

11.0

5,889

Discounted Cash Flow

Discount Rate

11.0 - 15.0%

11.0

Prepayment Speed

0.0 - 42.8%

15.4

Prepayment Speed

4.7 - 41.7%

13.5

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Notes to Consolidated Financial Statements

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

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, ~~2019:~~2020:

Weighted

Measured at fair value

Unobservable

Average

Unobservable

Average

on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Mortgage servicing rights

5,935

Discounted Cash Flow

Discount Rate

10.0 - 58.8%

10.1

4,224

Discounted Cash Flow

Discount Rate

11.0 - 15.0%

11.0

Prepayment Speed

0.0 - 69.0%

14.1

Prepayment Speed

5.5 - 59.1

19.5

In addition to the above, Level 3 fair value measurement included ~~$4.8~~$4.6 million for state and political subdivisions representing various local municipality securities at ~~September 30, 2020.~~March 31, 2021. This was classified as securities available-for-sale, and was valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input. The state and political subdivisions securities balance in Level 3 fair value at ~~September 30, 2019,~~March 31, 2020, was ~~$5.9~~$11.2 million. These securities were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.

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

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of individually evaluated (formerly, impaired) loans and OREO. For assets measured at fair value on a nonrecurring basis at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:


	September 30, 2020								March 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Individually evaluated loans¹	$	-	$	-	$	12,200	$	12,200	$	-	$	-	$	7,542	$	7,542
Other real estate owned, net²		-		-		2,686		2,686		-		-		2,163		2,163
Total	$	-	$	-	$	14,886	$	14,886	$	-	$	-	$	9,705	$	9,705

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; had a carrying amount of $~~14.9~~10.4 million and a valuation allowance of $~~2.7~~2.9 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $~~1.6~~269,000 ~~million~~ for the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $~~2.7~~2.2 million at ~~September 30, 2020,~~March 31, 2021, which is made up of the outstanding balance of $~~4.3~~3.8 million, net of a valuation allowance of $1.6 ~~million and no participations.~~million.


	December 31, 2019								December 31, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Impaired loans¹	$	-	$	-	$	7,435	$	7,435
Individually evaluated loans¹									$	-	$	-	$	9,675	$	9,675
Other real estate owned, net²		-		-		5,004		5,004		-		-		2,474		2,474
Total	$	-	$	-	$	12,439	$	12,439	$	-	$	-	$	12,149	$	12,149

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; had a carrying amount of $~~8.6~~12.3 million and a valuation allowance of $~~1.2~~2.6 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $~~783,000~~1.4 million for the year ended December 31, ~~2019.~~2020.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $~~5.0~~2.5 million at December 31, ~~2019,~~2020, which is made up of the outstanding balance of $~~12.7~~4.1 million, net of a valuation allowance of $~~6.7~~1.6 ~~million and a participation of~~ ~~$937,000~~.million.

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

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Notes to Consolidated Financial Statements

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

~~projections, discount rates, and recent comparable sales. The numerical ranges of unobservable inputs for these valuation assumptions are not meaningful.~~

Note 1312 – 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 September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities. The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities. The fair value of off balance sheet volume is not considered material.

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


	September 30, 2020										March 31, 2021
	Carrying		Fair								Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	29,489	$	29,489	$	29,489	$	-	$	-	$	25,448	$	25,448	$	25,448	$	-	$	-
Interest earning deposits with financial institutions		283,651		283,651		283,651		-		-		415,497		415,497		415,497		-		-
Securities available-for-sale		448,421		448,421		4,134		439,497		4,790		593,280		593,280		4,102		584,537		4,641
FHLBC and FRBC stock		9,917		9,917		-		9,917		-		9,917		9,917		-		9,917		-
Loans held-for-sale		10,229		10,229		-		10,229		-		7,842		7,842		-		7,842		-
Net loans		1,997,409		2,013,415		-		-		2,013,415		1,928,658		1,920,676		-		-		1,920,676
Interest rate swap agreements		10,506		10,506		-		10,506		-		6,126		6,126		-		6,126		-
Interest rate lock commitments and forward contracts												1,234		1,234		-		1,234		-
Interest receivable on securities and loans		9,706		9,706		-		9,706		-		9,476		9,476		-		9,476		-

Financial liabilities:
Noninterest bearing deposits	$	889,085	$	889,085	$	889,085	$	-	$	-	$	982,664	$	982,664	$	982,664	$	-	$	-
Interest bearing deposits		1,590,158		1,593,058		-		1,593,058		-		1,673,878		1,675,943		-		1,675,943		-
Securities sold under repurchase agreements		59,268		59,268		-		59,268		-		77,321		77,321		-		77,321		-
Other short-term borrowings		6,125		6,125		-		6,125		-
Junior subordinated debentures		25,773		14,167		-		14,167		-		25,773		19,511		-		19,511		-
Senior notes		44,349		44,799		44,799		-		-		44,402		44,837		44,837		-		-
Note payable and other borrowings		24,469		25,160		-		25,160		-		22,314		22,815		-		22,815		-
Interest rate swap agreements		15,128		15,128		-		15,128		-		7,106		7,106		-		7,106		-
Interest payable on deposits and borrowings		1,257		1,257		-		1,257		-		999		999		-		999		-

3733

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

December 31, 2019

Carrying

Fair


Amount

Value

Level 1

Level 2

Level 3
Financial assets:

Cash and due from banks

$
34,096

$
34,096

$
34,096

$
-

$
-
Interest earning deposits with financial institutions

16,536

16,536

16,536

-

-
Securities available-for-sale

484,648

484,648

4,036

475,193

5,419
FHLBC and FRBC stock

9,917

9,917

-

9,917

-
Loans held-for-sale

3,061

3,061

-

3,061

-
Net loans

1,911,023

1,915,531

-

-

1,915,531
Interest rate swap agreements

2,771

2,771

-

2,771

-
Interest receivable on securities and loans

9,697

9,697

-

9,697

-

Financial liabilities:

Noninterest bearing deposits

$
669,795

$
669,795

$
669,795

$
-

$
-
Interest bearing deposits

1,456,954

1,457,832

-

1,457,832

-
Securities sold under repurchase agreements

48,693

48,693

-

48,693

-
Other short-term borrowings

48,500

48,500

-

48,500

-
Junior subordinated debentures

57,734

51,188

33,614

17,574

-
Senior notes

44,270

46,269

46,269

-

-
Note payable and other borrowings

6,673

7,003

-

7,003

-
Interest rate swap agreements

5,921

5,921

-

5,921

-
Interest payable on deposits and borrowings

1,079

1,079

-

1,079

-


	December 31, 2020
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	24,306	$	24,306	$	24,306	$	-	$	-
Interest earning deposits with financial institutions		305,597		305,597		305,597		-		-
Securities available-for-sale		496,178		496,178		4,117		487,742		4,319
FHLBC and FRBC stock		9,917		9,917		-		9,917		-
Loans held-for-sale		12,611		12,611		-		12,611		-
Net loans		2,000,996		2,009,773		-		-		2,009,773
Interest rate swap agreements		9,388		9,388		-		9,388		-
Interest rate lock commitments and forward contracts		840		840		-		840		-
Interest receivable on securities and loans		9,698		9,698		-		9,698		-

Financial liabilities:
Noninterest bearing deposits	$	909,505	$	909,505	$	909,505	$	-	$	-
Interest bearing deposits		1,627,568		1,630,109		-		1,630,109		-
Securities sold under repurchase agreements		66,980		66,980		-		66,980		-
Junior subordinated debentures		25,773		14,658		-		14,658		-
Senior notes		44,375		44,600		44,600		-		-
Note payable and other borrowings		23,393		24,043		-		24,043		-
Interest rate swap agreements		13,071		13,071		-		13,071		-
Interest payable on deposits and borrowings		418		418		-		418		-

Note 1413 – Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s loan portfolio.

Cash Flow Hedges of Interest Rate Risk

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

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest income/expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings. During the next twelve ~~months, the Company estimates that an additional $180,000 will be reclassified as an increase to interest income and an additional $163,000 will be reclassified as an increase to interest expense.~~

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Notes to Consolidated Financial Statements

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

months, the Company estimates that an additional $181,000 will be reclassified as an increase to interest income and an additional $169,000 will be reclassified as an increase to interest expense.

Non-designated Hedges

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

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

Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017. This transaction had a notional amount totaling $25.8 million as of ~~September 30, 2020,~~March 31, 2021, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other liabilities with changes in fair value recorded in other comprehensive income, net of tax. The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective. The Company expects the hedge to remain fully effective during the remaining term of the swap. The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR. The trust preferred securities changed from fixed rate to floating rate on June 15, 2017. The cash flow hedge has a maturity date of June 15, 2037.

In December 2019, the Company also executed a loan pool hedge of $50.0 million to convert variable rate loans to a fixed rate index for a five year term. This transaction falls under hedge accounting standards and is paired against a pool of the Bank’s Libor-based loans. Overall, the new swap only bolsters income in down rate scenarios by a modest degree. We consider the current level of interest rate risk to be moderate but intend to continue looking for market opportunities to hedge further. The Bank held ~~$1.7~~$1.0 million and $1.4 million of cash collateral related to ~~one~~1 correspondent financial institution to cover the loan pool hedge mark to market valuation at ~~September 30, 2020.~~March 31, 2021, and December 31, 2020, respectively.

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments. These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. The Bank had $17.2 million of cash collateral held by 1 correspondent financial institution to support interest rate swap activity ~~at September 30, 2020~~ and no0 investment securities were required to be pledged to any correspondent financial ~~institution. The Bank had $114,000~~institution at March 31, 2021 and December 31, 2020. At March 31, 2021, the notional amount of ~~cash collateral pledged with 1 correspondent financial institution to support~~non-hedging interest rate ~~swap activity at~~swaps was $177.7 million with a weighted average maturity of 5.6 years. At December 31, ~~2019 and $11.0 million of investment securities were required to be pledged to 2 correspondent financial institutions. At September 30,~~ 2020, the notional amount of non-hedging interest rate swaps was ~~$191.3~~$189.1 million with a weighted average maturity of ~~5.0 years. At December 31, 2019, the notional amount of non-hedging interest rate swaps was $177.9 million with a weighted average maturity of 5.9~~4.7 years. The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.

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Notes to Consolidated Financial Statements

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

Fair Value of Derivative Instruments


			September 30, 2020						March 31, 2021
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swaps	2	75,774	Other Assets	2,988	Other Liabilities	7,610
Interest rate swap agreements							2	75,774	Other Assets	1,832	Other Liabilities	2,812
Total derivatives designated as hedging instruments				2,988		7,610				1,832		2,812

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	28	191,341	Other Assets	7,518	Other Liabilities	7,518	27	177,709	Other Assets	4,294	Other Liabilities	4,294
Interest rate lock commitments and forward contracts	250	92,154	Other Assets	1,434	Other Liabilities	-	150	57,494	Other Assets	1,234	Other Liabilities	-
Other contracts	4	26,683	Other Assets	-	Other Liabilities	103	3	18,857	Other Assets	-	Other Liabilities	41
Total derivatives not designated as hedging instruments				8,952		7,621				5,528		4,335


			December 31, 2019						December 31, 2020
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swaps	2	75,774	Other Assets	-	Other Liabilities	3,150
Interest rate swap agreements							2	75,774	Other Assets	2,697	Other Liabilities	6,380
Total derivatives designated as hedging instruments				-		3,150				2,697		6,380

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	25	177,872	Other Assets	2,771	Other Liabilities	2,771	28	189,126	Other Assets	6,691	Other Liabilities	6,691
Interest rate lock commitments and forward contracts	87	23,667	Other Assets	250	Other Liabilities	-	205	84,472	Other Assets	840	Other Liabilities	-
Other contracts	4	28,176	Other Assets	-	Other Liabilities	53	4	26,523	Other Assets	-	Other Liabilities	88
Total derivatives not designated as hedging instruments				3,021		2,824				7,531		6,779

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 ~~$3.3~~$705,000 as of March 31, 2021, and $4.1 million as of ~~September 30, 2020, and a loss of $3.4 million as of September 30, 2019.~~March 31, 2020. The amount of the ~~loss~~gain or (loss) reclassified from AOCI to interest income or interest expense on the income statement totaled ~~$72,000~~$12,000 and ~~$27,000~~($86,000) for the ~~nine~~three months ended ~~September 30,~~March 31, 2021, and March 31, 2020, ~~and September 30, 2019,~~ respectively.

Credit-risk-related Contingent Features

For derivative transactions involving counterparties who are lending customers of the Company, the derivative credit exposure is managed through the normal credit review and monitoring process, which may include collateralization, financial covenants and/or financial guarantees of affiliated parties. Agreements with such customers require that losses associated with derivative transactions receive payment priority from any funds recovered should a customer default and ultimate disposition of collateral or guarantees occur.

Credit exposure to broker/dealer counterparties is managed through agreements with each derivative counterparty that require collateralization of fair value gains owed by such counterparties. Some small degree of credit exposure exists due to timing differences between when a gain may occur and the subsequent point in time that collateral is delivered to secure that gain. This is monitored by the Company and procedures are in place to minimize this exposure. Such agreements also require the Company to collateralize counterparties in circumstances wherein the fair value of the derivatives result in loss to the Company.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

●

If the Company either defaults or is capable of being declared in default on any of its indebtedness (exclusive of deposit obligations), then the Company could also be declared in default on its derivative obligations.

●

If a merger occurs that materially changes the Company's creditworthiness in an adverse manner.

●

If certain specified adverse regulatory actions occur, such as the issuance of a Cease and Desist Order, or citations for actions considered Unsafe and Unsound or that may lead to the termination of deposit insurance coverage by the FDIC.

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers. In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO. The following table represents the Company’s contractual commitments due to letters of credit as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019.~~2020.

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


	September 30, 2020						December 31, 2019						March 31, 2021						December 31, 2020
	Fixed		Variable		Total		Fixed		Variable		Total		Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	329	$	8,881	$	9,210	$	339	$	9,612	$	9,951	$	329	$	8,979	$	9,308	$	329	$	9,051	$	9,380
Commercial standby		-		-		-		-		-		-		-		-		-		-		-		-
Performance standby		356		5,825		6,181		571		6,212		6,783		356		6,514		6,870		356		4,517		4,873
		685		14,706		15,391		910		15,824		16,734		685		15,493		16,178		685		13,568		14,253
Non-borrower:
Performance standby		-		67		67		-		67		67		-		67		67		-		67		67
Total letters of credit	$	685	$	14,773	$	15,458	$	910	$	15,891	$	16,801	$	685	$	15,560	$	16,245	$	685	$	13,635	$	14,320

Unused loan commitments:	$	93,875	$	325,162	$	419,037	$	111,348	$	320,120	$	431,468	$	124,118	$	320,101	$	444,219	$	88,883	$	316,298	$	405,181

As of ~~January 1, 2020, we adopted ASU 2016-13, and per CECL guidance, the Company recorded an allowance for credit losses on unfunded commitments of $1.7 million. As of September 30, 2020,~~March 31, 2021, the Company evaluated current market conditions, including the impacts related to COVID-19 and market interest rates during the ~~third~~first quarter of ~~2020,~~2021, and based on that analysis under the CECL methodology, the Company ~~recorded a reversal of the provision for~~determined credit losses related to unfunded commitments ~~of $980,000.~~totaled $3.5 million. The ~~reduction~~increase in the ACL for unfunded commitments inof $470,000 for the ~~third~~first quarter of ~~2020,~~2021, compared to the prior quarter end, is primarily related to ~~a decrease~~an increase in the commercial unfunded commitments funding rate assumptions based on our analysis of the last 12 months of utilization. The Company will continue to assess the credit risk at least quarterly, and adjust the allowance for unfunded commitments, which is carried within other liabilities on our Consolidated Balance Sheet, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

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

Overview

The following discussion provides additional information regarding our operations for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, compared to the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, and our financial condition at ~~September 30, 2020, and~~March 31, 2021, compared to December 31, ~~2019.~~2020. 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, ~~2019.~~2020. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and ~~September~~March 2021 and 2020 ~~and 2019~~ 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 29 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.

Recent Events—COVID-19

The ~~coronavirus (COVID-19)~~COVID-19 pandemic ~~which was declared a national emergency in the United States in March 2020,~~ continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. In particular, the COVID-19 pandemic has severely restricted the level of economic activity in our markets. Federal and state governments have taken, and may continue to take, unprecedented actions to contain the spread of the disease, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief to businesses and individuals impacted by the pandemic. Although in various locations certain activity restrictions have been relaxed and businesses and schools have reopened with some level of success, in many states and localities the number of individuals diagnosed with COVID-19 has increased significantly, which may cause a freezing or, in certain cases, a reversal of previously announced relaxation of activity restrictions and may prompt the need for additional aid and other forms of relief.

The impact of the COVID-19 pandemic is fluid and continues to ~~evolve.~~evolve, adversely affecting many of our clients. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower ~~bank~~ equity market valuations and significant volatility and disruption in financial markets. ~~In addition,~~Market interest rates, after falling to historically low levels due to the COVID-19 pandemic ~~market interest~~through the second quarter of 2020, have generally stabilized, while intermediate and longer-term Treasury rates have ~~declined significantly, with the 10-year Treasury bond falling below 1.00% on March 3, 2020, for the first time, and declining further~~begun to ~~0.65% as of June 30, 2020. On March 3, 2020, the Federal Open Market Committee reduced the targeted federal funds~~rise. The low interest rate ~~range by 50 basis points to 1.00% to 1.25%. This range was further reduced to 0% to 0.25% percent on March 16, 2020. These reductions in interest rates~~environment, and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on our business, financial condition and results of operations. For instance, the pandemic has had negative effects on our interest income, ACL, and certain transaction-based line items of noninterest income. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including ~~among others,~~ the ~~duration and scope~~effect of ~~the pandemic, as well as~~ governmental ~~regulatory~~ and private sector ~~responses to~~initiatives, the ~~pandemic,~~effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strain, and the ~~associated impacts on the economy, financial markets~~ability for customers and ~~our customers, employees and vendors.~~businesses to return to their pre-pandemic routine.

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Our business, financial condition and results of operations generally rely upon the ability of our borrowers to repay their loans, the value of collateral underlying our secured loans, and demand for loans and other products and services we offer, which are highly dependent on the business environment in our primary markets where we operate and in the United States as a whole.

~~Temporary Operational Changes~~

We have taken a number of steps to protect our employees, customers and communities. In March 2020, as part of our efforts to exercise social distancing, we closed all of our banking lobbies (other than by appointment) conducted most of our business through drive-thru tellers and through electronic and online means. At this time, our lobbies have been reopened, but we encourage customers to use other means to conduct their banking, and are following social distancing and personal protective protocols as directed by the Center for Disease Control and Prevention. In addition, a majority of our workforce has been working from home since mid-March 2020, and we expect this to continue through the end of 2020.

Results of Operation and Financial Condition

We are monitoring the impact of the COVID-19 pandemic on our results of operation and financial condition. ~~While~~To date, the COVID-19 pandemic has not ~~yet had a~~significantly impacted the health of the overall real estate industry in our markets, which have reflected relative stability over the past three years. In addition, we have not experienced significant ~~impact to our financial condition as of September 30, 2020, in the form of~~ incurred losses on loans or received communications from our borrowers that significant losses ~~were imminent,~~are imminent. While management does not currently expect the next year to result in the precipitous decline in the value of certain real estate assets similar to the declines seen in 2009 to 2010, our forecast includes assumptions for certain

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loss scenarios that may occur due to the exhaustion of federal stimulus funds or a decrease in market valuations. Accordingly, we ~~nevertheless~~ determined it prudent to increase our ~~provision~~allowance for credit losses ~~in anticipation~~to $33.9 million as of ~~continued market risk and uncertainty at this time. Our provision for credit losses was $8.0 million for the first quarter of~~December 31, 2020, ~~which was impacted~~driven by both our adoption of the new CECL methodology and the expected impact ~~as of March 31, 2020,~~ of the COVID-19 pandemic and market interest rate ~~reductions. Our~~reductions in anticipation of continued market risk and uncertainty. During the first quarter of 2021, unemployment expectations and other market indicators reflected an improving economic outlook, which resulted in a net benefit of $3.0 million in our provision for credit losses, ~~was $300,000~~comprised of a $3.5 million reserve release on loans and an additional $470,000 of expense in our provision for ~~the third quarter of 2020, as we continued to forecast an increase in future expected~~ credit losses ~~due to the ongoing impact of the pandemic. Periods ending after September 30, 2020 may also be materially impacted by the COVID-19 pandemic.~~on unfunded commitments.

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

As of ~~September 30,~~March 31, 2021 and December 31, 2020, we had $18.6 million of goodwill. At ~~each quarter end in~~November 30, 2020, we ~~have considered whether a quantitative assessment of~~performed our recurring annual review for any goodwill ~~was required because of the significant economic disruption caused by the COVID-19 pandemic. At September 30, 2020, we~~impairment. We determined no goodwill impairment ~~was required. However, further~~existed, however, continued delayed recovery or further deterioration in market conditions related to the general economy, financial markets, and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our results of operations and financial condition.

Lending Operations and Accommodations to Borrowers

To more fully support our customers during the pandemic, we established client assistance programs, including offering commercial, consumer, and mortgage loan payment deferrals for certain clients. ~~During the 2020 year to date period,~~As of March 31, 2021, we have executed ~~468~~504 of these deferrals on loan balances of ~~$226.2 million.~~$237.7 million since March 31, 2020. In accordance with interagency guidance issued in March 2020, these short term deferrals were not considered troubled debt restructurings. As of ~~September 30, 2020, 372~~March 31, 2021, 464 loans previously in deferral status, representing loan balances of ~~$172.1~~$218.5 million, had resumed ~~payments.~~payments or paid off, and 40 loans totaling $19.2 million remained in active deferral status, of which only $4.3 million were in nonaccrual status. We also suspended late fees for consumer loans through June 30, 2020, and, although consumer late fees have been reinstated, we will continue to evaluate any late fee suspension based on the borrower’s financial situation and prior payment history. ~~We also~~In addition, we paused new foreclosure and repossession actions through ~~September 30, 2020,~~March 31, 2021, and will continue to re-evaluate these activities based on the ongoing COVID-19 pandemic. These programs may negatively impact our revenue and other results of operations in the near term and, if not effective in mitigating the effect of COVID-19 on our customers, may adversely affect our business and results of operations more substantially over a longer period of time. Future governmental actions may require these and other types of customer-related responses.

We are also participating in the ~~Coronavirus Aid, Relief and Economic Security Act (“CARES” Act). As of August 10,~~CARES Act. During 2020, ~~the date~~as part of the ~~conclusion~~first round of the SBA PPP program, ~~offering,~~ we ~~had~~ processed 746 PPP loan applications, ~~for the SBA Paycheck Protection Program (“PPP”),~~ representing a total of $136.7 million. In early October, we started the application process for PPP loan forgiveness, and have received $90.8 million of funds from payment forgiveness as of March 31, 2021. We expect this application process to continue through the ~~remainder~~second quarter of ~~2020,~~2021, with funds to be received from the SBA for the forgiven loans ~~well~~ into the third quarter of 2021. Due to the governmental authorization of the second round of the SBA PPP in late 2020, we originated an additional $58.3 million on 481 PPP loans in the first quarter of 2021, and anticipate filing for forgiveness of these loans with the SBA in the latter half of 2021. We recorded $504,000 of net fee income on PPP loans in the first quarter of 2021, and as of March 31, 2021, unearned net fee income on both first and second round PPP loans totaled $2.5 million. In addition, as of ~~September 30, 2020,~~March 31, 2021, we had originated ~~one loan~~two loans for ~~$125,000~~$305,000 under the Main Street Lending Program. ~~We remain ready to continue to fund eligible client requests if Congress appropriates additional funds.~~

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Capital and Liquidity

As of ~~September 30, 2020,~~March 31, 2021, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by credit losses.

We believe there could be potential stresses on liquidity management as a result of the COVID-19 ~~pandemic and our participation in the PPP. As~~pandemic. For instance, as customers manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit.

The Federal Reserve Bank has provided a lending facility that will allow us to obtain funding specifically for loans that we make under the PPP (the “PPPLF”), which will allow us to retain existing sources of liquidity for our traditional operations. PPP loans will be pledged as collateral on any of our borrowings under the Federal Reserve Bank’s lending facility. These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations. We have ~~not yet participated in the PPPLF program, but have the ability to do so should the need arise.~~

~~We have also~~ developed new processes to monitor our liquidity on a daily basis, and have run stress testing based on various economic assumptions under stress and severe stress scenarios. In addition, management continues to communicate ~~each week~~bi-weekly in structured meetings with key staff to ensure all current events related to the COVID-19 pandemic, such as federal government stimulus check receipt, ~~and~~ PPP loan fundings and the forgiveness application process, are managed appropriately.

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Financial Overview

Our community-focused banking franchise experienced ~~growth~~a decrease in total loans in the ~~third~~first quarter of ~~2020,~~2021, compared to ~~both~~ the year ended December 31, ~~2019, and~~2020, but an increase in total loans compared to the ~~third~~first quarter of ~~2019,~~2020, and we believe we are positioned for ~~further~~ moderate loan growth as we continue to serve our customers’ needs in a competitive economic environment. Given the ongoing, dynamic and unprecedented nature of the COVID-19 pandemic, it is difficult to predict the full impact the pandemic will have on our business; however, we expect the pandemic will make it challenging for us to attain the levels of profitability and growth we have experienced in the past five years. We are continuing to seek to provide value to our customers and the communities in which we operate, by executing on growth opportunities in our local markets and developing new banking relationships, while ensuring the safety and soundness of our Bank, our customers and our employees during the COVID-19 pandemic.

The following provides an overview of some of the factors impacting our financial performance for the three month period ended ~~September 30, 2020,~~March 31, 2021, compared to the like period ended ~~September 30, 2019:~~March 31, 2020:

●

Net income for the ~~third~~first quarter of ~~2020~~2021 was ~~$10.3 million, or $0.34 per diluted share, compared to $12.2~~$11.9 million, or $0.40 per diluted share, compared to $275,000, or $0.01 per diluted share, for the ~~third~~first quarter of ~~2019.~~2020.

●

Net interest and dividend income was ~~$22.5~~$23.5 million for the ~~third~~first quarter of ~~2020,~~2021, compared to ~~$24.8~~$22.7 million for the ~~third~~first quarter of ~~2019.~~2020. The ~~decrease~~increase in ~~2020~~2021 was primarily due to the year over year decline in interest expense, due to the acceleration of debt issuance costs of $635,000 stemming from our redemption of the trust preferred securities issued by Old Second Capital Trust I and related junior subordinated debentures, which totaled $32.6 million, in March 2020, as well as a decline in market interest rates, which negatively impacted loan and security income, ~~despite growth in our loan portfolio of $130.5 million in the same period.~~but also reduced time deposit interest expense year over year.

●

AThe provision for credit losses ~~of $300,000 was recorded for~~resulted in a $3.0 million net benefit driven by a reserve release in the ~~third~~first quarter of ~~2020,~~2021, consisting of ~~$1.3~~a $3.5 million reserve release related to loans and ~~leases and~~ a ~~$980,000 reversal~~provision for credit loss expense of $470,000 related to unfunded commitments, compared to a provision for ~~loan and lease~~credit losses of ~~$550,000~~$8.0 million recorded in the ~~third~~first quarter of ~~2019.~~2020. We adopted the new current expected credit losses accounting standard, or CECL, effective January 1, 2020, which measures the allowance based on management’s best estimate of lifetime expected credit losses inherent in our lending activities, which resulted in a $5.9 million allowance for credit losses related to loans and a $1.7 million allowance for credit losses related to unfunded commitments as of January 1, 2020. The provision expense recorded in 2020 was impacted by both our adoption of the new CECL methodology ~~applied~~ and the expected impact, as of ~~September 30,~~March 31, 2020, of the COVID-19 pandemic on future losses.

●

Noninterest income was ~~$11.7~~$11.3 million for the ~~third~~first quarter of ~~2020,~~2021, compared to ~~$11.9~~$6.3 million for the ~~third~~first quarter of ~~2019.~~2020. The ~~decrease~~increase in 2021 was primarily due to a ~~$3.5~~$4.9 million ~~reduction~~increase in ~~securities gains,~~mortgage banking revenue, primarily stemming from a more favorable mark to market adjustments on MSRs of $3.2 million, and a $1.5 million increase in net ~~due~~gain on sales of mortgage loans. In addition, a net increase of $383,000 was recorded related to ~~sales in~~ the ~~third~~cash surrender value of bank owned life insurance (“BOLI”) for the first quarter of ~~2019 and no like sales in~~2021, compared the ~~current period, as well as reductions stemming from COVID-19 related impacts in the third~~first quarter of 2020, ~~compared to~~as market interest rates have partially recovered from the ~~third~~lows experienced at the end of the first quarter of ~~2019, including~~2020. Partially offsetting these increases was a ~~$698,000 decrease~~reduction of $531,000 in service charges on deposits due to a reduction in overdraft ~~fees. Partially offsetting these decreases were interest rate driven growth in net gain on sales of mortgage loans, as~~

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~~proceeds~~fees stemming from mortgages sold in the third quarter of 2020 totaled $116.5 million, compared to $63.3 million in the third quarter of 2019, resulting in an increase in noninterest income of $3.2 million. A reduction in mark to market losses on mortgage servicing rights (“MSRs”) of $786,000 in the third quarter of 2020, compared to the third quarter of 2019,COVID-19 related commercial and a net increase in the cash surrender value of bank owned life insurance (“BOLI”) of $192,000 for the third quarter of 2020, compared the third quarter of 2019, also mitigated the overall decrease in noninterest income for the quarter year over year.consumer spending declines.

●

Noninterest expense was ~~$20.3~~$21.7 million for the ~~third~~first quarter of 2021, compared to $21.0 million for the first quarter of 2020, ~~compared to $20.0 million for the third quarter of 2019,~~ an increase of ~~$312,000,~~$736,000, or ~~1.6%~~3.5%. The increase in ~~2020~~2021 was primarily due to an increase in salaries and employee benefits expense driven by an increase in ~~full-time equivalent employees in 2020,~~ annual ~~merit~~officer incentive expense and related payroll taxes and Company 401K match, increases in ~~early 2020,~~occupancy, furniture and ~~higher employee insurance costs,~~equipment expense and an increase in FDIC insurance expense related to ~~an accrual reversal~~assessment credits received in the third quarter of 2019. Partially offsetting these increases were reductions in occupancy, furniture and equipment expense, computer and data processing expense and advertising expense, as we reduced our marketing efforts during the COVID-19 pandemic.2020.

●

The provision for income taxes was ~~$3.4~~$4.2 million for the ~~third~~first quarter of ~~2020,~~2021, compared to ~~$4.0 million~~a tax benefit of $281,000 for the ~~third~~first quarter of ~~2019.~~2020. Pretax income was ~~$13.6~~$16.1 million in the ~~third~~first quarter of ~~2020,~~2021, compared to ~~$16.2 million~~a $6,000 pretax loss for the ~~third~~first quarter of ~~2019.~~2020.

●

Asset quality remained consistent with nonperforming loans as a percent of total loans remaining ~~relatively~~ steady at ~~1.0%~~1.1% as of ~~September 30, 2020, 0.8% as of~~March 31, 2021, December 31, ~~2019,~~2020, and ~~0.7% as of September 30, 2019.~~March 31, 2020.

●

During the ~~third~~first quarter of ~~2020,~~2021, we repurchased ~~137,756~~455,134 shares of our common stock at a weighted average price of ~~$8.34~~$12.31 per share pursuant to our stock repurchase program.

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Critical Accounting Policies

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 Policies” in our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~

~~Determining the allowance for loan and lease losses has historically~~2020. There have been ~~identified as a~~no material changes to our critical accounting ~~policy. On January 1,~~policies or the estimates made pursuant to those policies during the most recent quarter from those disclosed in our 2020 we adopted the new CECL accounting methodology which requires entities to estimate and recognize an allowance for lifetime expected credit losses for loans and other financial assets measured at amortized cost. Previously, an allowance for loan and lease losses was recognized based on probable incurred losses. The accounting estimates relating to the allowance for credit losses is also a “critical accounting policy” as:

●

~~changes in the provision for credit losses can materially affect our financial results;~~

●

estimates relating to the allowance for credit losses require us to project future borrower performance, including cash flows, delinquencies and charge-offs, along with, when applicable, collateral values, based on a reasonable and supportable forecast period utilizing forward-looking economic scenarios in order to estimate probability of default and loss given default; and

●

the allowance for credit losses is influenced by factors outside of our control such as industry and business trends, geopolitical events and the effects of laws and regulations as well as economic conditions such as trends in housing prices, interest rates, GDP, inflation, energy prices and unemployment; and

●

considerable judgment is required to determine whether the models used to generate the allowance for credit losses produce an estimate that is sufficient to encompass the current view of lifetime expected credit losses.

~~Because our estimates of the allowance for credit losses involve judgment and are influenced by factors outside our control, there is uncertainty inherent~~Annual Report in these estimates. Our estimate of lifetime expected credit losses is inherently uncertain because it is highly sensitive to changes in economic conditions and other factors outside of our control. Changes in such estimates could significantly impact our allowance and provision for credit losses. See Note 1 – ~~Basis of Presentation and Changes in Significant Accounting Policies~~ ~~in the accompanying notes to the consolidated financial statements included elsewhere in this report for a discussion of our Allowance for Credit Losses.~~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, our adjusted efficiency ratio, our tangible common equity to tangible assets ratio, and our core net interest margin on a TE basis. Management believes that the presentation of these non-GAAP financial measures (a) provides important supplemental information that contributes to a proper understanding of our operating performance, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These disclosures should not be considered an alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below or alongside the first instance where each non-GAAP financial measure is used.

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Results of Operations

Overview

Three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

Our income before taxes was ~~$13.6~~$16.1 million in the ~~third~~first quarter of ~~2020~~2021 compared to ~~$16.2 million~~a pretax loss of $6,000 in the ~~third~~first quarter of ~~2019.~~2020. This ~~$2.6 million decrease~~increase in pretax income was primarily due to ~~the $2.3~~a net benefit of $3.0 million ~~decrease in net interest and dividend income in the third quarter of 2020, compared~~related to the third quarter of 2019. Also contributing to the decline in pretax income in the third quarter of 2020, compared to the third quarter of 2019, was a $248,000 reduction in noninterest income and a $312,000 increase in noninterest expense. These negative variances were partially offset by a $250,000 reduction in the provision for credit losses ~~for~~driven primarily by a reserve release on loans in the ~~year over year quarter. We adopted the new CECL methodology effective January 1, 2020, which requires us~~first quarter of 2021, compared to ~~estimate and recognize an allowance for lifetime expected credit losses, and we recorded~~ provision expense of ~~$10.1~~$8.0 million ~~during the first two quarters of 2020, due to the expected impact of the COVID-19 pandemic and related market interest rate reductions. Our provision build~~ in the first ~~and second quarters~~quarter of ~~2020 allowed us to record a lower provision of $300,000~~2020. In addition, noninterest income increased $5.0 million in the ~~third~~first quarter of 2021, compared to the first quarter of 2020, primarily due to growth in mortgage banking revenue, which increased $4.9 million due to more favorable mark to market adjustments on MSRs and an increase in net gain on sales of mortgage loans due to higher origination volumes in the low rate environment. Net interest income also increased $885,000 in the first quarter of 2021, compared to the first quarter of 2020. Partially offsetting these increases to net income was a ~~$550,000 provision for loan and lease losses~~$736,000 increase in noninterest expense in the ~~third~~first quarter of ~~2019, under~~2021, compared to the ~~incurred loss model.~~first quarter of 2020, primarily due to growth in salaries and employee benefits expenses, occupancy, furniture and equipment, and FDIC insurance costs. Our net income was ~~$10.3 million, or $0.34 per diluted share, for the third quarter of 2020, compared to net income of $12.2~~$11.9 million, or $0.40 per diluted share, for the ~~third~~first quarter of ~~2019.~~2021, compared to net income of $275,000, or $0.01 per diluted share, for the first quarter of 2020.

Net interest and dividend income was ~~$22.5~~$23.5 million in the ~~third~~first quarter of ~~2020,~~2021, compared to ~~$24.8~~$22.7 million in the ~~third~~first quarter of ~~2019.~~2020. The ~~$2.3 million decrease~~$885,000 increase was primarily driven by a $4.4 million decrease in interest and dividend income in the third quarter of 2020, compared to the third quarter of 2019, driven by the reduction in market interest rates on loans and securities. Loan growth of $130.5 million was recorded in the year over year period, but interest income on loans declined $3.1 million from the quarter ended September 30, 2019 to September 30, 2020. Securities available-for-sale decreased $40.0 million as of September 30, 2020, compared to September 30, 2019, which exacerbated the reduction in securities related income of $1.2 million in the same year over year period. Partially offsetting the decrease in interest and dividend income was a $2.1$2.9 million reduction in ~~total~~ interest expense, in the third quarter of 2020, compared to the third quarter of 2019, due to a reduction in interest expense of $1.0 million on deposits, $405,000 on other short-term borrowings, and $648,000 on junior subordinated debentures, due to the redemption of the Old Second Capital Trust I trust preferred securities and related subordinated debentures in the first quarter of 2020, as well as the market interest rate reductions year over year, which contributed to the decrease in the cost of deposit interest expense related to time deposits of $1.3 million, and savings, NOW and money market accounts of $394,000. Interest and dividend income also decreased in the first quarter of 2021 compared to the first quarter of 2020, but at a lesser rate than the decline in interest expense. A $2.1 million decrease in interest and

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dividend income in the first quarter of 2021, compared to the first quarter of 2020, was driven by the reduction in market interest rates on loans and securities. Loan growth of $2.4 million was recorded in the year over year period, but interest income on loans declined $1.4 million in the first quarter of 2021, compared to the like period in 2020. Securities available-for-sale increased $143.6 million as of March 31, 2021, compared to March 31, 2020, but interest income recorded on securities available-for-sale decreased $696,000 in the year over year period.

Management has remained diligent in reviewing our loan portfolio to analyze and determine if charge-offs are required. Average loan growth, including loans held for sale, in the ~~third~~first quarter of 2021, compared to the first quarter of 2020, ~~compared to the third quarter of 2019,~~ totaled ~~$153.5~~$64.4 million, stemming primarily from ~~746~~481 PPP loans originated in the ~~second and third~~first quarters of ~~2020~~2021 totaling ~~$136.7~~$58.3 million, as well as organic growth primarily in our commercial, leases, ~~and~~ commercial real estate-investor and construction portfolios.

~~Nine months ended September 30, 2020 and 2019~~

Our income before taxes was $26.0 million for the nine months ended September 30, 2020, compared to $39.4 million for the nine months ended September 30, 2019. This $13.4 million decrease in pretax income was primarily due to a $9.0 million increase in provision for credit losses for the nine months ended September 30, 2020, compared to the same period in 2019, due both to our adoption of the new CECL methodology effective January 1, 2020 and the expected impact, as of September 30, 2020, of the COVID-19 pandemic and related market interest rate reductions. Our net income was $19.8 million, or $0.65 per diluted share, for the nine months ended September 30, 2020, compared to net income of $29.9 million, or $0.98 per diluted share, for the nine months ended September 30, 2019.

Net interest and dividend income was $67.9 million for the nine months ended September 30, 2020, compared to $73.6 million for the same period of 2019. The decrease in net interest and dividend income was primarily due to the impact of the reduction in market interest rates on loans and securities. Also impacting net income was a $2.1 million increase in noninterest income for the nine months ended September 30, 2020, compared to the like 2019 period, driven primarily by a $8.1 million increase in net gain on sales of mortgage loans, which more than offset the reduction year over year due to securities gains, net, of $4.5 million for the nine months ended September 30, 2019, compared to securities losses, net, of $25,000 for the nine months ended September 30, 2020, and a $1.7 million reduction in service charges on deposits in the year over year period due to a decline in customer spending due to the COVID-19 pandemic and resultant decrease in overdraft and bounce fees. Noninterest expense increased $890,000 for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, due primarily to growth in salaries and employee benefits expense driven by an increase in full-time equivalent employees, annual merit increases and higher employee insurance costs, partially offset by reductions in computer and data processing and advertising expense.

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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 ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

Our net interest and dividend income ~~decreased~~increased by ~~$2.3 million,~~$885,000 to ~~$22.5~~$23.5 million, for the ~~third~~first quarter of ~~2020,~~2021, from ~~$24.8~~$22.7 million for the ~~third~~first quarter of ~~2019.~~2020. This ~~decline~~increase was attributable to ~~the $4.4~~a $2.9 million, or ~~14.9%~~61.4%, decrease in interest ~~and dividend income~~expense for the ~~third~~first quarter of ~~2020~~2021 compared to the ~~third~~first quarter of ~~2019,~~2020, partially offset by a $2.1 million decrease in interest ~~expense.~~and dividend income. The decline in interest expense was due to lower rates for all interest earning deposits in the first quarter of 2021, as well as the redemption of the Old Second Capital Trust I preferred securities and related subordinated debentures in the first quarter of 2020, which increased interest expense by $635,000 due to the acceleration of unamortized debt issuance costs. Net interest and dividend income for the ~~third~~first quarter of ~~2020~~2021 reflected a decrease of ~~$198,000,~~$334,000, or ~~0.9%~~1.4%, compared to the ~~second~~fourth quarter of 2020.

Average earning assets for the ~~third~~first quarter of ~~2020~~2021 were ~~$2.77~~$2.92 billion, reflecting an increase of ~~$102.3~~$116.8 million, or ~~3.8%~~4.2%, compared to the ~~second~~fourth quarter of 2020, and an increase of ~~$349.2~~$457.5 million, or ~~14.4%~~18.6%, compared to the ~~third~~first quarter of ~~2019.~~2020. Average interest earning deposits with financial institutions totaled $359.6 million for the first quarter of 2021, which reflected an increase of $84.5 million compared to the fourth quarter of 2020, and an increase of $331.6 million compared to the first quarter of 2020. The yield on average interest earning deposits decreased to ten basis points for the first quarter of 2020, from 108 basis points for the first quarter of 2020, which drove the overall reduction in the yield on interest earning assets year over year. Total average loans, including loans held-for-sale, totaled ~~$2.05~~$2.01 billion in the ~~third~~first quarter of 2020, which reflected a decrease of ~~$3.1~~$18.0 million compared to the ~~second~~fourth quarter of 2020, ~~and~~but an increase of ~~$153.5~~$69.4 million compared to the ~~third~~first quarter of ~~2019.~~2020. The growth in average loan balances year over year was primarily due to an increase in commercial loans related to PPP loan ~~disbursements~~originations, and ~~lease and~~organic growth in our leases, commercial real estate-investor, ~~loans stemming from organic growth.~~and construction loan portfolios. This growth in loan volumes was offset by the reduction in market interest rates over the past year, which resulted in a decrease in interest income of ~~$3.1~~$1.4 million related to loans in the year over year period. For the ~~third~~first quarter of ~~2020,~~2021, the yield on average loans decreased to ~~4.29%~~4.48%, compared to the yield on average loans of ~~4.40%~~4.51% for the ~~second~~fourth quarter of 2020, and ~~5.27%~~4.89% for the ~~third~~first quarter of ~~2019.~~2020. Securities also reflected a reduction in interest income year over year, due to ~~both~~ decreases in market interest rates over the past year, ~~and volumes used to fund loan growth.~~partially offset by growth in volumes. Total average securities for the ~~third~~first quarter of ~~2020 decreased $4.3~~2021 increased $50.3 million from the ~~second~~fourth quarter of 2020, and ~~decreased $45.6~~increased $56.5 million from the ~~third~~first quarter of ~~2019.~~2020. The yield on average securities declined to ~~2.78%~~2.49% for the ~~third~~first quarter of ~~2020,~~2021, compared to ~~3.07%~~2.55% for the ~~second~~fourth quarter of 2020 and ~~3.59%~~3.39% for ~~third~~first quarter of ~~2019.~~2020.

Average interest bearing liabilities increased ~~$44.6~~$68.0 million, or ~~2.6%~~3.9%, in the ~~third~~first quarter of ~~2020,~~2021, compared to the ~~second~~fourth quarter of 2020, and increased ~~$71.5~~$161.0 million, or ~~4.3%~~9.8%, compared to the ~~third~~first quarter of ~~2019.~~2020. The growth in average interest bearing deposits of ~~$37.4~~$59.0 million from the prior linked quarter and $162.2 million from the first quarter of 2020 was primarily due to ~~seasonal deposit fluctuations from income tax refunds, commercial deposit build for projects to be deployed later in the year,~~federal stimulus funds received by depositors and growth in depositor liquidity due to market uncertainty related to the COVID-19 pandemic. ~~The~~In addition, we experienced growth in average ~~interest~~noninterest bearing deposits of ~~$142.0~~$33.7 million from the ~~third~~prior linked quarter, ~~of 2019 was primarily due to~~and $260.3 million from the ~~impacts of the COVID-19 pandemic, which also impacted the $240.9 million of growth in noninterest bearing deposits for the same~~year over year period, as reductions in market interest rates over the past year have provided less incentive to maintain funds in interest bearing deposits.

~~Average~~42

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Due to the significant increase in cash and due from banks stemming from federal stimulus funds received and PPP loan forgiveness, we had no average other short-term borrowings, which consist of FHLBC advances, ~~decreased $192,000~~ in the ~~third~~first quarter of ~~2020,~~2021, compared to the ~~second~~$5.4 million in the fourth quarter of 2020 and ~~decreased $67.1~~$23.1 million ~~compared to the third quarter of 2019. We drew on a $4.0 million, zero interest, 360 day advance offered by the FHLB to its members under a COVID-19 liquidity program~~ in the ~~third~~first quarter of 2020. The average rate paid on short-term FHLBC advances was impacted by the reduction in interest rates in 2020, resulting in an average rate of ~~1.16%~~0.88% for the ~~third~~fourth quarter of 2020, compared to ~~1.63%~~1.90% for the ~~second~~first quarter of ~~2020, and 2.26% for the third quarter of 2019.~~2020. As of ~~September 30, 2020,~~March 31, 2021, notes payable and other borrowings consisted of one long-term FHLBC advance of ~~$6.5~~$6.3 million, ~~that we acquired in our acquisition of ABC Bank,~~ and ~~$18.0~~$16.0 million outstanding on a term note with a correspondent bank originated in the first quarter of 2020 to fund our redemption of the Old Second Capital Trust I trust preferred securities and related junior subordinated debentures of $32.6 million. This redemption occurred in March 2020 and was the primary cause of the decrease of ~~201~~721 basis points in the cost of the average junior subordinated debentures for the ~~third~~first quarter of ~~2020~~2021 compared to the ~~third~~first quarter of ~~2019.~~2020. The rate paid on the redeemed junior subordinated debentures was 7.8%, in comparison to the rate to be paid going forward on the newly executed $20.0 million term note of one month Libor plus 175 basis points.

Our net interest margin, expressed as a percentage of average earning assets, was ~~3.23%~~3.27% for the ~~third~~first quarter of ~~2020,~~2021, reflecting a 1912 basis point decrease from the ~~second~~fourth quarter of 2020, and ~~an 83~~a 44 basis point decrease from the ~~third~~first quarter of ~~2019.~~2020. Our net interest margin,

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on a tax-equivalent (TE) basis, expressed as a percentage of average earning assets, was ~~3.28%~~3.32% for the ~~third~~first quarter of ~~2020,~~2021, reflecting a 2012 basis point decrease from the ~~second~~fourth quarter of 2020, and ~~an 86~~a 45 basis point decrease from the ~~third~~first quarter of ~~2019.~~2020. The average tax-equivalent yield on earning assets decreased to ~~3.65%~~3.58% for the ~~third~~first quarter of ~~2020,~~2021, compared to ~~3.93%~~3.74% for the ~~second~~fourth quarter of 2020, and ~~4.90%~~4.55% for the ~~third~~first quarter of ~~2019.~~2020. The decreases in net interest margin and the yield on average earning assets for the ~~third~~first quarter of ~~2020,~~2021, compared to the ~~third~~fourth quarter of ~~2019,~~2020, was primarily attributable to growth in lower yielding interest earning deposits with financial institutions, as well as a decline in ~~security~~loan volumes and interest rate reductions which impacted loans and securities in the ~~third~~first quarter of ~~2020.~~2021. Average PPP loans for the ~~third~~first quarter of ~~2020~~2021 totaled ~~$136.3~~$94.1 million, which resulted in ~~a reduction~~an increase to our net interest margin (TE) of ~~six~~one basis ~~points~~point for the quarter as $27.8 million of these loans were ~~issued at a 1.00% interest rate, plus origination fees, net~~forgiven in the first quarter of ~~costs.~~2021, which accelerated the unamortized fee recognition on these loans. The cost of funds on interest bearing liabilities was ~~0.58%~~0.41% for the ~~third~~first quarter of ~~2020, 0.72%~~2021, 0.49% for the ~~second~~fourth quarter of 2020, and ~~1.11%~~1.17% for the ~~third~~first quarter of ~~2019.~~2020. The decrease in our cost of funds in the ~~third~~first quarter of 2021 compared to the fourth quarter of 2020 ~~compared to~~and the ~~second~~first quarter of 2020 ~~was primarily driven by a full quarter of impact of interest rate reductions on our deposits. The decrease in our cost of funds in the third quarter of 2020 compared to the third quarter of 2019~~ was primarily driven by a decline in the rates paid on deposits, a decline in volume and rates paid on short-term borrowings, and the redemption of our junior subordinated debentures in the first quarter of 2020 which resulted in the average yield on our junior subordinated debentures of ~~4.40%~~4.41% for the ~~third~~first quarter of ~~2020,~~2021, compared to ~~6.41%~~11.62% in the prior year like quarter.

~~Nine months ended September 30, 2020 and 2019~~

Our net interest and dividend income decreased by $5.7 million to $67.9 million for the nine months ended September 30, 2020, compared to $73.6 million for the nine months ended September 30, 2019. This decline was attributable to a $9.7 million, or 11.1%, decrease in interest and dividend income for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, partially offset by a $4.0 million decrease in interest expense.

Average earning assets for the nine months ended September 30, 2020 were $2.63 billion, reflecting an increase of $197.0 million, or 8.1%, compared to the nine months ended September 30, 2019. The yield on average earning assets for the nine months ended September 30, 2020 was 4.02%, compared to 4.91% for the nine months ended September 30, 2019. Total average loans, including loans held-for-sale, totaled $2.02 billion for the nine months ended September 30, 2020, which reflected an increase of $119.5 million compared to the nine months ended September 30, 2019. The growth in average loan balances was more than offset by market interest rate reductions, which resulted in a $6.1 million decrease in loan interest income for the nine months ended September 30, 2020, compared to the like 2019 period. For the nine months ended September 30, 2020, yields on average securities decreased by 71 basis points and yields on average loans decreased by 72 basis points, each as compared to the nine months ended September 30, 2019, due primarily to the falling interest rate environment. Average interest earning deposits with financial institutions increased $128.9 million in the nine months ended September 30, 2020, compared to the prior year like period as consumer spending declined year over year as a result of the COVID-19 pandemic, which increased our liquidity.

Average interest bearing liabilities decreased $23.2 million, or 1.4%, in the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019. The decrease was due to reductions in average other short-term borrowings of $75.7 million, which primarily consist of FHLBC advances, and a reduction in average junior subordinated debentures of $24.8 million due to the redemption of the trust preferred securities and the related $32.6 million of subordinated debentures issued by Old Second Capital Trust I in March 2020. The rate on our junior subordinated debentures was 7.85% for the nine months ended September 30, 2020, and 6.47% for the nine months ended September 30, 2019, as $635,000 of deferred issuance costs was expensed upon the redemption in 2020. Average interest bearing deposits increased by $61.9 million in the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, but the reduction in market interest rates resulted in a 16 basis point reduction in the cost of interest bearing deposits for the nine months ended September 30, 2020, compared to the like 2019 period. Average noninterest bearing deposits increased $167.2 million in the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, as customers spent less as a result of the COVID-19 pandemic.

Our net interest margin for the nine months ended September 30, 2020 was 3.44% compared to 4.04% for the nine months ended September 30, 2019, reflecting a 60 basis point decrease. Our net interest margin (TE) for the nine months ended September 30, 2020 was 3.50% compared to 4.13% for the nine months ended September 30, 2019, reflecting a 63 basis point decrease. The decrease in net interest margin for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was due primarily to reductions in the market interest rates as well as the issuance of $136.7 million of PPP loans at 1.00%, and the growth of our liquidity with an increase in cash and due from banks, which have not yet been reinvested into higher yielding assets. We are currently assessing potential investment opportunities for this excess liquidity. Core net interest margin (TE), a non-GAAP financial measure that excludes PPP loans, was 3.54% for the nine months ended September 30, 2020, reflecting a four basis point reduction from net interest margin (TE) for the same period. These reductions to the net interest margin were partially offset by reductions in rates paid on deposits, as well as reductions in volumes and rates paid on borrowings, and growth in noninterest bearing deposits, which drove down our overall cost of funds.

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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~~table sets forth certain information relating to our average consolidated balance sheet and reflect the yield on average earning assets and cost of average interest bearing liabilities for the periods indicated. These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period. Average balances are derived from daily balances. For purposes of discussion, net interest income and net interest income to total earning assets in the following tables have been adjusted to a non-GAAP TE basis using a marginal rate of 21% in ~~2020~~2021 and ~~2019~~2020 to more appropriately compare returns on tax-exempt loans and securities to other earning assets.

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

Quarters Ended

September 30, 2020

June 30, 2020

September 30, 2019

Average

Income /

Rate

Average

Income /

Rate

Average

Income /

Rate

Balance

Expense

%

Balance

Expense

%

Balance

Expense

%
Assets

Interest earning deposits with financial institutions
$
263,199

$
68

0.10

$
153,532
��
$
42

0.11

$
21,425

$
119

2.20
Securities:

Taxable

251,760

1,458

2.30

247,868

1,694

2.75

260,842

2,296

3.49
Non-taxable (TE)¹

196,648

1,680

3.40

204,840

1,767

3.47

233,208

2,176

3.70
Total securities (TE)¹

448,408

3,138

2.78

452,708

3,461

3.07

494,050

4,472

3.59
Dividends from FHLBC and FRBC

9,917

118

4.73

9,917

123

4.99

10,398

154

5.88
Loans and loans held-for-sale^{1, 2}

2,048,968

22,078

4.29

2,052,060

22,460

4.40

1,895,454

25,159

5.27
Total interest earning assets

2,770,492

25,402

3.65

2,668,217

26,086

3.93

2,421,327

29,904

4.90
Cash and due from banks

31,354

-

-

30,594

-

-

34,315

-

-
Allowance for credit losses on loans

(31,518)

-

-

(30,747)

-

-

(19,452)

-

-
Other noninterest bearing assets

185,228

-

-

187,305

-

-

172,250

-

-
Total assets
$
2,955,556

$
2,855,369

$
2,608,440

Liabilities and Stockholders' Equity

NOW accounts
$
470,474

$
106

0.09

$
457,772

$
129

0.11

$
420,437

$
334

0.32
Money market accounts

306,763

91

0.12

279,873

85

0.12

282,797

269

0.38
Savings accounts

378,957

102

0.11

359,358

171

0.19

308,483

121

0.16
Time deposits

417,952

1,084

1.03

439,735

1,442

1.32

420,429

1,672

1.58
Interest bearing deposits

1,574,146

1,383

0.35

1,536,738

1,827

0.48

1,432,146

2,396

0.66
Securities sold under repurchase agreements

54,313

28

0.21

45,882

23

0.20

40,342

135

1.33
Other short-term borrowings

8,204

24

1.16

8,396

34

1.63

75,310

429

2.26
Junior subordinated debentures

25,773

285

4.40

25,773

283

4.42

57,716

933

6.41
Senior notes

44,337

673

6.04

44,310

673

6.11

44,222

682

6.12
Notes payable and other borrowings

25,482

144

2.25

26,551

165

2.50

10,973

89

3.22
Total interest bearing liabilities

1,732,255

2,537

0.58

1,687,650

3,005

0.72

1,660,709

4,664

1.11
Noninterest bearing deposits

892,811

-

-

854,324

-

-

651,863

-

-
Other liabilities

39,589

-

-

39,613

-

-

30,329

-

-
Stockholders' equity

290,901

-

-

273,782

-

-

265,539

-

-
Total liabilities and stockholders' equity
$
2,955,556

$
2,855,369

$
2,608,440

Net interest income (GAAP)

$
22,509

$
22,707

$
24,780

Net interest margin (GAAP)

3.23

3.42

4.06

Net interest income (TE)¹

$
22,865

$
23,081

$
25,240

Net interest margin (TE)¹

3.28

3.48

4.14
Core net interest margin (TE - excluding PPP loans)¹

3.34

3.51

4.14
Interest bearing liabilities to earning assets

62.53
%

63.25
%

68.59
%

5043

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

	Quarters Ended
	March 31, 2021						December 31, 2020						March 31, 2020
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	359,576		$	92	0.10	$	275,087		$	73	0.11	$	27,989		$	75	1.08
Securities:
Taxable		340,873			1,615	1.92		288,089			1,458	2.01		273,429			2,163	3.18
Non-taxable (TE)¹		191,357			1,655	3.51		193,859			1,637	3.36		202,289			1,842	3.66
Total securities (TE)¹		532,230			3,270	2.49		481,948			3,095	2.55		475,718			4,005	3.39
Dividends from FHLBC and FRBC		9,917			115	4.70		9,917			118	4.73		9,917			125	5.07
Loans and loans held-for-sale^{1, 2}		2,014,773			22,266	4.48		2,032,741			23,067	4.51		1,945,383			23,636	4.89
Total interest earning assets		2,916,496			25,743	3.58		2,799,693			26,353	3.74		2,459,007			27,841	4.55
Cash and due from banks		28,461			-	-		30,086			-	-		32,549			-	-
Allowance for credit losses on loans		(34,540)			-	-		(33,255)			-	-		(23,507)			-	-
Other noninterest bearing assets		187,488			-	-		192,421			-	-		172,712			-	-
Total assets	$	3,097,905					$	2,988,945					$	2,640,761

Liabilities and Stockholders' Equity
NOW accounts	$	495,384		$	95	0.08	$	474,470		$	96	0.08	$	422,065		$	233	0.22
Money market accounts		329,050			77	0.09		317,780			85	0.11		280,828			236	0.34
Savings accounts		412,743			69	0.07		391,904			69	0.07		322,618			166	0.21
Time deposits		399,310			500	0.51		393,297			741	0.75		448,763			1,766	1.58
Interest bearing deposits		1,636,487			741	0.18		1,577,451			991	0.25		1,474,274			2,401	0.66
Securities sold under repurchase agreements		82,475			31	0.15		67,059			35	0.21		47,825			116	0.98
Other short-term borrowings		-			-	-		5,448			12	0.88		23,069			109	1.90
Junior subordinated debentures		25,773			280	4.41		25,773			283	4.37		47,200			1,364	11.62
Senior notes		44,389			673	6.15		44,363			673	6.04		44,284			673	6.11
Notes payable and other borrowings		23,330			123	2.14		24,407			135	2.20		14,762			130	3.54
Total interest bearing liabilities		1,812,454			1,848	0.41		1,744,501			2,129	0.49		1,651,414			4,793	1.17
Noninterest bearing deposits		937,039			-	-		903,383			-	-		676,755			-	-
Other liabilities		37,801			-	-		39,281			-	-		28,490			-	-
Stockholders' equity		310,611			-	-		301,780			-	-		284,102			-	-
Total liabilities and stockholders' equity	$	3,097,905					$	2,988,945					$	2,640,761
Net interest income (GAAP)				$	23,543					$	23,877					$	22,658
Net interest margin (GAAP)						3.27						3.39						3.71

Net interest income (TE)¹				$	23,895					$	24,224					$	23,048
Net interest margin (TE)¹						3.32						3.44						3.77
Core net interest margin (TE - excluding PPP loans)¹						3.33						3.32						3.77
Interest bearing liabilities to earning assets		62.14	%					62.31	%					67.16	%

¹Represents a non-GAAP financial measure. See the discussion entitled “Non-GAAP Presentations” below ~~and the table on page 52~~ 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 ~~2020~~2021 and ~~2019.~~2020.

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 50, and includes fees of ~~$975,000, $718,000~~$1.3 million, $2.3 million, and ~~$295,000~~$294,000 for the ~~third~~first quarter of ~~2020,~~2021, the ~~second~~fourth quarter of 2020, and the ~~third~~first quarter of ~~2019, respectively. Nonaccrual loans are included in the above-stated average balances.~~

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

Nine Months Ended September 30,

2020

2019

Average

Income /

Rate

Average

Income /

Rate

Balance

Expense

%

Balance

Expense

%
Assets

Interest earning deposits with financial institutions
$
148,660

$
185

0.17

$
19,783

$
344

2.32
Securities:

Taxable

257,664

5,315

2.76

242,417

6,933

3.82
Non-taxable (TE)¹

201,242

5,289

3.51

266,694

7,542

3.78
Total securities (TE)¹

458,906

10,604

3.09

509,111

14,475

3.80
Dividends from FHLBC and FRBC

9,917

366

4.93

11,056

459

5.55
Loans and loans held-for-sale ^{1 , 2}

2,015,592

68,174

4.52

1,896,096

74,243

5.24
Total interest earning assets

2,633,075

79,329

4.02

2,436,046

89,521

4.91
Cash and due from banks

31,498

-

-

33,896

-

-
Allowance for credit losses on loans

(28,601)

-

-

(19,375)

-

-
Other noninterest bearing assets

181,762

-

-

175,998

-

-
Total assets
$
2,817,734

$
2,626,565

Liabilities and Stockholders' Equity

NOW accounts
$
450,178

$
468

0.14

$
437,025

$
1,086

0.33
Money market accounts

289,219

412

0.19

290,206

801

0.37
Savings accounts

353,737

439

0.17

310,018

367

0.16
Time deposits

435,419

4,292

1.32

429,403

4,931

1.54
Interest bearing deposits

1,528,553

5,611

0.49

1,466,652

7,185

0.65
Securities sold under repurchase agreements

49,358

167

0.45

43,210

431

1.33
Other short-term borrowings

13,205

167

1.69

88,918

1,611

2.42
Junior subordinated debentures

32,889

1,932

7.85

57,704

2,791

6.47
Senior notes

44,310

2,019

6.09

44,196

2,026

6.13
Notes payable and other borrowings

22,277

439

2.63

13,100

312

3.18
Total interest bearing liabilities

1,690,592

10,335

0.82

1,713,780

14,356

1.12
Noninterest bearing deposits

808,273

-

-

641,053

-

-
Other liabilities

35,911

-

-

21,285

-

-
Stockholders' equity

282,958

-

-

250,447

-

-
Total liabilities and stockholders' equity
$
2,817,734

$
2,626,565

Net interest income (GAAP)

$
67,874

$
73,570

Net interest margin (GAAP)

3.44

4.04

Net interest income (TE)¹

$
68,994

$
75,165

Net interest margin (TE)¹

3.50

4.13
Core net interest margin (TE - excluding PPP loans)¹

3.54

4.13
Interest bearing liabilities to earning assets

64.21
%

70.35
%

~~Tableof Contents~~

¹Represents a non-GAAP financial measure. See the discussion entitled “Non-GAAP Presentations” below and the table on page 52 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 2020, ~~and 2019.~~

²Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 52, and includes fees of $2.0 million and $708,000 for the first nine months of 2020 and 2019, respectively. Nonaccrual loans are included in the above-stated average balances.

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 ~~2020~~2021 and ~~2019~~2020 to more appropriately compare returns on tax-exempt loans and securities to other earning assets. The table below provides a reconciliation of each non-GAAP (TE) measure to the GAAP equivalent for the periods indicated:

Tableof Contents


	Three Months Ended									Nine Months Ended						Three Months Ended
	September 30,			June 30,			September 30,			September 30,						March 31,			December 31,			March 31,
Net Interest Margin	2020			2020			2019			2020			2019			2021			2020			2020
(Dollars in thousands)


Interest income (GAAP)	$	25,046		$	25,712		$	29,444		$	78,209		$	87,926		$	25,391		$	26,006		$	27,451
Taxable-equivalent adjustment:
Loans		3			3			3			9			11			4			3			3
Securities		353			371			457			1,111			1,584			348			344			387
Interest and dividend income (TE)		25,402			26,086			29,904			79,329			89,521			25,743			26,353			27,841
Interest expense (GAAP)		2,537			3,005			4,664			10,335			14,356			1,848			2,129			4,793
Net interest income (TE)	$	22,865		$	23,081		$	25,240		$	68,994		$	75,165		$	23,895		$	24,224		$	23,048
Paycheck Protection Program ("PPP") loan - interest and net fee income		736			603			NA			1,339			NA			741			1,777			NA
Net interest income (TE) - excluding PPP loans	$	22,129			22,478			NA		$	67,655			NA		$	23,154			22,447			23,048
Net interest income (GAAP)	$	22,509		$	22,707		$	24,780		$	67,874		$	73,570		$	23,543		$	23,877		$	22,658
Average interest earning assets	$	2,770,492		$	2,668,217		$	2,421,327		$	2,633,075		$	2,436,046		$	2,916,496		$	2,799,693		$	2,459,007
Average PPP loans	$	136,281		$	90,447			N/A		$	77,302			N/A		$	94,149		$	111,491			N/A
Average interest earning assets, excluding PPP loans	$	2,634,211			2,577,770			2,421,327		$	2,555,773			2,436,046		$	2,822,347			2,688,202			2,459,007
Net interest margin (GAAP)		3.23	%		3.42	%		4.06	%		3.44	%		4.04	%		3.27	%		3.39	%		3.71	%
Net interest margin (TE)		3.28	%		3.48	%		4.14	%		3.50	%		4.13	%		3.32	%		3.44	%		3.77	%
Core net interest margin (TE - excluding PPP loans)		3.34	%		3.51	%		4.14	%		3.54	%		4.13	%		3.33	%		3.32	%		3.77	%

5245

Table of Contents

Noninterest Income

Three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

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

3rd Quarter 2020

Noninterest Income

Three Months Ended

Percent Change From

(Dollars in thousands)

September 30,

June 30,

September 30,

June 30,
September 30,


2020

2020

2019

2020

2019

Trust income

$
1,506

$
1,664

$
1,730

(9.5)

(12.9)

Service charges on deposits

1,322

1,120

2,020

18.0

(34.6)

Residential mortgage banking revenue

Secondary mortgage fees

492

505

282

(2.6)

74.5

Mortgage servicing rights mark to market loss

(160)

(445)

(946)

64.0

83.1

Mortgage servicing income

521

458

460

13.8

13.3

Net gain on sales of mortgage loans

5,246

4,631

2,074

13.3

152.9

Total residential mortgage banking revenue

6,099

5,149

1,870

18.5

226.1

Securities (losses) gains, net

(1)

-

3,463

N/M

(100.0)

Change in cash surrender value of BOLI

459

532

267

(13.7)

71.9

Death benefit realized on BOLI

(2)

59

-

(103.4)

N/M

Card related income

1,499

1,311

1,595

14.3

(6.0)

Other income

803

860

988

(6.6)

(18.7)

Total noninterest income

$
11,685

$
10,695

$
11,933

9.3

(2.1)

~~N/M -~~ ~~Not meaningful~~


							1st Quarter 2021
Noninterest Income	Three Months Ended						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Wealth management	$	2,151	$	2,112	$	1,906	1.8	12.9
Service charges on deposits		1,195		1,344		1,726	(11.1)	(30.8)
Residential mortgage banking revenue
Secondary mortgage fees		322		387		270	(16.8)	19.3
Mortgage servicing rights mark to market gain (loss)		1,113		(1,260)		(2,134)	188.3	152.2
Mortgage servicing income		567		503		468	12.7	21.2
Net gain on sales of mortgage loans		3,721		3,396		2,246	9.6	65.7
Total residential mortgage banking revenue		5,723		3,026		850	89.1	573.3
Securities losses, net		-		-		(24)	-	100.0
Change in cash surrender value of BOLI		334		291		(49)	14.8	781.6
Card related income		1,447		1,435		1,287	0.8	12.4
Other income		450		577		626	(22.0)	(28.1)
Total noninterest income	$	11,300	$	8,785	$	6,322	28.6	78.7

Noninterest income increased ~~$990,000,~~$2.5 million, or ~~9.26%~~28.6%, in the ~~third~~first quarter of ~~2020,~~2021, compared to the ~~second~~fourth quarter of 2020, and ~~decreased $248,000,~~increased $5.0 million, or ~~2.08%~~78.7%, compared to the ~~third~~first quarter of ~~2019.~~2020. The increase infrom both the linked ~~quarters~~quarter and the prior year quarter was primarily driven by an increase in residential mortgage banking revenue, primarily due to favorable adjustments on the mark to market valuation of ~~$615,000 in~~MSRs and net gain on sales of mortgage loans, ~~and a reduction of $285,000 in~~both stemming from the ~~mark to~~low market ~~losses on MSRs in~~interest rate environment over the third quarter of 2020, compared to the prior quarter. Service charges on deposits also increased in the third quarter of 2020 compared to the prior quarter, as customer spending increased and overdraft and bounces fees increased commensurately.

The $248,000 decrease in noninterest income in the third quarter of 2020 compared to the third quarter of 2019 was primarily driven by $3.5 million of pretax securities gain, net, recorded in the third quarter of 2019, and no like transactions in the third quarter of 2020.past year. In addition, ~~service charges on deposits decreased $698,000~~the change in cash surrender value of BOLI increased from both the ~~third~~linked quarter ~~of 2020, compared to~~and the year over year period due to the reduction in customer spending and resultant fee income due to the COVID-19 pandemic. Materially offsetting these decreases in noninterest income was a $4.2 million increase in total residential mortgage banking revenue in the third quarter of 2020, compared to the third quarter of 2019, due to the large volume of mortgage originations and refinances in the lowermarket interest rate ~~environment. The cash surrender value of BOLI~~growth since March 31, 2020. Wealth management income also increased ~~$192,000 in~~from both the ~~third~~linked quarter and year over year, as the valuation of ~~2020, compared to the third quarter of 2019,~~assets under management increased due to market interest rate ~~fluctuations.~~growth, which impacted fees assessed.

Partially offsetting these increases was a $149,000 decrease in service charges on deposits in the first quarter of 2021 compared to the linked quarter and a $531,000 decrease year over year, as federal stimulus funds were received by many of our depositors over the past year, and customer spending decreased due to uncertainty stemming from the COVID-19 pandemic, causing overdraft fees to decrease commensurately. Other income also decreased $127,000 for the first quarter of 2021, compared to the linked quarter due to various miscellaneous recoveries recorded in the fourth quarter of 2020, and decreased $176,000 compared to the prior year period, primarily due to a reduction in commercial interest rate swap fees.

5346

Table of Contents

~~Nine months ended September 30, 2020 and 2019~~

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

Noninterest Income

Nine Months Ended

YTD
(Dollars in thousands)

September 30,

September 30,

Percent


2020

2019

Change
Trust income

$
4,702

$
4,955

(5.1)
Service charges on deposits

4,168

5,841

(28.6)
Residential mortgage banking revenue

Secondary mortgage fees

1,267

621

104.0
Mortgage servicing rights mark to market loss

(2,739)

(2,902)

5.6
Mortgage servicing income

1,447

1,408

2.8
Net gain on sales of mortgage loans

12,123

3,999

203.2
Total residential mortgage banking revenue

12,098

3,126

287.0
Securities (losses) gains, net

(25)

4,476

(100.6)
Change in cash surrender value of BOLI

942

1,045

(9.9)
Death benefit realized on BOLI

57

-

Card related income

4,097

4,433

(7.6)
Other income

2,663

2,682

(0.7)
Total noninterest income

$
28,702

$
26,558

8.1

Noninterest income for the nine months ended September 30, 2020 increased $2.1 million, or 8.1%, compared to the nine months ended September 30, 2019. This increase was primarily driven by a $9.0 million increase in total residential mortgage banking revenue stemming from the falling interest rate environment and the resultant net gain on sales of mortgage loans and secondary mortgage fees. Partially offsetting these increases were a reduction in service charges on deposits and card related income due to reductions in customer activity as a result of the COVID-19 pandemic, a $4.5 million decrease in security (losses) gains, net, and a $253,000 reduction in trust income primarily due to a decline in estate fees year over year.

~~Tableof Contents~~

Noninterest Expense

Three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

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


										3rd Quarter 2020											1st Quarter 2021
Noninterest Expense	Three Months Ended									Percent Change From		Three Months Ended									Percent Change From
(Dollars in thousands)	September 30,			June 30,			September 30,			June 30,	September 30,	March 31,			December 31,			March 31,			December 31,	March 31,
	2020			2020			2019			2020	2019	2021			2020			2020			2020	2020
Salaries	$	9,731		$	8,588		$	9,460		13.3	2.9	$	9,216		$	9,978		$	9,761		(7.6)	(5.6)
Officers incentive		968			968			923		-	4.9		1,653			680			958		143.1	72.5
Benefits and other		1,887			1,786			1,679		5.7	12.4		2,637			2,043			2,199		29.1	19.9
Total salaries and employee benefits		12,586			11,342			12,062		11.0	4.3		13,506			12,701			12,918		6.3	4.6
Occupancy, furniture and equipment expense		2,003			1,935			2,235		3.5	(10.4)		2,467			2,259			2,301		9.2	7.2
Computer and data processing		1,226			1,247			1,490		(1.7)	(17.7)		1,298			1,335			1,335		(2.8)	(2.8)
FDIC insurance		191			155			(114)		23.2	(267.5)		201			194			57		3.6	252.6
General bank insurance		281			237			270		18.6	4.1		276			266			246		3.8	12.2
Amortization of core deposit intangible asset		122			124			157		(1.6)	(22.3)		120			120			128		-	(6.3)
Advertising expense		62			57			360		8.8	(82.8)		60			70			109		(14.3)	(45.0)
Card related expense		566			514			531		10.1	6.6		593			583			532		1.7	11.5
Legal fees		169			176			111		(4.0)	52.3		55			285			131		(80.7)	(58.0)
Other real estate owned expense, net		125			143			26		(12.6)	380.8		36			146			237		(75.3)	(84.8)
Other expense		2,935			2,966			2,826		(1.0)	3.9		3,126			3,294			3,008		(5.1)	3.9
Total noninterest expense	$	20,266		$	18,896		$	19,954		7.3	1.6	$	21,738		$	21,253		$	21,002		2.3	3.5
Efficiency ratio (GAAP)¹		58.27	%		55.13	%		57.82	%				63.98	%		61.87	%		66.28	%
Adjusted efficiency ratio (non-GAAP)²		57.47	%		54.28	%		56.93	%				63.16	%		61.10	%		65.48	%

N/M - Not meaningful

¹The 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 and OREO expenses, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI.

See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” on page 5748 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the ~~third~~first quarter of ~~2020~~2021 increased ~~$1.4 million,~~$485,000, or ~~7.3%~~2.3%, compared to the ~~second~~fourth quarter of 2020, and increased ~~$312,000,~~$736,000, or ~~1.6%~~3.5%, compared to the ~~third~~first quarter of ~~2019.~~2020. The linked quarter increase is primarily attributable to ~~a $1.2 million~~an $805,000 increase in salaries and employee benefits ~~stemming~~in the first quarter of 2021 and a $588,000 increase in salaries and employee benefits from the first quarter of 2020, driven by an increase in officer incentive expense and related increases in payroll taxes and company 401K matching expense. These increases to officer incentive and benefits expense were partially offset by an increase in deferrals of new loan origination costs related to PPP loans in the ~~second~~first quarter of 2021, which reduced salary expense in the first quarter of 2021 by $1.1 million, compared to new loan origination cost deferrals of $705,000 in the fourth quarter of 2020 ~~which reduced expense~~and $733,000 in the ~~second quarter.~~first quarter of 2020.

The ~~year over year~~ increase in noninterest expense ~~is primarily attributable~~for the first quarter of 2021 compared to ~~a $524,000 increase in salaries~~the linked quarter and ~~employee benefits~~prior year quarter was also due to an increase in full-time equivalent employees, annual merit increases in early 2020, and higher employee insurance costs. In addition, a $305,000 increase in FDIC insurance due to an accrual reversal in the third quarter of 2019, and a $99,000 increase in other real estate owned expense, net, due to property valuation write-downs. ~~Partially offsetting the year over year increases were a $232,000 decrease~~ in occupancy, furniture and equipment expense, ~~a $264,000 decrease in computer and data processing~~FDIC insurance expense and ~~a $298,000 decrease~~general bank insurance expense. FDIC insurance expense increased $144,000 year over year due to assessment credits received in ~~advertising~~the first quarter of 2020, and general bank insurance expense increased year over year due to an increase in policy costs. These increases were partially offset by decreases in legal fees of $230,000 and $76,000 for the linked quarter and year over year, respectively, due to a ~~reduction~~decline in ~~our marketing efforts~~loan volumes and related legal fees, as ~~a result of the pandemic.~~

5547

Table of Contents

~~Nine months ended September 30, 2020 and 2019~~

Noninterest Expense

Nine Months Ended

YTD
(Dollars in thousands)

September 30,

September 30,

Percent


2020

2019

Change
Salaries

$
28,080

$
27,098

3.6
Officers incentive

2,894

2,698

7.3
Benefits and other

5,872

5,465

7.4
Total salaries and employee benefits

36,846

35,261

4.5
Occupancy, furniture and equipment expense

6,239

6,149

1.5
Computer and data processing

3,808

4,346

(12.4)
FDIC insurance

403

176

129.0
General bank insurance

764

756

1.1
Amortization of core deposit intangible asset

374

410

(8.8)
Advertising expense

228

975

(76.6)
Card related expense

1,612

1,360

18.5
Legal fees

476

480

(0.8)
Other real estate owned expense, net

505

324

55.9
Other expense

8,909

9,037

(1.4)
Total noninterest expense

$
60,164

$
59,274

1.5
Efficiency ratio (GAAP)¹

59.71
%

59.40
%

Adjusted efficiency ratio (non-GAAP)²

58.89
%

58.29
%

¹~~The efficiency ratio shown in the table above is a GAAP financial measure calculated~~well 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 and OREO expenses, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI.

~~See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” on page 57 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.~~

Noninterest expense for the nine months ended September 30, 2020, increased $890,000, or 1.5%, compared to the nine months ended September 30, 2019, primarily due to a $1.6 million increase in salaries and employee benefits related to an increase in full-time equivalent employees, annual merit increases in early 2020, and higher employee insurance costs; a $227,000 increase in FDIC insurance related to assessment credits that were applied in 2019; a $252,000 increase in card related expenses; and a $181,000 increasereductions in other real estate owned expense, net, ~~due to a higher amount~~ of ~~gains recorded in 2019.~~

~~Partially offsetting these increases were decreases in computer~~$110,000 and ~~data processing expense of $538,000, advertising expense of $747,000,~~$201,000 for the linked quarter and ~~other expense of $128,000. Computer and data processing expense declined~~ year over year, due to a new core system contract that we executed in the last half of 2019, which included cost savings, as well as voice and data services price reductions negotiated over the past year. Advertising expenses decreased year over yearrespectively, due to a reduction in ~~our marketing efforts as a result~~other real estate held.

Reconciliation of ~~the pandemic. Other expense decreased year over year due to a reduction in employee travel costs primarily due to the pandemic, and a reduction in consulting and management fees.~~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,
	2021			2020			2020			2021			2020			2020
Efficiency Ratio / Adjusted Efficiency Ratio


Noninterest expense	$	21,738		$	21,253		$	21,002		$	21,738		$	21,253		$	21,002
Less amortization of core deposit		120			120			128			120			120			128
Less other real estate expense, net		36			146			237			36			146			237
Noninterest expense less adjustments	$	21,582		$	20,987		$	20,637		$	21,582		$	20,987		$	20,637

Net interest income	$	23,543		$	23,877		$	22,658		$	23,543		$	23,877		$	22,658
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			4			3			3
Securities		N/A			N/A			N/A			348			344			387
Net interest income including adjustments		23,543			23,877			22,658			23,895			24,224			23,048
Noninterest income		11,300			8,785			6,322			11,300			8,785			6,322
Less death benefit related to BOLI		-			-			-			-			-			-
Less securities losses, net		-			-			(24)			-			-			(24)
Less MSRs mark to market gains (losses)		1,113			(1,260)			(2,134)			1,113			(1,260)			(2,134)
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			N/A			89			77			(13)
Noninterest income (less) / including adjustments		10,187			10,045			8,480			10,276			10,122			8,467

Net interest income including adjustments plus noninterest income (less) / including adjustments	$	33,730		$	33,922		$	31,138		$	34,171		$	34,346		$	31,515
Efficiency ratio / Adjusted efficiency ratio		63.98	%		61.87	%		66.28	%		63.16	%		61.10	%		65.48	%

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~~Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures~~

GAAP

Non-GAAP

Three Months Ended

Three Months Ended

September 30,

June 30,

September 30,

September 30,

June 30,

September 30,

2020

2020

2019

2020

2020

2019

Efficiency Ratio / Adjusted Efficiency Ratio

(Dollars in thousands)

Noninterest expense

$
20,266

$
18,896

$
19,954

$
20,266

$
18,896

$
19,954

Less amortization of core deposit

122

124

157

122

124

157

Less other real estate expense, net

125

143

26

125

143

26

Noninterest expense less adjustments

$
20,019

$
18,629

$
19,771

$
20,019

$
18,629

$
19,771

Net interest income

$
22,509

$
22,707

$
24,780

$
22,509

$
22,707

$
24,780

Taxable-equivalent adjustment:

Loans

N/A

N/A

N/A

3

3

3

Securities

N/A

N/A

N/A

353

371

457

Net interest income including adjustments

22,509

22,707

24,780

22,865

23,081

25,240

Noninterest income

11,685

10,695

11,933

11,685

10,695

11,933

Less death benefit related to BOLI

(2)

59

-

(2)

59

-

Less securities (losses) gains, net

(1)

-

3,463

(1)

-

3,463

Less MSRs mark to market loss

(160)

(445)

(946)

(160)

(445)

(946)

Taxable-equivalent adjustment:

Change in cash surrender value of BOLI

N/A

N/A

N/A

122

157

71

Noninterest income (less) / including adjustments

11,848

11,081

9,416

11,970

11,238

9,487

Net interest income including adjustments plus noninterest income (less) / including adjustments

$
34,357

$
33,788

$
34,196

$
34,835

$
34,319

$
34,727

Efficiency ratio / Adjusted efficiency ratio

58.27
%

55.13
%

57.82
%

57.47
%

54.28
%

56.93
%

~~Tableof Contents~~

GAAP

Non-GAAP

Nine Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2020

2019

2020

2019

Efficiency Ratio / Adjusted Efficiency Ratio

(Dollars in thousands)

Noninterest expense

$
60,164

$
59,274

$
60,164

$
59,274

Less amortization of core deposit

374

410

374

410

Less other real estate expense, net

505

324

505

324

Noninterest expense less adjustments

$
59,285

$
58,540

$
59,285

$
58,540

Net interest income

$
67,874

$
73,570

$
67,874

$
73,570

Taxable-equivalent adjustment:

Loans

N/A

N/A

9

11

Securities

N/A

N/A

1,111

1,584

Net interest income including adjustments

67,874

73,570

68,994

75,165

Noninterest income

28,702

26,558

28,702

26,558

Less death benefit related to BOLI

57

-

57

-

Less securities (losses) gains, net

(25)

4,476

(25)

4,476

Less MSRs mark to market loss

(2,739)

(2,902)

(2,739)

(2,902)

Taxable-equivalent adjustment:

Change in cash surrender value of BOLI

N/A

N/A

266

285

Noninterest income (less) / including adjustments

31,409

24,984

31,675

25,269

Net interest income including adjustments plus noninterest income (less) / including adjustments

$
99,283

$
98,554

$
100,669

$
100,434

Efficiency ratio / Adjusted efficiency ratio

59.71
%

59.40
%

58.89
%

58.29
%

Income Taxes

We recorded income tax expense of ~~$3.4~~$4.2 million for the ~~third~~first quarter of ~~2020~~2021 on ~~$13.6~~$16.1 million of pretax income, compared to income tax expense of ~~$3.1~~$3.4 million on ~~$12.4~~$11.4 million of pretax income in the ~~second~~fourth quarter of 2020, and ~~$4.0 million of~~an income tax ~~expense~~benefit of $281,000 on ~~$16.2 million~~$6,000 of pretax ~~income~~loss in the ~~third~~first quarter of ~~2019.~~2020. The effective tax rate was ~~24.7%~~26.2% for the ~~third~~first quarter of 2021 and 29.5% for the fourth quarter of 2020; the effective tax rate was not meaningful for the first quarter of 2020, ~~25.4% for~~due to the ~~second quarter of 2020, and 24.9% for the third quarter of 2019. We recorded income tax expense of $6.2 million on $26.0 million of~~ pretax income for the nine months ended September 30, 2020, compared to income tax expense of $9.5 million on $39.4 million of pretax income for the nine months ended September 30, 2019, which reflected effective tax rates of 23.9% and 24.1%, respectively.loss.

Income tax expense reflected all relevant statutory tax rates and GAAP accounting. There were no significant changes in our ability to utilize ~~the~~our deferred tax assets during the quarter ended ~~September 30, 2020.~~March 31, 2021. We had no valuation reserve on the deferred tax assets as of ~~September 30, 2020.~~March 31, 2021.

Financial Condition

Total assets increased ~~$339.3~~$125.8 million to ~~$2.97~~$3.17 billion at ~~September 30, 2020,~~March 31, 2021, from ~~$2.64~~$3.04 billion at December 31, ~~2019,~~2020, due primarily to an increase in cash and cash equivalents of ~~$262.5~~$111.0 million and ~~loan growth~~securities available-for-sale of ~~$99.5~~$97.1 million, partially offset by a reduction in loans of ~~$36.2 million in securities available-for-sale.~~$75.2 million. We ~~are currently assessing~~continue to actively assess potential investment opportunities for this excess liquidity. Total deposits were ~~$2.48~~$2.66 billion at ~~September 30, 2020,~~March 31, 2021, an increase of ~~$352.5~~$119.5 million from December 31, ~~2019,~~2020, primarily due to increases in noninterest bearing demand accounts, savings, ~~accounts,~~money market and NOW accounts due to a decrease in consumer spending during the COVID-19 pandemic, and federal stimulus funds received by many depositors.


							March 31, 2021
Securities	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Securities available-for-sale, at fair value
U.S. Treasuries	$	4,102	$	4,117	$	4,152	(0.4)	(1.2)
U.S. government agencies		6,361		6,657		7,723	(4.4)	(17.6)
U.S. government agencies mortgage-backed		70,602		17,209		17,255	310.3	309.2
States and political subdivisions		242,146		249,259		255,095	(2.9)	(5.1)
Corporate bonds		34,843		-		-	100.0	100.0
Collateralized mortgage obligations		74,936		56,585		53,403	32.4	40.3
Asset-backed securities		130,368		131,818		77,727	(1.1)	67.7
Collateralized loan obligations		29,922		30,533		34,339	(2.0)	(12.9)
Total securities	$	593,280	$	496,178	$	449,694	19.6	31.9

Securities available-for-sale increased $97.1 million as of March 31, 2021, compared to December 31, 2020, and increased $143.6 million compared to March 31, 2020. Available-for-sale security purchases during the quarter ended March 31, 2021, totaled $109.8 million and consisted of $55.2 million of U.S. agency mortgage backed securities, $34.8 million of corporate bonds, and $19.8 million of collateralized mortgage–backed securities. These purchases were partially offset by $7.3 million of calls, maturities and paydowns during the first quarter of 2021, as well as an unrealized mark to market loss of $4.8 million and net premium amortization of $535,000. During the first quarter of 2021 and the fourth quarter of 2020, no security gains or losses were recorded, compared to $24,000 of security losses, net, in the first quarter of 2020.

5849

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September 30, 2020
Securities

As of

Percent Change From
(Dollars in thousands)

September 30,

December 31,

September 30,

December 31,

September 30,


2020

2019

2019

2019

2019
Securities available-for-sale, at fair value

U.S. Treasuries

$
4,134

$
4,036

$
4,038

2.4

2.4
U.S. government agencies

7,005

8,337

9,143

(16.0)

(23.4)
U.S. government agencies mortgage-backed

18,219

16,588

16,940

9.8

7.6
States and political subdivisions

249,777

249,175

238,727

0.2

4.6
Collateralized mortgage obligations

57,013

57,984

64,121

(1.7)

(11.1)
Asset-backed securities

81,585

81,844

83,182

(0.3)

(1.9)
Collateralized loan obligations

30,688

66,684

72,271

(54.0)

(57.5)
Total securities

$
448,421

$
484,648

$
488,422

(7.5)

(8.2)

Securities available-for-sale decreased $36.2 million as of September 30, 2020, compared to December 31, 2019, and decreased $40.0 million compared to September 30, 2019. Available-for-sale security calls, maturities and paydowns during the three months ended September 30, 2020, totaled $6.1 million and consisted primarily of tax exempt state and political subdivisions securities and collateralized debt obligations, whereas purchases during the quarter ended September 30, 2020 totaled $1.9 million and were primarily U.S. agency mortgage backed securities. During the third quarter of 2020 $1,000 of security losses, net, were recorded, compared to $3.5 million of securities gains, net, in the third quarter of 2019.


							September 30, 2020								March 31, 2021
Loans	As of						Percent Change From		As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,	March 31,		December 31,		March 31,		December 31,	March 31,
	2020		2019		2019		2019	2019	2021		2020		2020		2020	2020
Commercial	$	436,277	$	332,842	$	333,664	31.1	30.8	$	392,380	$	407,159	$	364,626	(3.6)	7.6
Leases		133,676		119,751		108,152	11.6	23.6		138,240		141,601		126,237	(2.4)	9.5
Commercial real estate - Investor		548,970		520,095		491,794	5.6	11.6		567,475		582,042		503,905	(2.5)	12.6
Commercial real estate - Owner occupied		335,978		345,504		334,986	(2.8)	0.3		326,857		333,070		349,595	(1.9)	(6.5)
Construction		91,856		69,617		91,066	31.9	0.9		93,745		98,486		78,159	(4.8)	19.9
Residential real estate - Investor		61,923		71,105		68,989	(12.9)	(10.2)		52,176		56,137		69,429	(7.1)	(24.8)
Residential real estate - Owner occupied		114,283		136,023		136,046	(16.0)	(16.0)		107,303		116,388		129,982	(7.8)	(17.4)
Multifamily		188,398		189,773		183,476	(0.7)	2.7		178,258		189,040		195,297	(5.7)	(8.7)
HELOC		85,882		91,605		90,791	(6.2)	(5.4)		75,604		80,908		93,165	(6.6)	(18.8)
HELOC - Purchased		22,312		31,852		35,518	(30.0)	(37.2)		17,078		19,487		30,880	(12.4)	(44.7)
Other ¹		10,772		12,258		14,140	(12.1)	(23.8)
Total loans, excluding deferred loan costs and PCI Loans ²		2,030,327		1,920,425		1,888,622	5.7	7.5
Net deferred loan costs		-		1,786		2,054	(100.0)	(100.0)
Total loans, excluding PCI loans²		2,030,327		1,922,211		1,890,676	5.6	7.4
PCI loans, net of purchase accounting adjustments²		-		8,601		9,135	(100.0)	(100.0)
Other ⁽¹⁾										10,509		10,533		15,929	(0.2)	(34.0)
Total loans	$	2,030,327	$	1,930,812	$	1,899,811	5.2	6.9	$	1,959,625	$	2,034,851	$	1,957,204	(3.7)	0.1

¹The “Other” segment includes consumer and overdrafts.

² As discussed below, for periods before our adoption of CECL on January 1, 2020, PCI loans and their related deferred loan costs (now PCD loans) were excluded from nonperforming loan disclosures and were therefore separately reported. After the adoption of CECL, all PCD loans are now included within each relevant loan type and are not separately reported as PCI loans, because such loans are now included within our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan.

~~Tableof Contents~~

Total loans were ~~$2.03~~$1.96 billion as of ~~September 30, 2020, an increase~~March 31, 2021, a decrease of ~~$99.5~~$75.2 million from December 31, ~~2019.~~2020. The ~~increase~~decrease in total loans in the first ~~nine months~~quarter of ~~2020~~2021 was due primarily to ~~our origination~~forgiveness of ~~746~~294 PPP loans that totaled ~~$136.7~~$27.8 million within commercial loans, as well as reduction in all loan segments due to paydowns as commercial and consumer liquidity increased primarily due to the receipt of federal stimulus funds and decreases in capital expenditures during the COVID-19 pandemic. Total loans increased $2.4 million from March 31, 2020 to March 31, 2021, primarily due to loan growth in our commercial loans related to PPP loan originations and organic growth in our leases, commercial real estate-investor, and construction loan portfolios, partially offset by reductions in our commercial real estate-owner occupied, residential real estate-investor, residential real estate-owner occupied, HELOC and HELOC–purchased portfolios. Total loans increased $130.5 million from September 30, 2019 to September 30, 2020, due primarily to loan growth in our commercial loans due to PPP loan originations, leases, commercial real estate-investor, and multifamily portfolios, partially offset by reductions in our residential real estate-investor, residential real estate-owner occupied, HELOC, and HELOC-purchased portfolios. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) are 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 ACL. ~~Accordingly, at January 1, 2020, $2.5 million of purchase accounting adjustments related to PCD loans were reclassified to the ACL from loans, resulting in an increase to total PCD loans.~~

The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate. Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio. These categories comprised ~~71.4%~~72.4% of the portfolio as of ~~September 30, 2020,~~March 31, 2021, compared to ~~75.4%~~72.5% of the portfolio as of December 31, ~~2019.~~2020. We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

Asset Quality

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

We recorded a $1.3 million provision for credit losses on loans and a $980,000 reversal of provision for credit losses on unfunded commitments for the third quarter of 2020, compared to a $550,000 provision for loan and lease losses for the third quarter of 2019. In the third quarter of 2020, we determined provision expense was necessary, after considering our net recoveries of $365,000 for the quarter, due to the guidance under the newly adopted CECL methodology, which requires a provision based on future expected credit losses, as compared to the previously used incurred loss model. Runoffs on our acquired loan portfolios are trending with expectations. 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 and leases. In addition, we established a separate ACL on unfunded commitments of $1.7 million under CECL guidelines as of January 1, 2020, and we recorded a $734,000 provision for credit losses on unfunded commitments in the second quarter of 2020. During our third quarter projected credit losses assessment, we determined the utilization rate on lines during the past 12 months had declined, resulting in a reversal of $980,000 of ACL related to unfunded commitments for the quarter. The increase in the total provision for credit losses stems from our CECL model calculations due to the ongoing COVID-19 pandemic.

Nonperforming loans consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or greater past due. Remediation work continues in all segments. Nonperforming loans ~~increased~~decreased by ~~$5.0~~$1.8 million to ~~$20.8~~$21.2 million at ~~September 30, 2020,~~March 31, 2021 from ~~$15.8~~$23.0 million at December 31, ~~2019.~~2020. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, the Company determined had experienced a more-than-insignificant deterioration in credit quality since origination. Before we adopted CECL on January 1, 2020, PCD loans were referred to as purchased credit impaired loans, or PCI loans, and such PCI loans and their related deferred loan costs were excluded from our nonperforming loan disclosures, as long as the cash flows on such loans and the timing of such cash flows continued to be estimable and probable of collection. However, after we adopted CECL on January 1, 2020, PCD loans and their related deferred loan costs are ~~now~~ included in our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan. As of the date of CECL adoption, $2.5 million of the credit related component of the purchase accounting adjustment on PCI loans was reclassified to the ACL, which comprises half of the $5.0 million increase in nonperforming loans since December 31, 2019. Credit metrics ~~excluding the impact of this reclassification,~~ continue to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans as a percent of total loans ~~increased to 1.0%~~were 1.1% as of ~~September 30, 2020, from 0.8% as of~~March 31, 2021, December 31, ~~2019,~~2020, and ~~0.7% September 30, 2019.~~March 31, 2020. The distribution of our nonperforming loans is shown in the following table.

6050

Table of Contents


							September 30, 2020								March 31, 2021
Nonperforming Loans	As of						Percent Change From		As of						Percent Change From
(Dollars in thousands)	September 30,		December		September 30,		December	September 30,	March 31,		December 31,		March 31,		December 31,	March 31,
	2020		2019		2019		2019	2019	2021		2020		2020		2020	2020
Commercial	$	1,605	$	2,247	$	148	(28.6)	984.5	$	933	$	1,125	$	2,418	(17.1)	(61.4)
Leases		2,079		410		74	407.1	N/M		2,562		2,801		187	(8.5)	N/M
Commercial real estate - Investor		2,021		2,092		4,701	(3.4)	(57.0)		1,913		1,632		1,809	17.2	5.7
Commercial real estate - Owner occupied		8,635		5,180		2,899	66.7	197.9		7,427		9,262		7,436	(19.8)	(0.1)
Construction		-		93		94	(100.0)	(100.0)		128		-		2,800	N/M	(95.4)
Residential real estate - Investor		935		788		379	18.7	146.7		855		1,085		859	(21.2)	(0.5)
Residential real estate - Owner occupied		3,516		3,169		3,300	10.9	6.5		3,567		3,561		4,736	0.2	(24.7)
Multifamily		895		68		-	N/M	N/M		2,398		2,437		69	(1.6)	N/M
HELOC		1,140		1,603		1,604	(28.9)	(28.9)		1,000		1,142		1,400	(12.4)	(28.6)
HELOC - Purchased		-		180		181	(100.0)	(100.0)		-		-		114	-	(100.0)
Other ¹		6		19		22	(68.4)	(72.7)		399		-		9	N/M	N/M
Total nonperforming loans	$	20,832	$	15,849	$	13,402	31.4	55.4	$	21,182	$	23,045	$	21,837	(8.1)	(3.0)

N/M - Not meaningful

¹ The “Other” segment includes consumer and overdrafts.

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

Nonperforming Assets

As of

Percent Change From
(Dollars in Thousands)

September 30,

December 31,

September 30,

December 31,

September 30,


2020

2019

2019

2019

2019
Nonaccrual loans

$
20,076

$
12,432

$
11,852

61.5

69.4
Performing troubled debt restructured loans accruing interest

334

872

1,532

(61.7)

(78.2)
Loans past due 90 days or more and still accruing interest

422

2,545

18

(83.4)

N/M
Total nonperforming loans

20,832

15,849

13,402

31.4

55.4
Other real estate owned

2,686

5,004

4,682

(46.3)

(42.6)
Total nonperforming assets

$
23,518

$
20,853

$
18,084

12.8

30.0

PCD loans, net of purchase accounting adjustments¹

$
10,638

$
8,601

$
9,135

23.7

16.5

30-89 days past due loans and still accruing interest

$
5,511

$
14,390

$
7,937

Nonaccrual loans to total loans

1.0
%

0.6
%

0.6
%

Nonperforming loans to total loans

1.0
%

0.8
%

0.7
%

Nonperforming assets to total loans plus OREO

1.2
%

1.1
%

0.9
%

Purchased credit-deteriorated loans to total loans

0.5
%

0.4
%

0.5
%

Allowance for credit losses

$
32,918

$
19,789

$
19,651

Allowance for credit losses to total loans

1.6
%

1.0
%

1.0
%

Allowance for credit losses to nonaccrual loans

164.0
%

159.2
%

165.8
%

¹ In 2020, due to the adoption of CECL, PCD loans are included in total nonperforming assets, if their risk rating at period end so indicates. For 2019 periods presented, PCI loans are not included within total nonperforming assets as these loans had an accretable yield.


										March 31, 2021
Nonperforming Assets	As of									Percent Change From
(Dollars in Thousands)	March 31,			December 31,			March 31,			December 31,	March 31,
	2021			2020			2020			2020	2020
Nonaccrual loans	$	20,379		$	22,280		$	19,497		(8.5)	4.5
Performing troubled debt restructured loans accruing interest		290			331			934		(12.4)	(69.0)
Loans past due 90 days or more and still accruing interest		513			434			1,406		18.2	(63.5)
Total nonperforming loans		21,182			23,045			21,837		(8.1)	(3.0)
Other real estate owned		2,163			2,474			5,049		(12.6)	(57.2)
Total nonperforming assets	$	23,345		$	25,519		$	26,886		(8.5)	(13.2)


30-89 days past due loans and still accruing interest	$	13,506		$	11,326		$	16,173
Nonaccrual loans to total loans		1.0	%		1.1	%		1.0	%
Nonperforming loans to total loans		1.1	%		1.1	%		1.1	%
Nonperforming assets to total loans plus OREO		1.2	%		1.3	%		1.4	%

Allowance for credit losses	$	30,967		$	33,855		$	30,045
Allowance for credit losses to total loans		1.6	%		1.7	%		1.6	%
Allowance for credit losses to nonaccrual loans		152.0	%		152.0	%		154.1	%

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

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Loan Charge-offs, Net of Recoveries	Three Months Ended
Loan Charge-offs, Net of Recoveries										Three Months Ended
(Dollars in thousands)	September 30,		% of	June 30,		% of	September 30,		% of	March 31,		% of	December 31,		% of	March 31,		% of
	2020		Total¹	2020		Total¹	2019		Total¹	2021		Total¹	2020		Total¹	2020		Total¹
Commercial	$	(7)	1.9	$	(2)	(1.2)	$	10	3.7	$	(18)	3.1	$	(93)	(169.1)	$	85	7.6
Leases		119	(32.6)		-	-		47	17.3		-	-		(11)	(20.0)		-	-
Commercial real estate - Investor		(102)	27.9		(14)	(8.4)		147	54.2		(20)	3.4		471	856.4		(8)	(0.7)
Commercial real estate - Owner occupied		(420)	115.1		292	174.9		-	-		(205)	35.2		86	156.4		1,108	98.8
Construction		59	(16.2)		-	-		7	2.6		-	-		(171)	(310.9)		-	-
Residential real estate - Investor		(15)	4.1		(2)	(1.2)		(6)	(2.2)		(266)	45.7		(12)	(21.8)		(21)	(1.9)
Residential real estate - Owner occupied		(25)	6.8		(66)	(39.5)		(13)	(4.8)		(49)	8.4		(130)	(236.4)		(22)	(2.0)
Multifamily		-	-		-	-		-	-		-	-		-	-		-	-
HELOC		(52)	14.2		(53)	(31.7)		(2)	(0.7)		(12)	2.1		(97)	(176.4)		(58)	(5.2)
HELOC - Purchased		66	(18.1)		-	-		-	-		-	-		-	-		-	-
Other ²		12	(3.10)		12	7.10		81	29.9		(12)	2.1		12	21.8		38	3.4
Net (recoveries) charge-offs	$	(365)	100.0	$	167	100.0	$	271	100.0	$	(582)	100.0	$	55	100.0	$	1,122	100.0

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

² The “Other” segment includes consumer and overdrafts.

Net recoveries of ~~$365,000~~$582,000 were recorded for the ~~third~~first quarter of ~~2020,~~2021, compared to net charge-offs of ~~$167,000~~$55,000 for the ~~second~~fourth quarter of 2020, and ~~$271,000~~net charge-offs $1.1 million for the ~~third~~first quarter of ~~2019,~~2020, reflecting continuing management attention to credit quality and remediation efforts. The net recoveries for the ~~third~~first quarter of ~~2020~~2021 were primarily due to ~~a recovery~~recoveries on ~~one~~two large ~~charge-off~~charge-offs recorded ~~earlier in 2020.~~prior to 2021. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

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

September 30, 2020
Classified Assets
As of

Percent Change From
(Dollars in thousands)
September 30,

December 31,

September 30,

December 31,

September 30,

2020

2019

2019

2019

2019
Commercial
$
5,992

$
11,688

$
7,704

(48.7)

(22.2)

Leases

3,270

329

125

893.9

N/M

Commercial real estate - Investor

5,596

4,926

8,791

13.6

(36.3)

Commercial real estate - Owner occupied

9,658

7,956

11,605

21.4

(16.8)

Construction

5,108

262

273

N/M

N/M

Residential real estate - Investor

1,526

1,390

1,029

9.8

48.3

Residential real estate - Owner occupied

3,836

3,631

3,773

5.6

1.7

Multifamily

5,833

503

493

N/M

N/M

HELOC

1,566

1,789

1,894

(12.5)

(17.3)

HELOC - Purchased

-

180

184

(100.0)

(100.0)

Other ¹

272

359

24

(24.2)

N/M

Total classified loans, excluding PCI loans²

42,657

33,013

35,895

29.2

18.8

Other real estate owned

2,686

5,004

5,668

(46.3)

(52.6)

Total classified assets, excluding PCI loans²

45,343

38,017

41,563

19.3

9.1

PCI, net of purchase accounting adjustments²

-

8,601

10,834

(100.0)

(100.0)

Total classified assets
$
45,343

$
46,618

$
52,397

(2.7)

(13.5)

~~N/M -~~ ~~Not meaningful~~

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

²~~Due to the adoption of CECL, as of January 1, 2020, we no longer have PCI loans~~.

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard. Classified assets include both classified loans and OREO. Loans classified as substandard are inadequately protected by either the current net worth and ability to meet payment obligations of the obligor, or by the collateral pledged to secure the loan, if any. These loans have a well-defined

~~Tableof Contents~~

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, 2021
Classified Assets	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Commercial	$	2,397	$	2,679	$	11,260	(10.5)	(78.7)
Leases		3,147		3,222		264	(2.3)	N/M
Commercial real estate - Investor		5,130		5,117		6,073	0.3	(15.5)
Commercial real estate - Owner occupied		8,652		11,187		10,504	(22.7)	(17.6)
Construction		5,366		5,192		2,414	3.4	122.3
Residential real estate - Investor		1,435		1,516		1,452	(5.3)	(1.2)
Residential real estate - Owner occupied		4,148		4,040		4,568	2.7	(9.2)
Multifamily		7,846		7,558		5,374	3.8	46.0
HELOC		1,303		1,540		1,628	(15.4)	(20.0)
HELOC - Purchased		-		-		114	-	(100.0)
Other ¹		402		4		349	N/M	15.2
Total classified loans		39,826		42,055		44,000	(5.3)	(9.5)
Other real estate owned		2,163		2,474		5,049	(12.6)	(57.2)
Total classified assets	$	41,989	$	44,529	$	49,049	(5.7)	(14.4)

N/M - Not meaningful

¹ The “Other” segment includes consumer and overdrafts.

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Total classified loans ~~increased~~and classified assets decreased as of ~~September 30, 2020,~~March 31, 2021, from the levels at both December 31, ~~2019,~~2020 and ~~June 30, 2019,~~March 31, 2020, primarily due to ~~inclusion~~continued remediation efforts and the high level of ~~PCD loans in their respective segments in 2020~~paydowns and payoffs we have experienced due to ~~the adoption of CECL. Total classified assets, including PCD loans, reflected a decrease~~increased borrower liquidity stemming from federal stimulus funds received by borrowers and other COVID-19 relief funding, such as ~~of September 30, 2020, compared to the level at December 31, 2019, and the level one year ago.~~PPP loans. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ACL on loans as another measure of overall change in loan related asset quality, which is referred to as the “classified assets ratio.” The classified assets ratio was ~~12.95%~~11.60% for the period ended ~~September 30, 2020,~~March 31, 2021, compared to ~~11.11%~~12.64% as of December 31, ~~2019,~~2020, and ~~9.84%~~15.26% as of ~~September 30, 2019.~~March 31, 2020. The ~~increase~~decrease in the classified assets ratio for the period ended ~~September 30, 2020,~~March 31, 2021, compared to ~~September 30, 2019,~~March 31, 2020, is also due to the ~~inclusion of PCD loans~~remediation efforts and borrower liquidity noted above, as well as growth in ~~their respective segments within~~our capital level over the calculation, as these loans were previously excluded. The increase in total PCD loans as of September 30, 2020, compared to December 31, 2019, is due to our reclassification of the credit-related component of the purchase accounting adjustments carried on former PCI loans to the ACL on January 1, 2020, the date we adopted the CECL methodology. The PCD balance of $10.6 million is now included within total classified assets, as applicable, under CECL guidance.past year.

Allowance for Credit Losses on Loans

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

We recorded a net benefit of $3.0 million in our provision for credit losses due to a reserve release for the first quarter of 2021, comprised of a $3.5 million reserve release to loans and $470,000 of additional provision expense for credit losses on unfunded commitments, compared to no provision for credit losses recorded in the fourth quarter of 2020, and an $8.0 million provision for credit losses recorded for the first quarter of 2020, due to both our adoption of the CECL accounting standard on January 1, 2020 ~~(Day One),~~and the potential impact of the COVID-19 pandemic. In the first quarter of 2021, we ~~recognized an increase in~~determined a reserve release on loans was appropriate, after considering our ~~ACL~~net recoveries for the quarter of $582,000, as well as the impact of changes to our future loss rate assumptions based on ~~outstanding~~a decrease to the unemployment factor projected for the life of the loans ~~of $5.9 million and an increase in our ACL~~over the one year forecast period. In addition, we recorded a $470,000 provision for credit losses on unfunded commitments of $1.7 million as a cumulative effect adjustment from change in accounting policies. Approximately $2.5 million of the increase to the ACL resulted from the transfer of the non-accretable purchase accounting adjustments on PCD loans. The Day One adjusting entries resulted in a $3.8 million reduction to retained earnings, and a deferred tax asset adjustment of $1.4 million. At September 30, 2020, the ACL on loans totaled $32.9 million, and the ACL on unfunded commitments, included in other liabilities, totaled $4.0 million. This reserve build was driven by $300,000 of provision expense and $365,000 of net recoveries in the third quarter of 2020, as well as $2.1 million of provision expense in the second quarter of 2020, and $8.0 million of provision expense in the first quarter of ~~2020, augmented by the previously mentioned impact of adopting CECL on January 1, 2020. The total increase in the ACL reflects forecasted credit deterioration~~2021, primarily due to an updated analysis of line utilization rates over the ~~COVID-19 pandemic~~past twelve months, as well as the roll off of prior historical periods with lower losses within the CECL model.

Management estimates the amount of provision required on a quarterly basis and records the ~~resultant recession.~~appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loan, leases and unfunded commitments. Our ACL on loans to total loans was 1.6% as of ~~September 30, 2020,~~March 31, 2021, compared to ~~1.0%~~1.7% and 1.6% at ~~both~~ December 31, ~~2019,~~2020, and ~~September 30, 2019.~~March 31, 2020, respectively. See ~~Note 1~~Item 2 –~~Basis of Presentation and Changes in Significant~~ Critical Accounting Policies in the ~~accompanying notes to the consolidated financial statements included elsewhere~~Management Discussion and Analysis in this report 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.

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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								Nine Months Ended							Three Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,			March 31,			December 31,			March 31,
	2020			2020			2019			2020			2019			2021			2020			2020
Allowance at beginning of period	$	31,273		$	30,045		$	19,372		$	19,789		$	19,006		$	33,855		$	32,918		$	19,789
Charge-offs:
Commercial		5			22			20			124			99			2			(85)			97
Leases		119			-			47			119			47			-			87			-
Commercial real estate - Investor		-			2			159			15			303			-			497			13
Commercial real estate - Owner occupied		145			292			-			1,546			129			3			217			1,109
Construction		60			-			7			60			8			-			-			-
Residential real estate - Investor		3			4			1			8			7			-			-			-
Residential real estate - Owner occupied		-			43			2			43			14			-			-			1
Multifamily		-			-			-			-			-			-			-			-
HELOC		-			2			19			85			69			12			42			83
HELOC - Purchased		66			-			-			66			229
Other ¹		53			41			142			192			311			25			52			98
Total charge-offs		451			406			397			2,258			1,216			42			810			1,401
Recoveries:
Commercial		12			24			10			48			46			20			8			12
Leases		-			-			-			-			-			-			98			-
Commercial real estate - Investor		102			16			12			139			44			20			26			21
Commercial real estate - Owner occupied		565			-			-			566			3			208			131			1
Construction		1			-			-			1			1			-			171			-
Residential real estate - Investor		18			6			7			45			26			266			12			21
Residential real estate - Owner occupied		25			109			15			157			52			49			130			23
Multifamily		-			-			-			-			8			-			-			-
HELOC		52			55			21			248			79			24			139			141
HELOC - Purchased		-			-			-			-			-
Other ¹		41			29			61			130			152			37			40			60
Total recoveries		816			239			126			1,334			411			624			755			279
Net (recoveries) charge-offs		(365)			167			271			924			805			(582)			55			1,122
Adoption of ASU 326		-			-			-			5,879			-
Adoption of ASC 326																	-			-			5,879
Provision for credit losses on loans		1,280			1,395			550			8,174			1,450			(3,470)			992			5,499
Allowance at end of period	$	32,918		$	31,273		$	19,651		$	32,918		$	19,651		$	30,967		$	33,855		$	30,045

Average total loans (exclusive of loans held-for-sale)	$	2,035,584		$	2,038,082		$	1,890,992		$	1,989,921		$	1,893,025		$	2,006,157		$	2,023,238		$	1,941,760
Net charge-offs / (recoveries) to average loans		(0.02)	%		0.01	%		0.01	%		0.05	%		0.04	%		(0.03)	%		0.00	%		0.06	%
Allowance at period end to average loans		1.62	%		1.53	%		1.04	%		1.65	%		1.04	%		1.54	%		1.67	%		1.55	%

¹ The “Other” segment includes consumer and overdrafts.

The coverage ratio of the ACL on loans to nonperforming loans was ~~158.0%~~146.2% as of ~~September 30, 2020,~~March 31, 2021, which was ~~an increase~~a decrease from the coverage ratio of ~~124.9%~~146.9% as of December 31, ~~2019, and~~2020, but an increase from ~~146.6%~~137.6% as of ~~September 30, 2019.~~March 31, 2020. When measured as a percentage of average loans, our total ACL on loans was ~~1.62%~~1.54% for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, and ~~1.04%~~1.55% for the like period of ~~September 30, 2019. This increase was driven by the adoption of CECL as of January 1, 2020.~~March 31, 2020, reflecting minimal change year over year.

We recorded PCD loans (formerly PCI loans), which refers to loans that showed evidence of deteriorated credit quality upon purchase, in our acquisition of ABC Bank. PCD loans totaled $10.6 million, net of purchase accounting adjustments, as of September 30, 2020, and the credit-related component of the purchase accounting adjustments on these loans, which totaled $2.5 million, was reclassified to ACL, per CECL guidance, on January 1, 2020. We perform re-estimations of cash flows on our PCD loan portfolio on a quarterly basis. Any decline in expected cash flows as a result of these re-estimations, due in any part to a change in credit, is deemed credit impairment, and recorded as provision for credit losses during the period.

~~Tableof Contents~~

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at ~~September 30, 2020,~~March 31, 2021, and general changes in lending policy, procedures and staffing, as well as other external factors, such as the impacts of the COVID-19 pandemic. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. Further delayed recovery or further deterioration in market conditions related to COVID-19 and the associated impacts on our customers, changes in business climates and the condition of collateral at the time of default or repossession may revise our current expectations of future credit losses in future reporting periods.

Tableof Contents

Other Real Estate Owned

As of ~~September 30, 2020,~~March 31, 2021, OREO totaled ~~$2.7~~$2.2 million, reflecting a ~~$2.3~~$311,000 reduction from the $2.5 million at December 31, 2020, and a $2.9 million reduction from the $5.0 million at ~~December~~March 31, ~~2019,~~2020. One property sale of $305,000 net book value and ~~a $2.0 million reduction~~no transfers to OREO from ~~the $4.7 million at September 30, 2019. There was one property addition of $314,000 to the OREO portfolio~~loans were recorded in the ~~third~~first quarter of 2021. There were two property additions totaling $491,000 in the first quarter of 2020. ~~There were seven~~The net book value of four property disposals ~~totaling $2.7 million~~ in the ~~third~~first quarter of ~~2020.~~2020 totaled $288,000. Valuation write-downs occurred in the ~~third~~first quarter of ~~2020~~2021 which totaled ~~$46,000,~~$6,000, compared to ~~$120,000~~$93,000 of OREO valuation write-downs in the fourth quarter of ~~2019,~~2020, and ~~$203,000~~$158,000 of valuation write-downs recorded in the ~~third~~first quarter of ~~2019.~~2020.

September 30, 2020
OREO
Three Months Ended

Percent Change From
(Dollars in thousands)
September 30,

December 31,

September 30,

December 31,

September 30,

2020

2019

2019

2019

2019
Balance at beginning of period
$
5,082

$
4,682

$
5,668

8.5

(10.3)

Property additions, net of acquisition adjustments

314

567

305

(44.6)

3.0

Less:

Proceeds from property disposals, net of participation purchase and of gains/losses

2,664

125

1,088

2,031.2

144.9

Period valuation adjustments

46

120

203

(61.7)

(77.3)

Balance at end of period
$
2,686

$
5,004

$
4,682

(46.3)

(42.6)

~~N/M -~~ ~~Not meaningful~~


							March 31, 2021
OREO	Three Months Ended						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Balance at beginning of period	$	2,474	$	2,686	$	5,004	(7.9)	(50.6)
Property additions, net of acquisition adjustments		-		-		491	-	(100.0)
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		305		119		288	156.3	5.9
Period valuation adjustments		6		93		158	(93.5)	(96.2)
Balance at end of period	$	2,163	$	2,474	$	5,049	(12.6)	(57.2)

In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future. Of note, properties valued in total at ~~$1.5~~$1.4 million, or approximately ~~55.8%~~65.8% of total OREO at ~~September 30, 2020,~~March 31, 2021, 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)	September 30, 2020				December 31, 2019				September 30, 2019				March 31, 2021				December 31, 2020				March 31, 2020
		Amount	% of Total			Amount	% of Total			Amount	% of Total			Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	450	17	%	$	174	3	%	$	-	-	%	$	430	20	%	$	430	17	%	$	450	9	%
Lots (single family and commercial)		1,461	54	%		3,945	79	%		4,044	86	%		1,381	64	%		1,387	57	%		3,747	74	%
Vacant land		351	13	%		41	1	%		42	1	%		352	16	%		352	14	%		41	1	%
Commercial property		424	16	%		844	17	%		596	13	%		-	0	%		305	12	%		811	16	%
Total other real estate owned	$	2,686	100	%	$	5,004	100	%	$	4,682	100	%	$	2,163	100	%	$	2,474	100	%	$	5,049	100	%

~~Tableof Contents~~

Deposits and Borrowings


							September 30, 2020								March 31, 2021
Deposits	As of						Percent Change From		As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,	March 31,		December 31,		March 31,		December 31,	March 31,
	2020		2019		2019		2019	2019	2021		2020		2020		2020	2020
Noninterest bearing demand	$	889,085	$	669,795	$	643,355	32.7	38.2	$	982,664	$	909,505	$	702,598	8.0	39.9
Savings		382,711		307,015		304,726	24.7	25.6		429,256		399,057		338,134	7.6	26.9
NOW accounts		492,407		425,792		413,291	15.6	19.1		522,760		486,612		428,419	7.4	22.0
Money market accounts		310,613		282,478		286,484	10.0	8.4		338,921		316,465		277,018	7.1	22.3
Certificates of deposit of less than $100,000		208,570		227,578		222,378	(8.4)	(6.2)		193,291		200,107		231,704	(3.4)	(16.6)
Certificates of deposit of $100,000 through $250,000		129,522		151,279		142,669	(14.4)	(9.2)		132,514		164,982		150,185	(19.7)	(11.8)
Certificates of deposit of more than $250,000		66,335		62,812		61,588	5.6	7.7		57,136		60,345		67,584	(5.3)	(15.5)
Total deposits	$	2,479,243	$	2,126,749	$	2,074,491	16.6	19.5	$	2,656,542	$	2,537,073	$	2,195,642	4.7	21.0

Total deposits were ~~$2.48~~$2.66 billion at ~~September 30, 2020,~~March 31, 2021, which reflects a ~~$352.5~~$119.5 million increase from total deposits of ~~$2.13~~$2.54 billion at December 31, ~~2019,~~2020, and an increase of ~~$404.8~~$460.9 million from total deposits of ~~$2.07~~$2.20 billion at ~~September 30, 2019.~~March 31, 2020. The increase in deposits at ~~September 30, 2020,~~March 31, 2021, compared to both December 31, ~~2019,~~2020, and ~~September 30, 2019,~~March 31, 2020, was due to increases in noninterest bearing demand,

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savings, ~~and~~ NOW, ~~accounts, with smaller increases noted in~~and money market accounts, ~~and~~with decreases noted in all maturity categories of certificates of deposit. These total deposit ~~more than $250,000. These~~ increases in the linked quarter as well as the year over year periods were primarily due to federal stimulus funds received by depositors and a decrease in consumer spending due to the COVID-19 pandemic.

In addition to deposits, we obtained funding from other sources in all periods presented. Securities sold under repurchase agreements totaled ~~$59.3~~$77.3 million at ~~September 30, 2020,~~March 31, 2021, a ~~$10.6~~$10.3 million, or ~~21.7%~~15.4%, increase from ~~$48.7~~$67.0 million at December 31, ~~2019. We also had short-term borrowings of $6.1~~2020, and a $51.2 million increase from ~~the FHLBC at September 30, 2020, as compared to $48.5 million in short-term borrowings at December~~March 31, ~~2019.~~2020. Our notes payable and other borrowings is comprised of one remaining ~~$6.5~~$6.3 million long-term FHLBC advance, ~~acquired in our ABC Bank acquisition,~~ which matures on February 2, 2026, and ~~$18.0~~$16.0 million outstanding on a $20.0 million term note originated with a correspondent bank in the first quarter of 2020, to facilitate the redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures, completed on March 2, 2020. Notes payable and other borrowings of ~~$24.5~~$22.3 million as of ~~September 30, 2020, increased $17.8~~March 31, 2021, decreased $1.1 million from December 31, ~~2019,~~2020, and ~~increased $15.6~~decreased $4.3 million from ~~September 30, 2019.~~March 31, 2020.

The Company is indebted on senior notes originated in December 2016, totaling ~~$44.3~~$44.4 million, net of deferred issuance costs, as of ~~September 30, 2020.~~March 31, 2021. These notes mature in December 2026, and include interest payable semi-annually at 5.75% for five years. Beginning December 2021, the interest becomes payable quarterly at three month LIBOR plus 385 basis points. The Company is also indebted on $25.8 million, net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust II (“Trust II”). The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of ~~4.40%~~4.41% as of ~~September 30, 2020,~~March 31, 2021, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017, rate reset. The Company also redeemed $32.6 million of trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust I, on March 2, 2020, as noted above. The cash paid at redemption of $33.0 million included accrued interest of $438,000 on the debentures, and resulted in a payment of $10.13 per preferred share.

Capital

As of ~~September 30, 2020,~~March 31, 2021, total stockholders’ equity was ~~$296.3~~$311.1 million, which was an increase of ~~$18.4~~$4.0 million from ~~$277.9~~$307.1 million as of December 31, ~~2019.~~2020. This increase is attributable to an increase in retained earnings of ~~$15.1~~$11.6 million, comprised of net income year to date of ~~$19.8~~$11.9 million, less a reduction to retained earnings ~~of $3.8 million upon the adoption of ASU 2016-13 (CECL) as of January 1, 2020, and~~$300,000 for payment ~~of $900,000~~ of dividends to our common stockholders in the ~~nine months ended September 30, 2020.~~first quarter of 2021. In addition, ~~an increase~~a decrease to accumulated other comprehensive income of ~~$6.5~~$1.5 million was recorded due to a net ~~increase~~decrease in unrealized gains on available-for-sale securities, net of unrealized losses on swaps. Total stockholders’ equity was reduced by an increase of ~~$4.4~~$3.9 million to our treasury stock ~~year to date 2020,~~in the first quarter of 2021, primarily due to repurchases of our common shares pursuant to our stock repurchase program.

In the third quarter of 2019, our Board of Directors authorized a stock repurchase program, under which we were authorized to repurchase up to approximately 1.5 million shares (or approximately 5%) of our outstanding common stock through open market purchases, trading plans established in accordance with U.S. Securities and Exchange Commission rules, privately negotiated transactions, or by other means. The stock repurchase program expired on September 19, 2020; however, we received a notice of non-objection from the Federal Reserve Bank of Chicago to extend the previously authorized stock repurchase program through October 20, 2021. The actual means

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and timing of any repurchases, quantity of purchased shares and prices will be, subject to certain limitations, at the discretion of management and will depend on a number of factors, including, without limitation, market prices of our common stock, general market and economic condition, and applicable legal and regulatory requirements. These share purchases are anticipated to be funded by our cash on hand. During the ~~third~~first quarter of ~~2020,~~2021, we repurchased ~~137,756~~455,134 shares of our common stock at a weighted average price of ~~$8.34~~$12.31 per share pursuant to our stock repurchase program. To date, we have repurchased ~~596,411~~1,174,407 shares orof our common stock at a weighted average price of ~~$7.35~~$9.45 per share, under our stock repurchase program.

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


	Minimum Capital		Well Capitalized								Minimum Capital		Well Capitalized
	Adequacy with		Under Prompt								Adequacy with		Under Prompt
	Capital Conservation		Corrective Action		September 30,		December 31,		September 30,		Capital Conservation		Corrective Action		March 31,		December 31,		March 31,
	Buffer, if applicable¹		Provisions²		2020		2019		2019		Buffer, if applicable¹		Provisions²		2021		2020		2020
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		11.97	%	11.14	%	10.89	%	7.00	%	N/A		12.43	%	11.94	%	10.85	%
Total risk-based capital ratio	10.50	%	N/A		14.33	%	14.53	%	14.34	%	10.50	%	N/A		14.73	%	14.26	%	13.09	%
Tier 1 risk-based capital ratio	8.50	%	N/A		13.08	%	13.65	%	13.45	%	8.50	%	N/A		13.53	%	13.01	%	11.93	%
Tier 1 leverage ratio	4.00	%	N/A		10.07	%	11.93	%	11.54	%	4.00	%	N/A		10.02	%	10.21	%	10.57	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	14.24	%	14.35	%	14.83	%	7.00	%	6.50	%	14.59	%	13.75	%	12.89	%
Total risk-based capital ratio	10.50	%	10.00	%	15.49	%	15.23	%	15.72	%	10.50	%	10.00	%	15.80	%	15.00	%	14.07	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	14.24	%	14.35	%	14.83	%	8.50	%	8.00	%	14.59	%	13.75	%	12.89	%
Tier 1 leverage ratio	4.00	%	5.00	%	10.90	%	12.50	%	12.68	%	4.00	%	5.00	%	10.78	%	10.74	%	11.36	%

¹ Amounts are shown inclusive of a capital conservation buffer of 2.50%. Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes.

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

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 ~~provides~~provided banking organizations that adopt 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. The cumulative amount that is not recognized in regulatory capital, in addition to the $3.8 million Day One impact of CECL adoption, will be phased in at 25% per year beginning January 1, 2022. As of ~~September 30, 2020,~~March 31, 2021, the capital measures of the Company exclude ~~$5.7~~$5.1 million, which is the ~~Day One impact to retained earnings, and 25% of the $10.4 million increase, net of taxes, in the ACL in the nine months ended September 30, 2020, excluding PCD loans.~~modified CECL transition adjustment.

As of ~~September 30, 2020,~~March 31, 2021, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the now fully phased-in capital conservation buffer requirements. In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, decreased from ~~10.54%~~10.10% at December 31, ~~2019,~~2020, to ~~9.96%~~9.82% at ~~September 30, 2020.~~March 31, 2021. Our GAAP tangible common equity to tangible assets ratio was ~~9.32%~~9.23% at ~~September 30, 2020,~~March 31, 2021, compared to ~~9.81%~~9.48% as of December 31, ~~2019.~~2020. Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, decreased from ~~9.83%~~9.49% at December 31, ~~2019,~~2020, to ~~9.34%~~9.24% at ~~September 30, 2020.~~March 31, 2021, due to the growth in total tangible assets.

In November 2019, the federal banking agencies published final rules to provide an optional simplified measure of capital adequacy for qualifying community banking organizations, which we refer to as the community bank leverage ratio (“CBLR”) framework. Generally, under the CBLR framework, qualifying community banking organizations with total assets of less than $10 billion, and limited amounts of off-balance-sheet exposures and trading assets and liabilities, may elect whether to be subject to the CBLR framework if they have a

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CBLR of greater than 9%. Qualifying community banking organizations that elect to be subject to the CBLR framework and continue to meet all requirements under the framework would not be subject to risk-based or other leverage capital requirements and, in the case of an insured depository institution, would be considered to have met the well capitalized ratio requirements for purposes of the FDIC’s Prompt Corrective Action framework. The final rule became effective on January 1, 2020. We do not have any immediate plans to elect to use the community bank leverage ratio framework, but may make such an election in the future.

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


	September 30, 2020						December 31, 2019						March 31, 2021						December 31, 2020
Tangible common equity	GAAP			Non-GAAP			GAAP			Non-GAAP			GAAP			Non-GAAP			GAAP			Non-GAAP
(Dollars in thousands)

Total Equity	$	296,268		$	296,268		$	277,864		$	277,864		$	311,113		$	311,113		$	307,087		$	307,087
Less: Goodwill and intangible assets		20,901			20,901			21,275			21,275			20,661			20,661			20,781			20,781
Add: Limitation of exclusion of core deposit intangible (80%)		N/A			459			N/A			534			N/A			411			N/A			435
Adjusted goodwill and intangible assets		20,901			20,442			21,275			20,741			20,661			20,250			20,781			20,346
Tangible common equity	$	275,367		$	275,826		$	256,589		$	257,123		$	290,452		$	290,863		$	286,306		$	286,741
Tangible assets
Total assets	$	2,974,824		$	2,974,824		$	2,635,545		$	2,635,545		$	3,166,652		$	3,166,652		$	3,040,837		$	3,040,837
Less: Adjusted goodwill and intangible assets		20,901			20,442			21,275			20,741			20,661			20,250			20,781			20,346
Tangible assets	$	2,953,923		$	2,954,382		$	2,614,270		$	2,614,804		$	3,145,991		$	3,146,402		$	3,020,056		$	3,020,491

Common equity to total assets		9.96	%		9.96	%		10.54	%		10.54	%		9.82	%		9.82	%		10.10	%		10.10	%
Tangible common equity to tangible assets		9.32	%		9.34	%		9.81	%		9.83	%		9.23	%		9.24	%		9.48	%		9.49	%

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

Liquidity

Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. We monitor our borrowing capacity at the FHLBC as part of our liquidity management process as supervised by our Asset and Liability Committee (“ALCO”) and reviewed by our Board of Directors. In addition, due to the potential impacts on our liquidity stemming from the COVID-19 pandemic, our senior management team monitors cash balances daily to ensure we have adequate liquidity to meet our operational and financing needs. As of ~~September 30, 2020,~~March 31 2021, our cash on hand liquidity totaled ~~$313.1~~$440.9 million, an increase of ~~$262.5~~$111.0 million over cash balances held as of December 31, ~~2019.~~2020.

Net cash inflows from operating activities were ~~$16.8~~$15.4 million during the first ~~nine~~three months of ~~2020,~~2021, compared with net cash inflows of ~~$37.5~~$9.0 million in the same period of ~~2019.~~2020. Funds used to originate loans held-for-sale, net of proceeds from sales of loans held-for-sale, were a source of inflows for the first ~~nine~~three months of ~~2020~~2021 and outflows for the like period of ~~2019.~~2020. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the ~~nine~~three months ended ~~September 30, 2020 and~~March 31, 2021, but were a source of inflows for the like period of ~~2019.~~2020. 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 ~~$54.4~~$26.6 million in the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, compared to net cash ~~inflows~~outflows of ~~$74.6 million~~$220,000 in the same period in ~~2019.~~2020. In the first ~~nine~~three months of 2021, securities transactions accounted for net outflows of $102.4 million, and the principal change on loans accounted for net inflows of $75.9 million. In the first three months of 2020, securities transactions accounted for net inflows of ~~$45.0 million, and the principal change on loans accounted for net outflows of $100.4 million. In the first nine months of 2019, securities transactions accounted for net inflows of $77.1~~$28.1 million, and net principal on loans funded accounted for net outflows of ~~$2.8~~$27.7 million. Proceeds from sales of OREO accounted for ~~$3.1 million~~$325,000 and ~~$2.6 million~~$311,000 in investing cash inflows for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively.

Net cash inflows from financing activities in the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 were ~~$300.2~~$122.3 million, compared with net cash ~~outflows~~inflows of ~~$113.3~~$13.7 million in the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020. Net deposit inflows in the first ~~nine~~three months of ~~2020~~2021 were

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~~$352.5~~ $119.5 million compared to net deposit inflows of $68.9 million in the first three months of 2020. Other short-term borrowings had no net cash outflows in the first three months of 2021, compared to $42.1 million in the first ~~nine~~three months of ~~2019. Other short-term borrowings had net cash outflows of $42.4 million in the first nine months of 2020, and $65.5 million in the first nine months of 2019.~~2020. Changes in securities sold under repurchase agreements accounted for ~~$10.6~~$10.3 million and ~~$2.2~~$2.5 million in net inflows for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. The redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures resulted in cash outflows of $32.6 million in the first quarter of 2020, which was partially offset by a $20.0 million term note cash inflow which was originated to partially fund this trust preferred redemption; ~~$18.0~~$16.0 million of this term note remains outstanding as of ~~September 30, 2020.~~March 31, 2021.

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Cash and cash equivalents for the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, totaled ~~$313.1~~$440.9 million, as compared to ~~$54.0~~$73.1 million as of ~~September 30, 2019.~~March 31, 2020. 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 $20 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.

In the first quarter of 2020 the Federal Reserve cut the Fed Funds rate three times down to a target range of 0% to 0.25%. Additionally, the Federal Reserve has been aggressively purchasing various assets since March 2020 in an effort to stabilize the economy from the continuing effects of COVID-19. Overall, the Federal Reserve’s balance sheet has increased from about $4.2 trillion in early March 2020 to about ~~$7.1~~$7.7 trillion as of ~~September 30, 2020. The~~March 31, 2021, the current pace of asset purchases is expected to continue. Despite the market pricing in a rate hike in late 2022, the Federal Reserve ~~has indicated~~maintained the statement that ~~it expects~~ the Fed Funds rate towill remain in the 0% to 0.25% range through ~~2023 and possibly even longer.~~2023. 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 well within our guidelines so that such exposure does not pose a material risk to our future earnings.

We seek to 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 ~~September 30, 2020,~~March 31, 2021 and December 31, ~~2019,~~2020 are outlined in the table below.

Our net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction. Our asset-liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 1420 of our consolidated financial statements included in this ~~quarterly~~annual report. 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 December 31, ~~2019,~~2020, we had ~~modest~~notable amounts of earnings gains (in both dollars and percentage) should interest rates ~~rise, and limited earnings reductions should~~rise. Due to relatively low current market interest rates, ~~fall.~~it was not possible to calculate any down rate scenarios because many of the market interest rates would fall below zero in that scenario. The projected increases in income across all up rate interest rate shock scenarios as of ~~September 30, 2020~~March 31, 2021 were ~~considerably higher~~moderately lower than ~~those in~~ December 31, ~~2019.~~2020. This was primarily the result of updated assumptions in our asset liability management model associated with an updated deposit decay study, deposit beta study, and loan prepayment study. Additionally, large growth in non-maturity deposits since the beginninga second round of the year also contributed to the increases. However, the September 30, 2020 net interest income sensitivity profile did not materially change from the June 30, 2020 result. The June 30, 2020 and September 30, 2020 percent change in net interest income projected varied by less than 0.5% for all interest rate shock scenarios. The general balance sheet composition of both assets and liabilities changed onlyPPP loans.

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modestly during the quarter, which resulted in minimal change to our interest rate risk profile. Management still considers the current level of interest rate risk to be moderate but intends to continue looking for market opportunities to flatten its interest rate risk profile.

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%, and 2% and no change in the slope of the yield curve. Due to the low interest rate environment, it was not possible to calculate ~~certain~~any down rate scenarios because rates would fall below zero in all down rate scenarios.

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Analysis of Net Interest Income Sensitivity

(Dollars in thousands)


																			Analysis of Net Interest Income Sensitivity
	Immediate Changes in Rates																		Immediate Changes in Rates
		(2.0)	%		(1.0)	%		(0.5)	%		0.5	%		1.0	%		2.0	%		(2.0)	%	(1.0)	%	(0.5)	%		0.5	%		1.0	%		2.0	%
September 30, 2020
March 31, 2021
Dollar change		N/M			N/M			N/M		$	3,093		$	6,099		$	11,278			N/M		N/M		N/M		$	2,793		$	5,985		$	12,200
Percent change		N/M			N/M			N/M			3.7	%		7.2	%		13.4	%		N/M		N/M		N/M			3.2	%		6.9	%		14.1	%

December 31, 2019
December 31, 2020
Dollar change		N/M		$	(6,229)		$	(2,670)		$	993		$	2,016		$	3,856			N/M		N/M		N/M		$	3,405		$	6,879		$	13,145
Percent change		N/M			(6.6)	%		(2.8)	%		1.1	%		2.1	%		4.1	%		N/M		N/M		N/M			3.9	%		7.8	%		14.9	%

N/M - Not meaningful

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

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 ~~September 30, 2020.~~March 31, 2021. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of ~~September 30, 2020,~~March 31, 2021, 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.

~~We adopted the new guidance under Accounting Standards Update 2016-13, (ASC Topic 326) “~~~~Measurement of Credit Losses on Financial Instruments,”~~ also known as Current Expected Credit Losses, or CECL, on January 1, 2020. The Company implemented new accounting processes and procedures, which required us to update our internal controls over accounting for the allowance for credit losses, and the related disclosures under the new guidance. As a result of the adoption of CECL, we implemented new internal controls designed to mitigate the risks associated with these new processes and to provide assurance at a reasonable level of the fair presentation of our consolidated financial statements and related disclosures. There were no ~~other~~ changes in the Company’s internal controls over financial reporting during the ~~nine months~~quarter ended ~~September 30, 2020,~~March 31, 2021, 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.

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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, ~~2019,~~2020, 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,”~~Statements” and ~~set forth~~ in ~~Part II, Item 1A of~~ our ~~Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.~~

~~Except as set forth in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and filed~~other filings with the SEC on May 11, 2020, which is incorporated herein by this reference, there have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 6, 2020.SEC.

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

Stock Repurchases

The actual means and timing of any repurchases, quantity of purchased shares and prices will be, subject to certain limitations, at the discretion of management and will depend on a number of factors, including, without limitation, market prices of our common stock, general market and economic conditions, and applicable legal and regulatory requirements. Repurchases under the Repurchase Program may be initiated, discontinued, suspended or restarted at any time provided that repurchases under the Repurchase Program after October 20, 2021, would require Federal Reserve non-objection or approval. We are not obligated to repurchase any shares under the Repurchase Program.

The following table presents our stock repurchases for the quarter ended ~~September 30, 2020.~~March 31, 2021.


				Total Number of	Maximum Number
	Total			Shares Purchased	of Shares that May
	Number of		Average	as Part of Publicly	Yet Be
(Dollars in thousands, except for per share	Shares		Price Paid	Announced Plans	Purchased Under
amounts)	Purchased (a)		per Share (b)	or Programs (c)(1)	the Plans or Programs (d)
January 1, 2021 - January 31, 2021	-		-	-	775,553
February 1, 2021 - February 28, 2021	249,557		11.44	249,557	525,996
March 1, 2021 - March 31, 2021	205,577		13.35	205,577	320,419
Total	455,134	$	12.31	455,134	320,419

Total Number of

Maximum Number

Total

Shares Purchased

of Shares that May

Number of

Average

as Part of Publicly

Yet Be
(Dollars in thousands, except for per share

Shares

Price Paid

Announced Plans

Purchased Under
amounts)

Purchased

per Share

or Programs

the Plans or Programs
July 1, 2020 - July 31, 2020

-

$
-

-

1,036,171
August 1, 2020 - August 31, 2020

-

-

-

1,036,171
September 1, 2020 - September 30, 2020

137,756

8.34

596,411

898,415
Total

137,756

$
8.34

596,411

898,415

~~Tableof Contents~~

(1)

We publicly announced the extension of our Repurchase Program, which will expire on October 20, 2021 unless further extended as described above, in our Current Report on Form 8-K filed on October 21, 2020, and 898,415 shares remained available for repurchase under the Repurchase Program as of October 20, 2020.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

~~Amendment to Bylaws~~None.

Given the timing of the following amendment, the following information is included in this Quarterly Report on Form 10-Q pursuant to Item 5.03 of Form 8-K, “Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year” in lieu of filing a Form 8-K.

On November 4, 2020, our board of directors amended and restated our Company’s bylaws (the “Amended Bylaws”), effective immediately. The Amended Bylaws replace and supersede in their entirety the then existing bylaws of the Company (the “Prior Bylaws”). Substantive amendments to the Prior Bylaws include:

~~Stockholder Proposals~~

~~Article II, Section 2.4 of the Prior Bylaws generally provided that a stockholder wishing to submit new business at an annual meeting of stockholders must provide a notice of such proposal at least~~ ~~60 days in advance of the first anniversary date of the previous year’s annual meeting to be considered at the annual meeting. Article II, Section 2.4 of the Prior Bylaws required certain information to be provided by the stockholder making any such proposal.~~

Article II, Section 2.4 of the Amended Bylaws require additional information in the stockholder’s notice to the Company with respect to a stockholder proposal (other than a director nomination) for an annual meeting of stockholders, including, among other things, (a) the stockholder’s name and address; (b) information about the stockholder’s stock ownership in the Company and certain interests and relationships; and (c) a description of the business the stockholder desires to bring before the meeting. In connection with an annual meeting of stockholders, a stockholder generally must submit notice of such stockholder’s intentions to submit a proposal not earlier than 120 days and not later than 90 days prior to the first anniversary of the preceding year’s annual meeting; provide that, if the date of the annual meeting is moved to more than 30 days before or more than 60 days after the anniversary date of the previous year’s meeting, for notice by the stockholder to be timely it must be delivered to us not earlier than 120 days prior to the date of such annual meeting and not later than 90 days prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, then the tenth day following the day on which public announcement of the date of such meeting is first made by the Company. Article II, Section 2.4 of the Amended Bylaws also eliminated a provision in the Prior Bylaws that allowed a stockholder to make a proposal at any time (including the date of the annual meeting) that would be discussed and considered at the annual meeting but not voted on until the subsequent annual meeting.

~~Director Nominations~~

Article II, Section 2.5 of the Prior Bylaws generally provided that a stockholder could nominate candidates for election to the Company’s board of directors if such nominations were made in writing to the Company not less than 60 days nor more than 90 days before the first anniversary of the preceding year’s annual meeting. Article II, Section 2.5 of the Prior Bylaws also required such stockholder’s notice to include certain information related to each proposed nominee, including (a) such nominee’s name, age, business address and residential address; (b) such nominee’s principal occupation; (c) certain information about the nominee’s stock ownership in the Company; and (d) any other information relating to such nominee that would be required to be disclosed on Schedule 13D pursuant to Regulation 13D-G under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and pursuant to Regulation 14A under the Exchange Act. In addition, the stockholder giving the notice was required to provide their name and address, the name and principal business or residential address of any other beneficial stockholders known by such stockholder to support such nominees, and certain information about the their stock ownership in the Company and any other record or beneficial stockholders known by such stockholder to be supporting such nominee. Article II, Section 2.5 of the Prior Bylaws also included requirements for the Board to provide notice of any failure of a stockholder to satisfy these information requirements and a time period to cure such deficiencies.

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Article II, Section 2.5 of the Amended Bylaws has been revised to generally replicate the language in Article X.F of the Company’s Certificate of Incorporation. Article II, Section 2.5 of the Amended Bylaws generally provides that a stockholder can nominate candidates for election to the Company’s board of directors if such nominations are made in writing to the Company not more than 60 days nor fewer than 14 days before any meeting of the stockholders called for the election of directors. Each such written nomination must include (a) the name, age, business address and, if known, residence address of each nominee proposed; (b) the principal occupation or employment of each such nominee for the past five years; and (c) the number of shares of stock of the Company beneficially owned by each such nominee and by the nominating stockholder. The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with these requirements, and if so determined, the Chairman will declare to the meeting that the defective nomination will be disregarded.

The foregoing description of the Amended Bylaws is qualified in its entirety by reference to the full text of the Amended Bylaws, a copy of which is filed as Exhibit 3.1 to this Form 10-Q and is incorporated herein by reference.

~~Date of Annual Meeting of Stockholders~~

We currently anticipate that we will hold our 2021 annual meeting of stockholders (the “2021 Annual Meeting”) on May 18, 2021, which will be more than 30 calendar days before the anniversary date of our 2020 annual meeting of stockholders. In accordance with Rule 14a-5(f) under the Exchange Act, we are hereby notifying our stockholders that, to be considered for inclusion in our 2021 Annual Meeting proxy material under Rule 14a-8 of the Exchange Act, your proposal must be submitted in writing by December 17, 2020. If you wish to bring a proposal (other than a director nomination) before the 2021 Annual Meeting outside of Rule 14a-8 (that will not be included in our proxy materials), you must submit your proposal in writing not later than the close of business on February 17, 2021, but no earlier than the close of business on January 18, 2021. If you wish to nominate a candidate for election to our board of directors at the 2021 Annual Meeting, you must provide written notice of such nomination no later than May 4, 2021, but no earlier than March 19, 2021. You are also advised to review our certificate of incorporation or bylaws, as applicable, which contain additional requirements about advance notice of director nominations and stockholder proposals. All such notices should be directed, in writing, to our Secretary at 37 South River Street, Aurora, Illinois 60507.

Item 6. Exhibits

Exhibits:



~~3.1~~	~~Bylaws of Old Second Bancorp, Inc., as amended and restated through November 4, 2020.~~

10.1	Compensation and Benefits Assurance Agreement dated as of March 16, 2021, between Old Second Bancorp, Inc. ~~Voluntary Deferred Compensation Plan, effective November 1, 2020~~and Richard A. Gartelmann, Jr., Executive Vice President (incorporated by reference to Exhibit 10.1 toof the Company’s Current Report on Form 8-K filed on ~~September 29, 2020)~~March 19, 2021)..

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 ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019;~~2020; (ii) Consolidated Statements of Income for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iii) Consolidated Statements of Stockholders’ Equity for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; (iv) Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019;~~2020; and (v) 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).

	* As provided in Rule 406T of Regulation S-T, these interactive data files shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 as amended, or otherwise subject to liability under those sections.

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SIGNATURES

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


	OLD SECOND BANCORP, INC.


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


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


DATE: ~~November 6, 2020~~May 7, 2021

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7564


	PART I
		Page Number
Item 1.	Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4238
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6959
Item 4.	Controls and Procedures	7060
	PART II

Item 1.	Legal Proceedings	7160
Item 1.A.	Risk Factors	7160
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7161
Item 3.	Defaults Upon Senior Securities	7261
Item 4.	Mine Safety Disclosure	7261
Item 5.	Other Information	7261
Item 6.	Exhibits	7362

	Signatures	7463


															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
December 31, 2019	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	1,271	$	925	$	2,103	$	4,299	$	328,399	$	144	$	332,842	$	2,132
Leases		362		-		81		443		118,979		329		119,751		128
Commercial real estate - Investor		626		95		343		1,064		517,336		1,695		520,095		348
Commercial real estate - Owner occupied		2,469		1,026		-		3,495		336,829		5,180		345,504		-
Construction		26		-		-		26		69,498		93		69,617		-
Residential real estate - Investor		141		125		-		266		70,051		788		71,105		-
Residential real estate - Owner occupied		3,450		1,351		-		4,801		128,650		2,572		136,023		-
Multifamily		10		1,700		-		1,710		187,995		68		189,773		-
HELOC		735		50		18		803		89,438		1,364		91,605		20
HELOC - Purchased		-		-		-		-		31,672		180		31,852		-
Other ¹		28		-		-		28		13,997		19		14,044		-
Total, excluding PCI		9,118		5,272		2,545		16,935		1,892,844		12,432		1,922,211		2,628
PCI loans, net of purchase accounting adjustments		261		-		-		261		5,377		2,963		8,601		-
Total	$	9,379	$	5,272	$	2,545	$	17,196	$	1,898,221	$	15,395	$	1,930,812	$	2,628

Substandard¹		69		-		2,687		901		119		2,057		-		-		5,833
Total multifamily		27,925		37,940		49,522		46,969		13,269		12,571		202		-		188,398

HELOC
Pass		2,185		2,287		1,697		2,471		694		1,197		73,772		-		84,303
Special Mention		-		-		-		-		-		-		13		-		13
Substandard¹		-		-		88		37		265		93		1,083		-		1,566
Total HELOC		2,185		2,287		1,785		2,508		959		1,290		74,868		-		85,882

HELOC - Purchased
Pass		-		-		-		-		-		22,312		-		-		22,312
Special Mention		-		-		-		-		-		-		-		-		-
Substandard¹		-		-		-		-		-		-		-		-		-
Total HELOC - purchased		-		-		-		-		-		22,312		-		-		22,312

Other
Pass		995		1,415		451		320		468		324		6,527		-		10,500
Special Mention		-		-		-		-		-		-		-		-		-
Substandard¹		-		-		266		6		-		-		-		-		272
Total other		995		1,415		717		326		468		324		6,527		-		10,772

Total loans
Pass		462,620		441,751		284,526		207,644		145,944		139,969		283,056		-		1,965,510
Special Mention		3,223		2,363		2,307		2,706		5,356		16		6,189		-		22,160
Substandard¹		3,368		10,602		10,245		2,924		2,538		10,258		2,722		-		42,657
Total loans	$	469,211	$	454,716	$	297,078	$	213,274	$	153,838	$	150,243	$	291,967	$	-	$	2,030,327


December 31, 2019			Special
	Pass		Mention		Substandard²		Doubtful		Total
Commercial	$	307,948	$	13,206	$	11,688	$	-	$	332,842
Leases		119,045		377		329		-		119,751
Commercial real estate - Investor		510,640		4,529		4,926				520,095
Commercial real estate - Owner occupied		330,891		6,657		7,956		-		345,504
Construction		69,355		-		262		-		69,617
Residential real estate - Investor		69,715		-		1,390		-		71,105
Residential real estate - Owner occupied		132,258		134		3,631		-		136,023
Multifamily		187,560		1,710		503		-		189,773
HELOC		89,804		12		1,789		-		91,605
HELOC - Purchased		31,672		-		180		-		31,852
Other ¹		13,685		-		359		-		14,044
Total, excluding PCI loans	$	1,862,573	$	26,625	$	33,013	$	-	$	1,922,211
PCI loans, net of purchase accounting adjustments		573		261		7,767		-		8,601
Total	$	1,863,146	$	26,886	$	40,780	$	-	$	1,930,812


	TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2020					Nine Months Ended September 30, 2020
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Residential real estate - Owner occupied
HAMP¹	1	$	154	$	153	3	$	410	$	404
Total	1	$	154	$	153	3	$	410	$	404


	TDR Modifications					TDR Modifications
	Three Months Ended September 30, 2019					Nine Months Ended September 30, 2019
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Commercial real estate - Investor
Other²	1	$	1,159	$	1,122	2	$	1,217	$	1,177
Residential real estate - Owner occupied
HAMP¹	-		-		-	3		399		297
HELOC
HAMP¹	-		-		-	1		39		34
Other²	-		-		-	1		39		38
Total	1	$	1,159	$	1,122	7	$	1,694	$	1,546


Noninterest Income	Nine Months Ended				YTD
(Dollars in thousands)	September 30,		September 30,		Percent
	2020		2019		Change
Trust income	$	4,702	$	4,955	(5.1)
Service charges on deposits		4,168		5,841	(28.6)
Residential mortgage banking revenue
Secondary mortgage fees		1,267		621	104.0
Mortgage servicing rights mark to market loss		(2,739)		(2,902)	5.6
Mortgage servicing income		1,447		1,408	2.8
Net gain on sales of mortgage loans		12,123		3,999	203.2
Total residential mortgage banking revenue		12,098		3,126	287.0
Securities (losses) gains, net		(25)		4,476	(100.6)
Change in cash surrender value of BOLI		942		1,045	(9.9)
Death benefit realized on BOLI		57		-
Card related income		4,097		4,433	(7.6)
Other income		2,663		2,682	(0.7)
Total noninterest income	$	28,702	$	26,558	8.1