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, 2021~~March 31, 2022


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

For transition period from to

Commission File Number 000-10537

(Exact name of Registrant as specified in its charter)


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

37 South River Street, Aurora, Illinois 60507

(Address of principal executive offices) (Zip Code)

~~(630)~~(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 2, 2021,~~May 5, 2022, the Registrant has ~~28,707,737~~44,461,045 shares of common stock outstanding at $1.00 par value per share.

Table of Contents

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

Cautionary Note Regarding Forward-Looking Statements

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~~but not limited to, management’s expectations regarding future plans, strategies and financial performance, including regulatory developments, industry and economic trends ~~our proposed merger with West Suburban Bancorp. Inc. (“West Suburban”)~~ and ~~other matters.~~estimates and assumptions underlying accounting policies. Forward-looking statements ~~which may be~~are based ~~upon~~on our current beliefs, expectations and assumptions ~~of the Company's management~~ and on information currently available ~~to management,~~and, can be identified by the ~~inclusion~~use of words such ~~qualifications~~ as “expects,” “intends,” “believes,” “may,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “estimate,” “possible,” “likely” or the negative thereof as well as other ~~indications that~~similar words and expressions of the ~~particular~~future. Forward-looking statements ~~are not historical facts and refer to future periods. Because forward-looking statements relate to the future, they~~ are subject to ~~inherent~~risks, uncertainties ~~risks~~ and ~~changes in circumstances~~assumptions that are difficult to predict as to timing, extent, likelihood and ~~may be outside~~degree of ~~the Company’s control. Actual events and~~occurrence, which could cause our actual results ~~may~~to differ materially from those ~~described~~anticipated in or by such ~~forward-looking statements due~~statements. Potential risks and uncertainties include, but are not limited to, ~~numerous factors, including:~~the following:

●

our ability to execute our growth strategy;

●

the continuing impact of COVID-19 and its variants on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

●

negative economic conditions, including inflation, that may adversely affect the economy, real estate values, the job market and other factors nationally and in our market area, in each case that may affect our liquidity and the performance of our loan portfolio;

●

~~challenges retaining or hiring key personnel, including~~risks with respect to ~~new lenders in key markets and the resulting negative impact on~~ our ability to ~~increase lending activities;~~

●

the possibility that our previously announced merger with West Suburban does not close when expected or at all because stockholder or other conditions to closing are not received or satisfied on a timely basis or at all;

●

~~the occurrence of any event, change or other circumstances that could give rise to the right of the Company, West Suburban or both to terminate the Merger Agreement;~~

●

the occurrence of any event, change or other circumstances that causes the Board of Governors of the Federal Reserve System or the Office of the Comptroller of the Currency to revoke their approvals of the proposed merger with West Suburban or its subsidiary bank, respectively, or otherwise impose conditions on such approvals that could adversely affect the combined company or the benefits of the transaction;

●

~~the possibility that the anticipated benefits of the proposed merger with West Suburban, including anticipated cost savings~~successfully expand and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where the Company and West Suburban do business, or as a result of other unexpected factors or events;

●

the impact of purchase accounting with respect to the proposed merger with West Suburban, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;

●

~~diversion of management’s attention from ongoing business operations and opportunities as a result of the proposed merger with West Suburban;~~

●

~~potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the proposed merger with West Suburban;~~

●

~~the outcome of any legal proceedings that may be instituted against the Company or West Suburban as a result of the proposed merger with West Suburban;~~

●

~~the integration of the~~integrate businesses and operations ofthat we acquire, such as the ~~Company and~~recent acquisition of West Suburban ~~which may take longer than anticipated~~Bancorp, Inc., as well our ability to identify and complete future mergers or ~~be more costly than anticipated or have unanticipated adverse results relating to the Company’s and West Suburban’s existing businesses;~~acquisitions;

●

the financial success and viability of the borrowers of our commercial loans;

●

changes in U.S. monetary policy, the level and volatility of interest rates, the capital markets and other market conditions that may affect, among other things, our liquidity and the value of our assets and liabilities;

●

the transition away from LIBOR to an alternative reference rate;

●

competitive pressures from other financial service businesses and from nontraditional financial technology (“FinTech”) companies;

●

any negative perception of our reputation or financial strength;

●

our ability to raise additional capital on acceptable terms when needed;

●

our ability to raise cost-effective funding to support business plans when needed;

●

our ability to use technology to provide products and services that will satisfy customer demands and create efficiencies in operations;

●

adverse effects on our information technology systems resulting from system failures, human error or cyberattacks;

●

adverse effects of failures by our vendors to provide agreed upon services in the manner and at the cost agreed, particularly our information technology vendors and those vendors performing a service on the Company’s behalf;

●

the impact of any claims or legal actions, including any effect on our reputation;

●

losses incurred in connection with repurchases and indemnification payments related to mortgages;

~~Tableof Contents~~

●

the soundness of other financial institutions and other counter-party risk;

●

changes in accounting standards, rules and interpretations and the related impact on our financial statements, including assumptions surrounding the ongoing impact of ~~CECL,~~our adoption of the Current Expected Credit Losses (“ CECL”) model, which are subject to change based on a number of factors including changes in our macroeconomic forecasts, credit quality, loan composition and other factors;

●

our ability to receive dividends from our subsidiaries;

●

a decrease in our regulatory capital ~~ratios;~~ratios or negative changes in our capital position;

●

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

●

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

●

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

●

increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment, including changes as a result of the ~~new~~current 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 epidemics and pandemics (including COVID-19), war or terrorist activities, such as the war in Ukraine, essential utility outages, deterioration in the global economy, instability in the credit markets, disruptions in our customers’ supply chains or disruption in transportation;

●

changes in trade policy and any related tariffs; and

●

each of the factors and risks under the heading “Risk Factors” in our ~~2020~~2021 Annual Report on Form 10-K our Quarterly Reports on Form 10-Q, the Joint Proxy Statement/Prospectus dated October 21, 2021, filed pursuant to Rule 424(b)(3) on October 25, 2021, relating to our Form S-4 Registration Statement (File No. 333-259964) and in subsequent filings we make with the ~~SEC~~.SEC.

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

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)


	(unaudited)				(unaudited)
	September 30,		December 31,		March 31,		December 31,
	2021		2020		2022		2021
Assets
Cash and due from banks	$	26,705	$	24,306	$	41,511	$	38,565
Interest earning deposits with financial institutions		492,548		305,597		593,166		713,542
Cash and cash equivalents		519,253		329,903		634,677		752,107
Securities available-for-sale, at fair value		715,188		496,178		1,816,450		1,692,488
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		9,917		9,917		21,974		13,257
Loans held-for-sale		3,009		12,611		8,075		4,737
Loans		1,867,942		2,034,851		3,402,370		3,421,948
Less: allowance for credit losses on loans		26,949		33,855		44,308		44,281
Net loans		1,840,993		2,000,996		3,358,062		3,377,667
Premises and equipment, net		44,120		45,477		86,156		88,005
Other real estate owned		1,912		2,474		2,374		2,356
Mortgage servicing rights, at fair value		5,320		4,224		10,376		7,097
Goodwill and core deposit intangible		20,433		20,781
Goodwill						86,332		86,332
Core deposit intangible						15,639		16,304
Bank-owned life insurance ("BOLI")		64,265		63,102		105,424		105,300
Deferred tax assets, net		7,335		8,121		22,628		6,100
Other assets		43,387		47,053		55,579		60,439
Total assets	$	3,275,132	$	3,040,837	$	6,223,746	$	6,212,189

Liabilities
Deposits:
Noninterest bearing demand	$	1,037,638	$	909,505	$	1,461,712	$	1,428,055
Interest bearing:
Savings, NOW, and money market		1,366,138		1,202,134		3,605,457		3,534,367
Time		310,553		425,434		477,556		503,810
Total deposits		2,714,329		2,537,073		5,544,725		5,466,232
Securities sold under repurchase agreements		42,962		66,980		33,521		50,337
Junior subordinated debentures		25,773		25,773		25,773		25,773
Subordinated debentures		59,190		-		59,233		59,212
Senior notes		44,454		44,375		44,506		44,480
Notes payable and other borrowings		20,155		23,393		17,992		19,074
Other liabilities		47,037		36,156		31,678		45,054
Total liabilities		2,953,900		2,733,750		5,757,428		5,710,162

Stockholders’ Equity
Common stock		34,957		34,957		44,705		44,705
Additional paid-in capital		121,074		122,212		203,190		202,443
Retained earnings		262,513		236,579		261,807		252,011
Accumulated other comprehensive income		12,249		14,762
Accumulated other comprehensive (loss) income						(37,484)		8,768
Treasury stock		(109,561)		(101,423)		(5,900)		(5,900)
Total stockholders’ equity		321,232		307,087		466,318		502,027
Total liabilities and stockholders’ equity	$	3,275,132	$	3,040,837	$	6,223,746	$	6,212,189


	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
	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		34,957,384		44,705,150		44,705,150
Shares outstanding		28,707,737		29,328,723		44,461,045		44,461,045
Treasury shares		6,249,647		5,628,661		244,105		244,105

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)


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

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

See accompanying notes to consolidated financial statements.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(unaudited)

(unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,


2021

2020

2021

2020

Interest and dividend income

Loans, including fees

$
21,315

$
21,980

$
64,337

$
67,924

Loans held-for-sale

39

95

132

241

Securities:

Taxable

1,835

1,458

5,282

5,315

Tax exempt

1,285

1,327

3,851

4,178

Dividends from FHLBC and FRBC stock

114

118

342

366

Interest bearing deposits with financial institutions

203

68

432

185

Total interest and dividend income

24,791

25,046

74,376

78,209

Interest expense

Savings, NOW, and money market deposits

209

299

667

1,319

Time deposits

330

1,084

1,239

4,292

Securities sold under repurchase agreements

15

28

67

167

Other short-term borrowings

-

24

-

167

Junior subordinated debentures

286

285

850

1,932

Subordinated debentures

547

-

1,064

-

Senior notes

673

673

2,019

2,019

Notes payable and other borrowings

113

144

355

439

Total interest expense

2,173

2,537

6,261

10,335

Net interest and dividend income

22,618

22,509

68,115

67,874

(Release of) provision for credit losses

(1,500)

300

(8,000)

10,413

Net interest and dividend income after (release of) provision for credit losses

24,118

22,209

76,115

57,461

Noninterest income

Wealth management

2,372

1,889

6,912

5,793

Service charges on deposits

1,368

1,322

3,784

4,168

Secondary mortgage fees

240

492

834

1,267

Mortgage servicing rights mark to market loss

(282)

(160)

(202)

(2,739)

Mortgage servicing income

572

521

1,646

1,447

Net gain on sales of mortgage loans

2,186

5,246

7,802

12,123

Securities gains (losses), net

244

(1)

246

(25)

Change in cash surrender value of BOLI

406

459

1,163

942

Death benefit realized on BOLI

-

(2)

-

57

Card related income

1,624

1,499

��
4,737

4,097

Other income

610

420

1,637

1,572

Total noninterest income

9,340

11,685

28,559

28,702

Noninterest expense

Salaries and employee benefits

12,964

12,586

39,366

36,846

Occupancy, furniture and equipment

2,418

2,003

7,188

6,239

Computer and data processing

1,477

1,226

4,079

3,808

FDIC insurance

211

191

604

403

General bank insurance

301

281

854

764

Amortization of core deposit intangible

113

122

348

374

Advertising expense

107

62

262

228

Card related expense

662

566

1,881

1,612

Legal fees

455

169

645

476

Other real estate expense, net

25

125

138

505

Other expense

3,396

2,935

9,903

8,909

Total noninterest expense

22,129

20,266

65,268

60,164

Income before income taxes

11,329

13,628

39,406

25,999

Provision for income taxes

2,917

3,363

10,295

6,221

Net income

$
8,412

$
10,265

$
29,111

$
19,778

��

Basic earnings per share

$
0.30

$
0.35

$
1.01

$
0.67

Diluted earnings per share

0.29

0.34

0.99

0.65

Dividends declared per share

0.05

0.01

0.11

0.03


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

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

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

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

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



	Accumulated		Accumulated		Total
	Unrealized Gain		Unrealized Gain		Accumulated Other
	(Loss) on Securities		(Loss) on Derivative		Comprehensive
(unaudited)	Available-for -Sale		Instruments		Income/(Loss)
For the Three Months Ended
Balance, December 31, 2020	$	17,413	$	(2,651)	$	14,762
Other comprehensive (loss) income, net of tax		(3,442)		1,946		(1,496)
Balance, March 31, 2021	$	13,971	$	(705)	$	13,266

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

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

~~Consolidated Statements of Comprehensive Income~~

~~(In thousands)~~

(unaudited)

(unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,


2021

2020

2021

2020
Net Income

$
8,412

$
10,265

$
29,111

$
19,778

Unrealized holding (losses) gains on available-for-sale securities arising during the period

(3,007)

5,812

(4,483)

10,455
Related tax benefit (expense)

841

(1,633)

1,277

(2,932)
Holding (losses) gains, after tax, on available-for-sale securities

(2,166)

4,179

(3,206)

7,523

Less: Reclassification adjustment for the net gains (losses) realized during the period

Net realized gains (losses)

244

(1)

246

(25)
Related tax (expense) benefit

(69)

-

(70)

7
Net realized gains (losses) after tax

175

(1)

176

(18)
Other comprehensive (loss) income on available-for-sale securities

(2,341)

4,180

(3,382)

7,541

Changes in fair value of derivatives used for cash flow hedges

218

615

1,207

(1,472)
Related tax (expense) benefit

(62)

(173)

(338)

413
Other comprehensive income (loss) on cash flow hedges

156

442

869

(1,059)

Total other comprehensive (loss) income

(2,185)

4,622

(2,513)

6,482
Total comprehensive income

$
6,227

$
14,887

$
26,598

$
26,260

(unaudited)

(unaudited)

(unaudited)

Accumulated

Accumulated

Total

Unrealized Gain

Unrealized Gain

Accumulated Other

(Loss) on Securities

(Loss) on Derivative

Comprehensive

Available-for -Sale

Instruments

Income/(Loss)
For the Three Months Ended

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, June 30, 2021

$
16,372

$
(1,938)

$
14,434
Other comprehensive (loss) income, net of tax

(2,341)

156

(2,185)
Balance, September 30, 2021

$
14,031

$
(1,782)

$
12,249

For the Nine Months Ended

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

Balance, December 31, 2020

$
17,413

$
(2,651)

$
14,762
Other comprehensive (loss) income, net of tax

(3,382)

869

(2,513)
Balance, September 30, 2021

$
14,031

$
(1,782)

$
12,249

~~See accompanying notes to consolidated financial statements.~~

~~Tableof Contents~~

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

Consolidated Statements of Cash Flows

(In thousands)


	(Unaudited)
	Nine Months Ended September 30,				Three Months Ended March 31,
	2021		2020		2022		2021
Cash flows from operating activities
Net income	$	29,111	$	19,778	$	12,020	$	11,879
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount from amortization on securities		1,736		1,712
Securities (gains) losses, net		(246)		25
(Release of) provision for credit losses		(8,000)		10,413
Net premium / discount amortization on securities						1,809		534
Release of provision for credit losses						-		(3,000)
Originations of loans held-for-sale		(191,679)		(296,388)		(32,739)		(78,284)
Proceeds from sales of loans held-for-sale		207,339		300,045		30,791		85,914
Net gains on sales of mortgage loans		(7,802)		(12,123)		(1,495)		(3,721)
Mortgage servicing rights mark to market loss		202		2,739		(2,978)		(1,113)
Net discount from accretion on loans		(618)		(841)
Net accretion of discount on loans						(2,382)		(520)
Net change in cash surrender value of BOLI		(1,163)		(942)		(124)		(334)
Net gains on sale of other real estate owned		(40)		(188)		(49)		(20)
Provision for other real estate owned valuation losses		65		264		-		6
Depreciation of fixed assets and amortization of leasehold improvements		2,286		2,075		1,086		765
Amortization of core deposit intangibles		348		374		665		120
Change in current income taxes receivable		329		(781)		2,955		3,557
Deferred tax expense (benefit)		1,796		(693)		1,458		668
Change in accrued interest receivable and other assets		2,973		(19,144)		902		2,200
Amortization of purchase accounting adjustment on notes payable and other borrowings		(3)		25
Amortization of junior subordinated debentures issuance costs		-		643
Amortization of subordinated debentures issuance costs		42		-
Amortization of senior notes issuance costs		79		79
Accretion of purchase accounting adjustment on time deposits						(424)		-
Amortization of senior and subordinated debentures issuance costs						47		26
Change in accrued interest payable and other liabilities		12,898		8,060		(12,011)		(3,401)
Stock based compensation		1,113		1,623		747		114
Net cash provided by operating activities		50,766		16,755		278		15,390
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		91,931		41,645		75,650		7,259
Proceeds from sales of securities available-for-sale		35,075		18,006
Purchases of securities available-for-sale		(352,236)		(14,681)		(266,250)		(109,708)
Purchases of FHLBC/FRBC stock						(8,717)		-
Net change in loans		168,551		(100,370)		21,900		75,858
Proceeds from claims on BOLI, net of claims receivable		-		483
Proceeds from sales of other real estate owned, net of participations and improvements		607		3,140		118		325
Proceeds from disposition of fixed assets						1,250		-
Net purchases of premises and equipment		(929)		(2,635)		(487)		(343)
Net cash used in investing activities		(57,001)		(54,412)		(176,536)		(26,609)
Cash flows from financing activities
Net change in deposits		177,256		352,494		78,917		119,469
Net change in securities sold under repurchase agreements		(24,018)		10,575		(16,816)		10,341
Net change in other short-term borrowings		-		(42,375)
Redemption of junior subordinated debentures		-		(32,604)
Issuance of subordinated debentures, net of issuance costs		59,148		-
Issuance of term note		-		20,000
Repayment of term note		(3,000)		(2,000)		(1,000)		(1,000)
Net change in notes payable and other borrowings, excluding term note		(235)		(229)		(81)		(78)
Dividends paid on common stock		(3,177)		(893)		(2,192)		(293)
Purchase of treasury stock		(10,389)		(4,803)		-		(6,178)
Net cash provided by financing activities		195,585		300,165		58,828		122,261
Net change in cash and cash equivalents		189,350		262,508		(117,430)		111,042
Cash and cash equivalents at beginning of period		329,903		50,632		752,107		329,903
Cash and cash equivalents at end of period	$	519,253	$	313,140	$	634,677	$	440,945

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													Accumulated
				Additional				Other				Total					Additional				Other				Total
(unaudited)	(unaudited)	Common		Paid-In		Retained		Comprehensive		Treasury		Stockholders’		(unaudited)	Common		Paid-In		Retained		Comprehensive		Treasury		Stockholders’
		Stock		Capital		Earnings		Income (Loss)		Stock		Equity			Stock		Capital		Earnings		Income (Loss)		Stock		Equity
For the Three Months Ended
Balance, June 30, 2020		$	34,957	$	121,437	$	218,856	$	6,422	$	(99,156)	$	282,516

Balance, December 31, 2020															$	34,957	$	122,212	$	236,579	$	14,762	$	(101,423)	$	307,087
Net income							10,265						10,265							11,879						11,879
Other comprehensive income, net of tax									4,622				4,622
Other comprehensive loss, net of tax																						(1,496)				(1,496)
Dividends declared and paid, ($0.01 per share)							(296)						(296)							(293)						(293)
Vesting of restricted stock																		(2,251)						2,251		-
Stock based compensation					309								309					114								114
Purchase of treasury stock from taxes withheld on stock awards																								(577)		(577)
Purchase of treasury stock from stock repurchase program											(1,148)		(1,148)											(5,601)		(5,601)
Balance, September 30, 2020		$	34,957	$	121,746	$	228,825	$	11,044	$	(100,304)	$	296,268
Balance, March 31, 2021															$	34,957	$	120,075	$	248,165	$	13,266	$	(105,350)	$	311,113

Balance, June 30, 2021		$	34,957	$	120,572	$	255,536	$	14,434	$	(109,561)	$	315,938
Balance, December 31, 2021															$	44,705	$	202,443	$	252,011	$	8,768	$	(5,900)	$	502,027
Net income							8,412						8,412							12,020						12,020
Other comprehensive loss, net of tax									(2,185)				(2,185)									(46,252)				(46,252)
Dividends declared and paid, ($0.05 per share)							(1,435)						(1,435)							(2,224)						(2,224)
Stock based compensation					502								502					747								747
Balance, September 30, 2021		$	34,957	$	121,074	$	262,513	$	12,249	$	(109,561)	$	321,232


								Accumulated
				Additional				Other				Total
		Common		Paid-In		Retained		Comprehensive		Treasury		Stockholders’
		Stock		Capital		Earnings		Income (Loss)		Stock		Equity
For the Nine Months Ended
Balance, December 31, 2019		$	34,854	$	120,657	$	213,723	$	4,562	$	(95,932)	$	277,864
Adoption of ASU 2016-13 (CECL)							(3,783)						(3,783)
Net income							19,778						19,778
Other comprehensive income, net of tax									6,482				6,482
Dividends declared and paid, ($0.03 per share)							(893)						(893)
Vesting of restricted stock			103		(534)						431		-
Stock based compensation					1,623								1,623
Purchase of treasury stock from taxes withheld on stock awards											(423)		(423)
Purchase of treasury stock from stock repurchase program											(4,380)		(4,380)
Balance, September 30, 2020		$	34,957	$	121,746	$	228,825	$	11,044	$	(100,304)	$	296,268


Balance, December 31, 2020		$	34,957	$	122,212	$	236,579	$	14,762	$	(101,423)	$	307,087
Net income							29,111						29,111
Other comprehensive loss, net of tax									(2,513)				(2,513)
Dividends declared and paid, ($0.11 per share)							(3,177)						(3,177)
Vesting of restricted stock					(2,251)						2,251		-
Stock based compensation					1,113								1,113
Purchase of treasury stock from taxes withheld on stock awards											(577)		(577)
Purchase of treasury stock from stock repurchase program											(9,812)		(9,812)
Balance, September 30, 2021		$	34,957	$	121,074	$	262,513	$	12,249	$	(109,561)	$	321,232

Balance, March 31, 2022															$	44,705	$	203,190	$	261,807	$	(37,484)	$	(5,900)	$	466,318

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information. The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented. Results for the period ended ~~September 30, 2021,~~March 31, 2022, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022. These interim consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, ~~2020.~~2021. Unless otherwise indicated, dollar amounts in the tables contained in the notes to the consolidated financial statements are in thousands. Certain items in prior periods have been reclassified to conform to the current presentation.

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

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

Recent Accounting Pronouncements

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

ASU 2018-16, ASU 2020-04 and ASU 2021-01 - In ~~June 2016,~~October 2018, the Financial Standards Board, or FASB, issued ~~Accounting Standards Update (ASU)~~ASU No. ~~2016-13,~~2018-16 “~~Financial Instruments – Measurement of Credit Losses on Financial Instruments~~Derivatives and Hedging (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 collectability815): Inclusion of the ~~reported amounts.~~Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting.” ASU 2018-16 adds the SOFR overnight index swap rate to the list of United States (U.S.) benchmark rates eligible for hedge accounting purposes, which is the fourth rate permissible to be used as a U.S. benchmark rate. This ~~new methodology also requires available-for-sale debt securities~~guidance is effective for annual and interim periods beginning after December 15, 2018, and we do not expect this guidance to have a ~~credit loss recorded through an allowance rather than write-downs through an other than temporary impairment analysis.~~material impact on the financial condition or liquidity of the Company. ASU 2020-04 and ASU 2021-01 Reference Rate Reform (Topic 848) were issued on March 12, 2020 and January 7, 2021, respectively, and each provide further guidance on optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships due to the discontinuation of LIBOR. In addition, on March 5, 2021, the International Swaps and Derivatives Association (“ISDA”) issued a statement with an ~~allowance must be established~~“Index Cessation Event Announcement,” which confirmed the extension of the cessation of LIBOR-referenced rates from December 31, 2021, to June 30, 2023, for certain rate tenors.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

ASU ~~2016-13~~2022-02 – On March 31, 2022, the FASB issued ASU 2022-02 “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 is effective for ~~financial statements issued~~any entities that have adopted CECL, and is effective for fiscal years beginning after December 15, ~~2019,~~2022, including interim periods within those years. The amendments eliminate certain troubled debt restructuring (“TDR”) recognition and ~~was adopted~~measurement guidance previously in effect, and consideration of the TDRs similar to other modified loans under CECL is now required. ASU 2022-02 also requires enhancements to vintage loan disclosures, requiring detail be provided on current-period gross write-offs and disclosure of the amortized cost basis of financing receivables by credit quality indicators and by loan portfolio class of the gross charge-off based on year of origination.

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

Change in Significant Accounting Policies

Significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. During the ~~third~~first quarter of ~~2021,~~2022, the Company had no changes to significant accounting ~~policies.~~policies or estimates.

Subsequent Events

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

Note 2 – Acquisition

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

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

~~On October 19, 2021,~~The following table provides the ~~Company’s Board of Directors declared a cash dividend of $0.05 per share payable on November 8, 2021, to stockholders of record~~preliminary purchase price allocation as of ~~October 29, 2021; dividends~~the December 1, 2021 closing date of ~~$1.4 million are scheduled to be paid to stockholders on November 8, 2021.~~the merger for the estimated fair value of the assets acquired and liabilities assumed, as recorded by the Company.


West Suburban Acquisition Summary
As of Date of Acquisition

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

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

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

~~Note 2 – Proposed Merger with~~Expenses related to the West Suburban ~~Bancorp, Inc.~~acquisition totaled $5.6 million for the quarter ended March 31, 2022, and $13.2 million during the year ended December 31, 2021, and are reported within noninterest expense based on the line items impacted, which are primarily salaries and employee benefits, occupancy, furniture and equipment, computer and data processing, legal fees, and other expense in the Consolidated Statements of Income.

~~On July 25, 2021,~~Purchased loans and leases that reflect a more-than-insignificant deterioration of credit from origination are considered purchased credit deteriorated (“PCD”) loans. For PCD loans, the ~~Company~~initial estimate of expected credit losses was recognized in the allowance for credit losses (“ACL”) on the date of acquisition using the same methodology as other loans and leases held-for-investment. The following table provides a summary of loans purchased as part of the West Suburban acquisition which were individually evaluated and determined to be PCD loans at acquisition.

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Old Second Bancorp, Inc. ~~(“West Suburban”) entered into an Agreement~~ and ~~Plan of Merger and Reorganization (the “Merger Agreement”), under which West Suburban will merge with and into Old Second, with Old Second as the surviving corporation.~~Subsidiaries

Notes to Consolidated Financial Statements

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


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

The ~~merger is expected to close in~~following table presents the carrying amount of all acquired loans as of March 31, 2022 and December 21, 2021, ~~subject to the satisfaction of customary closing conditions,~~ including ~~approval by the stockholders~~loans that, as of the Company and the shareholders of West Suburban. Subject to the terms and conditions of the Merger Agreement, if the merger closes, each West Suburban shareholder will receive 42.413 shares of Company common stock and $271.15acquisition date, had not experienced a more-than-insignificant deterioration in ~~cash, without interest, for each share of West Suburban common stock owned by the shareholder.~~credit quality since origination (“non-PCD loans”):


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

Based on the number of outstanding shares of Company common stock and West Suburban common stock as of September 30, 2021, and based on the exchange ratio of 42.413, it is expected that the Company’s stockholders will hold approximately 64% and West Suburban’s shareholders will hold approximately 36% of the issued and outstanding shares of Company common stock immediately following the closing of the merger.

Note 3 – Securities

Investment Portfolio Management

Our investment portfolio serves the liquidity needs and income objectives of the Company. While the portfolio serves as an important component of the overall liquidity management at the Bank, portions of the portfolio also serve as income producing assets. The size and composition of the portfolio reflects liquidity needs, loan demand and interest income objectives. Portfolio size and composition will be adjusted from time to time. While a significant portion of the portfolio consists of readily marketable securities to address liquidity, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.

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

Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments. FHLBC stock was recorded at ~~$3.7~~$7.1 million at ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020.~~2021. FRBC stock was recorded at $14.9 million at March 31, 2022, and $6.2 million at ~~September 30, 2021, and~~ December 31, ~~2020.~~2021.

The following tables summarize the amortized cost and fair value of the securities portfolio at ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, and the corresponding amounts of gross unrealized gains and losses:

1112

Table of 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, 2021	Cost¹		Gains		Losses		Value
March 31, 2022									Cost¹		Gains		Losses		Value
Securities available-for-sale		��
U.S. Treasury	$	4,017	$	53	$	-	$	4,070	$	227,646	$	13	$	(7,096)	$	220,563
U.S. government agencies		33,915		-		(340)		33,575		62,029		-		(2,993)		59,036
U.S. government agencies mortgage-backed		17,269		764		(215)		17,818		161,119		117		(8,088)		153,148
States and political subdivisions		222,833		16,758		(639)		238,952		237,988		4,358		(5,938)		236,408
Corporate bonds		5,000		-		(8)		4,992		10,000		-		(317)		9,683
Collateralized mortgage obligations		163,756		1,966		(308)		165,414		720,960		298		(24,745)		696,513
Asset-backed securities		187,825		1,646		(133)		189,338		278,941		240		(4,240)		274,941
Collateralized loan obligations		61,085		18		(74)		61,029		167,124		3		(969)		166,158
Total securities available-for-sale	$	695,700	$	21,205	$	(1,717)	$	715,188	$	1,865,807	$	5,029	$	(54,386)	$	1,816,450


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
December 31, 2020	Cost¹		Gains		Losses		Value
December 31, 2021									Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,014	$	103	$	-	$	4,117	$	202,251	$	125	$	(37)	$	202,339
U.S. government agencies		6,811		-		(154)		6,657		62,587		-		(699)		61,888
U.S. government agencies mortgage-backed		16,098		1,112		(1)		17,209		172,016		856		(570)		172,302
States and political subdivisions		229,352		21,269		(1,362)		249,259		240,793		16,344		(672)		256,465
Corporate bonds										10,000		-		(113)		9,887
Collateralized mortgage obligations		53,999		2,866		(280)		56,585		673,238		2,014		(2,285)		672,967
Asset-backed securities		130,959		1,370		(511)		131,818		236,293		1,245		(661)		236,877
Collateralized loan obligations		30,728		15		(210)		30,533		79,838		3		(78)		79,763
Total securities available-for-sale	$	471,961	$	26,735	$	(2,518)	$	496,178	$	1,677,016	$	20,587	$	(5,115)	$	1,692,488

¹ Excludes accrued interest receivable of $~~2.8~~5.2 million and $~~2.7~~4.3 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, that is recorded in other assets on the consolidated balance sheet.

The fair value, amortized cost and weighted average yield of debt securities at ~~September 30, 2021,~~March 31, 2022, by contractual maturity, are listed in the table below. Securities not due at a single maturity date are shown separately.


			Weighted						Weighted
	Amortized		Average		Fair		Amortized		Average		Fair
Securities available-for-sale	Cost		Yield		Value		Cost		Yield		Value
Due in one year or less	$	4,227	1.87	%	$	4,281	$	7,451	1.47	%	$	7,458
Due after one year through five years		36,288	0.79			36,240		300,065	0.95			289,731
Due after five years through ten years		28,159	2.35			29,387		46,076	2.50			44,739
Due after ten years		197,091	3.01			211,681		184,071	2.98			183,762
		265,765	2.62			281,589		537,663	1.78			525,690
Mortgage-backed and collateralized mortgage obligations		181,025	1.73			183,232		882,079	1.50			849,661
Asset-backed securities		187,825	1.14			189,338		278,941	1.33			274,941
Collateralized loan obligations		61,085	1.40			61,029		167,124	2.06			166,158
Total securities available-for-sale	$	695,700	1.88	%	$	715,188	$	1,865,807	1.61	%	$	1,816,450

At ~~September 30, 2021,~~March 31, 2022, the Company’s investments included ~~$154.5~~$218.1 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”). Under the FFEL, private lenders made federally guaranteed ~~student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL securities are~~

1213

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL securities are generally guaranteed by the U.S Department of Education (“DOE”) at not less than 97% of the outstanding principal amount of the loans. The guarantee will reduce to 85% if the DOE receives reimbursement requests in excess of 5% of insured loans; reimbursement will drop to 75% if reimbursement requests exceed 9% of insured loans. In addition to the DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to ~~$15.6~~$20.3 million, or ~~10.03%~~9.29%, of outstanding principal.

At ~~September 30, 2021,~~ March 31, 2022, the Company had ~~invested in~~0 securities issued from 1any one originator, ~~that~~other than the U.S. Government and its agencies, which individually amounted to over 10% of the Company’s stockholders’ equity. ~~Information regarding this issuer and the value of the securities issued follows:~~

September 30, 2021

Amortized

Fair
Issuer

Cost

Value
Towd Point Mortgage Trust

$
32,836

$
34,339

Securities with unrealized losses with no corresponding allowance for credit losses at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):


	Less than 12 months					12 months or more										Less than 12 months					12 months or more
September 30, 2021	in an unrealized loss position					in an unrealized loss position					Total
March 31, 2022																in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair		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		Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. Treasuries																5	$	7,096	$	216,531	-	$	-	$	-	5	$	7,096	$	216,531
U.S. government agencies	2	$	229	$	28,066	4	$	111	$	5,509	6	$	340	$	33,575	5		2,884		54,588	4		109		4,448	9		2,993		59,036
U.S. government agencies mortgage-backed	6		215		6,084	-		-		-	6		215		6,084	124		7,322		142,866	5		766		5,341	129		8,088		148,207
States and political subdivisions	2		23		1,490	1		616		4,085	3		639		5,575	27		4,535		90,991	1		1,403		3,232	28		5,938		94,223
Corporate bonds	1		8		4,992	-		-		-	1		8		4,992	2		317		9,683	-		-		-	2		317		9,683
Collateralized mortgage obligations	7		244		63,495	1		64		7,531	8		308		71,026	208		24,649		647,144	1		96		7,366	209		24,745		654,510
Asset-backed securities	5		79		35,048	1		54		3,270	6		133		38,318	41		4,109		230	4		131		4,534	45		4,240		4,764
Collateralized loan obligations	6		27		20,386	2		47		10,625	8		74		31,011	22		885		128,303	2		84		10,587	24		969		138,890
Total securities available-for-sale	29	$	825	$	159,561	9	$	892	$	31,020	38	$	1,717	$	190,581	434	$	51,797	$	1,290,336	17	$	2,589	$	35,508	451	$	54,386	$	1,325,844


	Less than 12 months					12 months or more										Less than 12 months					12 months or more
December 31, 2020	in an unrealized loss position					in an unrealized loss position					Total
December 31, 2021																in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair	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	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. Treasuries																1	$	37	$	49,719	-	$	-	$	-	1	$	37	$	49,719
U.S. government agencies	-	$	-	$	-	4	$	154	$	6,657	4	$	154	$	6,657	5		592		56,879	4		107		5,008	9		699		61,887
U.S. government agencies mortgage-backed	1		1		141	-		-		-	1		1		141	63		505		78,711	1		65		1,663	64		570		80,374
States and political subdivisions	-		-		-	1		1,362		3,433	1		1,362		3,433	7		55		8,430	1		617		4,051	8		672		12,481
Corporate bonds																2		113		9,887	-		-		-	2		113		9,887
Collateralized mortgage obligations	4		279		8,142	1		1		146	5		280		8,288	133		2,285		381,658	-		-		-	133		2,285		381,658
Asset-backed securities	1		2		251	3		509		49,572	4		511		49,823	20		608		103,819	3		53		3,276	23		661		107,095
Collateralized loan obligations	1		31		7,468	4		179		21,477	5		210		28,945	10		35		45,132	2		43		10,628	12		78		55,760
Total securities available-for-sale	7	$	313	$	16,002	13	$	2,205	$	81,285	20	$	2,518	$	97,287	241	$	4,230	$	734,235	11	$	885	$	24,626	252	$	5,115	$	758,861

Each quarter we perform an analysis to determine if any of the unrealized losses on securities available-for-sale are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. Our assessment includes a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and our ability and intent to hold the security for a period of time sufficient for a recovery in value. We also consider the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. NaN credit losses were determined to be present as of ~~September 30, 2021,~~March 31, 2022, as there was no credit quality deterioration noted. Therefore, 0 provision for credit losses on securities was recognized for the ~~third~~first quarter of 2022.

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

~~The following table presents proceeds~~As of March 31, 2022, securities valued at $478.2 million were pledged to secure deposits and borrowings, and for other purposes, a decrease from ~~sale and net realized gains (losses) on~~$501.3 million of securities ~~available-for-sale for the three and nine months ended September 30, 2021 and 2020:~~

pledged at year-end 2021.

1314

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

Securities available-for-sale

2021

2020

2021

2020


Proceeds from sales of securities

$
26,873

$
-

$
35,075

$
18,006

Gross realized gains on securities

$
262

$
-

$
267

$
17

Gross realized losses on securities

(18)

(1)

(21)

(42)

Net realized gains (losses)

$
244

$
(1)

$
246

$
(25)

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

$
(69)

$
-

$
(70)

$
7

Effective tax rate applied

28.3
%

0.0
%

28.5
%

28.0
%

As of September 30, 2021, securities valued at $353.2 million were pledged to secure deposits and borrowings, and for other purposes, an increase from $335.8 million of securities pledged at year-end 2020.

Note 4 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:


	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
Commercial ¹	$	321,548	$	407,159	$	695,545	$	771,474
Leases		162,444		141,601		211,132		176,031
Commercial real estate - Investor		535,506		582,042		965,767		957,389
Commercial real estate - Owner occupied		330,648		333,070		655,792		574,384
Construction		108,690		98,486		165,558		206,132
Residential real estate - Investor		45,497		56,137		62,846		63,399
Residential real estate - Owner occupied		108,343		116,388		203,118		213,248
Multifamily		160,798		189,040		298,686		309,164
HELOC		69,651		80,908		110,688		115,664
HELOC - Purchased		12,370		19,487		9,553		10,626
Other ²		12,447		10,533		23,685		24,437
Total loans		1,867,942		2,034,851		3,402,370		3,421,948
Allowance for credit losses on loans		(26,949)		(33,855)		(44,308)		(44,281)
Net loans³	$	1,840,993	$	2,000,996	$	3,358,062	$	3,377,667

¹ Includes $~~34.7~~11.2 million and $~~74.1~~38.4 million of Paycheck Protection Program (“PPP”) loans at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

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

³ Excludes accrued interest receivable of $~~6.1~~9.6 million and $~~7.0~~9.2 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, that is recorded in other assets on the consolidated balance sheet.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to assure access to collateral, in the event of borrower default, through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. Although the Bank makes loans primarily within its market area, there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector. The real estate related categories listed above represent ~~73.4%~~72.7% and ~~72.5%~~71.6% of the portfolio at ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, respectively, and include a mix of owner and non-owner occupied, residential, construction and multifamily loans.

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

The following tables represent the activity in the allowance for credit losses for loans, or the ACL, for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:

Provision for

Beginning

(Release of)

Ending
Allowance for credit losses

Balance

Credit Losses

Charge-offs

Recoveries

Balance
Three months ended September 30, 2021

Commercial

$
2,601

$
82

$
23

$
25

$
2,685
Leases

3,388

(41)

4

-

3,343
Commercial real estate - Investor

10,437

(890)

101

18

9,464
Commercial real estate - Owner occupied

1,086

99

5

7

1,187
Construction

3,048

(175)

-

-

2,873
Residential real estate - Investor

975

(287)

-

7

695
Residential real estate - Owner occupied

1,866

(116)

-

18

1,768
Multifamily

3,266

(121)

183

-

2,962
HELOC

1,604

13

-

28

1,645
HELOC - Purchased

229

(36)

-

-

193
Other

139

19

53

29

134
Ending Balance, September 30, 2021

$
28,639

$
(1,453)

$
369

$
132

$
26,949

Provision for

Beginning

(Release of)

Ending
Allowance for credit losses

Balance

Credit Losses

Charge-offs

Recoveries

Balance
Nine months ended September 30, 2021

Commercial

$
2,812

$
43

$
232

$
62

$
2,685
Leases

3,888

(513)

32

-

3,343
Commercial real estate - Investor

9,205

302

101

58

9,464
Commercial real estate - Owner occupied

2,251

(1,250)

39

225

1,187
Construction

4,054

(1,181)

-

-

2,873
Residential real estate - Investor

1,740

(1,328)

-

283

695
Residential real estate - Owner occupied

2,714

(1,074)

-

128

1,768
Multifamily

3,625

(480)

183

-

2,962
HELOC

1,749

(216)

17

129

1,645
HELOC - Purchased

199

(6)

-

-

193
Other

1,618

(1,483)

108

107

134
Ending Balance, September 30, 2021

$
33,855

$
(7,186)

$
712

$
992

$
26,949

Impact of

Provision for

Beginning

Adopting

(Release of)

Ending
Allowance for credit losses

Balance

ASC 326

Credit 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
Residential real estate - Investor

2,217

-

(290)

3

18

1,942
Residential 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
Other

700

-

64

53

41

752
Ending Balance, September 30, 2020

$
31,273

$
-

$
1,280

$
451

$
816

$
32,918



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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Impact of

Provision for

Allowance for credit losses

Beginning

Adopting

(Release of)

Ending
Nine months ended September 30, 2020

Balance

ASC 326

Credit Losses

Charge-offs

Recoveries

Balance
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
Ending Balance, September 30, 2020

$
19,789

$
5,879

$
8,174

$
2,258

$
1,334

$
32,918



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

The ACL on loans excludes ~~$2.2~~$4.2 million, ~~$3.0~~$4.5 million and ~~$4.0~~$3.5 million of allowance for unfunded commitments as of March 31, 2022, December 31, 2021 and March 31, 2021, respectively, recorded within Other Liabilities. The total ACL on unfunded commitments listed as of March 31, 2022 and December 31, 2021 excludes the purchase accounting adjustment of $1.5 million and $1.7 million, respectively, recorded due to our acquisition of West Suburban, which is also recorded within Other Liabilities, asand is being accreted in interest income over the estimated life of ~~September 30, 2021, December 31, 2020 and September 30, 2020, respectively.~~the unused commitments.

The following tables presents the collateral dependent loans and the related ACL allocated by segment of loans as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


			Accounts									ACL				Accounts								ACL
September 30, 2021	Real Estate		Receivable		Equipment		Other		Total			Allocation
March 31, 2022														Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	195	$	-	$	-	$	-	$	195		$	-	$	1,955	$	9,022	$	-	$	-	$	10,977	$	2,432
Leases		-		-		3,413		546		3,959			661		-		-		2,641		-		2,641		475
Commercial real estate - Investor		6,070		-		-		-		6,070			2,290		4,379		-		-		-		4,379		288
Commercial real estate - Owner occupied		4,373		-		-		2,523		6,896			7		7,414		-		-		2,457		9,871		554
Construction		4,898		-		-		-		4,898			988		2,098		-		-		-		2,098		1,007
Residential real estate - Investor		998		-		-		-		998			-		1,391		-		-		-		1,391		-
Residential real estate - Owner occupied		3,945		-		-		-		3,945			-		3,941		-		-		-		3,941		260
Multifamily		1,889		-		-		-		1,889			90		938		-		-		-		938		-
HELOC		700		-		-		-		700			195		914		-		-		-		914		32
HELOC - Purchased		181		-		-		-		181			-		173		-		-		-		173		-
Other		-		-		-		2		2			2		-		-		-		-		-		-
Total	$	23,249	$	-	$	3,413	$	3,071	$	29,733		$	4,233	$	23,203	$	9,022	$	2,641	$	2,457	$	37,323	$	5,048


			Accounts									ACL				Accounts								ACL
December 31, 2020	Real Estate		Receivable		Equipment		Other		Total			Allocation
December 31, 2021														Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	1,070	$	-	$	55	$	1,125		$	56	$	1,986	$	9,901	$	-	$	-	$	11,887	$	2,677
Leases		-		-		2,377		597		2,974			880		-		-		3,249		505		3,754		811
Commercial real estate - Investor		4,179		-		-		-		4,179			84		5,693		-		-		-		5,693		-
Commercial real estate - Owner occupied		9,726		-		-		-		9,726			195		9,147		-		-		2,490		11,637		362
Construction		1,891		-		-		-		1,891			952		2,104		-		-		-		2,104		992
Residential real estate - Investor		928		-		-		-		928	��		-		925		-		-		-		925		-
Residential real estate - Owner occupied		3,535		-		-		-		3,535			10		4,271		-		-		-		4,271		276
Multifamily		3,838		-		-		-		3,838			378		1,845		-		-		-		1,845		75
HELOC		1,053		-		-		-		1,053			78		826		-		-		-		826		190
HELOC - Purchased		-		-		-		-		-			-		180		-		-		-		180		-
Other		-		-		-		4		4			4		-		-		-		7		7		4
Total	$	25,150	$	1,070	$	2,377	$	656	$	29,253		$	2,637	$	26,977	$	9,901	$	3,249	$	3,002	$	43,129	$	5,387

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


													90 days or														90 days or
					90 Days or								Greater Past						90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and		30-59 Days		60-89 Days		Greater Past		Total Past						Due and
September 30, 2021	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
March 31, 2022															Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	778	$	-	$	220	$	998	$	320,550	$	321,548	$	25	$	4,904	$	548	$	7,124	$	12,576	$	682,969	$	695,545	$	-
Leases		-		-		1,637		1,637		160,807		162,444		-		401		-		1,536		1,937		209,195		211,132		-
Commercial real estate - Investor		-		239		30		269		535,237		535,506		30		3,399		-		1		3,400		962,367		965,767		-
Commercial real estate - Owner occupied		812		672		2,258		3,742		326,906		330,648		-		9,764		100		2,956		12,820		642,972		655,792		-
Construction		-		-		2,665		2,665		106,025		108,690		-		117		-		7		124		165,434		165,558		7
Residential real estate - Investor		-		-		882		882		44,615		45,497		-		269		-		1,001		1,270		61,576		62,846		2
Residential real estate - Owner occupied		-		322		1,853		2,175		106,168		108,343		741		1,805		98		2,589		4,492		198,626		203,118		20
Multifamily		876		32		437		1,345		159,453		160,798		437		-		-		691		691		297,995		298,686		691
HELOC		344		-		77		421		69,230		69,651		-		354		93		319		766		109,922		110,688		23
HELOC - Purchased		-		-		181		181		12,189		12,370		-		-		-		173		173		9,380		9,553		-
Other		1		-		-		1		12,446		12,447		-		66		-		2		68		23,617		23,685		-
Total	$	2,811	$	1,265	$	10,240	$	14,316	$	1,853,626	$	1,867,942	$	1,233	$	21,079	$	839	$	16,399	$	38,317	$	3,364,053	$	3,402,370	$	743


													90 days or														90 days or
					90 Days or								Greater Past						90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and		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
December 31, 2021¹															Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	-	$	-	$	52	$	52	$	407,107	$	407,159	$	-	$	3,407	$	1,413	$	1,828	$	6,648	$	764,826	$	771,474	$	1,396
Leases		613		59		316		988		140,613		141,601		163		125		-		1,571		1,696		174,335		176,031		-
Commercial real estate - Investor		1,439		-		1,108		2,547		579,495		582,042		-		-		267		1,107		1,374		956,015		957,389		-
Commercial real estate - Owner occupied		1,848		958		7,309		10,115		322,955		333,070		-		2,324		500		4,848		7,672		566,712		574,384		1,594
Construction		1,237		-		-		1,237		97,249		98,486		-		854		-		-		854		205,278		206,132		-
Residential real estate - Investor		1,022		20		484		1,526		54,611		56,137		157		395		470		792		1,657		61,742		63,399		23
Residential real estate - Owner occupied		859		286		717		1,862		114,526		116,388		114		1,994		591		3,077		5,662		207,586		213,248		97
Multifamily		3,282		467		-		3,749		185,291		189,040		-		-		1,046		-		1,046		308,118		309,164		-
HELOC		549		50		206		805		80,103		80,908		-		193		23		218		434		115,230		115,664		-
HELOC - Purchased		47		-		-		47		19,440		19,487		-		-		-		180		180		10,446		10,626		-
Other		20		-		-		20		10,513		10,533		-		50		46		23		119		24,318		24,437		-
Total	$	10,916	$	1,840	$	10,192	$	22,948	$	2,011,903	$	2,034,851	$	434	$	9,342	$	4,356	$	13,644	$	27,342	$	3,394,606	$	3,421,948	$	3,110

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

~~There were 506~~The table presents all nonaccrual loans ~~which totaled $237.8 million modified under the CARES Act. As~~as of ~~September 30, 2021, 12 loans of the original 506 loans deferred, or $8.8 million, had an active deferral request~~March 31, 2022, and ~~were in compliance with modified terms; 494 loans which totaled $229.0 million had resumed payments or paid off. Details of loans in active deferral is below:~~December 31, 2021:

September 30, 2021

1st Deferral

2nd Deferral

3rd Deferral

Total
Loans modified under CARES Act, in deferral

$
-

$
6,752

$
2,077

$
8,829
Loans modified under CARES Act, in nonaccrual, within deferral above

-

2,524

2,077

4,601


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

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

~~The table presents all nonaccrual loans as of September 30, 2021, and December 31, 2020:~~

Nonaccrual loan detail

September 30, 2021

December 31, 2020

Commercial

$
195

$
1,125

Leases

3,959

2,638

Commercial real estate - Investor

6,070

1,632

Commercial real estate - Owner occupied

6,896

9,262

Construction

2,958

-

Residential real estate - Investor

998

928

Residential real estate - Owner occupied

3,945

3,206

Multifamily

1,618

2,437

HELOC

700

1,052

HELOC - Purchased

181

-

Other

-

-

Total

$
27,520

$
22,280

~~The Company recognized $243,000 of interest on nonaccrual loans during the three months ended September 30, 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.

Credit quality indicators by loan segment and loan origination date at ~~September 30, 2021~~March 31, 2022 were as follows:

~~Tableof 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


2021

2020

2019

2018

2017

Prior

Loans

Loans

Total
Commercial

Pass

$
64,298

$
24,032

$
26,420

$
11,445

$
4,172

$
2,184

$
186,201

$
59

$
318,811
Special Mention

287

357

177

-

-

-

1,449

-

2,270
Substandard

233

200

-

34

-

-

-

-

467
Total commercial

64,818

24,589

26,597

11,479

4,172

2,184

187,650

59

321,548

Leases

Pass

59,361

47,677

$
36,332

10,311

1,752

2,588

-

-

158,021
Special Mention

-

-

-

-

-

-

-

-

-
Substandard

-

-

2,918

664

35

806

-

-

4,423
Total leases

59,361

47,677

39,250

10,975

1,787

3,394

-

-

162,444

Commercial real estate - Investor

Pass

109,776

146,497

107,124

62,359

44,644

42,916

2,697

-

516,013
Special Mention

-

-

10,607

-

-

168

-

-

10,775
Substandard

2,107

-

448

185

5,948

30

-

-

8,718
Total commercial real estate - investor

111,883

146,497

118,179

62,544

50,592

43,114

2,697

-

535,506

Commercial real estate - Owner occupied

Pass

85,407

67,186

42,218

41,444

38,798

45,990

2,179

-

323,222
Special Mention

-

-

-

-

215

-

-

-

215
Substandard

-

3,493

1,686

-

1,008

1,024

-

-

7,211
Total commercial real estate - owner occupied

85,407

70,679

43,904

41,444

40,021

47,014

2,179

-

330,648

Construction

Pass

30,362

44,396

16,992

1,671

514

1,258

7,511

-

102,704
Special Mention

-

-

1,088

-

-

-

-

-

1,088
Substandard

174

-

2,784

1,940

-

-

-

-

4,898
Total construction

30,536

44,396

20,864

3,611

514

1,258

7,511

-

108,690

Residential real estate - Investor

Pass

1,877

6,148

10,909

6,383

6,867

10,229

1,930

-

44,343
Special Mention

-

-

-

-

-

-

-

-

-
Substandard

-

-

-

156

388

610

-

-

1,154
Total residential real estate - investor

1,877

6,148

10,909

6,539

7,255

10,839

1,930

-

45,497

Residential real estate - Owner occupied

Pass

16,322

16,625

19,433

6,892

11,045

30,816

2,022

-

103,155
Special Mention

253

-

-

-

-

-

-

427

680
Substandard

64

46

-

399

178

3,821

-

-

4,508
Total residential real estate - owner occupied

16,639

16,671

19,433

7,291

11,223

34,637

2,022

427

108,343

Multifamily

Pass

20,071

29,014

28,374

45,325

21,745

6,362

69

-

150,960
Special Mention

-

-

6,901

610

-

-

-

-

7,511

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Substandard

-

-

-

1,580

747

-

-

-

2,327
Total multifamily

20,071

29,014

35,275

47,515

22,492

6,362

69

-

160,798

HELOC

Pass

503

1,918

2,018

1,132

1,576

1,023

60,339

-

68,509
Special Mention

-

-

-

-

-

-

108

-

108
Substandard

-

28

-

30

34

259

683

-

1,034
Total HELOC

503

1,946

2,018

1,162

1,610

1,282

61,130

-

69,651

HELOC - Purchased

Pass

-

-

-

-

-

12,189

-

-

12,189
Special Mention

-

-

-

-

-

-

-

-

-
Substandard

-

-

-

-

-

181

-

-

181
Total HELOC - purchased

-

-

-

-

-

12,370

-

-

12,370

Other

Pass

3,772

1,490

575

178

112

223

6,095

-

12,445
Special Mention

-

-

-

-

-

-

-

-

-
Substandard

-

-

-

2

-

-

-

-

2
Total other

3,772

1,490

575

180

112

223

6,095

-

12,447

Total loans

Pass

391,749

384,983

290,395

187,140

131,225

155,778

269,043

59

1,810,372
Special Mention

540

357

18,773

610

215

168

1,557

427

22,647
Substandard

2,578

3,767

7,836

4,990

8,338

6,731

683

-

34,923
Total loans

$
394,867

$
389,107

$
317,004

$
192,740

$
139,778

$
162,677

$
271,283

$
486

$
1,867,942

~~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


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

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

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

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

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

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

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

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

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

HELOC - Purchased

2019

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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


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

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

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

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

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

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

2120

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

The Company had ~~$572,000~~$623,000 and ~~$546,000~~$488,000 in residential real estate loans in the process of foreclosure as of ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, respectively.

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

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

~~There was 0 TDR activity for the three and nine months ended September 30, 2021.~~

~~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

¹~~HAMP: Home Affordable Modification Program~~

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, 2021, and September 30, 2020, for loans that were restructured within the prior 12 month period.

2221

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

There was one TDR loan modification of $1.1 million for the three months ended March 31, 2022, and 0 TDR activity for the three months ended March 31, 2021. TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There was 0 TDR default activity for the periods ended March 31, 2022, and March 31, 2021, for loans that were restructured within the prior 12 month period.

Note 5 – Other Real Estate Owned

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
Other real estate owned	2021		2020		2021		2020		2022		2021
Balance at beginning of period	$	1,877	$	5,082	$	2,474	$	5,004	$	2,356	$	2,474
Property additions, net of acquisition adjustments		70		314		70		898		87		-
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		37		2,664		567		2,952		69		305
Period valuation (write-up)/write-down		(2)		46		65		264
Period valuation write-down										-		6
Balance at end of period	$	1,912	$	2,686	$	1,912	$	2,686	$	2,374	$	2,163

Activity in the valuation allowance was as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2021		2020		2021		2020		2022		2021
Balance at beginning of period	$	1,296	$	6,464	$	1,643	$	6,712	$	1,179	$	1,643
Provision for unrealized losses		(2)		46		65		264		-		6
Reductions taken on sales		(129)		(4,897)		(543)		(5,363)
Balance at end of period	$	1,165	$	1,613	$	1,165	$	1,613	$	1,179	$	1,649

Expenses related to OREO, net of lease revenue includes:


	Three Months Ended				Nine Months Ended					Three Months Ended
	September 30,				September 30,					March 31,
	2021		2020		2021		2020		��	2022		2021
Gain on sales, net	$	(5)	$	(165)	$	(40)	$	(188)		$	(49)	$	(20)
Provision for unrealized losses		(2)		46		65		264			-		6
Operating expenses		32		253		117		460			37		54
Less:
Lease revenue		-		9		4		31			-		4
Net OREO expense	$	25	$	125	$	138	$	505
Net OREO (gain) expense										$	(12)	$	36

~~Note 6 – Deposits~~

~~Major classifications of deposits were as follows:~~

September 30, 2021

December 31, 2020

Noninterest bearing demand

$
1,037,638

$
909,505

Savings

457,900

399,057

NOW accounts

537,547

486,612

Money market accounts

370,691

316,465

Certificates of deposit of less than $100,000

173,595

200,107

Certificates of deposit of $100,000 through $250,000

98,496

164,982

Certificates of deposit of more than $250,000

38,462

60,345

Total deposits

$
2,714,329

$
2,537,073

2322

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 6 – Deposits

Major classifications of deposits were as follows:


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

Note 7 – Borrowings

The following table is a summary of borrowings as of ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020.~~2021. Junior subordinated debentures are discussed in more detail in Note 8:


	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021
Securities sold under repurchase agreements	$	42,962	$	66,980	$	33,521	$	50,337
Junior subordinated debentures		25,773		25,773		25,773		25,773
Subordinated debentures		59,190		-		59,233		59,212
Senior notes		44,454		44,375		44,506		44,480
Notes payable and other borrowings		20,155		23,393		17,992		19,074
Total borrowings	$	192,534	$	160,521	$	181,025	$	198,876

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities. These transactions consistently mature overnight from the transaction date and are governed by sweep repurchase agreements. All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities and had a carrying amount of ~~$43.0~~$33.5 million at ~~September 30, 2021,~~March 31, 2022, and ~~$67.0~~$50.3 million at December 31, ~~2020.~~2021. The fair value of the pledged collateral was ~~$113.8~~$107.3 million at ~~September 30, 2021,~~March 31, 2022, and ~~$94.4~~$113.0 million at December 31, ~~2020.~~2021. At ~~September 30, 2021,~~March 31, 2022, 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, 2021,~~March 31, 2022, and December 31, ~~2020~~2021, the Bank had 0 short-term advances outstanding under the FHLBC. The Bank ~~also~~ assumed $23.4 million of long-term FHLBC advances with ~~the~~our ABC Bank acquisition in 2018. At ~~September 30, 2021,~~March 31, 2022, one advance remains in long-term status, with a total outstanding balance of ~~$6.2~~$6.0 million, at a 2.83% interest rate, and is scheduled to mature on February 2, 2026. ~~FHLBC~~FHLB stock held ~~at September 30, 2021~~as of March 31, 2022 was valued at ~~$3.7~~$7.1 million, and any potential FHLBC advances were collateralized by loans with a principal balance of ~~$553.6~~$545.0 million, which carried a FHLBC-calculated combined collateral value of ~~$402.1~~$396.9 million. The Company had excess collateral of ~~$269.7~~$315.9 million available to secure borrowings at ~~September 30, 2021.~~March 31, 2022.

The Company also had $44.5 ~~million and $44.4~~ million of senior notes outstanding, net of deferred issuance costs, as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. The senior notes were issued in December 2016 with a ten year maturity, and terms include interest payable semiannually at 5.75% for five years. Beginning December 31, 2021, the senior debt ~~will~~began to pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points. The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. As of ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, unamortized debt issuance costs related to the senior notes were ~~$546,000~~$494,000 and ~~$625,000,~~$520,000, respectively, and are

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

On February 24, 2020, the Company originated a $20.0 million term note, of which ~~$14.0~~$12.0 million is outstanding as of ~~September 30, 2021,~~March 31, 2022, 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 8 – Junior Subordinated Debentures.bank. The term note was issued for a three year term at one-month LIBOR plus 175 basis points, requires principal and interest payments quarterly, and the balance of this note is included within Notes Payable and Other Borrowings on the Consolidated Balance Sheet. The Company also has an undrawn line of credit of ~~$20.0~~$30.0 million with a correspondent bank to be used for short-term funding needs; advances under this line can be outstanding up to 360 days from the date of issuance. This line of credit has not been utilized since early 2019.

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

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

Note 8 – Junior Subordinated Debentures

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 7 – 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~~an 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~~now have a floating rate of 150 basis points over three-month ~~LIBOR thereafter.~~LIBOR. Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of ~~4.40%~~4.41% for the quarters ended ~~September 30, 2021~~March 31, 2022 and ~~September 30, 2020.~~March 31, 2021. The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering. The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

The junior subordinated debentures issued by the Company are disclosed on the Consolidated Balance Sheet, and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, the remaining unamortized debt issuance costs related to the junior subordinated debentures were $1,000 and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheet. The remaining deferred issuance costs on the junior subordinated debentures related to the issuance of Old Second Capital Trust II will be amortized to interest expense over the remainder of the 30-year term of the notes and are included in the Consolidated Statements of Income.

Note 9 – Equity Compensation Plans

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

The 2019 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”). Awards may be granted to selected directors, officers, employees or eligible service providers under the 2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors.

As of ~~September 30, 2021, 1,418,520~~March 31, 2022, 1,144,926 shares remained available for issuance under the 2019 ~~Plan.~~Plan

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Notes to Consolidated Financial Statements

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

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

Awards of restricted stock units under the 2019 Plan generally entitle holders to voting and dividend rights upon grant and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period. Awards of restricted stock units under the 2019 Plan are also subject to forfeiture until certain restrictions have lapsed including employment for a specific period, but do not entitle holders to voting rights until the restricted period ends and shares are transferred in connection with the units Generally, restricted stock and restricted stock units granted under the Plans vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until the vest date.

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 ~~224,464~~251,055 and ~~137,944~~217,964 restricted stock units issued under the 2019 Plan during the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and March 31, 2021, ~~and September 30, 2020,~~ 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 ~~$1.2 million~~$795,000 in the first ~~nine~~three months of ~~2021~~2022 and ~~$1.6 million~~$125,000 for the first ~~nine~~three months ~~ended~~ of ~~2020.~~2021.

A summary of changes in the Company’s unvested restricted awards for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, is as follows:


	September 30, 2021			March 31, 2022
		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	532,609	$	13.15	540,306	$	12.04
Granted	224,464		11.38	251,055		14.28
Vested	(191,653)		13.95	-		-
Forfeited	(42,111)		14.15	-		-
Unvested at September 30	523,309	$	12.01
Unvested at March 31				791,361	$	12.75

Total unrecognized compensation cost of restricted awards was ~~$3.1~~$5.8 million as of ~~September 30, 2021,~~March 31, 2022, which is expected to be recognized over a weighted-average period of ~~1.88~~1.1 years.

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Notes to Consolidated Financial Statements

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

Note 10 – Earnings Per Share

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020			2022		2021
Basic earnings per share:
Weighted-average common shares outstanding			28,707,737		29,559,026		28,925,612		29,708,239			44,461,045		29,225,775
Net income		$	8,412	$	10,265	$	29,111	$	19,778		$	12,020	$	11,879
Basic earnings per share		$	0.30	$	0.35	$	1.01	$	0.67		$	0.27	$	0.41

Diluted earnings per share:
Weighted-average common shares outstanding			28,707,737		29,559,026		28,925,612		29,708,239			44,461,045		29,225,775
Dilutive effect of unvested restricted awards ¹			522,543		543,275		533,194		553,482			700,670		558,982
Diluted average common shares outstanding			29,230,280		30,102,301		29,458,806		30,261,721			45,161,715		29,784,757

Net Income		$	8,412	$	10,265	$	29,111	$	19,778		$	12,020	$	11,879
Diluted earnings per share		$	0.29	$	0.34	$	0.99	$	0.65		$	0.27	$	0.40


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

Note 11 – Regulatory & Capital Matters

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies. In connection with the current risk-based capital regulatory guidelines, the Bank’s Board of Directors has established an internal guideline requiring the Bank to maintain a Tier 1 leverage capital ratio at or above 8 percent (8%) and a total risk-based capital ratio at or above 12 percent (12%). At ~~September 30, 2021,~~March 31, 2022, the Bank exceeded those thresholds.

At ~~September 30, 2021,~~March 31, 2022, the Bank’s Tier 1 capital leverage ratio was ~~10.83%~~8.61%, ~~an increase~~a decrease of 997 basis points from December 31, ~~2020,~~2021, but is ~~well~~ above the 8.00% objective. The Bank’s total capital ratio was ~~16.69%~~13.83%, an increase of ~~168~~37 basis points from December 31, ~~2020,~~2021, 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, 2021,~~March 31, 2022, and December 31, ~~2020.~~2021.

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015. The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies”, which are generally holding companies with consolidated assets of less than $3.0 billion. The Company is currently considered a “small bank holding company.” As we had 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, ~~2020,~~2021, under the heading “Supervision and Regulation.”

At ~~September 30, 2021,~~March 31, 2022 and December 31, ~~2020,~~2021, 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, 2021
March 31, 2022
Common equity tier 1 capital to risk weighted assets
Consolidated	$	292,767	12.99	%	$	157,765	7.00	%		N/A	N/A		$	404,444	9.73	%	$	290,967	7.00	%		N/A	N/A
Old Second Bank		351,663	15.65			157,293	7.00		$	146,058	6.50	%		528,655	12.74			290,470	7.00		$	269,722	6.50	%
Total capital to risk weighted assets
Consolidated		401,027	17.80			236,561	10.50			N/A	N/A			533,984	12.85			436,329	10.50			N/A	N/A
Old Second Bank		374,923	16.69			235,871	10.50			224,639	10.00			573,949	13.83			435,753	10.50			415,003	10.00
Tier 1 capital to risk weighted assets
Consolidated		317,767	14.10			191,562	8.50			N/A	N/A			429,444	10.33			353,366	8.50			N/A	N/A
Old Second Bank		351,663	15.65			190,999	8.50			179,764	8.00			528,655	12.74			352,713	8.50			331,965	8.00
Tier 1 capital to average assets
Consolidated		317,767	9.81			129,569	4.00			N/A	N/A			429,444	7.00			245,397	4.00			N/A	N/A
Old Second Bank		351,663	10.83			129,885	4.00			162,356	5.00			528,655	8.61			245,600	4.00			307,001	5.00

December 31, 2020
December 31, 2021
Common equity tier 1 capital to risk weighted assets
Consolidated	$	277,199	11.94	%	$	162,512	7.00	%		N/A	N/A		$	394,421	9.46	%	$	291,855	7.00	%		N/A	N/A
Old Second Bank		318,466	13.75			162,128	7.00		$	150,548	6.50	%		514,992	12.41			290,487	7.00		$	269,738	6.50	%
Total capital to risk weighted assets
Consolidated		331,178	14.26			243,855	10.50			N/A	N/A			522,932	12.55			437,513	10.50			N/A	N/A
Old Second Bank		347,408	15.00			243,186	10.50			231,605	10.00			558,503	13.46			435,682	10.50			414,935	10.00
Tier 1 capital to risk weighted assets
Consolidated		302,199	13.01			197,440	8.50			N/A	N/A			419,421	10.06			354,382	8.50			N/A	N/A
Old Second Bank		318,466	13.75			196,870	8.50			185,289	8.00			514,992	12.41			352,734	8.50			331,985	8.00
Tier 1 capital to average assets
Consolidated		302,199	10.21			118,393	4.00			N/A	N/A			419,421	7.81			214,812	4.00			N/A	N/A
Old Second Bank		318,466	10.74			118,609	4.00			148,262	5.00			514,992	9.58			215,028	4.00			268,785	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 elected to utilize the five-year CECL transition. ~~The cumulative amount that~~As of March 31, 2022, the capital measures of the Company exclude $2.9 million, which is ~~not recognized in regulatory capital, in addition to~~ the ~~$3.8 million~~modified CECL transition adjustment.

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Old Second Bancorp, Inc. and Subsidiaries

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 September 30, 2021, the capital measures of the Company exclude $4.2 million, which is the 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 third quarter of 2021, we repurchased 0 shares of our common stock pursuant to the Repurchase Program. As of September 30, 2021, 1,485,307 shares had been repurchased since the program’s inception, and 9,519 shares remained available for repurchase under the Repurchase Program. The Repurchase Program expired on October 21, 2021.

Note 12 – Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy established by the Company also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of inputs that may be used to measure fair value are:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2: Significant observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own view about the assumptions that market participants would use in pricing an asset or liability.

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

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

●

Government-sponsored agency debt securities are primarily priced using available market information through processes such as benchmark spreads, market valuations of like securities, like securities groupings and matrix pricing.

●

Other government-sponsored agency securities, MBS and some of the actively traded real estate mortgage investment conduits and collateralized mortgage obligations are priced using available market information including benchmark yields, prepayment speeds, spreads, volatility of similar securities and trade date.

●

State and political subdivisions are largely grouped by characteristics (e.g., geographical data and source of revenue in trade dissemination systems). Because some securities are not traded daily and due to other grouping limitations, active market quotes are often obtained using benchmarking for like securities.

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

●

Auction rate securities are priced using market spreads, cash flows, prepayment speeds, and loss analytics. Therefore, the valuations of auction rate asset-backed securities are considered Level 2 valuations.

●

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

●

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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

●

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

●

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

●

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

●

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

●

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

●

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

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

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


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

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

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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~~:


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

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

The ~~tables below present the balance of~~changes in Level 3 assets and liabilities ~~at September 30, 2021, and December 31, 2020, respectively,~~ measured ~~by the Company~~ at fair value on a recurring ~~basis:~~basis are as follows:

September 30, 2021


Level 1

Level 2

Level 3

Total
Assets:

Securities available-for-sale

U.S. Treasury

$
4,070

$
-

$
-

$
4,070
U.S. government agencies

-

33,575

-

33,575
U.S. government agencies mortgage-backed

-

17,818

-

17,818
States and political subdivisions

-

233,392

5,560

238,952
Corporate bonds

-

4,992

-

4,992
Collateralized mortgage obligations

-

165,414

-

165,414
Asset-backed securities

-

189,338

-

189,338
Collateralized loan obligations

-

61,029

-

61,029
Loans held-for-sale

-

3,009

-

3,009
Mortgage servicing rights

-

-

5,320

5,320
Interest rate swap agreements

-

5,292

-

5,292
Mortgage banking derivatives

-

875

-

875
Total

$
4,070

$
714,734

$
10,880

$
729,684

Liabilities:

Interest rate swap agreements, including risk participation agreements

$
-

$
7,798

$
-

$
7,798
Total

$
-

$
7,798

$
-

$
7,798

December 31, 2020


Level 1

Level 2

Level 3

Total
Assets:

Securities available-for-sale

U.S. Treasury

$
4,117

$
-

$
-

$
4,117
U.S. government agencies

-

6,657

-

6,657
U.S. government agencies mortgage-backed

-

17,209

-

17,209
States and political subdivisions

-

244,940

4,319

249,259
Collateralized mortgage obligations

-

56,585

-

56,585
Asset-backed securities

-

131,818

-

131,818
Collateralized loan obligations

-

30,533

-

30,533
Loans held-for-sale

-

12,611

-

12,611
Mortgage servicing rights

-

-

4,224

4,224
Interest rate swap agreements

-

9,388

-

9,388
Mortgage banking derivatives

-

840

-

840
Total

$
4,117

$
510,581

$
8,543

$
523,241

Liabilities:

Interest rate swap agreements, including risk participation agreements

$
-

$
13,159

$
-

$
13,159
Total

$
-

$
13,159

$
-

$
13,159


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

3130

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

Nine Months Ended September 30, 2021

Securities available-for-sale

States and

Mortgage

Political

Servicing

Subdivisions

Rights
Beginning balance January 1, 2021

$
4,319

$
4,224
Total gains or losses

Included in earnings

(7)

840
Included in other comprehensive income

812

-
Purchases, issuances, sales, and settlements

Purchases

748

-
Issuances

-

1,298
Settlements

(312)

(1,042)
Ending balance September 30, 2021

$
5,560

$
5,320


	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

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of ~~September 30, 2021:~~March 31, 2022:

Weighted

Measured at fair value

Unobservable

Average

Significant 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

5,320

Discounted Cash Flow

Discount Rate

11.0 - 15.0%

11.0

10,376

Discounted Cash Flow

Discount Rate

9.0 - 11.0%

9.0

Prepayment Speed

0.0 - 49.6%

15.5

Prepayment Speed

5.7 - 28.9%

6.2

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

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

Weighted

Measured at fair value

Unobservable

Average

Significant 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

4,224

Discounted Cash Flow

Discount Rate

11.0 - 15.0%

11.0

7,097

Discounted Cash Flow

Discount Rate

11.0 - 15.0%

11.0

Prepayment Speed

5.5 - 59.1%

19.5

Prepayment Speed

0.0 - 36.6%

11.9

In addition to the above, Level 3 fair value measurement included ~~$5.6~~$13.8 million for state and political subdivisions representing various local municipality securities at ~~September 30, 2021.~~March 31, 2022. These securities were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input. The state and political subdivisions securities balance in Level 3 fair value at ~~September 30, 2020,~~March 31, 2021, was ~~$4.8~~$4.6 million. These securities were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.

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

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of individually evaluated (formerly, impaired) loans and OREO. For assets measured at fair value on a nonrecurring basis at ~~September 30, 2021,~~March 31, 2022, and December 31, ~~2020,~~2021, 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, 2021


Level 1

Level 2

Level 3

Total
Individually evaluated loans¹

$
-

$
-

$
7,187

$
7,187
Other real estate owned, net²

-

-

1,912

1,912
Total

$
-

$
-

$
9,099

$
9,099

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	March 31, 2022
	Level 1		Level 2		Level 3		Total
Individually evaluated loans¹	$	-	$	-	$	21,990	$	21,990
Other real estate owned, net²		-		-		2,374		2,374
Total	$	-	$	-	$	24,364	$	24,364

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent ~~loans;~~loans, which had a carrying amount of $~~11.0~~33.6 million and a valuation allowance of $~~3.8~~11.6 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $~~1.2~~6.2 million for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $~~1.9~~2.4 million at ~~September 30, 2021,~~March 31, 2022, which is made up of the outstanding balance of $~~3.1~~3.7 million, net of a purchase accounting adjustment of $131,000 and a valuation allowance of $1.2 million.


	December 31, 2020								December 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Individually evaluated loans¹	$	-	$	-	$	9,675	$	9,675	$	-	$	-	$	13,138	$	13,138
Other real estate owned, net²		-		-		2,474		2,474		-		-		2,356		2,356
Total	$	-	$	-	$	12,149	$	12,149	$	-	$	-	$	15,494	$	15,494

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent ~~loans;~~loans, which had a carrying amount of $~~12.3~~18.5 million and a valuation allowance of $~~2.6~~5.4 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $~~1.4~~2.7 million for the year December 31, ~~2020.~~2021.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $~~2.5~~2.4 million at December 31, ~~2020,~~2021, which is made up of the outstanding balance of $~~4.1~~3.7 million, net of a purchase accounting adjustment of $131,000 ~~million, net of~~and a valuation allowance of $~~1.6~~1.2 million.

The Company has estimated the fair values of these assets based primarily on Level 3 inputs. OREO and impaired loans are generally valued using the fair value of collateral provided by third party appraisals. These valuations include assumptions related to cash flow

~~Tableof Contents~~

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

~~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 13 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table. Securities available-for-sale fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security. The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC or another member institution at par. FHLBC stock is carried at cost and considered a Level 2 fair value. ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The fair value of time deposits is estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities. The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities. The fair value of off balance sheet volume is not considered material.

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

September 30, 2021

Carrying

Fair


Amount

Value

Level 1

Level 2

Level 3
Financial assets:

Cash and due from banks

$
26,705

$
26,705

$
26,705

$
-

$
-
Interest earning deposits with financial institutions

492,548

492,548

492,548

-

-
Securities available-for-sale

715,188

715,188

4,070

705,558

5,560
FHLBC and FRBC stock

9,917

9,917

-

9,917

-
Loans held-for-sale

3,009

3,009

-

3,009

-
Net loans

1,840,993

1,849,933

-

-

1,849,933
Mortgage servicing rights

5,320

5,320

-

-

5,320
Interest rate swap agreements

5,292

5,292

-

5,292

-
Interest rate lock commitments and forward contracts

875

875

-

875

-
Interest receivable on securities and loans

8,956

8,956

-

8,956

-

Financial liabilities:

Noninterest bearing deposits

$
1,037,638

$
1,037,638

$
1,037,638

$
-

$
-
Interest bearing deposits

1,676,691

1,677,796

-

1,677,796

-
Securities sold under repurchase agreements

42,962

42,962

-

42,962

-
Junior subordinated debentures

25,773

18,557

-

18,557

-
Subordinated debentures

59,190

60,390

60,390

Senior notes

44,454

44,724

44,724

-

-
Note payable and other borrowings

20,155

20,600

-

20,600

-
Interest rate swap agreements

7,767

7,767

-

7,767

-
Interest payable on deposits and borrowings

1,920

1,920

-

1,920

-

3432

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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, 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
Mortgage servicing rights

4,224

4,224

-

-

4,224
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

-

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


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

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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


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

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

Note 14 – Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

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

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

3534

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional ~~$189,000~~$178,000 will be reclassified as an increase to interest income and an additional ~~$175,000~~$162,000 will be reclassified as an increase to interest expense.

Non-designated Hedges

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

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

Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017. This transaction had a notional amount totaling $25.8 million as of ~~September 30, 2021,~~March 31, 2022, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented. As such, 0 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 $740,000 and $1.4 million of cash collateral related to 1 correspondent financial institution to cover the loan pool hedge mark to market valuation at September 30, 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 held 0 cash collateral and $180,000 of cash collateral related to 1 correspondent financial institution to cover the loan pool hedge mark to market valuation at March 31, 2022, and December 31, 2021, respectively. The Bank had $18.5 million and $17.2 million of cash collateral held by 1 correspondent financial institution to support interest rate swap activity and 0 investment securities were required to be pledged to any correspondent financial institution at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021, respectively. At ~~September 30,~~March 31, 2022, the notional amount of non-hedging interest rate swaps was $150.7 million with a weighted average maturity of 5.9 years. At December 31, 2021, the notional amount of non-hedging interest rate swaps was ~~$167.2~~$165.0 million with a weighted average maturity of ~~4.1 years. At December 31, 2020, the notional amount of non-hedging interest rate swaps was $189.1 million with a weighted average maturity of 4.7~~3.9 years. The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

3635

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Fair Value of Derivative Instruments


			September 30, 2021						March 31, 2022
	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 swap agreements	2	75,774	Other Assets	1,567	Other Liabilities	4,042	2	75,774	Other Assets	-	Other Liabilities	2,705
Total derivatives designated as hedging instruments				1,567		4,042				-		2,705

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	26	167,218	Other Assets	3,725	Other Liabilities	3,725	23	150,712	Other Assets	952	Other Liabilities	952
Interest rate lock commitments and forward contracts	132	46,753	Other Assets	875	Other Liabilities	-	81	32,994	Other Assets	930	Other Liabilities	-
Other contracts	3	17,297	Other Assets	-	Other Liabilities	31	3	17,050	Other Assets	-	Other Liabilities	6
Total derivatives not designated as hedging instruments				4,600		3,756				1,882		958


			December 31, 2020						December 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 swap agreements	2	75,774	Other Assets	2,697	Other Liabilities	6,380	2	75,774	Other Assets	808	Other Liabilities	4,102
Total derivatives designated as hedging instruments				2,697		6,380				808		4,102

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	28	189,126	Other Assets	6,691	Other Liabilities	6,691	26	165,005	Other Assets	2,686	Other Liabilities	2,686
Interest rate lock commitments and forward contracts	205	84,472	Other Assets	840	Other Liabilities	-	87	34,414	Other Assets	508	Other Liabilities	-
Other contracts	4	26,523	Other Assets	-	Other Liabilities	88	3	17,173	Other Assets	-	Other Liabilities	21
Total derivatives not designated as hedging instruments				7,531		6,779				3,194		2,707

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

The fair value and cash flow hedge accounting related to derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other Comprehensive Income (“AOCI”) and the Income Statement. The loss recognized in AOCI on derivatives totaled ~~$1.8~~$1.9 million as of ~~September 30, 2021,~~March 31, 2022, and ~~$3.3 million~~$705,000 as of ~~September 30, 2020.~~March 31, 2021. The amount of the gain ~~or (loss)~~ reclassified from AOCI to interest income or interest expense on the income statement totaled ~~$40,000~~$16,000 and ~~($72,000)~~$12,000 for the ~~nine~~three months ended ~~September 30,~~March 31, 2022, and March 31, 2021, ~~and September 30, 2020,~~ 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, 2021,~~March 31, 2022, and December 31, ~~2020.~~2021.

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


	September 30, 2021						December 31, 2020						March 31, 2022						December 31, 2021
	Fixed		Variable		Total		Fixed		Variable		Total		Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	329	$	8,446	$	8,775	$	329	$	9,051	$	9,380	$	384	$	19,416	$	19,800	$	384	$	17,474	$	17,858
Commercial standby		-		-		-		-		-		-		-		-		-		-		-		-
Performance standby		532		6,836		7,368		356		4,517		4,873		308		15,683		15,991		456		14,907		15,363
		861		15,282		16,143		685		13,568		14,253		692		35,099		35,791		840		32,381		33,221
Non-borrower:
Performance standby		-		67		67		-		67		67		-		67		67		-		67		67
Total letters of credit	$	861	$	15,349	$	16,210	$	685	$	13,635	$	14,320	$	692	$	35,166	$	35,858	$	840	$	32,448	$	33,288

Unused loan commitments:	$	126,753	$	330,934	$	457,687	$	88,883	$	316,298	$	405,181	$	107,085	$	910,602	$	1,017,687	$	84,225	$	895,665	$	979,890

As of ~~September 30, 2021,~~March 31, 2022, the Company evaluated current market conditions, including ~~the~~any impacts related to COVID-19, ~~and~~ market interest ~~rates~~rate changes, and unused line of credit utilization trends during the ~~third~~first quarter of ~~2021,~~2022, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments totaled ~~$2.2 million.~~$4.2 million, excluding a $1.5 million purchase accounting adjustment on unfunded commitments recorded from our West Suburban acquisition, which is being accreted to interest income over the estimated life of the unused commitments. The resultant decrease in the ACL for unfunded commitments of ~~$47,000~~$320,000 for the ~~third~~first quarter of ~~2021,~~2022, compared to the prior quarter end, is primarily related to a decrease in the commercial unfunded commitments funding rate assumptions based on our analysis of the last 12 months of utilization. The Company will continue to assess the credit risk at least quarterly, and adjust the allowance for unfunded commitments, which is carried within other liabilities on our Consolidated Balance Sheet, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

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

Overview

The following discussion provides additional information regarding our operations for the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, compared to the three ~~and nine~~ months ended ~~September 30, 2020,~~March 31, 2021, and our financial condition at ~~September 30, 2021,~~March 31, 2022, compared to December 31, ~~2020.~~2021. This discussion should be read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our Form 10-K for the year ended December 31, ~~2020.~~2021. The results of operations for the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ 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 2962 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.

~~Proposed~~ Merger with West Suburban Bancorp, Inc.

~~The Company and~~On December 1, 2021, we completed our merger with West Suburban Bancorp, Inc. (“West Suburban”) ~~have entered into an Agreement and Plan of Merger and Reorganization, dated as of July 25, 2021 (the “Merger Agreement”).~~, the holding company for West Suburban Bank. Under the ~~Merger Agreement,~~terms of the merger agreement, each share of West Suburban ~~will be merged with~~common stock was converted into 42.413 shares of our common stock and ~~into~~$271.15 in cash. Total cash and stock consideration paid was approximately $295.2 million. With the ~~Company, with the Company continuing as the surviving entity. Immediately following the merger or at such later time as the parties may mutually agree,~~acquisition of West Suburban, ~~Bank will merge with~~we acquired 34 branches in DuPage, Kane, Kendall and into the Bank, with the Bank as the surviving bank. The Merger Agreement was approved by the boards of directors of the Company and West Suburban, and bank regulatory approval was received from the Office of the Comptroller of the Currency on September 30, 2021, and the Federal Reserve Bank of Chicago on October 8, 2021. The merger is subject to stockholder approval of each company and satisfaction of other customary closing conditions. The transaction is anticipated to closeWill counties in ~~December 2021.~~Illinois. The transaction is discussed in more detail in Note 2 to our Consolidated Financial Statements included in this ~~Quarterly Report.~~report.

COVID-19 Update

~~The COVID-19 pandemic~~

Our historically careful underwriting practices and ~~variants of~~diverse loan portfolio has helped minimize the ~~virus continue to create disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. The~~adverse impact of the ~~COVID-19~~ pandemic ~~and its related variants is fluid and continues to evolve, adversely affecting many of our~~ ~~clients. 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. The unprecedented and rapid spread of COVID-19 and its variants and their associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities have resulted and continue to result in less economic activity, and volatility and disruption in financial markets.Company. In addition, ~~due to~~ the ~~COVID-19 pandemic, market interest rates declined to historic lows. These reductions in interest rates and the other effects~~combination of the ~~COVID-19~~vaccine rollout, government stimulus payments, and reduced spending during the pandemic ~~have had, and~~ are ~~expected to continue to have, possibly materially, adverse effects~~likely contributing factors mitigating the impact of the pandemic on our business, financial condition, ~~and~~ results of ~~operations.~~operations, and our customers as of March 31, 2022. While vaccine availability and uptake has increased, the longer term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition

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and results of operations is currently uncertain and will depend on various developments and other factors, including new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the ~~effect of governmental and private sector initiatives, the effect~~vaccine along with concerns related to new strains of the ~~continued rollout of vaccinations for~~virus; supply chain issues remaining unresolved longer than anticipated; labor shortages and wage increases continuing to impact many industries; consumer confidence and spending falls; and rising geopolitical tensions. Given the ~~virus, whether such vaccinations will be effective against any resurgence~~ongoing and dynamic nature of the ~~virus and its variants, including any new strains, and~~circumstances surrounding the ~~ability for customers and businesses to return to, and remain in, their pre-pandemic routines. In addition,~~pandemic, it is ~~reasonably possible that certain significant estimates made in our~~difficult to predict its future adverse financial ~~statements could~~impact to the Company, although we expect to continue to be ~~materially and adversely affected in~~impacted by the ~~near term as a result~~pandemic throughout the remainder of ~~these conditions.~~2022.

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Results of Operation and Financial Condition

We continue to monitor the impact of the COVID-19 pandemic on our results of ~~operation~~operations and financial condition. ~~To date,~~For the COVID-19 pandemic has not 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 incurred losses on loans or received communications from our borrowers that significant losses 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 loss scenarios that may occur due to the exhaustion of federal stimulus funds or a decrease in market valuations. Accordingly,ended December 31, 2020, we determined it prudent to increase our allowance for credit losses to $33.9 million, ~~as of December 31, 2020,~~ driven by both our adoption of the ~~new CECL~~Current Expected Credit Losses (“CECL”) methodology and the expected impact of the COVID-19 pandemic and market interest rate reductions in anticipation of continued market risk and uncertainty. ~~During~~In 2021, due to the lack of significant net charge-offs projected with the 2020 forecast, and a more favorable forecast for the estimated life of loans, we reversed $9.5 million of our legacy allowance for credit losses, but recorded $12.1 million of Day One credit marks to the allowance for credit losses, as well as $12.2 million of Day Two adjustments on non-purchase credit deteriorated life of loan loss estimates, each stemming from the West Suburban acquisition.In the first ~~nine months~~quarter of ~~2021, unemployment expectations~~2022, we recorded provision expense of $320,000 based on our assessment of nonperforming loan metrics and ~~other market indicators reflected an improving economic outlook, which resulted in a $3.0 million release~~trends and estimated future credit losses. We recorded net charge-offs of ~~our provision for credit losses~~$293,000 in the first quarter of ~~2021, a $3.5 million release of provision for credit losses in~~2022, which reduced the second quarter of 2021, and a $1.5 million release of provision for credit losses in the third quarter of 2021. The total release of credit losses for the first nine months of 2021 of $8.0 million is comprised of a $7.2 million reserve release on loans and an $813,000 release of expense in our provision for credit losses on unfunded commitments.ACL.

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

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, we had ~~$18.6~~$86.3 million of goodwill. At November 30, ~~2020,~~2021, we performed our recurring annual review for any goodwill impairment. We determined no goodwill impairment existed, however, continued delayed recovery or further deterioration in market conditions related to the general economy, financial markets, and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our results of operations and financial condition.

Lending Operations and Accommodations to Borrowers

To more fully support our customers during the pandemic, we established client assistance programs, including offering commercial, consumer, and mortgage loan payment deferrals for certain clients. ~~As of September 30,~~During 2020 and 2021, we ~~have~~ executed ~~506~~509 of these deferrals on loan balances of ~~$237.8 million since~~$242.7 million. As of March 31, ~~2020. In accordance with interagency guidance issued in March 2020, these short term deferrals were not considered troubled debt restructurings. As~~2022, over 97% of ~~September 30, 2021, 494 loans~~the loan balances previously in deferral status ~~representing loan balances of $229.0 million,~~ had resumed payments or paid off, and 12 loans totaling $8.8 million remained in active deferral status, of which $4.6 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. In addition, we paused new foreclosure and repossession actions through October 3, 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. off.

During 2020 and 2021, as part ~~of the first round~~ of the SBA Paycheck Protection Program (“PPP”), we processed ~~746~~1,320 PPP loan applications, representing a total of ~~$136.7 million. In January through May 2021,~~$199.0 million, and we ~~processed an additional 574~~acquired $20.8 million PPP loans ~~totaling $62.3 million, as part~~from our acquisition of ~~the second round of the program, before the program expired on May 31, 2021.~~West Suburban. We started the application process for loan forgiveness for ~~the first round of~~ PPP loans in October 2020, and we continued to receive funds for forgiven loans from both the first and second round of PPP loans ~~during the first nine months of 2021.~~through March 2022. As of ~~September 30, 2021,~~March 31, 2022, we had ~~260~~80 loans, which totaled ~~$34.7~~$11.2 million, still outstanding under the PPP program. We expect the application process for loan forgiveness to continue through the ~~first~~third quarter of 2022, with funds to be received from the SBA for the forgiven loans through ~~March~~the remainder of 2022. ~~We recorded $1.1 million of net~~

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fee and interest income on PPP loans in the third quarter of 2021, and $2.7 million of net fee and interest income on PPP loans in the first nine months of 2021. As of September 30, 2021, unearned net fee income on both first and second round PPP loans totaled $1.3 million. In addition, as of September 30, 2021, we had one loan with a total outstanding balance of $87,500 under the Main Street Lending Program.

Capital and Liquidity

As of ~~September 30, 2021,~~March 31, 2022, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by credit losses.

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

We have 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 continued to communicate as needed throughout 2021 in structured meetings with key staff to ensure all current events related to the COVID-19 pandemic, such as federal government stimulus check receipt, PPP loan fundings and the forgiveness application process, are managed appropriately.

Financial Overview

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

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entitled “Non-GAAP Financial Measures” on page 41, as well as the table below, which provides a reconciliation of this non-GAAP measure to the year ended December 31, 2020, and a decrease in total loans compared to the third quarter of 2020, but we believe we are positioned for moderate loan growth for the last quarter of 2021 and into 2022, as we continue to serve our customers’ needs in a competitive economic environment. Given the unprecedented nature of the COVID-19 pandemic and any potential related variants, it is difficult to predict the full impact the pandemic will have on our business. 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. most comparable GAAP equivalents.


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

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

The following provides an overview of some of the factors impacting our financial performance for the three month period ended ~~September 30, 2021,~~March 31, 2022, compared to the like period ended ~~September 30, 2020:~~March 31, 2021:

●

~~Net income for the third quarter of 2021 was $8.4 million, or $0.29 per diluted share, compared to $10.3 million, or $0.34 per diluted share, for the third quarter of 2020.~~

●

Net interest and dividend income was ~~$22.6~~$41.2 million for the ~~third~~first quarter of ~~2021,~~2022, compared to ~~$22.5~~$23.5 million for the ~~third~~first quarter of ~~2020. The increase in 2021 was due to the year over year reduction in interest expense of $364,000 primarily due to the run-off of higher yielding time deposits, partially offset by a decrease~~2021. Growth in interest and dividend income of $255,000, primarily due to a reduction in interest income on loans, including fees, year over year. The decrease in interest and fee income on loans was primarily due to a $162.4 million reduction in loan volumes in the ~~third~~first quarter of ~~2021, compared to the third~~2022 reflected a full quarter of ~~2020.~~ West Suburban loan and securities income.

●

~~The~~We did not record a net provision for credit losses or a release of provision expense in the first quarter of 2022, as an assessment of the portfolio resulted in a ~~$1.5 million net benefit driven~~reduction in our allowance for unfunded commitments, which was offset by a ~~reserve release~~like increase in the third quarter of 2021, consisting of a $1.5 million reserve release related to loans and a $47,000 reserve release related to unfunded commitments, compared to a provision for credit losses of $300,000 recorded in the third quarter of 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~~on loans. We recorded a ~~$1.7~~$3.0 million ~~allowance for credit losses related to unfunded commitments as~~release of ~~January 1, 2020. The~~ provision expense ~~recorded~~ in ~~2020 was impacted by both our adoption~~the first quarter of ~~the new CECL methodology and the expected impact, as of September 30, 2020, of the COVID-19 pandemic on future losses.~~2021.

●

Noninterest income was ~~$9.3~~$13.5 million for the ~~third~~first quarter of 2022, compared to $11.3 million for the first quarter of 2021. Growth in wealth management, service charges on deposits, and card related income resulted primarily from the West Suburban acquisition and resultant additional fee income. In addition, an increase of $1.9 million was reflected in the mark to market gain on mortgage servicing rights (“MSRs”) in the first quarter of 2022, compared to the first quarter of 2021, ~~compared to $11.7 million for the third quarter of 2020. The decrease in 2021 was primarily~~ due to an increase in market interest rates in the 2022 period. These increases were partially offset by a ~~$3.4 million decrease in residential mortgage banking revenue, primarily stemming from a $3.1~~$2.2 million decrease in net gain on sales of mortgage ~~loans. Partially offsetting this decrease~~loans in the first quarter of 2022, compared to the first quarter of 2021.

●

Noninterest expense was $38.3 million for the first quarter of 2022, compared to $21.7 million for the first quarter of 2021, an increase of ~~$483,000~~$16.5 million, or 76.1%. The increase was due to growth in ~~wealth~~salaries and employee benefits and occupancy, furniture and equipment expenses in the first quarter of 2022, primarily stemming from the additional employees and branches due to the West Suburban acquisition. In addition, we recorded $5.6 million of acquisition-related costs in the first quarter of 2022, primarily within computer and data processing, consulting and management fees and other expense related to the West Suburban acquisition.

●

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

●

Our community-focused banking franchise experienced a $19.6 million decrease in total loans in the first quarter of 2022, compared to the year ended December 31, 2021, but an increase of ~~$125,000~~$1.44 billion in ~~card-related income, as customer spending increased due~~total loans compared to the ~~easing~~first quarter of 2021, as we acquired $1.50 billion of loans in the West Suburban acquisition. We believe we are positioned for moderate loan growth as we continue to serve our customers’ needs in a competitive economic environment. We are continuing to seek to provide value to our customers and the communities in which we operate, by executing on growth opportunities in our local markets and developing new banking relationships, while ensuring the safety and soundness of our Bank, our customers and our employees during the COVID-19 ~~restrictions.~~ pandemic.

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●

~~Noninterest expense was $22.1~~Nonaccrual loans decreased $5.6 million ~~for the third quarter~~as of ~~2021,~~March 31, 2022, compared to $20.3 million for the third quarter of 2020, an increase of $1.9 million, or 9.2%. The increase in 2021 was primarily due to increases in salaries and employee benefits expense, occupancy, furniture and equipment expense, computer and data processing expense, and legal fees, which included $425,000 of merger-related costs in the third quarter of 2021 stemming from our pending merger of West Suburban.

●

The provision for income taxes was $2.9 million for the third quarter of 2021, compared to a $3.4 million for the third quarter of 2020. Pretax income was $11.3 million in the third quarter of 2021, compared to a $13.6 million for the third quarter of 2020.

●

~~Nonaccrual loans increased in the third quarter of~~December 31, 2021, due to the ~~transfer~~upgrade or payoff of ~~two~~various credits ~~totaling $7.4 million to nonaccrual, which resulted~~ in ~~nonperforming~~the first quarter of 2022. Nonperforming loans as a percent of total loans ~~of 1.5%~~was 1.1% as of ~~September 30, 2021,~~March 31, 2022, compared to ~~1.1%~~1.3% as of December 31, ~~2020,~~2021, and ~~1.0%~~1.1% at ~~September 30, 2020.~~March 31, 2021. Classified assets decreased to ~~$36.8~~$69.0 million as of ~~September 30, 2021,~~March 31, 2022, which is ~~$7.7~~$8.1 million, or ~~17.3%~~10.5%, less than December 31, ~~2020, and $8.5~~2021, but $27.0 million ~~or 18.8%, less~~more than ~~September 30, 2020. Asset quality metrics continue to remain stable overall, as classified assets decreased 18.8% compared~~March 31, 2021, due to the ~~year over year period.~~West Suburban acquisition in late 2021.

Critical Accounting ~~Policies~~Estimates

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

Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting ~~Policies~~Estimates” in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. There have been no material changes to our critical accounting policies or the estimates made pursuant to those policies during the most recent quarter from those disclosed in our ~~2020~~2021 Annual Report in Form 10-K.

Non-GAAP Financial Measures

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

Results of Operations

Overview

Three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~

~~Tableof Contents~~

Our income before taxes was ~~$11.3~~$16.4 million in the ~~third~~first quarter of ~~2021~~2022 compared to ~~$13.6~~$16.1 million in the ~~third~~first quarter of ~~2020.~~2021. This ~~decrease~~increase in pretax income was primarily due to a ~~$2.3~~$17.9 million ~~decrease~~increase in interest and dividend income, and a $2.2 million increase in noninterest income, primarily due to a ~~$3.4 million decline in residential mortgage banking~~full quarter of West Suburban loan, securities and fee income ~~year over year, and~~being included. These increases were partially offset by a ~~$1.9~~$16.5 million increase in noninterest expense, primarily due to an increase in salaries and employee benefits, occupancy, furniture and equipment expense, computer and data processing expense and ~~legal~~other expense. ~~These decreases~~The majority of these increases were due to ~~pretax income were partially offset by~~the inclusion of a ~~$1.5~~full quarter of operating costs of the legacy West Suburban staff and branches, as well as $5.6 million ~~release~~ of ~~provision for credit losses expense~~West Suburban acquisition-related costs in the ~~third~~first quarter of ~~2021, compared to provision for credit losses of $300,000 in the like quarter of 2020.~~2022, primarily within computer and data processing, consulting fees and other expense. Our net income was ~~$8.4~~$12.0 million, or ~~$0.29~~$0.27 per diluted share, for the ~~third~~first quarter of ~~2021,~~2022, compared to net income of ~~$10.3~~$11.9 million, or ~~$0.34~~$0.40 per diluted share, for the ~~third~~first quarter of ~~2020.~~2021.

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Net interest and dividend income was ~~$22.6~~$41.2 million in the ~~third~~first quarter of ~~2021,~~2022, compared to ~~$22.5~~$23.5 million in the ~~third~~first quarter of ~~2020.~~2021. The ~~$109,000~~$17.7 million increase was primarily driven by growth in all interest and dividend income categories due to a ~~$377,000 increase in taxable~~full quarter of West Suburban related loan and securities income ~~as well as a $754,000 decrease in interest expense on time deposits due to higher yielding deposits running off year over year.~~being reflected. Partially offsetting this increase to net interest and dividend income was a ~~$665,000 decrease~~$251,000 increase in ~~loan~~ interest ~~income~~expense in the ~~third~~first quarter of 2022, compared to the first quarter of 2021, primarily due to the issuance of subordinated debt in April 2021, partially offset by a decrease in the rate paid on our senior notes in the first quarter of 2022, as the interest rate payable on these notes became floating as of January 1, 2022, at three month LIBOR plus 385 basis points, compared to the ~~third quarter of 2020, primarily due to a decrease in interest rates and loan volume reductions.~~prior 5.75% fixed rate.

~~Management has remained diligent in reviewing our loan portfolio to analyze and determine if charge-offs are required.~~ Average loans, including loans held for sale, ~~decreased $159.3 million~~increased $1.01 billion in the ~~third~~first quarter of 2022, compared to the fourth quarter of 2021, ~~compared to the third quarter of 2020,~~ stemming primarily from ~~$164.3 million~~the inclusion of a full quarter of average loans related to the $1.50 billion of loans acquired with the West Suburban acquisition, less PPP loans forgiven or repaid, ~~in the past nine months,~~ and loan paydowns due to growth in our borrowers’ ~~liquidity year over year.~~

~~Nine months ended September 30, 2021 and 2020~~

Our income before taxes was $39.4 million for the nine months ended September 30, 2021, compared to $26.0 million for the nine months ended September 30, 2020. This $13.4 million increase in pretax income was primarily due to a $8.0 million release of provision for credit losses expense for the nine months ended September 30, 2021, compared to a $10.4 million provision for credit losses for the like period in 2020, 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. Due to an improved unemployment forecast and our charge-offs recorded to date, our projected credit losses have decreased over the past year, resulting in the reversal in 2021 of a portion of our reserves recorded in 2020. Our net income was $29.1 million, or $0.99 per diluted share, for the nine months ended September 30, 2021, compared to net income of $19.8 million, or $0.65 per diluted share, for the nine months ended September 30, 2020.

Net interest and dividend income was $68.1 million for the nine months ended September 30, 2021, compared to $67.9 million for the same period of 2020. While net interest and dividend income remained relatively flat, interest and dividend income decreased $3.8 million year over year, due to the reduction in interest rates and a decline in loan volumes. This decrease was offset by a reduction in interest expense for the nine months ended September 30, 2021, compared to the like 2020 period, due to the reduction in interest rates on interest-bearing deposits, as well as our redemption of the Old Second Capital Trust I trust preferred securities and related subordinated debentures in the first quarter of 2020, which was partially offset by the issuance of $60.0 million of subordinated debentures in April 2021. continued liquidity.

Net Interest Income

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

Three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~

Our net interest and dividend income increased by ~~$109,000~~$17.7 million to ~~$22.6~~$41.2 million, for the ~~third~~first quarter of ~~2021,~~2022, from ~~$22.5~~$23.5 million for the ~~third~~first quarter of ~~2020.~~2021. This increase was primarily attributable to a ~~$754,000 decline~~$17.9 million increase in ~~time deposit~~total interest ~~expense~~and dividend income due to the ~~decrease~~acquisition of West Suburban in ~~interest rates and volume reductions year over year, and a $377,000 increase in taxable securities income due to an increase of $225.2 million in average taxable securities.~~December 2021. Partially offsetting this increase in ~~net~~ interest and dividend income was an increase of $251,000 in total interest expense, primarily due to a ~~decrease~~full quarter of ~~$665,000~~West Suburban deposit interest expense and an increase in subordinated debt interest expense based on the issuance in April 2021. Net interest and dividend income for the first quarter of 2022 reflected an increase of $12.6 million, or 43.9%, compared to the fourth quarter of 2021.

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

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~~loan~~Average interest ~~and fees income, primarily due to a reduction~~bearing liabilities increased $1.57 billion, or 59.0%, in ~~loan volumes and continuing low interest rates year over year. Net interest and dividend income for~~ the ~~third~~first quarter of ~~2021 reflected an increase of $664,000, or 3.0%,~~2022, compared to the ~~second quarter of 2021.~~

Average earning assets for the third quarter of 2021 totaled $3.09 billion, reflecting an increase of $32.1 million, or 1.1%, compared to the second quarter of 2021, and an increase of $316.1 million, or 11.4%, compared to the third quarter of 2020. Average interest earning deposits with financial institutions totaled $523.6 million for the third quarter of 2021, which reflected an increase of $24.0 million compared to the second quarter of 2021, and an increase of $260.4 million compared to the third quarter of 2020. The yield on average interest earning deposits was 15 basis points for the third quarter of 2021, five basis points more than the third quarter of 2020. Securities reflected an increase in interest income year over year, due to growth in volumes. Total average securities for the third quarter of 2021 increased $49.4 million from the secondfourth quarter of 2021, and increased $215.0 million from the third quarter of 2020. The yield on average securities declined to 2.07% for the third quarter of 2021, compared to 2.24% for the second quarter of 2021 and 2.78% for third quarter of 2020. Total average loans, including loans held-for-sale, totaled $1.89$2.43 billion ~~in the third quarter of 2021, which reflected a decrease of $41.3 million~~ compared to the ~~second~~first quarter of 2021, and a decrease of $159.3 million compared to the third quarter of 2020. The decline in average loan balances year over year was primarily due to a decrease in commercial loans related to PPP loan payoffs, net of originations, and early payoffs on other commercial loans due to higher levels of borrower liquidity. This decline in loan volumes resulted in a decrease in loan interest and fee income of $665,000 in the year over year period. For the third quarter of 2021, the yield on average loans increased to 4.48%, compared to 4.33% for the second quarter of 2021, and 4.29% for the third quarter of 2020.

Average interest bearing liabilities decreased $7.4 million, or 0.4%, in the third quarter of 2021, compared to the second quarter of 2021, but increased $137.7 million compared to the third quarter of 2020.2021. The year over year increase in average interest bearing liabilities was primarily driven by a ~~$98.9 million~~$2.41 billion increase in interest bearing deposits and a $59.2 million increase in subordinated debentures. The year over year and linked quarter increases in interest bearing deposits were primarily due to the West Suburban acquisition, as well as continued deposit growth of our legacy customers. The cost of interest bearing liabilities for the ~~third~~first quarter of ~~2021~~2022 decreased by ~~two~~13 basis points from the ~~second~~fourth quarter of 2021, and decreased 1221 basis points from the ~~third~~first quarter of ~~2020.~~2021. Growth in our average noninterest bearing demand deposits of ~~$136.9~~$500.8 million in the year over year period has assisted us in controlling our cost of funds stemming from average interest bearing deposits and borrowings, which totaled ~~0.30%~~0.20% for the ~~third~~first quarter of ~~2021, 0.31%~~2022, 0.33% for the ~~second~~fourth quarter of 2021, and ~~0.38%~~0.41% for the ~~third~~first quarter of ~~2020.~~2021.

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

Due to the significant increase in ~~cash~~interest earning deposits with financial institutions in 2020 and ~~due from banks~~2021 stemming from federal stimulus funds received and PPP loan forgiveness, we had no average other short-term borrowings, which typically consist of FHLBC advances, in the ~~third~~first quarter of 2022, in the fourth quarter of 2021 ~~compared to minimal average balances in~~or the ~~second~~first quarter of ~~2021, and $8.2 million in the third quarter of 2020.~~2021. As of ~~September 30, 2021,~~March 31, 2022, notes payable and other borrowings consisted of one long-term FHLBC advance of ~~$6.2~~$5.9 million, and ~~$14.0~~$12.0 million outstanding on a term note with a correspondent bank originated in the first quarter of 2020.

Our net interest margin (GAAP) increased three basis points to ~~2.91%~~2.85% for the ~~third~~first quarter of ~~2021,~~2022, compared to ~~2.88%~~2.82% for the ~~second~~fourth quarter of 2021, and decreased 3242 basis points compared to ~~3.23%~~3.27% for the ~~third~~first quarter of ~~2020.~~2021. Our net interest margin (TE) increased two basis points to ~~2.95%~~2.88% for the ~~third~~first quarter of ~~2021,~~2022, compared to ~~2.93%~~2.86% for the ~~second~~fourth quarter of 2021, and decreased 3344 basis points compared to ~~3.28%~~3.32% for the ~~third~~first quarter of 2020. Our core net interest margin (TE), a non-GAAP financial measure that excludes the impact of our PPP loans, was 2.85% for the third quarter of 2021, compared to 2.91% for the second quarter of 2021 and 3.34% for the third quarter of 2020.2021. The reductions year over year were due primarily to the lower level of market interest rates over the majority of the past twelve months, the related rate resets on loans and securities during the past year, and the increase in liquidity on the balance sheet.

~~Nine months ended September 30, 2021 and 2020~~

Our net interest and dividend income increased by $241,000, to $68.1 million for the nine months ended September 30, 2021, compared to $67.9 million for the nine months ended September 30, 2020. This increase was attributable to a $4.1 million decrease in total interest expense, which was materially offset by a $3.8 million decrease in interest and dividend income for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The reduction in market interest rates year over year drove the

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decrease in interest income on loans and securities, as well as the decrease in rates paid on interest bearing deposits, specifically impacting time deposits as both rate and volume declines occurred year over year.

Average earning assets for the nine months ended September 30, 2021 were $3.02 billion, reflecting an increase of $386.8 million, or 14.7%, compared to the nine months ended September 30, 2020. The yield on average earning assets for the nine months ended September 30, 2021 was 3.34%, compared to 4.02% for the nine months ended September 30, 2020. Total average loans, including loans held-for-sale, totaled $1.94 billion for the nine months ended September 30, 2021, which reflected a decrease of $70.9 million, compared to the nine months ended September 30, 2020. The decline in average loan balances and market interest rate reductions resulted in a $3.7 million decrease in loan interest income for the nine months ended September 30, 2021, compared to the like period in 2020. For the nine months ended September 30, 2021, yields on average securities decreased by 84 basis points and yields on average loans decreased by nine basis points, each as compared to the nine months ended September 30, 2020, due primarily to the falling interest rate environment and rate resets on those assets. Average interest earning deposits with financial institutions increased $312.8 million in the nine months ended September 30, 2021, compared to the prior year like period, as payoffs related to forgiven PPP loans were received from the Small Business Administration (“SBA”) over the past twelve months, in addition to federal stimulus funds received by certain of our depositors, both of which increased our liquidity.

Average interest bearing liabilities increased $162.9 million, or 9.6%, in the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. The increase was primarily due to growth in average interest bearing deposits of $128.4 million due to federal stimulus funds received by certain of our depositors. In addition, securities sold under repurchase agreements increased $16.0 million, and average subordinated debt increased $38.6 million, due to the $60.0 million of Notes issued in April 2021, as discussed above. Partially offsetting these increases to interest bearing liabilities was a decrease in average other short-term borrowings, which primarily consist of FHLBC advances, of $13.2 million, and a decrease in average junior subordinated debentures of $7.1 million due to the redemption of the trust preferred securities issued by Old Second Capital Trust I and the related $32.6 million of subordinated debentures in March 2020. The rate on our junior subordinated debentures was 7.85% for the nine months ended September 30, 2020, as $635,000 of deferred issuance costs was expensed upon the redemption in 2020. Average noninterest bearing deposits increased $185.0 million in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, primarily due to federal stimulus funds received from certain of our depositors. The cost of interest bearing liabilities decreased 37 basis points, to 45 basis points, for the nine months ended September 30, 2021, from 82 basis points for the nine months ended September 30, 2020.

Our net interest margin (GAAP) for the nine months ended September 30, 2021 was 3.02% compared to 3.44% for the nine months ended September 30, 2020, reflecting a 42 basis point decrease. Our net interest margin (TE) for the nine months ended September 30, 2021 was 3.06% compared to 3.50% for the nine months ended September 30, 2020, reflecting a 44 basis point decrease. The decrease in net interest margin for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, was due primarily to reductions in the market interest rates, a decline of $70.9 million in average loans and loans held for sale, and the growth of our liquidity with an increase in cash and due from banks, which were not yet reinvested into higher yielding assets. These reductions to the net interest margin were partially offset by reductions in rates paid on deposits, additional securities purchases, and growth in noninterest bearing deposits, which drove down our overall cost of funds.

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

The following table sets forth certain information relating to our average consolidated balance sheet and reflect the yield on average earning assets and cost of average interest bearing liabilities for the periods indicated. These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period. Average balances are derived from daily balances. For purposes of discussion, net interest income and net interest income to total earning assets in the following tables have been adjusted to a non-GAAP TE basis using a marginal rate of 21% in ~~2021~~2022 and ~~2020~~2021 to more appropriately compare returns on tax-exempt loans and securities to other earning assets.

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

	Quarters Ended																		Quarters Ended
	September 30, 2021						June 30, 2021						September 30, 2020						March 31, 2022						December 31, 2021						March 31, 2021
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	523,561		$	203	0.15	$	499,555		$	137	0.11	$	263,199		$	68	0.10	$	635,302		$	269	0.17	$	587,721		$	224	0.15	$	359,576		$	92	0.10
Securities:
Taxable		476,935			1,835	1.53		425,785			1,832	1.73		251,760			1,458	2.30		1,611,748			5,047	1.27		842,576			2,817	1.33		340,873			1,615	1.92
Non-taxable (TE)¹		186,515			1,627	3.46		188,281			1,594	3.40		196,648			1,680	3.40		195,240			1,814	3.77		189,697			1,674	3.50		191,357			1,655	3.51
Total securities (TE)¹		663,450			3,462	2.07		614,066			3,426	2.24		448,408			3,138	2.78		1,806,988			6,861	1.54		1,032,273			4,491	1.73		532,230			3,270	2.49
Dividends from FHLBC and FRBC		9,917			114	4.56		9,917			113	4.57		9,917			118	4.73		16,066			153	3.86		11,042			114	4.10		9,917			115	4.70
Loans and loans held-for-sale^{1, 2}		1,889,696			21,358	4.48		1,930,965			20,857	4.33		2,048,968			22,078	4.29		3,405,421			36,448	4.34		2,393,017			26,368	4.37		2,014,773			22,266	4.48
Total interest earning assets		3,086,624			25,137	3.23		3,054,503			24,533	3.22		2,770,492			25,402	3.65		5,863,777			43,731	3.02		4,024,053			31,197	3.08		2,916,496			25,743	3.58
Cash and due from banks		29,760			-	-		29,985			-	-		31,354			-	-		42,941			-	-		34,225			-	-		28,461			-	-
Allowance for credit losses on loans		(28,639)			-	-		(31,024)			-	-		(31,518)			-	-		(44,341)			-	-		(34,567)			-	-		(34,540)			-	-
Other noninterest bearing assets		185,415			-	-		185,368			-	-		185,228			-	-		373,423			-	-		287,762			-	-		187,488			-	-
Total assets	$	3,273,160					$	3,238,832					$	2,955,556					$	6,235,800					$	4,311,473					$	3,097,905

Liabilities and Stockholders' Equity
NOW accounts	$	534,056		$	96	0.07	$	531,804		$	105	0.08	$	470,474		$	106	0.09	$	610,797		$	89	0.06	$	567,971		$	85	0.06	$	495,384		$	95	0.08
Money market accounts		355,651			66	0.07		330,536			59	0.07		306,763			91	0.12		1,098,913			170	0.06		611,632			142	0.09		329,050			77	0.09
Savings accounts		451,829			47	0.04		439,104			53	0.05		378,957			102	0.11		1,845,656			138	0.03		918,835			68	0.03		412,743			69	0.07
Time deposits		331,482			330	0.39		359,635			409	0.46		417,952			1,084	1.03		495,452			277	0.23		370,919			271	0.29		399,310			500	0.51
Interest bearing deposits		1,673,018			539	0.13		1,661,079			626	0.15		1,574,146			1,383	0.35		4,050,818			674	0.07		2,469,357			566	0.09		1,636,487			741	0.18
Securities sold under repurchase agreements		46,339			15	0.13		67,737			21	0.12		54,313			28	0.21		39,204			11	0.11		47,571			15	0.13		82,475			31	0.15
Other short-term borrowings		-			-	-		1			-	-		8,204			24	1.16
Junior subordinated debentures		25,773			286	4.40		25,773			284	4.42		25,773			285	4.40		25,773			280	4.41		25,773			283	4.36		25,773			280	4.41
Subordinated debentures		59,180			547	3.67		56,081			517	3.70		-			-	-		59,222			546	3.74		59,201			546	3.66		-			-	-
Senior notes		44,441			673	6.01		44,415			673	6.08		44,337			673	6.04		44,494			485	4.42		44,468			673	6.00		44,389			673	6.15
Notes payable and other borrowings		21,171			113	2.12		22,250			119	2.15		25,482			144	2.25		19,009			103	2.20		20,090			107	2.11		23,330			123	2.14
Total interest bearing liabilities		1,869,922			2,173	0.46		1,877,336			2,240	0.48		1,732,255			2,537	0.58		4,238,520			2,099	0.20		2,666,460			2,190	0.33		1,812,454			1,848	0.41
Noninterest bearing deposits		1,029,705			-	-		1,012,163			-	-		892,811			-	-		1,437,881			-	-		1,193,387			-	-		937,039			-	-
Other liabilities		53,370			-	-		36,553			-	-		39,589			-	-		60,601			-	-		68,314			-	-		37,801			-	-
Stockholders' equity		320,163			-	-		312,780			-	-		290,901			-	-		498,798			-	-		383,312			-	-		310,611			-	-
Total liabilities and stockholders' equity	$	3,273,160					$	3,238,832					$	2,955,556					$	6,235,800					$	4,311,473					$	3,097,905
Net interest income (GAAP)				$	22,618					$	21,954					$	22,509					$	41,236					$	28,649					$	23,543
Net interest margin (GAAP)						2.91						2.88						3.23						2.85						2.82						3.27

Net interest income (TE)¹				$	22,964					$	22,293					$	22,865					$	41,632					$	29,007					$	23,895
Net interest margin (TE)¹						2.95						2.93						3.28						2.88						2.86						3.32
Core net interest margin (TE - excluding PPP loans)¹						2.85						2.91						3.34
Interest bearing liabilities to earning assets		60.58	%					61.46	%					62.53	%					72.28	%					66.26	%					62.14	%

¹Represents a non-GAAP financial measure. See the discussion entitled “Non-GAAP Presentations” below that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent. Tax equivalent basis is calculated using a marginal tax rate of 21% in ~~2021~~2022 and ~~2020.~~2021.

² Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page ~~50,~~45, and includes fees of ~~$1.8~~$1.1 million for the ~~third~~first quarter of ~~2021, $1.3~~2022, $1.4 million ~~second~~fourth quarter of 2021, and ~~$975,000~~$1.3 million for the ~~third~~first quarter of ~~2020.~~2021. Nonaccrual loans are included in the above-stated average balances.

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

Nine Months Ended September 30,

2021

2020

Average

Income /

Rate

Average

Income /

Rate

Balance

Expense

%

Balance

Expense

%
Assets

Interest earning deposits with financial institutions
$
461,498

$
432

0.13

$
148,660

$
185

0.17
Securities:

Taxable

415,029

5,282

1.70

257,664

5,315

2.76
Non-taxable (TE)¹

188,700

4,875

3.45

201,242

5,289

3.51
Total securities (TE)¹

603,729

10,157

2.25

458,906

10,604

3.09
Dividends from FHLBC and FRBC

9,917

342

4.61

9,917

366

4.93
Loans and loans held-for-sale ^{1 , 2}

1,944,687

64,480

4.43

2,015,592

68,174

4.52
Total interest earning assets

3,019,831

75,411

3.34

2,633,075

79,329

4.02
Cash and due from banks

29,407

-

-

31,498

-

-
Allowance for credit losses on loans

(31,380)

-

-

(28,601)

-

-
Other noninterest bearing assets

186,083

-

-

181,762

-

-
Total assets
$
3,203,941

$
2,817,734

Liabilities and Stockholders' Equity

NOW accounts
$
520,556

$
295

0.08

$
450,178

$
468

0.14
Money market accounts

338,510

203

0.08

289,219

412

0.19
Savings accounts

434,702

169

0.05

353,737

439

0.17
Time deposits

363,227

1,239

0.46

435,419

4,292

1.32
Interest bearing deposits

1,656,995

1,906

0.15

1,528,553

5,611

0.49
Securities sold under repurchase agreements

65,385

67

0.14

49,358

167

0.45
Other short-term borrowings

-

-

-

13,205

167

1.69
Junior subordinated debentures

25,773

850

4.41

32,889

1,932

7.85
Subordinated debentures

38,637

1,064

3.68

-

-

-
Senior note

44,416

2,019

6.08

44,310

2,019

6.09
Notes payable and other borrowings

22,243

355

2.13

22,277

439

2.63
Total interest bearing liabilities

1,853,449

6,261

0.45

1,690,592

10,335

0.82
Noninterest bearing deposits

993,308

-

-

808,273

-

-
Other liabilities

42,632

-

-

35,911

-

-
Stockholders' equity

314,552

-

-

282,958

-

-
Total liabilities and stockholders' equity
$
3,203,941

$
2,817,734

Net interest income (GAAP)

$
68,115

$
67,874

Net interest margin (GAAP)

3.02

3.44

Net interest income (TE)¹

$
69,150

$
68,994

Net interest margin (TE)¹

3.06

3.50
Core net interest margin (TE - excluding PPP loans)¹

3.02

3.54
Interest bearing liabilities to earning assets

61.38
%

64.21
%

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 50, and includes fees of $4.4 million and $2.0 million for the third quarter of 2021 and the third quarter of 2020, respectively. Nonaccrual loans are included in the above-stated average balances.

~~Tableof Contents~~

Reconciliation of Tax-Equivalent Non-GAAP Financial Measures

Net interest and dividend income (TE) and net interest income (TE) to average interest earning assets are non-GAAP measures that have been adjusted on a TE basis using a marginal rate of 21% for ~~2021~~2022 and ~~2020~~2021 to more appropriately compare returns on tax-exempt loans and securities to other earning assets. The table below provides a reconciliation of each non-GAAP (TE) measure to the GAAP equivalent for the periods indicated:


	Three Months Ended									Nine Months Ended						Three Months Ended
	September 30,			June 30,			September 30,			September 30,						March 31,			December 31,			March 31,
Net Interest Margin	2021			2021			2020			2021			2020			2022			2021			2021


Interest income (GAAP)	$	24,791		$	24,194		$	25,046		$	74,376		$	78,209		$	43,335		$	30,839		$	25,391
Taxable-equivalent adjustment:
Loans		4			4			3			11			9			15			7			4
Securities		342			335			353			1,024			1,111			381			351			348
Interest and dividend income (TE)		25,137			24,533			25,402			75,411			79,329			43,731			31,197			25,743
Interest expense (GAAP)		2,173			2,240			2,537			6,261			10,335			2,099			2,190			1,848
Net interest income (TE)	$	22,964		$	22,293		$	22,865		$	69,150		$	68,994		$	41,632		$	29,007		$	23,895
Paycheck Protection Program ("PPP") loan - interest and net fee income		1,138			832			736			2,711			1,339
Net interest income (TE) - excluding PPP loans	$	21,826		$	21,461		$	22,129		$	66,439		$	67,655
Net interest income (GAAP)	$	22,618		$	21,954		$	22,509		$	68,115		$	67,874		$	41,236		$	28,649		$	23,543
Average interest earning assets	$	3,086,624		$	3,054,503		$	2,770,492		$	3,019,831		$	2,633,075		$	5,863,777		$	4,024,053		$	2,916,496
Average PPP loans	$	53,562		$	91,948		$	136,281		$	78,288		$	77,302
Average interest earning assets, excluding PPP loans	$	3,033,062		$	2,962,555		$	2,634,211		$	2,941,543		$	2,555,773
Net interest margin (GAAP)		2.91	%		2.88	%		3.23	%		3.02	%		3.44	%		2.85	%		2.82	%		3.27	%
Net interest margin (TE)		2.95	%		2.93	%		3.28	%		3.06	%		3.50	%		2.88	%		2.86	%		3.32	%
Core net interest margin (TE - excluding PPP loans)		2.85	%		2.91	%		3.34	%		3.02	%		3.54	%

Noninterest Income

Three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~

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

~~Tableof Contents~~


							3rd Quarter 2021								1st Quarter 2022
Noninterest Income	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,
	2021		2021		2020		2021	2020	2022		2021		2021		2021	2021
Wealth management	$	2,372	$	2,389	$	1,889	(0.7)	25.6	$	2,698	$	2,422	$	2,151	11.4	25.4
Service charges on deposits		1,368		1,221		1,322	12.0	3.5		2,090		1,624		1,195	28.7	74.9
Residential mortgage banking revenue
Secondary mortgage fees		240		272		492	(11.8)	(51.2)		139		210		322	(33.8)	(56.8)
Mortgage servicing rights mark to market loss		(282)		(1,033)		(160)	(72.7)	76.3
MSRs mark to market gain										2,978		1,463		1,113	103.6	167.6
Mortgage servicing income		572		507		521	12.8	9.8		518		534		567	(3.0)	(8.6)
Net gain on sales of mortgage loans		2,186		1,895		5,246	15.4	(58.3)		1,495		1,498		3,721	(0.2)	(59.8)
Total residential mortgage banking revenue		2,716		1,641		6,099	65.5	(55.5)		5,130		3,705		5,723	38.5	(10.4)
Securities gains (losses), net		244		2		(1)	N/M	N/M
Securities (losses) gains, net										-		(14)		-	N/M	N/M
Change in cash surrender value of BOLI		406		423		459	(4.0)	(11.5)		124		227		334	(45.4)	(62.9)
Death benefit realized on BOLI		-		-		(2)	-	(100.0)
Card related income		1,624		1,666		1,499	(2.5)	8.3		2,550		1,967		1,447	29.6	76.2
Other income		610		577		420	5.7	45.2		901		740		450	21.8	100.2
Total noninterest income	$	9,340	$	7,919	$	11,685	17.9	(20.1)	$	13,493	$	10,671	$	11,300	26.4	19.4

N/M - Not meaningful

Noninterest income increased ~~$1.4~~$2.8 million, or ~~17.9%~~26.4%, in the ~~third~~first quarter of ~~2021,~~2022, compared to the ~~second~~fourth quarter of 2021, and ~~decreased $2.3~~increased $2.2 million, or ~~20.1%~~19.4%, compared to the ~~third~~first quarter of ~~2020.~~2021. The increase from the linked quarter was primarily driven by a ~~$1.1~~$1.4 million increase in residential mortgage banking revenue, ~~primarily~~ attributable to a ~~$751,000 decrease~~$1.5 million increase in mark to market ~~losses~~gain on mortgage servicing rights (MSRs) stemming from market interest rate changes and a $291,000 increase in net gain on sales of mortgage loans in the third quarter of 2021, compared to the second quarter of 2021. In addition, increases were noted compared to the linked quarter of $242,000 in securities gains, net, and $147,000 in service charges on deposits.

The decrease in noninterest income in the third quarter of 2021, compared to the third quarter of 2020, is primarily due to a $3.4 million decrease in residential mortgage banking revenue, which included a $3.1 million decrease in net gain on sales of mortgage loans and a $252,000 decrease in secondary mortgage fees from the 2020 like period. Partially offsetting these decreases was a $483,000 increase in wealth management income and a $125,000 increase in card related income in the third quarter of 2021, compared to the third quarter of 2020. The increase in card related income in the third quarter of 2021, compared to both the linked quarter and prior year quarter, resulted from reductions in COVID-19 related restrictions and the resultant increase in consumer spending. An increase of $245,000 in the third quarter of 2021, compared to the like quarter in 2020, was also noted in securities gains, net, due to securities sold in the third quarter of 2021.

~~Nine months ended September 30, 2021 and 2020~~

Noninterest Income

Nine Months Ended

YTD
(Dollars in thousands)

September 30,

September 30,

Percent


2021

2020

Change
Wealth management

$
6,912

$
5,793

19.3
Service charges on deposits

3,784

4,168

(9.2)
Residential mortgage banking revenue

Secondary mortgage fees

834

1,267

(34.2)
Mortgage servicing rights mark to market loss

(202)

(2,739)

92.6
Mortgage servicing income

1,646

1,447

13.8
Net gain on sales of mortgage loans

7,802

12,123

(35.6)
Total residential mortgage banking revenue

10,080

12,098

(16.7)
Securities gains (losses) , net

246

(25)

N/M
Change in cash surrender value of BOLI

1,163

942

23.5

~~Tableof Contents~~

Death benefit realized on BOLI

-

57

(100.0)
Card related income

4,737

4,097

15.6
Other income

1,637

1,572

4.1
Total noninterest income

$
28,559

$
28,702

(0.5)

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

Noninterest income for the nine months ended September 30, 2021 decreased $143,000, or 0.5%, compared to the nine months ended September 30, 2020. This decrease was primarily driven by a $2.0 million decrease in total residential mortgage banking revenue primarily stemming from a $4.3 million decrease in net gain on sales of mortgage loans, partially offset by a $2.5 million decrease in mark to market losses on MSRs. Wealth management income increased $1.1 million for the nine months ended September 30, 2021, compared to the like period in 2020, primarily due to an increase in customer liquidity and the resultant assets under management. In addition, card related income increased $640,000 for the nine months ended September 30, 2021, compared to the like period in 2020, as customers are starting to spend more as COVID-19 restrictions ease. The change in cash surrender value of BOLI also increased by $221,000 for the nine months ended September 30, 2021, compared to the like period in 2020, due to market rate changes and an increase in BOLI asset balances year over year. Securities gains, net, totaled $246,000, compared to securities losses, net of $25,000 for the like period in 2020, due to sales of $35.1 million during the nine months ended September 30, 2021 compared to sales of $18.0 million in the like period in 2020.

5045

Table of Contents

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

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

Noninterest Expense

Three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~

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

3rd Quarter 2021

Noninterest Expense

Three Months Ended

Percent Change From

(Dollars in thousands)

September 30,

June 30,

September 30,

June 30,

September 30,


2021

2021

2020

2021

2020

Salaries

$
9,630

$
9,435

$
9,731

2.1

(1.0)

Officers incentive

1,212

1,194

968

1.5

25.2

Benefits and other

2,122

2,267

1,887

(6.4)

12.5

Total salaries and employee benefits

12,964

12,896

12,586

0.5

3.0

Occupancy, furniture and equipment expense

2,418

2,303

2,003

5.0

20.7

Computer and data processing

1,477

1,304

1,226

13.3

20.5

FDIC insurance

211

192

191

9.9

10.5

General bank insurance

301

277

281

8.7

7.1

Amortization of core deposit intangible asset

113

115

122

(1.7)

(7.4)

Advertising expense

107

95

62

12.6

72.6

Card related expense

662

626

566

5.8

17.0

Legal fees

455

135

169

237.0

169.2

Other real estate owned expense, net

25

77

125

(67.5)

(80.0)

Other expense

3,396

3,381

2,935

0.4

15.7

Total noninterest expense

$
22,129

$
21,401

$
20,266

3.4

9.2

Efficiency ratio (GAAP)¹

68.73
%

68.63
%

58.27
%

Adjusted efficiency ratio (non-GAAP)²

66.46
%

67.64
%

57.47
%

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


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

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, OREO expenses and merger-related costs, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” starting on page ~~52 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.~~

Noninterest expense for the third quarter of 2021 increased $728,000, or 3.4%, compared to the second quarter of 2021, and increased $1.9 million, or 9.2%, compared to the third quarter of 2020. The linked quarter increase is primarily attributable to a $195,000 increase in salaries primarily due to a reduction of salary-related loan cost deferrals due to the decrease in PPP loan originations, a $173,000 increase in computer and data processing expense and a $320,000 increase in legal fees attributable to merger-related costs incurred related to our pending merger with West Suburban. In addition, occupancy, furniture and equipment expense increased $115,000 in the third quarter of 2021 compared to the linked quarter due to an increase in planned building maintenance. These increases were partially offset by a decrease in other real estate owned expenses.

The year over year increase in noninterest expense is primarily attributable to a $378,000 increase in salaries and employee benefits in the third quarter of 2021 compared to the third quarter of 2020. Officer incentive compensation increased $244,000 in the third quarter of 2021, compared to the third quarter of 2020, as incentive accruals in 2021 were at a higher rate than the prior year. Employee benefits expense increased $235,000 in the third quarter of 2021, compared to the third quarter of 2020, due to an increase in employee insurance costs as more employees returned to routine medical appointments, many of which were on hold during the first six months of the COVID-19 pandemic. We also had increases in the year over year period in occupancy, furniture and equipment of $415,000 due to an increase in planned building repairs, an increase in computer and data processing expense of $251,000, and an increase in legal fees of

~~Tableof Contents~~

$286,000, primarily due to merger-related costs incurred. Finally, other expense increased $461,000 primarily due to growth in management and consulting fees, commercial loan non-legal expense, and company events due to our 150^th ~~anniversary celebration during the third quarter of 2021.~~

~~Nine months ended September 30, 2021 and 2020~~

Noninterest Expense

Nine Months Ended

YTD
(Dollars in thousands)

September 30,

September 30,

Percent


2021

2020

Change
Salaries

$
28,280

$
28,080

0.7
Officers incentive

4,060

2,894

40.3
Benefits and other

7,026

5,872

19.7
Total salaries and employee benefits

39,366

36,846

6.8
Occupancy, furniture and equipment expense

7,188

6,239

15.2
Computer and data processing

4,079

3,808

7.1
FDIC insurance

604

403

49.9
General bank insurance

854

764

11.8
Amortization of core deposit intangible asset

348

374

(7.0)
Advertising expense

262

228

14.9
Card related expense

1,881

1,612

16.7
Legal fees

645

476

35.5
Other real estate owned expense, net

138

505

(72.7)
Other expense

9,903

8,909

11.2
Total noninterest expense

$
65,268

$
60,164

8.5
Efficiency ratio (GAAP)¹

67.04
%

59.71
%

Adjusted efficiency ratio (non-GAAP)²

65.69
%

58.89
%

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

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses and merger-related costs, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” on page 5247 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the ~~nine months ended September 30, 2021, increased $5.1 million,~~first quarter of 2022 decreased $247,000, or ~~8.5%~~0.6%, compared to the ~~nine months ended September 30, 2020, primarily due to an increase in salaries and employee benefits due to annual merit increases in March 2021, as well as payout~~fourth quarter of officer incentives in early 2021 at a rate higher than that accrued for 2020 performance, and the resultant increase in accruals in 2021 to be paid out in 2022. In addition, occupancy, furniture and equipment expense increased $949,000, stemming from planned building repairs and maintenance, FDIC insurance increased $201,000 due to assessment credits received in early 2020 not repeated in 2021, card related expense increased $269,000, primarily due to a return to pre-COVID-19 customer spending levels in 2021, and ~~other expense~~ increased ~~$994,000, primarily due an increase in management and consulting fees due~~$16.5 million, or 76.1%, compared to the ~~pending merger with~~first quarter of 2021. The linked quarter decrease was primarily attributable to $5.6 million of West Suburban ~~and directors fees due~~acquisition-related costs for the first quarter of 2022, compared to ~~growth in~~$12.8 million for the ~~number~~fourth quarter of our directors year over year. Partially offsetting these increases was a $367,000 decrease in other real estate owned expense, net, as property holdings have decreased $774,000 year over year, due to continued remediation of credits prior to foreclosure, and the COVID-19 foreclosure moratorium in effect during most of 2021.

These

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

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

Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures


	GAAP									Non-GAAP									GAAP									Non-GAAP
		Three Months Ended									Three Months Ended									Three Months Ended									Three Months Ended
	September 30,			June 30,			September 30,			September 30,			June 30,			September 30,			March 31,			December 31,			March 31,			March 31,			December 31,			March 31,
	2021			2021			2020			2021			2021			2020			2022			2021			2021			2022			2021			2021
Efficiency Ratio / Adjusted Efficiency Ratio

Noninterest expense	$	22,129		$	21,401		$	20,266		$	22,129		$	21,401		$	20,266		$	38,286		$	38,533		$	21,738		$	38,286		$	38,533		$	21,738
Less amortization of core deposit		113			115			122			113			115			122			665			296			120			665			296			120
Less other real estate expense, net		25			77			125			25			77			125			(12)			29			36			(12)			29			36
Less merger related costs		N/A			N/A			N/A			425			-			-			N/A			N/A			N/A			5,604			12,766			-
Noninterest expense less adjustments	$	21,991		$	21,209		$	20,019		$	21,566		$	21,209		$	20,019		$	37,633		$	38,208		$	21,582		$	32,029		$	25,442		$	21,582

Net interest income	$	22,618		$	21,954		$	22,509		$	22,618		$	21,954		$	22,509		$	41,236		$	28,649		$	23,543		$	41,236		$	28,649		$	23,543
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			4			4			3			N/A			N/A			N/A			15			7			4
Securities		N/A			N/A			N/A			342			335			353			N/A			N/A			N/A			381			351			348
Net interest income including adjustments		22,618			21,954			22,509			22,964			22,293			22,865			41,236			28,649			23,543			41,632			29,007			23,895
Noninterest income		9,340			7,919			11,685			9,340			7,919			11,685			13,493			10,671			11,300			13,493			10,671			11,300
Less death benefit related to BOLI		-			-			(2)			-			-			(2)
Less securities gains (losses), net		244			2			(1)			244			2			(1)
Less MSRs mark to market losses		(282)			(1,033)			(160)			(282)			(1,033)			(160)
Less securities losses, net																				-			(14)			-			-			(14)			-
Less MSRs mark to market gain																				2,978			1,463			1,113			2,978			1,463			1,113
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			N/A			108			112			122			N/A			N/A			N/A			33			61			89
Noninterest income (less) / including adjustments		9,378			8,950			11,848			9,486			9,062			11,970			10,515			9,222			10,187			10,548			9,283			10,276

Net interest income including adjustments plus noninterest income (less) / including adjustments	$	31,996		$	30,904		$	34,357		$	32,450		$	31,355		$	34,835		$	51,751		$	37,871		$	33,730		$	52,180		$	38,290		$	34,171
Efficiency ratio / Adjusted efficiency ratio		68.73	%		68.63	%		58.27	%		66.46	%		67.64	%		57.47	%		72.72	%		100.89	%		63.98	%		61.38	%		66.45	%		63.16	%

GAAP

Non-GAAP

Nine Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2021

2020

2021

2020

Efficiency Ratio / Adjusted Efficiency Ratio

(Dollars in thousands)

Noninterest expense

$
65,268

$
60,164

$
65,268

$
60,164

Less amortization of core deposit

348

374

348

374

Less other real estate expense, net

138

505

138

505

Less merger related costs

N/A

N/A

425

-

Noninterest expense less adjustments

$
64,782

$
59,285

$
64,357

$
59,285

Net interest income

$
68,115

$
67,874

$
68,115

$
67,874

Taxable-equivalent adjustment:

Loans

N/A

N/A

11

9

Securities

N/A

N/A

1,024

1,111

Net interest income including adjustments

68,115

67,874

69,150

68,994

Noninterest income

28,559

28,702

28,559

28,702

Less death benefit related to BOLI

-

57

-

57

Less securities gains (losses), net

246

(25)

246

(25)

Less MSRs mark to market losses

(202)

(2,739)

(202)

(2,739)

Taxable-equivalent adjustment:

Change in cash surrender value of BOLI

N/A

N/A

309

266

Noninterest income (less) / including adjustments

28,515

31,409

28,824

31,675

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

$
96,630

$
99,283

$
97,974

$
100,669

Efficiency ratio / Adjusted efficiency ratio

67.04
%

59.71
%

65.69
%

58.89
%

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Income Taxes

We recorded income tax expense of ~~$2.9~~$4.4 million for the ~~third~~first quarter of ~~2021~~2022 on ~~$11.3~~$16.4 million of pretax income, compared to income tax ~~expense~~benefit of ~~$3.2~~$2.5 million on ~~$12.0~~$11.5 million of pretax ~~income~~loss in the ~~second~~fourth quarter of 2021, and income tax expense of ~~$3.4~~$4.2 million on ~~$13.6~~$16.1 million of pretax income in the ~~third~~first quarter of ~~2020.~~2021. The effective tax rate was ~~25.8%~~26.9% for the ~~third~~first quarter of ~~2021, 26.3%~~2022, 21.4% for the ~~second~~fourth quarter of 2021, and ~~24.7%~~26.2% for the ~~third~~first quarter of ~~2020.~~2021.

Income tax expense reflected all relevant statutory tax rates and GAAP accounting. There were no significant changes in our ability to utilize our deferred tax assets during the quarter ~~or nine months~~ ended ~~September 30, 2021.~~March 31, 2022. We had no valuation reserve on the deferred tax assets as of ~~September 30, 2021.~~March 31, 2022.

Financial Condition

Total assets increased ~~$234.3~~$11.6 million to ~~$3.28~~$6.22 billion at ~~September 30, 2021,~~March 31, 2022, from ~~$3.04~~$6.21 billion at December 31, ~~2020,~~2021, due primarily to an increase in securities available-for-sale of $124.0 million and deferred tax assets of $16.5 million, partially offset by reductions in cash and cash equivalents of ~~$189.4~~$117.4 million and ~~securities available-for-sale of $219.0 million, partially offset by a reduction in~~ loans of ~~$166.9~~$19.6 million. We continue to actively assess potential investment opportunities ~~for~~to utilize our excess liquidity. Total deposits were ~~$2.71~~$5.54 billion at ~~September 30, 2021,~~March 31, 2022, an increase of ~~$177.3~~$78.5 million from December 31, ~~2020,~~2021, primarily due to increases in noninterest bearing demand accounts, savings, money market and NOW accounts due to lower interest rates on time deposits in ~~2021, and federal stimulus funds received by many depositors.~~2022.


							September 30, 2021								March 31, 2022
Securities	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,
	2021		2020		2020		2020	2020	2022		2021		2021		2021	2021
Securities available-for-sale, at fair value
U.S. Treasuries	$	4,070	$	4,117	$	4,134	(1.1)	(1.5)	$	220,563	$	202,339	$	4,102	9.0	N/M
U.S. government agencies		33,575		6,657		7,005	404.4	379.3		59,036		61,888		6,361	(4.6)	828.1
U.S. government agencies mortgage-backed		17,818		17,209		18,219	3.5	(2.2)		153,148		172,302		70,602	(11.1)	116.9
States and political subdivisions		238,952		249,259		249,777	(4.1)	(4.3)		236,408		256,465		242,146	(7.8)	(2.4)
Corporate bonds		4,992		-		-	-	-		9,683		9,887		34,843	(2.1)	(72.2)
Collateralized mortgage obligations		165,414		56,585		57,013	192.3	190.1		696,513		672,967		74,936	3.5	829.5
Asset-backed securities		189,338		131,818		81,585	43.6	132.1		274,941		236,877		130,368	16.1	110.9
Collateralized loan obligations		61,029		30,533		30,688	99.9	98.9		166,158		79,763		29,922	108.3	455.3
Total securities	$	715,188	$	496,178	$	448,421	44.1	59.5	$	1,816,450	$	1,692,488	$	593,280	7.3	206.2

N/M - Not meaningful

Securities available-for-sale increased ~~$219.0~~$124.0 million as of ~~September 30, 2021,~~March 31, 2022, compared to December 31, ~~2020,~~2021, and increased ~~$266.8 million~~$1.22 billion compared to ~~September 30, 2020. Available-for-sale security purchases~~March 31, 2021. The increase in the portfolio during the first quarter ~~ended September 30, 2021, totaled $189.6~~of 2022, compared to the linked quarter, was driven by the purchase of $266.3 million, ~~and~~which consisted of ~~$28.3~~$25.2 million of U.S. ~~government agencies, $73.0~~treasuries, $1.1 million of state and political subdivisions, $98.3 million of collateralized mortgage obligations, ~~$48.3~~$52.9 million of asset-backed securities, and ~~$39.4~~$88.8 million of collateralized loan obligations. These purchases were partially offset by ~~$23.8~~$75.7 million of calls, maturities and paydowns during the ~~third~~first quarter of ~~2021,~~2022, and ~~$26.9 million of security sales, as well as~~ an unrealized mark to market loss adjustment of ~~$3.3~~$64.8 million and net premium amortization of ~~$641,000.~~$1.8 million. We continue to seek to position our portfolio into higher credit quality, shorter duration issuances. The increase in the securities portfolio in the year over year period was primarily due to $1.07 billion of securities acquired in our acquisition of West Suburban, as well as $1.04 billion of purchases in the last twelve months, less $605.6 million of sales in that same period, to utilize our excess cash on hand. There were no security sales during the first quarter of 2022 or the first quarter of 2021. During the ~~third~~fourth quarter of 2021, ~~$244,000 of security gains, net,~~there were ~~recorded, compared to $1,000~~$14,000 of security losses, ~~net, in the third quarter of 2020.~~net.

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							September 30, 2021								March 31, 2022
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,
	2021		2020		2020		2020	2020	2022		2021		2021		2021	2021
Commercial	$	321,548	$	407,159	$	436,277	(21.0)	(26.3)	$	695,545	$	771,474	$	392,380	(9.8)	77.3
Leases		162,444		141,601		133,676	14.7	21.5		211,132		176,031		138,240	19.9	52.7
Commercial real estate - Investor		535,506		582,042		548,970	(8.0)	(2.5)		965,767		957,389		567,475	0.9	70.2
Commercial real estate - Owner occupied		330,648		333,070		335,978	(0.7)	(1.6)		655,792		574,384		326,857	14.2	100.6
Construction		108,690		98,486		91,856	10.4	18.3		165,558		206,132		93,745	(19.7)	76.6
Residential real estate - Investor		45,497		56,137		61,923	(19.0)	(26.5)		62,846		63,399		52,176	(0.9)	20.5
Residential real estate - Owner occupied		108,343		116,388		114,283	(6.9)	(5.2)		203,118		213,248		107,303	(4.8)	89.3
Multifamily		160,798		189,040		188,398	(14.9)	(14.6)		298,686		309,164		178,258	(3.4)	67.6
HELOC		69,651		80,908		85,882	(13.9)	(18.9)		110,688		115,664		75,604	(4.3)	46.4
HELOC - Purchased		12,370		19,487		22,312	(36.5)	(44.6)		9,553		10,626		17,078	(10.1)	(44.1)
Other ⁽¹⁾		12,447		10,533		10,772	18.2	15.5		23,685		24,437		10,509	(3.1)	125.4
Total loans	$	1,867,942	$	2,034,851	$	2,030,327	(8.2)	(8.0)	$	3,402,370	$	3,421,948	$	1,959,625	(0.6)	73.6

¹The “Other” segment includes consumer and overdrafts.

Total loans were ~~$1.87~~$3.40 billion as of ~~September 30, 2021,~~March 31, 2022, a decrease of ~~$166.9~~$19.6 million from December 31, ~~2020.~~2021. The decrease in total loans in the first ~~nine~~three months of ~~2021,~~2022, compared to December 31, ~~2020,~~2021, was due primarily to forgiveness or payoff of ~~1,060~~236 PPP loans that totaled ~~$164.3~~$27.2 million within commercial loans, as well as reductions in ~~the majority of our loan categories~~construction, residential real estate-investor and residential real estate-owner occupied loans, due to paydowns as commercial and consumer liquidity continued to remain at a high level. Total loans increased $1.44 billion from March 31, 2021 to March 31, 2022, primarily due to the ~~receipt of federal stimulus funds and capital expenditures decreased due to the COVID-19 pandemic. Total loans decreased $162.4 million~~loan portfolio acquired from ~~September 30, 2020 to September 30, 2021, primarily due to PPP loans forgiven, net of originations, as well as reductions in organic commercial loans due to payoffs related to borrower liquidity.~~West Suburban. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) ~~are~~is carried on a gross basis (rather than net of the associated credit loss estimate), and the expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses, or ACL.

The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate. Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio. These categories comprised ~~73.4%~~72.7% of the portfolio as of ~~September 30, 2021,~~March 31, 2022, compared to ~~72.5%~~71.6% of the portfolio as of December 31, ~~2020.~~2021. We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

Asset Quality

Nonperforming loans consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or greater past due. Remediation work continues in all segments. Nonperforming loans ~~increased~~decreased by ~~$5.9~~$6.7 million to ~~$29.0~~$38.0 million at ~~September 30, 2021~~March 31, 2022 from ~~$23.0~~$44.7 million at December 31, ~~2020.~~2021. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced a more-than-insignificant deterioration in credit quality since origination. PCD loans and their related deferred loan costs are included in our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan. Management continues to carefully monitor loans considered to be in a classified status. Nonperforming loans as a percent of total loans were ~~1.5%~~1.1% as of ~~September 30, 2021, 1.1%~~March 31, 2022, 1.3% as of December 31, ~~2020,~~2021, and ~~1.0%~~1.1% as of ~~September 30, 2020.~~March 31, 2021. The distribution of our nonperforming loans is shown in the following table.

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							September 30, 2021								March 31, 2022
Nonperforming 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,
	2021		2020		2020		2020	2020	2022		2021		2021		2021	2021
Commercial	$	220	$	1,125	$	1,605	(80.4)	(86.3)	$	9,029	$	13,291	$	933	(32.1)	867.7
Leases		3,959		2,801		2,079	41.3	90.4		2,641		3,754		2,562	(29.6)	3.1
Commercial real estate - Investor		6,100		1,632		2,021	273.8	201.8		6,335		5,694		1,913	11.3	231.2
Commercial real estate - Owner occupied		6,896		9,262		8,635	(25.5)	(20.1)		9,871		13,231		7,427	(25.4)	32.9
Construction		2,958		-		-	N/M	N/M		1,250		160		128	681.3	876.6
Residential real estate - Investor		998		1,085		935	(8.0)	6.7		1,393		899		855	54.9	62.9
Residential real estate - Owner occupied		4,885		3,561		3,516	37.2	38.9		4,470		5,019		3,567	(10.9)	25.3
Multifamily		2,055		2,437		895	(15.7)	129.6		1,629		1,573		2,398	3.6	(32.1)
HELOC		700		1,142		1,140	(38.7)	(38.6)		1,164		862		1,000	35.0	16.4
HELOC - Purchased		181		-		-	N/M	N/M		173		180		-	(3.9)	N/M
Other ¹		-		-		6	-	(100.0)		3		3		399	-	(99.2)
Total nonperforming loans	$	28,952	$	23,045	$	20,832	25.6	39.0	$	37,958	$	44,666	$	21,182	(15.0)	79.2

N/M - Not meaningful

¹ The “Other” segment includes consumer and overdrafts.

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


										September 30, 2021											March 31, 2022
Nonperforming Assets	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,
	2021			2020			2020			2020	2020	2022			2021			2021			2021	2021
Nonaccrual loans	$	27,520		$	22,280		$	20,076		23.5	37.1	$	35,973		$	41,531		$	20,379		(13.4)	76.5
Performing troubled debt restructured loans accruing interest		199			331			334		(39.9)	(40.4)		1,242			25			290		N/M	328.3
Loans past due 90 days or more and still accruing interest		1,233			434			422		184.1	192.2		743			3,110			513		(76.1)	44.8
Total nonperforming loans		28,952			23,045			20,832		25.6	39.0		37,958			44,666			21,182		(15.0)	79.2
Other real estate owned		1,912			2,474			2,686		(22.7)	(28.8)		2,374			2,356			2,163		0.8	9.8
Total nonperforming assets	$	30,864		$	25,519		$	23,518		20.9	31.2	$	40,332		$	47,022		$	23,345		(14.2)	72.8


30-89 days past due loans and still accruing interest	$	2,829		$	11,326		$	5,511				$	20,835		$	10,745		$	13,506
Nonaccrual loans to total loans		1.5	%		1.1	%		1.0	%				1.1	%		1.2	%		1.0	%
Nonperforming loans to total loans		1.5	%		1.1	%		1.0	%				1.1	%		1.3	%		1.1	%
Nonperforming assets to total loans plus OREO		1.7	%		1.3	%		1.2	%				1.2	%		1.4	%		1.2	%

Allowance for credit losses	$	26,949		$	33,855		$	32,918				$	44,308		$	44,281		$	30,967
Allowance for credit losses to total loans		1.4	%		1.7	%		1.6	%				1.3	%		1.3	%		1.6	%
Allowance for credit losses to nonaccrual loans		97.9	%		152.0	%		164.0	%				123.2	%		160.9	%		152.0	%

N/M - Not meaningful

Tableof Contents

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

~~Tableof Contents~~


Loan Charge-offs, Net of Recoveries	Three Months Ended									Three Months Ended
(Dollars in thousands)	September 30,		% of	June 30,		% of	September 30,		% of	March 31,		% of	December 31,		% of	March 31,		% of
	2021		Total¹	2021		Total¹	2020		Total¹	2022		Total¹	2021		Total¹	2021		Total¹
Commercial	$	(2)	(0.8)	$	190	292.3	$	(7)	1.9	$	-	-	$	441	9.3	$	(18)	3.1
Leases		4	1.7		28	43.1		119	(32.6)		-	-		37	0.8		-	-
Commercial real estate - Investor		83	35.0		(20)	(30.8)		(102)	27.9		213	72.7		2,603	55.1		(20)	3.4
Commercial real estate - Owner occupied		(2)	(0.8)		21	32.3		(420)	115.1		113	38.6		1,748	37.0		(205)	35.2
Construction		-	-		-	-		59	(16.2)
Residential real estate - Investor		(7)	(3.0)		(10)	(15.4)		(15)	4.1		(10)	(3.4)		(8)	(0.2)		(266)	45.7
Residential real estate - Owner occupied		(18)	(7.6)		(61)	(93.8)		(25)	6.8		(83)	(28.3)		(30)	(0.6)		(49)	8.4
Multifamily		183	77.2		-	-		-	-
HELOC		(28)	(11.8)		(72)	(110.8)		(52)	14.2		(35)	(11.9)		(105)	(2.2)		(12)	2.1
HELOC - Purchased		-	-		-	-		66	(18.1)
Other ²		24	10.1		(11)	(16.9)		12	(3.1)		95	32.3		38	0.8		(12)	2.1
Net (recoveries) charge-offs	$	237	100.0	$	65	100.0	$	(365)	100.0
Net charge-offs (recoveries)										$	293	100.0	$	4,724	100.0	$	(582)	100.0

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

² The “Other” segment includes consumer and overdrafts.

Net charge-offs of ~~$237,000~~$293,000 were recorded for the ~~third~~first quarter of ~~2021,~~2022, compared to net charge-offs of ~~$65,000~~$4.7 million for the ~~second~~fourth quarter of 2021, and net recoveries of ~~$365,000~~$582,000 for the ~~third~~first quarter of ~~2020,~~2021, reflecting continuing management attention to credit quality and remediation efforts. The net charge-offs for the ~~third~~fourth quarter of 2021 were primarily due to two larger credits, one ~~multifamily charge-off.~~commercial and one commercial real estate. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

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

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


							September 30, 2021								March 31, 2022
Classified Assets	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,
	2021		2020		2020		2020	2020	2022		2021		2021		2021	2021
Commercial	$	467	$	2,679	$	5,992	(82.6)	(92.2)	$	29,267	$	32,712	$	2,397	(10.5)	N/M
Leases		4,423		3,222		3,270	37.3	35.3		2,641		3,754		3,147	(29.6)	(16.1)
Commercial real estate - Investor		8,718		5,117		5,596	70.4	55.8		8,809		10,667		5,130	(17.4)	71.7
Commercial real estate - Owner occupied		7,211		11,187		9,658	(35.5)	(25.3)		13,259		15,429		8,652	(14.1)	53.2
Construction		4,898		5,192		5,108	(5.7)	(4.1)		3,185		2,104		5,366	51.4	(40.6)
Residential real estate - Investor		1,154		1,516		1,526	(23.9)	(24.4)		1,544		1,265		1,435	22.1	7.6
Residential real estate - Owner occupied		4,508		4,040		3,836	11.6	17.5		4,862		5,099		4,148	(4.6)	17.2
Multifamily		2,327		7,558		5,833	(69.2)	(60.1)		1,369		2,278		7,846	(39.9)	(82.6)
HELOC		1,034		1,540		1,566	(32.9)	(34.0)		1,496		1,243		1,303	20.4	14.8
HELOC - Purchased		181		-		-	N/M	N/M		173		180		-	(3.9)	N/M
Other ¹		2		4		272	(50.0)	(99.3)		3		10		402	(70.0)	(99.3)
Total classified loans		34,923		42,055		42,657	(17.0)	(18.1)		66,608		74,741		39,826	(10.9)	67.2
Other real estate owned		1,912		2,474		2,686	(22.7)	(28.8)		2,374		2,356		2,163	0.8	9.8
Total classified assets	$	36,835	$	44,529	$	45,343	(17.3)	(18.8)	$	68,982	$	77,097	$	41,989	(10.5)	64.3

N/M - Not meaningful

¹ The “Other” segment includes consumer and overdrafts.

Total classified loans and classified assets decreased as of ~~September 30, 2021,~~March 31, 2022, from the levels at ~~both~~ December 31, ~~2020~~2021 and ~~September 30, 2020,~~increased from March 31, 2021, primarily due to ~~continued~~the addition of the West Suburban loan portfolio in late 2021. We continue remediation efforts, and the high level of paydowns and payoffs we have experienced due to increased borrower liquidity stemming from federal stimulus funds received by borrowers and other COVID-19 relief funding, such as PPP ~~loans.~~loans, have contributed to the decrease in classified assets from December 31, 2021 to March 31, 2022. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ACL on loans as another measure of overall change in loan related asset quality, which is referred to as the “classified assets ratio.” The classified assets ratio was ~~9.73%~~12.04% for the period ended ~~September 30, 2021,~~March 31, 2022, compared to ~~12.64%~~13.79% as of December 31, ~~2020,~~2021, and ~~12.86%~~11.60% as of ~~September 30, 2020.~~March 31, 2021. The ~~decrease~~increase in the classified assets ratio for the period ended ~~September 30, 2021,~~March 31, 2022, compared to ~~September 30, 2020,~~March 31, 2021, is also due to the ~~remediation efforts and borrower liquidity noted above, as well as growth in our capital level over the past year.~~acquisition of West Suburban Bank.

Allowance for Credit Losses on Loans

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

~~We recorded a net release of $1.5 million in~~At March 31, 2022, our ~~provision~~allowance for credit losses ~~due to a reserve release for the third quarter of 2021, comprised of a $1.5~~(“ACL”) on loans totaled $44.3 million, ~~reserve release related to loans~~ and ~~a $47,000 reserve release related to unfunded commitments. We recorded a release of $3.5 million in~~ our ~~provision for credit losses for the second quarter of 2021, comprised of a $2.3 million reserve release related to loans and $1.2 million of additional provision expense for credit losses~~ACL on unfunded commitments, ~~compared to a~~included in other liabilities, totaled $5.7 million. In the first quarter of 2022, we recorded provision ~~for~~expense on loans of $320,000, based on our assessment of nonperforming loan metrics and trends and estimated future credit losses, ~~recorded in the third quarter~~which was offset by a $320,000 reduction of ~~2020 of $300,000. In the third quarter of 2021, we determined a~~our reserve release on loans was appropriate, after considering our low level of net charge-offs for the quarter of $237,000, and net recovery position of $280,000 year to date, as well as the impact of changes to our future loss rate assumptions based on a decrease to the unemployment factor projected for the life of the loans over the one year forecast period. In addition, we recorded a $47,000 release to the provision for credit losses on unfunded commitments, ~~in the third quarter of 2021,~~ primarily due to an updated analysis of line utilization rates over the past twelve months, as well as the roll off of prior historical periods with lower losses within the CECL model. These two entries resulted in a zero net impact to the provision for credit losses for the first quarter of 2022.

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

Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loan, leases and unfunded commitments. Our ACL on loans to total loans was ~~1.4%~~1.3% as of ~~September 30, 2021, compared to 1.7% at~~March 31, 2022, and December 31, ~~2020.~~2021. See Item 7 – Critical Accounting ~~Policies~~Estimates in the ~~Management Discussion and Analysis in our 2020 Annual Report in Form 10-K for discussion of our ACL~~

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

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


		Three Months Ended								Nine Months Ended							Three Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,			March 31,			December 31,			March 31,
	2021			2021			2020			2021			2020			2022			2021			2021
Allowance at beginning of period	$	28,639		$	30,967		$	31,273		$	33,855		$	19,789		$	44,281		$	26,949		$	33,855
Charge-offs:
Commercial		23			207			5			232			124			30			731			2
Leases		4			28			119			32			119			-			37			-
Commercial real estate - Investor		101			-			-			101			15			236			2,623			-
Commercial real estate - Owner occupied		5			31			145			39			1,546			121			1,758			3
Construction		-			-			60			-			60			-			-			-
Residential real estate - Investor		-			-			3			-			8			-			-			-
Residential real estate - Owner occupied		-			-			-			-			43			-			-			-
Multifamily		183			-			-			183			-			-			-			-
HELOC		-			5			-			17			85			-			-			12
HELOC - Purchased		-			-			66			-			66			-			-			-
Other ¹		53			30			53			108			192			127			72			25
Total charge-offs		369			301			451			712			2,258			514			5,221			42
Recoveries:
Commercial		25			17			12			62			48			30			290			20
Leases		-			-			-			-			-			-			-			-
Commercial real estate - Investor		18			20			102			58			139			23			20			20
Commercial real estate - Owner occupied		7			10			565			225			566			8			10			208
Construction		-			-			1			-			1			-			-			-
Residential real estate - Investor		7			10			18			283			45			10			8			266
Residential real estate - Owner occupied		18			61			25			128			157			83			30			49
Multifamily		-			-			-			-			-			-			-			-
HELOC		28			77			52			129			248			35			105			24
HELOC - Purchased		-			-			-			-			-			-			-			-
Other ¹		29			41			41			107			130			32			34			37
Total recoveries		132			236			816			992			1,334			221			497			624
Net charge-offs (recoveries)		237			65			(365)			(280)			924			293			4,724			(582)
Adoption of ASC 326		-			-			-			-			5,879
(Release of) provision for credit losses on loans		(1,453)			(2,263)			1,280			(7,186)			8,174
Day 1 PCD credit evaluation																	-			12,075			-
Provision for (release of) credit losses on loans																	320			9,981			(3,470)
Allowance at end of period	$	26,949		$	28,639		$	32,918		$	26,949		$	32,918		$	44,308		$	44,281		$	30,967

Average total loans (exclusive of loans held-for-sale)	$	1,884,788		$	1,926,105		$	2,035,584		$	1,938,573		$	2,005,253		$	3,398,714		$	2,388,746		$	2,006,157
Net charge-offs / (recoveries) to average loans		0.01	%		0.00	%		(0.02)	%		(0.01)	%		0.05	%		0.01	%		0.20	%		(0.03)	%
Allowance at period end to average loans		1.43	%		1.49	%		1.62	%		1.39	%		1.64	%		1.30	%		1.85	%		1.54	%

¹ The “Other” segment includes consumer and overdrafts.

The coverage ratio of the ACL on loans to nonperforming loans was ~~93.1%~~116.7% as of ~~September 30, 2021,~~March 31, 2022, which was ~~a decrease~~an increase from the coverage ratio of ~~123.9%~~99.1% as of ~~June 30,~~December 31, 2021 and a decrease from ~~158.0%~~146.2% as of ~~September 30, 2020.~~March 31, 2021. When measured as a percentage of average loans, our total ACL on loans was ~~1.39%~~1.30% for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, and ~~1.64%~~1.54% for the like period of ~~September 30, 2020~~ March 31, 2021.

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at ~~September 30, 2021,~~March 31, 2022, and general changes in lending policy, procedures and staffing, as well as other external factors, such as the impacts of the COVID-19 pandemic. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. Further delayed recovery or further deterioration in market conditions related to COVID-19 ~~and~~or other factors, such as the ~~associated impacts on our customers,~~war in Ukraine,

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

Other Real Estate Owned

As of ~~September 30, 2021,~~March 31, 2022, OREO totaled ~~$1.9~~$2.4 million, reflecting ~~a $562,000 reduction~~an $18,000 increase from the ~~$2.5~~$2.4 million at December 31, ~~2020,~~2021, and a ~~$774,000 reduction~~$211,000 increase from the ~~$2.7~~$2.2 million at ~~September 30, 2020. There~~March 31, 2021. In the first quarter of 2022, there was one property disposal of ~~$37,000~~$69,000 in net book value, which resulted in a gain on sale of OREO of $49,000, and one transfer to OREO for ~~$70,000~~$87,000. In the fourth quarter of 2021, we acquired three OREO properties in our acquisition of West Suburban, with a total fair value of $5.6 million, and we sold two of these properties in December, which had a net book value of $5.2 million. In the first quarter of 2021, one property sale of $305,000 net book value and no transfers to OREO from loans were recorded. No OREO valuation reserve adjustments were recorded in the ~~third~~first quarter of 2021. There was one property addition for $314,500 in the third quarter of 2020. There were seven property disposals for a total of $2.7 million in the third quarter of 2020. There were two valuation adjustments which occurred in the third quarter of 2021 for a net write-up of $2,000,2022, compared to ~~$93,000~~$14,000 of ~~OREO~~ valuation ~~write-downs~~reserves recorded in the fourth quarter of ~~2020,~~2021, and ~~$46,250 of~~$6,000 valuation ~~write-downs~~reserves recorded in the ~~third~~first quarter of ~~2020.~~2021.


							September 30, 2021								March 31, 2022
OREO	Three Months Ended						Percent Change From		Three Months Ended						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,
	2021		2020		2020		2020	2020	2022		2021		2021		2021	2021
Balance at beginning of period	$	1,877	$	2,686	$	5,082	(30.1)	(63.1)	$	2,356	$	1,912	$	2,474	23.2	(4.8)
Property additions, net of acquisition adjustments		70		-		314	-	(77.7)		87		5,678		-	(98.5)	-
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		37		119		2,664	(68.9)	(98.6)		69		5,220		305	(98.7)	(77.4)
Period valuation (write-up)/write-down		(2)		93		46	(102.2)	(104.3)		-		14		6	(100.0)	(100.0)
Balance at end of period	$	1,912	$	2,474	$	2,686	(22.7)	(28.8)	$	2,374	$	2,356	$	2,163	0.8	9.8

In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future. Of note, properties valued in total at $1.1 million, or approximately ~~56.4%~~45.4% of total OREO at ~~September 30, 2021,~~March 31, 2022, have been in OREO for five years or more. The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.



OREO Properties by Type
(Dollars in thousands)	September 30, 2021				December 31, 2020				September 30, 2020				March 31, 2022				December 31, 2021				March 31, 2021
		Amount	% of Total			Amount	% of Total			Amount	% of Total			Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	519	27	%	$	430	17	%	$	450	17	%	$	576	24	%	$	645	27	%	$	430	20	%
Lots (single family and commercial)		1,078	56	%		1,387	57	%		1,461	54	%		1,411	59	%		1,411	56	%		1,381	64	%
Vacant land		315	17	%		352	14	%		351	13	%		387	17	%		300	17	%		352	16	%
Commercial property		-	-	%		305	12	%		424	16	%
Total other real estate owned	$	1,912	100	%	$	2,474	100	%	$	2,686	100	%	$	2,374	100	%	$	2,356	100	%	$	2,163	100	%

~~Deposits and Borrowings~~

September 30, 2021
Deposits
As of

Percent Change From
(Dollars in thousands)
September 30,

December 31,

September 30,

December 31,

September 30,

2021

2020

2020

2020

2020
Noninterest bearing demand
$
1,037,638

$
909,505

$
889,085

14.1

16.7
Savings

457,900

399,057

382,711

14.7

19.6
NOW accounts

537,547

486,612

492,407

10.5

9.2
Money market accounts

370,691

316,465

310,613

17.1

19.3
Certificates of deposit of less than $100,000

173,595

200,107

208,570

(13.2)

(16.8)
Certificates of deposit of $100,000 through $250,000

98,496

164,982

129,522

(40.3)

(24.0)
Certificates of deposit of more than $250,000

38,462

60,345

66,335

(36.3)

(42.0)
Total deposits
$
2,714,329

$
2,537,073

$
2,479,243

7.0

9.5

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Deposits and Borrowings


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

Total deposits were ~~$2.71~~$5.54 billion at ~~September 30, 2021,~~March 31, 2022, which reflects a ~~$177.3~~$78.5 million increase from total deposits of ~~$2.54~~$5.47 billion at December 31, ~~2020,~~2021, and an increase of ~~$235.1 million~~$2.89 billion from total deposits of ~~$2.48~~$2.66 billion at ~~September 30, 2020.~~March 31, 2021. The increase in deposits at ~~September 30, 2021,~~March 31, 2022, compared to ~~both~~ December 31, ~~2020 and September 30, 2020,~~2021, was due to increases in noninterest bearing demand, savings ~~NOW,~~ and ~~money market~~NOW accounts, with decreases noted in all maturity categories of certificates of ~~deposit. These total~~ deposit ~~increases~~and money market accounts. The increase in ~~the linked quarter as well as the year over year periods were~~deposits at March 31, 2022, compared to March 31, 2021 was primarily due to ~~federal stimulus funds received by certain depositors due to~~an increase of $2.69 billion of deposits from the ~~COVID-19 pandemic.~~West Suburban acquisition.

In addition to deposits, we obtained funding from other sources in all periods presented. Securities sold under repurchase agreements totaled ~~$43.0~~$33.5 million at ~~September 30, 2021,~~March 31, 2022, a ~~$24.0~~$16.8 million, or ~~35.9%~~33.4%, decrease from ~~$67.0~~$50.3 million at December 31, ~~2020.~~2021. Our notes payable and other borrowings is comprised of one remaining ~~$6.2~~$6.0 million long-term FHLBC advance, which matures on February 2, 2026, and ~~$14.0~~$12.0 million outstanding on a $20.0 million term note originated with a correspondent bank in the first quarter of 2020, to facilitate the redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures, completed on March 2, 2020. Notes payable and other borrowings of ~~$20.1~~$18.0 million as of ~~September 30, 2021,~~March 31, 2022, decreased ~~$3.2~~$1.1 million from December 31, ~~2020,~~2021, and decreased $4.3 million from ~~September 30, 2020.~~March 31, 2021.

The Company is indebted on senior notes originated in December 2016, totaling $44.5 million, net of deferred issuance costs, as of ~~September 30, 2021.~~March 31, 2022. These notes mature in December 2026, and ~~include~~included interest payable semi-annually at 5.75% for five years. Beginning December 31, 2021, the interest ~~becomes~~became payable quarterly at three month LIBOR plus 385 basis points. The Company is also indebted on $25.8 million, net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust II (“Trust II”). The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of 4.41% as of ~~September 30, 2021,~~March 31, 2022, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017, rate reset.

Capital

As of ~~September 30, 2021,~~March 31, 2022, total stockholders’ equity was ~~$321.2~~$466.3 million, which was ~~an increase~~a decrease of ~~$14.1~~$35.7 million from ~~$307.1~~$502.0 million as of December 31, ~~2020.~~2021. This ~~increase~~decrease is attributable to an increase in retained earnings of $25.9 million, comprised of net income year to date of $29.1 million, less a reduction to retained earnings of $3.2 million for payment of dividends to our common stockholders in the first nine months of 2021. In addition, a decrease toin accumulated other comprehensive income of ~~$2.5~~$46.3 million ~~was recorded~~in the first quarter of 2022 due to a net decrease in unrealized gains on available-for-sale securities, net of unrealized losses on ~~swaps.~~swaps, due to the increase in market interest rates, as well as a reduction to retained earnings of $2.2 million for payment of dividends to our common stockholders in the first three months of 2022. Partially offsetting these decreases to total stockholders’ equity was $12.0 million of net income for the first quarter of 2022. Total stockholders’ equity ~~was reduced by an increase~~as of ~~$8.1~~March 31, 2022, increased $155.2 million compared to ~~our treasury stock in the first nine months of~~March 31, 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 outstandingWest Suburban acquisition in late 2021 and the resultant additional common stock ~~through open market purchases, trading plans established~~issued, as well as net income year over year, less the reduction in ~~accordance with U.S. Securities and Exchange Commission rules, privately negotiated transactions, or by~~accumulated other ~~means. The stock repurchase program expired on September 19, 2020; however, we received a notice~~comprehensive income 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 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 were funded by our cash on hand. During the third quarter of 2021, we did not repurchase any shares pursuant to our stock repurchase program. For the nine months ended September 30, 2021, we repurchased 766,034 shares at a weighted average share price of $12.81 per share. To date, we have repurchased 1,485,307 shares of our common stock at a weighted average price of $10.31 per share, under our stock repurchase program. As of September 30, 2021, we had substantially completed the stock repurchase program, which expired on October 21, 2021.

$50.8 million year over year.

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


	Minimum Capital		Well Capitalized								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		2021		2020		2020		Buffer, if applicable¹		Provisions²		2022		2021		2021
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		12.99	%	11.94	%	11.97	%	7.00	%	N/A		9.73	%	9.46	%	12.43	%
Total risk-based capital ratio	10.50	%	N/A		17.80	%	14.26	%	14.33	%	10.50	%	N/A		12.85	%	12.55	%	14.73	%
Tier 1 risk-based capital ratio	8.50	%	N/A		14.10	%	13.01	%	13.08	%	8.50	%	N/A		10.33	%	10.06	%	13.53	%
Tier 1 leverage ratio	4.00	%	N/A		9.81	%	10.21	%	10.07	%	4.00	%	N/A		7.00	%	7.81	%	10.02	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	15.65	%	13.75	%	14.24	%	7.00	%	6.50	%	12.74	%	12.41	%	14.59	%
Total risk-based capital ratio	10.50	%	10.00	%	16.69	%	15.00	%	15.49	%	10.50	%	10.00	%	13.83	%	13.46	%	15.80	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	15.65	%	13.75	%	14.24	%	8.50	%	8.00	%	12.74	%	12.41	%	14.59	%
Tier 1 leverage ratio	4.00	%	5.00	%	10.83	%	10.74	%	10.90	%	4.00	%	5.00	%	8.61	%	9.58	%	10.78	%

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 provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition. ~~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, 2021,~~March 31, 2022, the capital measures of the Company exclude ~~$4.2~~$2.9 million, which is the modified CECL transition adjustment.

As of ~~September 30, 2021,~~March 31, 2022, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the now fully phased-in capital conservation buffer requirements. In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, decreased from ~~10.10%~~8.08% at December 31, ~~2020,~~2021, to ~~9.81%~~7.49% at ~~September 30, 2021.~~March 31, 2022. Our GAAP tangible common equity to tangible assets ratio was ~~9.24%~~5.95% at ~~September 30, 2021,~~March 31, 2022, compared to ~~9.48%~~6.54% as of December 31, ~~2020.~~2021. Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, decreased from ~~9.49%~~6.59% at December 31, ~~2020,~~2021, to ~~9.25%~~6.00% at ~~September 30, 2021,~~March 31, 2022, primarily due to a decline in tangible common equity in the first quarter of 2022. The decline in tangible common equity was due to a decrease in accumulated other comprehensive income of $46.3 million primarily related to unrealized losses on available-for-sale securities stemming from the increase in market interest rates. The non-GAAP tangible common equity to tangible assets ratio was also negatively impacted by growth in total tangible ~~assets.~~assets in the first quarter of 2022.

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 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, 2021						December 31, 2020						March 31, 2022						December 31, 2021
Tangible common equity	GAAP			Non-GAAP			GAAP			Non-GAAP			GAAP			Non-GAAP			GAAP			Non-GAAP
(Dollars in thousands)

Total Equity	$	321,232		$	321,232		$	307,087		$	307,087		$	466,318		$	466,318		$	502,027		$	502,027
Less: Goodwill and intangible assets		20,433			20,433			20,781			20,781			101,971			101,971			102,636			102,636
Add: Limitation of exclusion of core deposit intangible (80%)		N/A			366			N/A			435			N/A			3,128			N/A			3,261
Adjusted goodwill and intangible assets		20,433			20,067			20,781			20,346			101,971			98,843			102,636			99,375
Tangible common equity	$	300,799		$	301,165		$	286,306		$	286,741		$	364,347		$	367,475		$	399,391		$	402,652
Tangible assets
Total assets	$	3,275,132		$	3,275,132		$	3,040,837		$	3,040,837		$	6,223,746		$	6,223,746		$	6,212,189		$	6,212,189
Less: Adjusted goodwill and intangible assets		20,433			20,067			20,781			20,346			101,971			98,843			102,636			99,375
Tangible assets	$	3,254,699		$	3,255,065		$	3,020,056		$	3,020,491		$	6,121,775		$	6,124,903		$	6,109,553		$	6,112,814

Common equity to total assets		9.81	%		9.81	%		10.10	%		10.10	%		7.49	%		7.49	%		8.08	%		8.08	%
Tangible common equity to tangible assets		9.24	%		9.25	%		9.48	%		9.49	%		5.95	%		6.00	%		6.54	%		6.59	%

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

Liquidity

Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. We monitor our borrowing capacity at the FHLBC as part of our liquidity management process as supervised by our Asset and Liability Committee (“ALCO”) and reviewed by our Board of Directors. In addition, due to the potential impacts on our liquidity stemming from the COVID-19 pandemic, our senior management team monitors cash balances daily to ensure we have adequate liquidity to meet our operational and financing needs. As of ~~September 30, 2021,~~March 31, 2022, our cash on hand liquidity totaled ~~$519.3~~$634.7 million, ~~an increase~~a decrease of ~~$189.4~~$117.4 million over cash balances held as of December 31, ~~2020.~~2021.

Net cash inflows from operating activities were ~~$50.8 million~~$278,000 during the first ~~nine~~three months of ~~2021,~~2022, compared with net cash inflows of ~~$16.8~~$15.4 million in the same period of ~~2020. Funds used to originate~~2021. Proceeds from sales of loans held-for-sale, net of ~~proceeds from sales of~~funds used to originate loans held-for-sale, were a source of ~~inflows~~outflows for ~~both~~ the first ~~nine~~three months of ~~2021 and~~2022 but were a source of inflows in the like period of ~~2020.~~2021. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of ~~inflows~~outflows for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, and ~~outflows~~ for the like period of ~~2020.~~2021. The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash outflows from investing activities were ~~$57.0~~$176.5 million in the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, compared to net cash outflows of ~~$54.4~~$26.6 million in the same period in ~~2020.~~2021. In the first ~~nine~~three months of ~~2021,~~2022, securities transactions accounted for net outflows of ~~$225.2~~$190.6 million, and the principal change on loans accounted for net inflows of ~~$168.6~~$21.9 million. In the first ~~nine~~three months of ~~2020,~~2021, securities transactions accounted for net ~~inflows~~outflows of ~~$45.0~~$102.4 million, and net principal on loans funded accounted for net ~~outflows~~inflows of ~~$100.4~~$75.9 million. Proceeds from sales of OREO accounted for ~~$608,000~~$118,000 and ~~$3.1 million~~$325,000 in investing cash inflows for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively.

Net cash inflows from financing activities in the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022, were ~~$195.6~~$58.8 million, compared with net cash inflows of ~~$300.2~~$122.3 million in the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. Net deposit inflows in the first ~~nine~~three months of ~~2021~~2022 were ~~$177.3~~$78.9 million compared to net deposit inflows of ~~$352.5~~$119.5 million in the first ~~nine~~three months of ~~2020.~~2021. Other short-term borrowings had no net cash inflows or outflows in the first ~~nine~~three months of ~~2021, compared to $42.4 million of outflows in the first nine months of 2020.~~2022 or 2021. Changes in securities sold under repurchase agreements accounted for outflows of ~~$24.0~~$16.8 million and inflows of ~~$10.6~~$10.3 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020,~~ respectively. ~~The redemption of~~Dividends paid on our ~~Old Second Capital Trust I trust preferred securities and related junior subordinated debentures resulted in cash outflows of $32.6~~common stock totaled $2.2 million in the ~~first~~three months ended March 31, 2022, compared to dividends paid of $293,000 for the like 2021 period, as the per common share dividend was increased to five cents per share in the second quarter of ~~2020, which was partially offset by a $20.0 million term note cash inflow which was originated to partially fund this trust preferred redemption; $14.0 million~~2021. The repurchase of ~~this term note~~treasury

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~~remains outstanding as of September 30, 2021. In~~stock in the ~~second quarter~~first three months of 2021 ~~we issued $59.1 million~~resulted in outflows of ~~subordinated debentures, net~~$6.2 million; in the first three months of ~~issuance costs; this cash is anticipated to be used for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common~~2022, there was no stock ~~repurchases or strategic acquisitions.~~repurchase program in place.

Cash and cash equivalents for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, totaled ~~$519.3~~$634.7 million, as compared to ~~$313.1~~$440.9 million as of ~~September 30, 2020.~~March 31, 2021. In addition to cash and cash equivalents on hand or held as deposits with other financial institutions, we rely on funding sources from customer deposits, cash flows from securities available-for-sale and loans, and a line of credit with the FHLBC to meet potential liquidity needs. These sources of liquidity are immediately available to satisfy any funding requirements due to depositor or borrower demands through the ordinary course of our business. Additional sources of funding include a ~~$20~~$30.0 million undrawn line of credit held by the Company with a third party financial institution, as well as unpledged securities available-for-sale.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

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

The Federal Reserve raised rates by 0.25% in March 2022 and has ~~kept~~set the ~~target Fed Funds range~~baseline expectation of 0%a 0.50% increase at the next meeting in May 2022. Rate forecasts have been changing week by week, with the expectation of faster rate hikes to ~~0.25% since~~combat inflation. The Federal Reserve balance sheet leveled off at $8.9 trillion earlier this year, and it is widely expected that the ~~first quarter of 2020, the latest Fed Funds Futures implies a rate hike in the third quarter of 2022. The Fed has been aggressively purchasing~~Federal Reserve will sell assets ~~in the open market since March 2020, increasing~~to trim its balance sheet to $8.5 trillion by the end of September 2021. Given that inflation has been more persistent than initially thought, the Fed announced that it will start tapering its asset purchases this year and conclude such purchases by the middle of 2022.assets in conjunction with raising rates. We manage interest rate risk within guidelines established by policy ~~which~~that are intended to limit the amount of rate exposure. In practice, we seek to manage our interest rate risk exposure well within our guidelines so that such exposure does not pose a material risk to our future earnings.

We manage various market risks in the normal course of our operations, including credit, liquidity risk, and interest-rate risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of our business activities and operations. In addition, since we do not hold a trading portfolio, we are not exposed to significant market risk from trading activities. Our interest rate risk exposures at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 are outlined in the table below.

Our net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction. Our asset-liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 1819 of our consolidated financial statements found in in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. We seek to monitor and manage interest rate risk within approved policy guidelines and limits.

We use simulation analysis to quantify the impact of various rate scenarios on our net interest income. Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by us are incorporated into the simulation model. Earnings at risk are calculated by comparing the net interest income of a stable interest rate environment to the net interest income of a different interest rate environment in order to determine the percentage change. As of ~~September 30, 2021, we had notable amounts of~~March 31, 2022, our net interest income profile remained sensitive to earnings gains (in both dollars and percentage) should interest rates rise. ~~The projected increases~~We have a moderately lower sensitivity profile quarter-over-quarter due to a higher percentage and dollars of fixed rate loans compared to variable rate loans. Additionally, the index for reinvestment tied to a Libor index was changed to a SOFR index, this resulted in ~~income across all up~~a lower index rate on reinvestments. In addition, we made changes to our asset liability management model to better reflect interest rate ~~shock scenarios as~~sensitivity of ~~September 30, 2021 were notably higher than December 31, 2020, primarily due to the increase in Fed Funds from high deposit levels and repricing on short term rates.~~fed funds.

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

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~~Analysis of Net Interest Income Sensitivity~~

~~(Dollars in thousands)~~


	Analysis of Net Interest Income Sensitivity																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	%
September 30, 2021
(Dollars in thousands)																		(2.0)	%	(1.0)	%	(0.5)	%		0.5	%		1.0	%		2.0	%
March 31, 2022
Dollar change		N/M		N/M		N/M		$	5,343		$	10,854		$	22,180			N/M		N/M		N/M		$	12,339		$	24,726		$	49,225
Percent change		N/M		N/M		N/M			6.4	%		12.9	%		26.5	%		N/M		N/M		N/M			7.7	%		15.4	%		30.6	%

December 31, 2020
December 31, 2021
Dollar change		N/M		N/M		N/M		$	3,405		$	6,879		$	13,145			N/M		N/M		N/M		$	13,404		$	27,689		$	54,007
Percent change		N/M		N/M		N/M			3.9	%		7.8	%		14.9	%		N/M		N/M		N/M			9.4	%		19.5	%		38.0	%

N/M - Not meaningful

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

Effects of Inflation

In management’s opinion, changes in interest rates affect ~~the~~our financial condition ~~of a financial institution~~ to a far greater degree than changes in the inflation ~~rate. While~~rate; however, we monitor both. The annual inflation rate in the U.S. accelerated to 8.5% in March 2022, the highest since December 1981. Management believes the inflation rate will remain elevated in the near term, which is expected to be favorable for the Bank. In general, we anticipate that higher inflation will increase borrowers’ needs for credit as a result of GDP growth. In addition, as interest rates are ~~greatly influenced by changes in~~expected to rise to combat inflation, we also expect our net interest margin to be favorably impacted. The downside risks of high inflation puts upwards pressure to our expenses, which could impact profits. Furthermore, higher costs of living weaken the ~~inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate~~financial condition of ~~inflation, as well as on changes in monetary and fiscal policies.~~our borrowers which could affect our credit profile. A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today’s volatile economic environment. We seek to ~~insulate~~mitigate the ~~Company from~~impact of interest rate volatility on the Bank by ~~using our best efforts~~seeking to ensure that rate sensitive assets and rate sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree. Overall, we expect the effects of higher inflation to be beneficial to us in the near term.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of ~~September 30, 2021.~~March 31, 2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of ~~September 30, 2021,~~March 31, 2022, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended ~~September 30, 2021,~~March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

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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

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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, ~~2020,~~2021, as well as cautionary statements contained in this Quarterly Report, on Form 10-Q, including those under the caption “Cautionary Note Regarding Forward-Looking ~~Statements,~~Statements.” ~~and set forth in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021.~~

Except as set forth in Part II, Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 and filed with the SEC on August 6, 2021, which is incorporated herein by this reference, thereThere 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, ~~2020~~2021 filed with the SEC on March ~~8, 2021.~~10, 2022.

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

Stock Repurchases

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibits:



~~2.1~~	Agreement and Plan of Merger between Old Second Bancorp, Inc. and West Suburban Bancorp, Inc. dated as of July 25, 2021 (incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed on July 26, 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, 2021,~~March 31, 2022 and December 31, ~~2020;~~2021; (ii) Consolidated Statements of Income for the three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020;~~2021; (iii) Consolidated Statements of Comprehensive (Loss) Income for the three months ended March 31, 2022 and 2021; (iv) Consolidated Statements of Stockholders’ Equity for the three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020; (iv)~~2021; (v) Consolidated Statements of Cash Flows for the three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020;~~2021; and ~~(v)~~(vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

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

	* 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.

6761

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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 5, 2021~~May 9, 2022

6862

~~Tableof Contents~~


	PART I
		Page Number
Item 1.	Financial Statements	54
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3938
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6458
Item 4.	Controls and Procedures	6559
	PART II

Item 1.	Legal Proceedings	6560
Item 1.A.	Risk Factors	6660
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6660
Item 3.	Defaults Upon Senior Securities	6660
Item 4.	Mine Safety Disclosure	6660
Item 5.	Other Information	6660
Item 6.	Exhibits	6761

	Signatures	6862



			Impact of		Provision for
	Beginning		Adopting		(Release of)						Ending
Allowance for credit losses	Balance		ASC 326		Credit 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
Residential real estate - Investor		2,217		-		(290)		3		18		1,942
Residential 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
Other		700		-		64		53		41		752
Ending Balance, September 30, 2020	$	31,273	$	-	$	1,280	$	451	$	816	$	32,918


September 30, 2021	1st Deferral		2nd Deferral		3rd Deferral		Total
Loans modified under CARES Act, in deferral	$	-	$	6,752	$	2,077	$	8,829
Loans modified under CARES Act, in nonaccrual, within deferral above		-		2,524		2,077		4,601

Substandard		-		-		-		1,580		747		-		-		-		2,327
Total multifamily		20,071		29,014		35,275		47,515		22,492		6,362		69		-		160,798

HELOC
Pass		503		1,918		2,018		1,132		1,576		1,023		60,339		-		68,509
Special Mention		-		-		-		-		-		-		108		-		108
Substandard		-		28		-		30		34		259		683		-		1,034
Total HELOC		503		1,946		2,018		1,162		1,610		1,282		61,130		-		69,651

HELOC - Purchased
Pass		-		-		-		-		-		12,189		-		-		12,189
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		181		-		-		181
Total HELOC - purchased		-		-		-		-		-		12,370		-		-		12,370

Other
Pass		3,772		1,490		575		178		112		223		6,095		-		12,445
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		2		-		-		-		-		2
Total other		3,772		1,490		575		180		112		223		6,095		-		12,447

Total loans
Pass		391,749		384,983		290,395		187,140		131,225		155,778		269,043		59		1,810,372
Special Mention		540		357		18,773		610		215		168		1,557		427		22,647
Substandard		2,578		3,767		7,836		4,990		8,338		6,731		683		-		34,923
Total loans	$	394,867	$	389,107	$	317,004	$	192,740	$	139,778	$	162,677	$	271,283	$	486	$	1,867,942

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

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


	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


Noninterest Income	Nine Months Ended				YTD
(Dollars in thousands)	September 30,		September 30,		Percent
	2021		2020		Change
Wealth management	$	6,912	$	5,793	19.3
Service charges on deposits		3,784		4,168	(9.2)
Residential mortgage banking revenue
Secondary mortgage fees		834		1,267	(34.2)
Mortgage servicing rights mark to market loss		(202)		(2,739)	92.6
Mortgage servicing income		1,646		1,447	13.8
Net gain on sales of mortgage loans		7,802		12,123	(35.6)
Total residential mortgage banking revenue		10,080		12,098	(16.7)
Securities gains (losses) , net		246		(25)	N/M
Change in cash surrender value of BOLI		1,163		942	23.5