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, 2017~~March 31, 2021


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

For transition period fromto

Commission File Number ~~0 -10537~~0-10537

(Exact name of Registrant as specified in its charter)


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

37 South River Street, Aurora, Illinois60507

(Address of principal executive offices) (Zip Code)

(630)892-0202

(Registrant’s telephone number, including area code)

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

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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☐

~~(Do not check if a smaller reporting 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 3, 2017,~~May 4, 2021, the Registrant ~~had 29,627,086~~has 28,859,521 shares of common stock outstanding at $1.00 par value per share.

Tableof Contents

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

Tableof Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

●

our ability to execute our growth strategy;

●

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

●

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

●

risks related to future acquisitions, if any, including execution and integration risks;

●

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

●

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

●

the transition away from LIBOR to an alternative reference rate;

●

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

●

any negative perception of our reputation or financial strength;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

our ability to receive dividends from our subsidiaries;

●

a decrease in our regulatory capital ratios;

●

adverse federal or state tax assessments, 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 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, 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 Annual Report on Form 10-K, in this Form 10-Q, and in subsequent filings we make with the SEC.

Tableof Contents

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

Tableof Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)

September 30,

December 31,

2017

2016
Assets

Cash and due from banks

$
32,772

$
33,805
Interest bearing deposits with financial institutions

14,730

13,529
Cash and cash equivalents

47,502

47,334
Securities available-for-sale, at fair value

533,484

531,838
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock

10,393

7,918
Loans held-for-sale

1,641

4,918
Loans

1,594,191

1,478,809
Less: allowance for loan losses

16,465

16,158
Net loans

1,577,726

1,462,651
Premises and equipment, net

37,971

38,977
Other real estate owned

9,024

11,916
Mortgage servicing rights, net

6,684

6,489
Goodwill and core deposit intangible

8,944

9,018
Bank-owned life insurance ("BOLI")

61,403

60,332
Deferred tax assets, net

42,394

53,464
Other assets

23,241

16,333
Total assets

$
2,360,407

$
2,251,188

Liabilities

Deposits:

Noninterest bearing demand

$
556,874

$
513,688
Interest bearing:

Savings, NOW, and money market

947,969

950,849
Time

384,272

402,248
Total deposits

1,889,115

1,866,785
Securities sold under repurchase agreements

26,853

25,715
Other short-term borrowings

125,000

70,000
Junior subordinated debentures

57,627

57,591
Senior notes

44,033

43,998
Other liabilities

17,016

11,889
Total liabilities

2,159,644

2,075,978

Stockholders’ Equity

Common stock

34,626

34,534
Additional paid-in capital

117,458

116,653
Retained earnings

145,767

129,005
Accumulated other comprehensive loss

(632)

(8,762)
Treasury stock

(96,456)

(96,220)
Total stockholders’ equity

200,763

175,210
Total liabilities and stockholders’ equity

$
2,360,407

$
2,251,188


	(unaudited)
	March 31,		December 31,
	2021		2020
Assets
Cash and due from banks	$	25,448	$	24,306
Interest earning deposits with financial institutions		415,497		305,597
Cash and cash equivalents		440,945		329,903
Securities available-for-sale, at fair value		593,280		496,178
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		9,917		9,917
Loans held-for-sale		7,842		12,611
Loans		1,959,625		2,034,851
Less: allowance for credit losses on loans		30,967		33,855
Net loans		1,928,658		2,000,996
Premises and equipment, net		45,055		45,477
Other real estate owned		2,163		2,474
Mortgage servicing rights, at fair value		5,889		4,224
Goodwill and core deposit intangible		20,661		20,781
Bank-owned life insurance ("BOLI")		63,436		63,102
Deferred tax assets, net		8,067		8,121
Other assets		40,739		47,053
Total assets	$	3,166,652	$	3,040,837

Liabilities
Deposits:
Noninterest bearing demand	$	982,664	$	909,505
Interest bearing:
Savings, NOW, and money market		1,290,937		1,202,134
Time		382,941		425,434
Total deposits		2,656,542		2,537,073
Securities sold under repurchase agreements		77,321		66,980
Junior subordinated debentures		25,773		25,773
Senior notes		44,402		44,375
Notes payable and other borrowings		22,314		23,393
Other liabilities		29,187		36,156
Total liabilities		2,855,539		2,733,750

Stockholders’ Equity
Common stock		34,957		34,957
Additional paid-in capital		120,075		122,212
Retained earnings		248,165		236,579
Accumulated other comprehensive income		13,266		14,762
Treasury stock		(105,350)		(101,423)
Total stockholders’ equity		311,113		307,087
Total liabilities and stockholders’ equity	$	3,166,652	$	3,040,837

September 30, 2017

December 31, 2016

Common

Common

Stock

Stock
Par value
$
1.00

$
1.00
Shares authorized

60,000,000

60,000,000
Shares issued

34,625,734

34,534,234
Shares outstanding

29,627,086

29,556,216
Treasury shares

4,998,648

4,978,018


	March 31, 2021		December 31, 2020
	Common		Common
	Stock		Stock
Par value	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000
Shares issued		34,957,384		34,957,384
Shares outstanding		29,018,637		29,328,723
Treasury shares		5,938,747		5,628,661

See accompanying notes to consolidated financial statements.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)

(unaudited)

(unaudited)

Quarters Ended September 30,

Nine Months Ended  September 30,


2017

2016

2017

2016

Interest and dividend income

Loans, including fees

$
18,208

$
13,496

$
52,202

$
39,593

Loans held-for-sale

34

48

95

115

Securities:

Taxable

2,424

3,954

7,994

12,547

Tax exempt

1,628

180

4,188

579

Dividends from FHLBC and FRBC stock

94

83

271

251

Interest bearing deposits with financial institutions

37

64

91

98

Total interest and dividend income

22,425

17,825

64,841

53,183

Interest expense

Savings, NOW, and money market deposits

239

193

695

577

Time deposits

1,077

931

3,081

2,622

Other short-term borrowings

224

23

482

69

Junior subordinated debentures

930

1,084

3,073

3,251

Senior notes

672

-

2,017

-

Subordinated debt

-

245

-

727

Notes payable and other borrowings

-

2

-

6

Total interest expense

3,142

2,478

9,348

7,252

Net interest and dividend income

19,283

15,347

55,493

45,931

Provision for loan losses

300

-

1,050

-

Net interest and dividend income after provision for loan losses

18,983

15,347

54,443

45,931

Noninterest income

Trust income

1,468

1,403

4,564

4,274

Service charges on deposits

1,722

1,756

4,955

4,961

Secondary mortgage fees

195

322

594

795

Mortgage servicing rights mark to market loss

(194)

(147)

(756)

(1,921)

Mortgage servicing income

451

437

1,330

1,280

Net gain on sales of mortgage loans

1,095

2,177

3,715

5,031

Securities gain (loss), net

102

(1,959)

(165)

(2,020)

Increase in cash surrender value of BOLI

362

383

1,071

987

Debit card interchange income

1,075

1,013

3,131

3,009

Gain (loss) on disposal and transfer of fixed assets, net

-

-

10

(1)

Other income

1,567

1,209

3,739

3,751

Total noninterest income

7,843

6,594

22,188

20,146

Noninterest expense

Salaries and employee benefits

10,049

9,014

31,167

26,854

Occupancy, furniture and equipment

1,482

1,500

4,510

4,427

Computer and data processing

1,081

1,105

3,283

3,093

FDIC insurance

199

228

512

793

General bank insurance

246

269

780

839

Amortization of core deposit intangible

24

-

74

-

Advertising expense

255

430

1,093

1,212

Debit card interchange expense

285

363

1,033

1,186

Legal fees

162

242

450

594

Other real estate expense, net

680

426

1,928

2,043

Other expense

2,455

3,005

8,128

8,505

Total noninterest expense

16,918

16,582

52,958

49,546

Income before income taxes

9,908

5,359

23,673

16,531

Provision for income taxes

1,831

1,860

6,023

5,865

Net income

$
8,077

$
3,499

$
17,650

$
10,666

Basic earnings per share

$
0.27

$
0.12

$
0.60

$
0.36

Diluted earnings per share

0.27

0.12

0.59

0.36


		(unaudited)
	Three Months Ended March 31,
	2021		2020
Interest and dividend income
Loans, including fees	$	22,207	$	23,597
Loans held-for-sale		55		36
Securities:
Taxable		1,615		2,163
Tax exempt		1,307		1,455
Dividends from FHLBC and FRBC stock		115		125
Interest bearing deposits with financial institutions		92		75
Total interest and dividend income		25,391		27,451
Interest expense
Savings, NOW, and money market deposits		241		635
Time deposits		500		1,766
Securities sold under repurchase agreements		31		116
Other short-term borrowings		-		109
Junior subordinated debentures		280		1,364
Senior notes		673		673
Notes payable and other borrowings		123		130
Total interest expense		1,848		4,793
Net interest and dividend income		23,543		22,658
(Release of) provision for credit losses		(3,000)		7,984
Net interest and dividend income after (release of) provision for credit losses		26,543		14,674
Noninterest income
Wealth management		2,151		1,906
Service charges on deposits		1,195		1,726
Secondary mortgage fees		322		270
Mortgage servicing rights mark to market gain (loss)		1,113		(2,134)
Mortgage servicing income		567		468
Net gain on sales of mortgage loans		3,721		2,246
Securities losses, net		-		(24)
Change in cash surrender value of BOLI		334		(49)
Card related income		1,447		1,287
Other income		450		626
Total noninterest income		11,300		6,322
Noninterest expense
Salaries and employee benefits		13,506		12,918
Occupancy, furniture and equipment		2,467		2,301
Computer and data processing		1,298		1,335
FDIC insurance		201		57
General bank insurance		276		246
Amortization of core deposit intangible		120		128
Advertising expense		60		109
Card related expense		593		532
Legal fees		55		131
Other real estate expense, net		36		237
Other expense		3,126		3,008
Total noninterest expense		21,738		21,002
Income (loss) before income taxes		16,105		(6)
Provision (benefit) for income taxes		4,226		(281)
Net income	$	11,879	$	275

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

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

(unaudited)

(unaudited)

Quarters Ended September 30,

Nine Months Ended  September 30,


2017

2016

2017

2016
Net Income

$
8,077

$
3,499

$
17,650

$
10,666

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

2,971

(616)

13,798

5,151
Related tax (expense) benefit

(1,191)

237

(5,516)

(2,071)
Holding gains (losses) after tax on available-for-sale securities

1,780

(379)

8,282

3,080

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

Net realized gains (losses)

102

(1,959)

(165)

(2,020)
Income tax (expense) benefit on net realized gains (losses)

(42)

782

64

807
Net realized gains (losses) after tax

60

(1,177)

(101)

(1,213)
Other comprehensive income  on available-for-sale securities

1,720

798

8,383

4,293

Accretion and reversal of net unrealized holding gains on held-to-maturity securities

-

-

-

5,939
Related tax expense

-

-

-

(2,446)
Other comprehensive income on held-to-maturity securities

-

-

-

3,493

Changes in fair value of derivatives used for cashflow hedges

19

(254)

(445)

(4,278)
Related tax benefit

8

102

192

1,714
Other comprehensive income (loss) on cashflow hedges

27

(152)

(253)

(2,564)

Total other comprehensive income

1,747

646

8,130

5,222
Total comprehensive income

$
9,824

$
4,145

$
25,780

$
15,888


	(unaudited)
	Three Months Ended March 31,
	2021		2020
Net Income	$	11,879	$	275

Unrealized holding losses on available-for-sale securities arising during the period		(4,813)		(6,376)
Related tax benefit		1,371		1,797
Holding losses after tax on available-for-sale securities		(3,442)		(4,579)

Less: Reclassification adjustment for the net losses realized during the period
Net realized losses		-		(24)
Related tax benefit		-		7
Net realized losses after tax		-		(17)
Other comprehensive loss on available-for-sale securities		(3,442)		(4,562)

Changes in fair value of derivatives used for cash flow hedges		2,703		(2,530)
Related tax (expense) benefit		(757)		711
Other comprehensive income (loss) on cash flow hedges		1,946		(1,819)

Total other comprehensive loss		(1,496)		(6,381)
Total comprehensive income	$	10,383	$	(6,106)


	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, December 31, 2019	$	6,827	$	(2,265)	$	4,562
Other comprehensive loss, net of tax		(4,562)		(1,819)		(6,381)
Balance, March 31, 2020	$	2,265	$	(4,084)	$	(1,819)

Balance, 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

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

Nine Months Ended  September 30,

2017

2016

Cash flows from operating activities

Net income

$
17,650

$
10,666

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation of fixed assets and amortization of leasehold improvements

1,760

1,682

Change in fair value of mortgage servicing rights

756

1,921

Loan loss reserve

1,050

-

Provision for deferred tax expense

5,682

5,476

Originations of loans held-for-sale

(113,077)

(147,187)

Proceeds from sales of loans held-for-sale

119,059

150,247

Net gain on sales of mortgage loans

(3,715)

(5,031)

Net discount accretion of purchase accounting adjustment on loans

(1,115)

-

Change in current income taxes receivable

111

300

Increase in cash surrender value of BOLI

(1,071)

(987)

Change in accrued interest receivable and other assets

(6,849)

(2,659)

Change in accrued interest payable and other liabilities

4,571

(246)

Net premium amortization/discount (accretion) on securities

1,320

(517)

Securities losses, net

165

2,020

Amortization of core deposit

74

-

Amortization of junior subordinated debentures issuance costs

36

36

Amortization of senior notes issuance costs

77

-

Stock based compensation

897

482

Net gain on sale of other real estate owned

(454)

(316)

Provision for other real estate owned losses

1,630

1,305

Net (gain) loss on disposal  and transfer of fixed assets

(10)

1

Net cash provided by operating activities

28,547

17,193

Cash flows from investing activities

Proceeds from maturities and calls including pay down of securities available-for-sale

105,327

62,868

Proceeds from sales of securities available-for-sale

152,476

271,374

Purchases of securities available-for-sale

(246,971)

(153,252)

Proceeds from maturities and calls including pay down of securities held-to-maturity

-

3,372

Net disbursements/proceeds from (purchases) sales of FHLBC stock

(2,475)

600

Net change in loans

(118,711)

(71,600)

Improvements in other real estate owned

-

(16)

Proceeds from sales of other real estate owned, net of participation purchase

5,512

5,247

Proceeds from disposition of premises and equipment

13

-

Net purchases of premises and equipment

(852)

(1,163)

Net cash used in (provided by) investing activities

(105,681)

117,430

Cash flows from financing activities

Net change in deposits

22,330

18,296

Net change in securities sold under repurchase agreements

1,138

12,536

Net change in other short-term borrowings

55,000

(15,000)

Payment of senior note issuance costs

(42)

-

Dividends paid on common stock

(888)

(592)

Purchase of treasury stock

(236)

(254)

Net cash provided by financing activities

77,302

14,986

Net change in cash and cash equivalents

168

149,609

Cash and cash equivalents at beginning of period

47,334

40,338

Cash and cash equivalents at end of period

$
47,502

$
189,947


		(Unaudited)
	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities
Net income	$	11,879	$	275
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount from amortization on securities		534		506
Securities losses , net		-		24
(Release of) provision for credit losses		(3,000)		7,984
Originations of loans held-for-sale		(78,284)		(50,418)
Proceeds from sales of loans held-for-sale		85,914		45,706
Net gains on sales of mortgage loans		(3,721)		(2,246)
Mortgage servicing rights mark to market (gain) loss		(1,113)		2,134
Net discount from accretion on loans		(520)		(409)
Net change in cash surrender value of BOLI		(334)		49
Net gains on sale of other real estate owned		(20)		(23)
Provision for other real estate owned valuation losses		6		158
Depreciation of fixed assets and amortization of leasehold improvements		765		662
Amortization of core deposit intangibles		120		128
Change in current income taxes receivable		3,557		(1,430)
Deferred tax expense (benefit)		668		(333)
Change in accrued interest receivable and other assets		2,200		(4,081)
Change in accrued interest payable and other liabilities		(3,375)		9,607
Stock based compensation		114		729
Net cash provided by operating activities		15,390		9,022
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		7,259		16,046
Proceeds from sales of securities available-for-sale		-		18,126
Purchases of securities available-for-sale		(109,708)		(6,100)
Net change in loans		75,858		(27,716)
Proceeds from sales of other real estate owned, net of participations and improvements		325		311
Net purchases of premises and equipment		(343)		(887)
Net cash used in investing activities		(26,609)		(220)
Cash flows from financing activities
Net change in deposits		119,469		68,893
Net change in securities sold under repurchase agreements		10,341		2,543
Net change in other short-term borrowings		-		(42,125)
Redemption of junior subordinated debentures		-		(32,604)
Issuance of term note		-		20,000
Repayment of term note		(1,000)		-
Net change in notes payable and other borrowings, excluding term note		(78)		(76)
Dividends paid on common stock		(293)		(300)
Purchase of treasury stock		(6,178)		(2,627)
Net cash provided by financing activities		122,261		13,704
Net change in cash and cash equivalents		111,042		22,506
Cash and cash equivalents at beginning of period		329,903		50,632
Cash and cash equivalents at end of period	$	440,945	$	73,138

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

~~Consolidated Statements of Cash Flows - Continued~~

~~(In thousands)~~

(unaudited)

Nine Months Ended  September 30,
Supplemental cash flow information

2017

2016
Income taxes paid, net

$
230

$
160
Interest paid for deposits

3,802

3,142
Interest paid for borrowings

4,890

4,021
Non-cash transfer of loans to other real estate owned

3,701

1,223
Non-cash transfer of premises to other real estate owned

95

-
Non-cash transfer of securities held-to-maturity to securities available-for-sale

-

244,823

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)

Accumulated

Additional

Other

Total

Common

Paid-In

Retained

Comprehensive

Treasury

Stockholders’


Stock

Capital

Earnings

Loss

Stock

Equity
Balance, December 31, 2015

$
34,427

$
115,918

$
114,209

$
(12,659)

$
(95,966)

$
155,929
Net income

10,666

10,666
Other comprehensive income, net of tax

5,222

5,222
Dividends declared and paid

(592)

(592)
Vesting of restricted stock

106

(106)

-
Tax effect from vesting of restricted stock

174

174
Stock based compensation

482

482
Purchase of treasury stock

(254)

(254)
Balance, September 30, 2016

$
34,533

$
116,468

$
124,283

$
(7,437)

$
(96,220)

$
171,627

Balance, December 31, 2016

$
34,534

$
116,653

$
129,005

$
(8,762)

$
(96,220)

$
175,210
Net income

17,650

17,650
Other comprehensive income, net of tax

8,130

8,130
Dividends declared and paid

(888)

(888)
Vesting of restricted stock

92

(92)

-
Stock based compensation

897

897
Purchase of treasury stock

(236)

(236)
Balance, September 30, 2017

$
34,626

$
117,458

$
145,767

$
(632)

$
(96,456)

$
200,763

~~Seeaccompanyingnotes~~to~~consolidatedfinancialstatements~~.


							Accumulated
			Additional				Other				Total
(unaudited)	Common		Paid-In		Retained		Comprehensive		Treasury		Stockholders’
	Stock		Capital		Earnings		Income (Loss)		Stock		Equity
For the Three Months Ended
Balance, December 31, 2019	$	34,854	$	120,657	$	213,723	$	4,562	$	(95,932)	$	277,864
Adoption of ASU 2016-13						(3,783)						(3,783)
Net income						275						275
Other comprehensive loss, net of tax								(6,381)				(6,381)
Dividends declared and paid, ($0.01 per share)						(300)						(300)
Vesting of restricted stock		103		(305)						202		-
Stock based compensation				729								729
Purchase of treasury stock from taxes withheld on stock awards										(411)		(411)
Purchase of treasury stock from stock repurchase program										(2,216)		(2,216)
Balance, March 31, 2020	$	34,957	$	121,081	$	209,915	$	(1,819)	$	(98,357)	$	265,777

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

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 1 – ~~Summary~~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, 2017,~~March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2021. These interim consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, ~~2016.~~2020. Unless otherwise indicated, dollar amounts in the tables contained in the notes to the consolidated financial statements are in thousands. Certain items in prior periods have been reclassified to conform to the current presentation.

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

All 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, 2016. 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.

Recent Accounting Pronouncements

~~In May 2014, the FASB issued ASU No. 2014-09~~ ~~"Revenue from Contracts with Customers (Topic 606)."~~ The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU 2015-14 “~~Revenue from Contracts with Customers (Topic 606) Deferral of the Effective Date~~.” This accounting standards update defers the effective date of ASU 2014-09 for an additional year. ASU 2015-14 will be effective for annual reporting periods beginning after December 15, 2017. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this update recognized at the date of initial application. Early application is not permitted. In March 2016, the FASB issued ASU 2016-08 “~~Revenue from Contracts with Customers (TOPIC 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and in April 2016, the FASB issued ASU 2016-10 “Revenue from Contracts with Customers (TOPIC 606): Identifying Performance Obligations and Licensing.”~~ ASU 2016-08 requires the entity to determine if it is acting as a principal with control over the goods or services it is contractually obligated to provide, or an agent with no control over specified goods or services provided by another party to a customer. ASU 2016-10 was issued to further clarify ASU 2014-09 implementation regarding identifying performance obligation materiality, identification of key contract components, and scope. The Company is assessing the impact of ASU 2014-09 and other related ASUs as noted above on its accounting and disclosures within noninterest income, as any interest income impact was not included in the scope of this final ASU pronouncement. Adoption of this ASU is expected to affect the methodology used to record certain recurring revenue streams within trust and asset management fees, but this impact is not anticipated to be significant to the Company’s financial statements. The Company will adopt ASU 2015-14 and related issuances on January 1, 2018, with a cumulative effect adjustment to opening retained earnings, if an adjustment is deemed to be material.

~~In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)~~.” This ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. One key revision from prior guidance was to include operating leases within assets and liabilities recorded; another revision was included which created a new model to follow for sale-leaseback transactions. The impact of this pronouncement will affect lessees primarily, as virtually all of their assets will be recognized on the balance sheet, by recording a right of use asset and lease liability. This pronouncement is effective for fiscal years beginning after December 15, 2018. The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures.

~~In March 2016, the FASB issued ASU No. 2016-09 “Stock Compensation - Improvements to Employee Share-Based Payment Accounting (Topic 718).~~” FASB issued this ASU as part of the Simplification Initiative. This ASU involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or

~~Tableof Contents~~

liability, and classification on the statement of cash flows. ASU 2016-09 is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. This standard was adopted by the Company effective January 2017; the adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

In June 2016, the Financial Standards Board, or FASB, issued ~~ASU~~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 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 ~~to be used should reflect~~reflects expected credit losses based on relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the collectability of the reported amounts. This new methodology ~~will~~ also ~~require~~requires available-for-sale debt securities to have a credit loss recorded through an allowance rather than ~~write-downs.~~write-downs through an other than temporary impairment analysis. In addition, an allowance must be established for the credit risk related to unfunded commitments. ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, ~~2019.~~ 2019, and was adopted as of January 1, 2020, by the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” and Note 1 – Summary of Significant Accounting Policies, both found in our Annual Report on Form 10-K for the year ended December 31, 2020 for further discussion of our Allowance for Credit Losses methodology and assessment as a critical accounting policy.

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

Risks and Uncertainties

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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

The impact of ~~ASU 2016-13~~the COVID-19 pandemic is fluid and continues to evolve. The unprecedented and rapid spread of COVID-19 and its associated impacts on ~~its accounting~~trade (including supply chains and ~~disclosures,~~export levels), travel, employee productivity, unemployment, consumer spending, and isother economic activities has resulted in less economic activity, lower bank equity market valuations and significant volatility and disruption in financial markets. In addition, due to the ~~process~~COVID-19 pandemic, market interest rates declined significantly, with the 10-year Treasury bond falling to a low of ~~accumulating data and evaluating model options~~0.52% in early August 2020, but increasing significantly since that time to ~~support future risk assessments.~~

1.75% at March 31, 2021. In March ~~2017,~~2020, the ~~FASB issued ASU No. 2017-08 “Receivables-Nonrefundable Fees~~Federal Open Market Committee reduced the targeted federal funds interest rate range to 0% to 0.25% percent, and ~~Other Costs – Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20).” This ASU~~this low rate was ~~issued to shorten~~still in effect as of March 31, 2021. These reductions in interest rates and the amortization period for the premium to the earliest call date on debt securities. This premium is required to be recorded as a reduction to net interest margin during the shorter yield to call period, as compared to prior practice of amortizing the premium as a reduction to net interest margin over the contractual lifeother effects of the ~~instrument. This ASU does not change the current method of amortizing any discount over the contractual life of the debt security,~~COVID-19 pandemic have had, and this pronouncement is effective for fiscal years beginning after December 15, 2018, with earlier adoption permitted. The Company adopted ASU 2017-08 as a change in accounting principle in the third quarter of 2017 on a modified retrospective basis, which required the Companyare expected to ~~reflect its adoption effective January 1, 2017. The effect of amortizing the premium over a shorter period negatively impacted the net interest margin for the first nine months of 2017, and will~~ continue to ~~decrease future quarterly net interest income by approximately 10 basis points a quarter until~~have, possibly materially, an adverse effect on the ~~premium, which is $25.0 million as~~Company’s business, financial condition and results of ~~September 30, 2017, is fully amortized. As a result~~operations. The ultimate extent of ~~management’s analysis,~~ the impact of the ~~change in accounting principle~~COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental, and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routine.

As of March 31, 2021, our consolidated balance sheet included goodwill of $18.6 million. For each quarter end of 2020, we considered whether a quantitative assessment of goodwill was required as a result of ~~ASU 2017-08~~the significant economic disruption caused by the COVID-19 pandemic. In addition, we performed the annual analysis to ~~adjust beginning~~assess if any goodwill impairment existed as of ~~year retained earnings was considered insignificant and, accordingly, the impact was adjusted through current period earnings.~~

~~In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging:Targeted Improvements to Accounting for Hedging Activities”.~~ ~~The purpose~~November 30, 2020. Impacts of ~~this updated guidance is to better align a company’s financial reporting for hedging activities with~~ the economic ~~objectives~~disruptions were noted from the latter half of ~~those activities. ASU 2017-12~~March through the remainder of 2020, specifically, the decline in the trading price of our common stock and an increase in the U.S. unemployment rate. After considering qualitative factors regarding the expected impacts of the pandemic on our business, operations and financial condition, we determined that these conditions did not indicate that it is ~~effective for public business entities for fiscal years beginning after~~more likely than not that the Company’s carrying value exceeded our fair value as of December 31, 2020. However, further delayed recovery or further deterioration in market conditions related to the general economy, financial markets, and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our results of operations and financial condition.

Subsequent Events

On 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, ~~2018, with early adoption, including adoption~~2031 (the “Notes”). The Notes were offered and sold to eligible purchasers in ~~an interim period, permitted.~~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 ~~plans~~intends to ~~adopt ASU 2017-12 on January 1, 2018. ASU 2017-12 requires~~use the net proceeds from the offering for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions. The Notes will bear interest at a ~~modified retrospective transition method in which the Company will recognize the cumulative effect~~fixed annual rate of ~~the change on the opening balance of each affected component of equity in the statement of financial position as of~~3.50%, from and including the date of ~~adoption. While~~issuance to but excluding April 15, 2026, payable semi-annually in arrears. From and including April 15, 2026 to, but excluding the ~~Company continues~~maturity date or early redemption date, the interest rate will reset quarterly to ~~assess all potential impacts of~~an interest rate per annum equal to Three-Month Term SOFR (as defined in the ~~standard, we currently expect adoption to have an immaterial impact on our consolidated financial statements.~~

~~Subsequent Events~~

Note) plus 273 basis points, payable quarterly in arrears.

On ~~October 17, 2017,~~April 20, 2021, the Company’s Board of Directors declared a cash dividend of ~~$0.01~~$0.05 per share payable on ~~November 6, 2017,~~May 10, 2021, to stockholders of record as of ~~October 27, 2017;~~April 30, 2021; dividends of ~~$296,000 were~~$1.5 million are scheduled to be paid to stockholders on ~~November 6, 2017.~~May 10, 2021.

Note 2 – ~~Acquisitions~~Securities

On October 28, 2016, the Bank acquired the Chicago branch of Talmer Bank and Trust, the banking subsidiary of Talmer Bancorp, Inc. (“Talmer”). As a result of this transaction, the Bank recorded assets with a fair value of approximately $230.9 million, including approximately $221.0 million of loans, and assumed deposits with a fair value of approximately $48.9 million. Goodwill of $8.4 million was included within the total assets recorded upon acquisition; net cash of $181.5 million was paid for the purchase.

~~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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

liquidity, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.

~~Tableof Contents~~

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.

~~FHLBC~~Federal Home Loan Bank of Chicago (“FHLBC”) and ~~FRBC~~Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments. FHLBC stock was recorded at ~~$5.6~~$3.7 million at ~~September 30, 2017,~~March 31, 2021, and ~~$3.1 million at~~ December 31, ~~2016, and is necessary to maintain access to FHLBC advances, which are utilized as a component to meet the Bank’s daily funding needs.~~2020. FRBC stock was recorded at ~~$4.8~~$6.2 million at ~~September 30, 2017,~~March 31, 2021, and December 31, ~~2016.~~2020.

The following ~~table summarizes~~tables summarize the amortized cost and fair value of the securities portfolio at ~~September 30, 2017,~~March 31, 2021, and December 31, ~~2016,~~2020, and the corresponding amounts of gross unrealized gains and losses:


			Gross			Gross
	Amortized		Unrealized			Unrealized			Fair
September 30, 2017	Cost			Gains			Losses			Value

														Gross		Gross
												Amortized		Unrealized		Unrealized		Fair
March 31, 2021												Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasuries	$	4,001		$	-		$	(11)		$	3,990
U.S. Treasury												$	4,015	$	87	$	-	$	4,102
U.S. government agencies		13,475			15			(39)			13,451		6,506		-		(145)		6,361
U.S. government agencies mortgage-backed		11,131			18			(119)			11,030		69,427		1,476		(301)		70,602
States and political subdivisions		224,648			5,173			(789)			229,032		227,336		16,189		(1,379)		242,146
Corporate bonds		10,823			20			(266)			10,577		34,750		108		(15)		34,843
Collateralized mortgage obligations		81,693			228			(1,535)			80,386		72,801		2,386		(251)		74,936
Asset-backed securities		134,542			865			(3,648)			131,759		129,118		1,389		(139)		130,368
Collateralized loan obligations		52,803			505			(49)			53,259		29,923		71		(72)		29,922
Total securities available-for-sale	$	533,116		$	6,824		$	(6,456)		$	533,484	$	573,876	$	21,706	$	(2,302)	$	593,280


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2020	Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,014	$	103	$	-	$	4,117
U.S. government agencies		6,811		-		(154)		6,657
U.S. government agencies mortgage-backed		16,098		1,112		(1)		17,209
States and political subdivisions		229,352		21,269		(1,362)		249,259
Collateralized mortgage obligations		53,999		2,866		(280)		56,585
Asset-backed securities		130,959		1,370		(511)		131,818
Collateralized loan obligations		30,728		15		(210)		30,533
Total securities available-for-sale	$	471,961	$	26,735	$	(2,518)	$	496,178

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

Gross

Gross

Amortized

Unrealized

Unrealized

Fair
December 31, 2016

Cost

Gains

Losses

Value
Securities available-for-sale

U.S. government agencies mortgage-backed

$
42,511

$
-

$
(977)

$
41,534
States and political subdivisions

68,718

258

(273)

68,703
Corporate bonds

10,957

9

(336)

10,630
Collateralized mortgage obligations

174,352

374

(3,799)

170,927
Asset-backed securities

146,391

341

(8,325)

138,407
Collateralized loan obligations

102,504

29

(896)

101,637
Total securities available-for-sale

$
545,433

$
1,011

$
(14,606)

$
531,838

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The fair value, amortized cost and weighted average yield of debt securities at ~~September 30, 2017,~~March 31, 2021, by contractual maturity, ~~were as follows~~are listed in the table below. Securities not due at a single maturity date are shown separately.


			Weighted
	Amortized		Average		Fair

									Weighted
							Amortized		Average		Fair
Securities available-for-sale	Cost		Yield		Value		Cost		Yield		Value
Due in one year or less	$	3,400	2.60	%	$	3,405	$	420	2.09	%	$	422
Due after one year through five years		5,846	2.74			5,831		7,025	2.50			7,318
Due after five years through ten years		16,105	2.52			16,057		61,065	1.79			61,813
Due after ten years		227,596	2.98			231,757		204,097	3.02			217,899
		252,947	2.94			257,050
								272,607	2.73			287,452
Mortgage-backed and collateralized mortgage obligations		92,824	2.72			91,416		142,228	2.08			145,538
Asset-backed securities		134,542	2.41			131,759		129,118	1.35			130,368
Collateralized loan obligations		52,803	4.38			53,259		29,923	1.93			29,922
Total securities available-for-sale	$	533,116	2.91	%	$	533,484	$	573,876	2.22	%	$	593,280

At ~~September 30, 2017,~~March 31, 2021, the Company’s investments ~~include $110.6~~included $103.3 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”). Under the FFEL, private lenders made federally guaranteed student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL securities are generally guaranteed by the U.S Department of Education ~~“DOE”~~(“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

~~Tableof Contents~~

will drop to 75% if reimbursement requests exceed 9% of insured loans. In addition to the ~~U.S. Department of Education~~DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to ~~$12.3~~$9.7 million, or ~~10.42%,~~9.26% of outstanding principal.

~~The~~At March 31, 2021, the Company ~~has~~had invested in securities issued from ~~three~~2 originators that individually ~~amount~~amounted to over 10% of the Company’s ~~stockholders~~stockholders’ equity. Information regarding these ~~three~~ issuers and the value of the securities issued follows:

September 30, 2017


Amortized

Fair

Issuer

Cost

Value

GCO Education Loan Funding Corp

$
27,555

$
26,505

Towd  Point Mortgage Trust

29,544

29,445

Student Loan Marketing Assocation

25,654

25,803


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

Securities with unrealized losses with no corresponding allowance for credit losses at ~~September 30, 2017,~~March 31, 2021 and December 31, ~~2016,~~2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):


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

Less than 12 months

12 months or more

September 30, 2017

in an unrealized loss position

in an unrealized loss position

Total

Number of

Unrealized

Fair

Number of

Unrealized

Fair

Number of

Unrealized

Fair
Securities available-for-sale

Securities

Losses

Value

Securities

Losses

Value

Securities

Losses

Value
U.S. Treasuries

1

$
11

$
3,990

-

$
-

$
-

1

$
11

$
3,990
U.S. government agencies

2

39

6,701

-

-

-

2

39

6,701
U.S. government agencies mortgage-backed

2

13

2,089

4

106

4,096

6

119

6,185
States and political subdivisions

7

789

24,843

-

-

-

7

789

24,843
Corporate bonds

-

-

-

3

266

10,078

3

266

10,078
Collateralized mortgage obligations

4

238

21,281

8

1,297

43,684

12

1,535

64,965
Asset-backed securities

1

265

4,293

9

3,383

76,725

10

3,648

81,018
Collateralized loan obligations

1

49

7,948

-

-

-

1

49

7,948
Total securities available-for-sale

18

$
1,404

$
71,145

24

$
5,052

$
134,583

42

$
6,456

$
205,728

Tableof Contents

Less than 12 months

12 months or more

December 31, 2016

in an unrealized loss position

in an unrealized loss position

Total

Number of

Unrealized

Fair

Number of

Unrealized

Fair

Number of

Unrealized

Fair
Securities available-for-sale

Securities

Losses


Value

Securities

Losses


Value

Securities

Losses


Value
U.S. government agencies mortgage-backed

11

$
957

$
40,636

1

$
20

$
898

12

$
977

$
41,534
States and political subdivisions

12

273

35,241

-

-

-

12

273

35,241
Corporate bonds

1

183

4,817

2

153

5,328

3

336

10,145
Collateralized mortgage obligations

16

3,402

117,752

7

397

18,109

23

3,799

135,861
Asset-backed securities

4

328

17,604

12

7,997

107,112

16

8,325

124,716
Collateralized loan obligations

-

-

-

12

896

81,613

12

896

81,613
Total securities available-for-sale

44

$
5,143

$
216,050

34

$
9,463

$
213,060

78

$
14,606

$
429,110

Old Second Bancorp, Inc. and Subsidiaries

~~Recognition~~Notes to Consolidated Financial Statements

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


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

Each quarter we perform an analysis to determine if any of ~~other-than-temporary impairment was not necessary in~~ the ~~three and nine months ended September 30, 2017 or 2016. The changes in fair value related primarily~~unrealized losses on securities available-for-sale are comprised of credit losses as compared to unrealized losses due to market interest rate ~~fluctuations.~~adjustments. Our assessment includes a review of ~~other-than-temporary impairment~~the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and our ability and intent to hold the security for a period of time sufficient for a recovery in value. We also consider the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. No credit losses were determined ~~that~~to be present as of March 31, 2021, as there was no credit quality ~~deterioration.~~deterioration noted. Therefore, no provision for credit losses on securities was recognized for the first quarter of 2021.

The following table presents proceeds from sale and net realized gains (losses) on securities available-for-sale for the ~~quarters and nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016.~~2020:

Quarter Ended

Nine Months Ended

September 30,

September 30,

Securities available-for-sale

2017

2016

2017

2016

Gross realized gains on securities

$
474

$
1,380

$
911

$
1,518

Gross realized losses on securities

(371)

(3,339)

(1,076)

(3,538)

Securities realized gains (losses), net

$
103

$
(1,959)

$
(165)

$
(2,020)

~~The majority~~


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

As of ~~the net realized losses in the prior year~~March 31, 2021, securities valued at $313.9 million were ~~incurred~~pledged to ~~meet the funding needs related to the Talmer branch acquisition in late 2016.~~secure deposits and borrowings, and for other purposes, a decrease from $335.8 million of securities pledged at year-end 2020.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 43 – Loans and Allowance for Credit Losses on Loans

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

September 30, 2017

December 31, 2016

Commercial

$
257,356

$
228,113

Leases

69,305

55,451

Real estate - commercial

739,136

736,247

Real estate - construction

94,868

64,720

Real estate - residential

419,583

377,851

Consumer

2,770

3,237

Other1

10,550

11,973

1,593,568

1,477,592

Net deferred loan costs

623

1,217

Total loans

$
1,594,191

$
1,478,809


	March 31, 2021		December 31, 2020
Commercial ¹	$	392,380	$	407,159
Leases		138,240		141,601
Commercial real estate - Investor		567,475		582,042
Commercial real estate - Owner occupied		326,857		333,070
Construction		93,745		98,486
Residential real estate - Investor		52,176		56,137
Residential real estate - Owner occupied		107,303		116,388
Multifamily		178,258		189,040
HELOC		75,604		80,908
HELOC - Purchased		17,078		19,487
Other ²		10,509		10,533
Total loans		1,959,625		2,034,851
Allowance for credit losses on loans		(30,967)		(33,855)
Net loans³	$	1,928,658	$	2,000,996

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

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

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

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The ~~Company’s~~Company seeks to assure access to collateral, in the event of borrower default, ~~is assured~~ through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. ~~With selected exceptions,~~Although the Bank makes loans ~~solely~~primarily within its market ~~area. There~~area, there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic ~~sector, although the~~sector. The real estate related categories listed above represent ~~78.6%~~72.4% and ~~79.7%~~72.5% of the portfolio at ~~September 30, 2017,~~March 31, 2021, and December 31, ~~2016,~~2020, respectively, and include a mix of owner and non-owner occupied, residential, construction and multifamily loans.

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


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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


					Provision
			Impact of		(Release)
	Beginning		Adopting		for Loan						Ending
Allowance for credit losses	Balance		ASC 326		Losses		Charge-offs		Recoveries		Balance
Three months ended March 31, 2020
Commercial	$	3,015	$	(292)	$	539	$	97	$	12	$	3,177
Leases		1,262		501		127		-		-		1,890
Commercial real estate - Investor		6,218		(741)		536		13		21		6,021
Commercial real estate - Owner occupied		3,678		(848)		329		1,109		1		2,051
Construction		513		1,334		2,184		-		-		4,031
Real estate - Investor		601		740		534		-		21		1,896
Real estate - Owner occupied		1,257		1,320		769		1		23		3,368
Multifamily		1,444		1,732		674		-		-		3,850
HELOC		1,161		1,526		(485)		83		141		2,260
HELOC - Purchased		-		-		850		-		-		850
Other		640		607		(558)		98		60		651
	$	19,789	$	5,879	$	5,499	$	1,401	$	279	$	30,045

The ACL on loans excludes $3.5 million, $3.0 million and $4.2 million of allowance for unfunded commitments, recorded within Other Liabilities, as of March 31, 2021, December 31, 2020 and March 31, 2020, respectively.

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


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


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

Tableof 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 ~~class~~segments of loans was as follows:

Recorded

Investment

90 days or

90 Days or

Greater Past

30-59 Days

60-89 Days

Greater Past

Total Past

Due and
September 30, 2017

Past Due

Past Due

Due

Due

Current

Nonaccrual

Total Loans

Accruing
Commercial

$
-

$
89

$
-

$
89

$
257,060

$
207

$
257,356

$
-
Leases

-

685

149

834

68,275

196

69,305

156
Real estate - commercial

Owner occupied general purpose

253

-

537

790

154,429

457

155,676

561
Owner occupied special purpose

513

-

-

513

172,866

359

173,738

-
Non-owner occupied general purpose

649

-

-

649

251,933

1,165

253,747

-
Non-owner occupied special purpose

-

248

-

248

93,498

-

93,746

-
Retail properties

-

-

-

-

45,149

1,113

46,262

-
Farm

-

-

383

383

15,584

-

15,967

387
Real estate - construction

Homebuilder

-

-

-

-

2,644

-

2,644

-
Land

-

-

-

-

3,235

-

3,235

-
Commercial speculative

-

-

-

-

34,817

-

34,817

-
All other

63

-

-

63

53,904

205

54,172

-
Real estate - residential

Investor

-

-

-

-

52,361

492

52,853

-
Multifamily

-

-

-

-

117,544

4,757

122,301

-
Owner occupied

40

-

-

40

124,414

4,127

128,581

-
Revolving and junior liens

732

22

100

854

113,956

1,038

115,848

103
Consumer

2

-

-

2

2,760

8

2,770

-
Other1

1

-

-

1

11,172

-

11,173

-
Total

$
2,253

$
1,044

$
1,169

$
4,466

$
1,575,601

$
14,124

$
1,594,191

$
1,207


													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
March 31, 2021¹	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	2	$	207	$	-	$	209	$	392,171	$	392,380	$	-
Leases		603		50		96		749		137,491		138,240		-
Commercial real estate - Investor		996		-		1,545		2,541		564,934		567,475		366
Commercial real estate - Owner occupied		1,092		-		2,973		4,065		322,792		326,857		-
Construction		3,340		-		-		3,340		90,405		93,745		-
Residential real estate - Investor		495		-		724		1,219		50,957		52,176		-
Residential real estate - Owner occupied		903		137		574		1,614		105,689		107,303		147
Multifamily		2,731		2,660		69		5,460		172,798		178,258		-
HELOC		517		-		201		718		74,886		75,604		-
HELOC - Purchased		399		-		-		399		16,679		17,078		-
Other		467		2		-		469		10,040		10,509		-
Total	$	11,545	$	3,056	$	6,182	$	20,783	$	1,938,842	$	1,959,625	$	513


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

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

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


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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Recorded

Investment

90 days or

90 Days or

Greater Past

30-59 Days

60-89 Days

Greater Past

Total Past

Due and
December 31, 2016

Past Due

Past Due

Due

Due

Current

Nonaccrual

Total Loans

Accruing
Commercial

$
57

$
74

$
-

$
131

$
227,742

$
240

$
228,113

$
-
Leases

-

286

286

54,799

366

55,451

Real estate - commercial

Owner occupied general purpose

758

-

-

758

135,599

879

137,236

-
Owner occupied special purpose

-

-

-

-

177,755

385

178,140

-
Non-owner occupied general purpose

667

379

-

1,046

229,315

1,930

232,291

-
Non-owner occupied special purpose

-

-

-

-

118,052

1,013

119,065

-
Retail properties

-

-

-

-

53,474

1,179

54,653

-
Farm

1,353

-

-

1,353

13,509

-

14,862

-
Real estate - construction

Homebuilder

-

-

-

-

3,883

-

3,883

-
Land

-

-

-

-

3,029

-

3,029

-
Commercial speculative

-

-

-

-

22,654

74

22,728

-
All other

364

-

-

364

34,509

207

35,080

-
Real estate - residential

Investor

237

-

-

237

54,924

936

56,097

-
Multifamily

-

-

-

96,502

-

96,502

Owner occupied

274

-

-

274

116,900

6,452

123,626

-
Revolving and junior liens

225

405

-

630

99,374

1,622

101,626

-
Consumer

10

36

-

46

3,191

-

3,237

-
Other1

14

-

-

14

13,176

-

13,190

-
Total

$
3,959

$
1,180

$
-

$
5,139

$
1,458,387

$
15,283

$
1,478,809

$
-

1The ~~“Other” class includes overdrafts~~table presents all nonaccrual loans as of March 31, 2021, and ~~net deferred costs.~~December 31, 2020:


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

The Company recognized $32,000 of interest on nonaccrual loans during the three months ended March 31, 2021.

Credit Quality Indicators

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison ~~against~~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 ~~institution~~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.

~~Tableof Contents~~

Credit ~~Quality Indicators~~quality indicators by ~~class of loans~~loan segment and loan origination date at March 31, 2021 were as follows:

September 30, 2017

Special


Pass

Mention

Substandard 1

Doubtful

Total
Commercial

$
245,603

$
11,371

$
382

$
-

$
257,356
Leases

68,274

-

1,031

-

69,305
Real estate - commercial

Owner occupied general purpose

153,039

1,274

1,363

-

155,676
Owner occupied special purpose

172,216

1,163

359

-

173,738
Non-owner occupied general purpose

250,497

2,085

1,165

-

253,747
Non-owner occupied special purpose

90,113

-

3,633

-

93,746
Retail Properties

43,922

1,227

1,113

-

46,262
Farm

13,472

-

2,495

-

15,967
Real estate - construction

Homebuilder

2,644

-

-

-

2,644
Land

3,235

-

-

-

3,235
Commercial speculative

34,817

-

-

-

34,817
All other

52,898

894

380

-

54,172
Real estate - residential

Investor

52,205

-

648

-

52,853
Multifamily

117,544

-

4,757

-

122,301
Owner occupied

123,600

563

4,418

-

128,581
Revolving and junior liens

113,871

-

1,977

-

115,848
Consumer

2,762

-

8

-

2,770
Other

11,173

-

-

-

11,173
Total

$
1,551,885

$
18,577

$
23,729

$
-

$
1,594,191

December 31, 2016

Special


Pass

Mention

Substandard 1

Doubtful

Total
Commercial

$
214,028

$
11,558

$
2,527

$
-

$
228,113
Leases

53,366

976

1,109

55,451
Real estate - commercial

Owner occupied general purpose

135,503

53

1,680

-

137,236
Owner occupied special purpose

172,353

5,402

385

-

178,140
Non-owner occupied general purpose

229,448

913

1,930

-

232,291
Non-owner occupied special purpose

114,293

-

4,772

-

119,065
Retail Properties

52,207

1,267

1,179

-

54,653
Farm

11,840

1,240

1,782

-

14,862
Real estate - construction

Homebuilder

3,883

-

-

-

3,883
Land

3,029

-

-

-

3,029
Commercial speculative

22,654

-

74

-

22,728
All other

34,696

-

384

-

35,080
Real estate - residential

Investor

55,001

-

1,096

-

56,097
Multifamily

96,502

-

-

-

96,502
Owner occupied

115,831

570

7,225

-

123,626
Revolving and junior liens

99,286

-

2,340

-

101,626
Consumer

3,236

-

1

-

3,237
Other

13,165

25

-

-

13,190
Total

$
1,430,321

$
22,004

$
26,484

$
-

$
1,478,809

Tableof Contents

1 ~~The substandard credit~~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	$	73,345	$	70,268		33,301		13,439		5,467		2,969	$	187,576	$	-	$	386,365
Special Mention		-		2,772		399		-		-		-		447		-		3,618
Substandard		-		260		-		1,344		-		-		793		-		2,397
Total commercial		73,345		73,300		33,700		14,783		5,467		2,969		188,816		-		392,380

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

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

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

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

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

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

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

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

HELOC - Purchased

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

Credit quality ~~indicator includes both potential problem loans that are currently performing~~indicators by loan segment and ~~nonperforming loans.~~loan origination date at December 31, 2020 were as follows:


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

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

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

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

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

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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


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

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

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

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

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

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

The Company had ~~$1.2 million~~$624,000 and ~~$1.8 million~~$546,000 in residential real estate loans in the process of foreclosure as of ~~September 30, 2017,~~March 31, 2021, and December 31, ~~2016,~~2020, respectively. ~~The Company also had $937,000 and $225,000 in residential real estate included in OREO as of September 30, 2017, and December 31, 2016, respectively.~~

~~Tableof Contents~~

~~Impaired loans, which include nonaccrual loans and accruing troubled debt restructurings, by class of loans for the September 30, 2017 periods listed were as follows:~~

Nine Months Ended

As of September 30, 2017

September 30, 2017

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income


Investment

Balance

Allowance

Investment

Recognized
With no related allowance recorded

Commercial

$
207

$
360

$
-

$
123

$
-
Leases

196

227

-

281

-
Commercial real estate

Owner occupied general purpose

457

495

-

1,169

-
Owner occupied special purpose

359

509

-

372

-
Non-owner occupied general purpose

1,218

1,592

-

1,481

2
Non-owner occupied special purpose

-

-

-

507

-
Retail properties

1,113

1,199

-

1,146

-
Farm

-

-

-

-

-
Construction

Homebuilder

-

-

-

-

-
Land

-

-

-

-

-
Commercial speculative

-

-

-

37

-
All other

205

231

-

206

-
Residential

Investor

1,374

1,627

-

1,607

36
Multifamily

4,757

4,965

-

2,379

-
Owner occupied

8,150

9,524

-

8,987

119
Revolving and junior liens

1,991

2,173

-

2,237

27
Consumer

8

8

-

104

-
Total impaired loans with no recorded allowance

20,035

22,910

-

20,636

184

With an allowance recorded

Commercial

-

-

-

-

-
Leases

-

-

-

-

-
Commercial real estate

Owner occupied general purpose

-

-

-

-

-
Owner occupied special purpose

-

-

-

-

-
Non-owner occupied general purpose

-

-

-

123

-
Non-owner occupied special purpose

-

-

-

-

-
Retail properties

-

-

-

-

-
Farm

-

-

-

-

-
Construction

Homebuilder

-

-

-

-

-
Land

-

-

-

-

-
Commercial speculative

-

-

-

-

-
All other

-

-

-

-

-
Residential

Investor

-

-

-

-

-
Multifamily

-

-

-

-

-
Owner occupied

-

-

-

402

-
Revolving and junior liens

51

51

6

26

2
Consumer

-

-

-

-

-
Total impaired loans with a recorded allowance

51

51

6

551

2
Total impaired loans

$
20,086

$
22,961

$
6

$
21,187

$
186

~~Tableof Contents~~

~~Impaired loans by class of loans as of December 31, 2016, and for the nine months ended September 30, 2016, were as follows:~~

Nine Months Ended

As of December 31, 2016

September 30, 2016

Unpaid

Average

Interest

Recorded

Principal

Related

Recorded

Income


Investment

Balance

Allowance

Investment

Recognized
With no related allowance recorded

Commercial

$
240

$
388

$
-

$
326

$
-
Leases

366

371

-

-

-
Commercial real estate

Owner occupied general purpose

1,881

2,131

-

2,412

66
Owner occupied special purpose

385

518

-

580

-
Non-owner occupied general purpose

1,744

2,010

-

1,655

2
Non-owner occupied special purpose

1,013

1,649

-

506

-
Retail properties

1,179

1,235

-

990

-
Farm

-

-

-

636

-
Construction

Homebuilder

-

-

-

-

-
Land

-

-

-

-

-
Commercial speculative

74

81

-

80

-
All other

207

221

-

-

-
Residential

Investor

1,841

2,308

-

1,864

35
Multifamily

-

-

-

-

-
Owner occupied

9,824

11,391

-

9,916

120
Revolving and junior liens

2,484

3,018

-

2,527

9
Consumer

-

-

-

-

-
Total impaired loans with no recorded allowance

21,238

25,321

-

21,492

232

With an allowance recorded

Commercial

-

-

-

2

-
Leases

-

-

-

-

-
Commercial real estate

Owner occupied general purpose

-

-

-

-

-
Owner occupied special purpose

-

-

-

-

-
Non-owner occupied general purpose

246

595

246

132

31
Non-owner occupied special purpose

-

-

-

-

-
Retail properties

-

-

-

-

-
Farm

-

-

-

-

-
Construction

Homebuilder

-

-

-

-

-
Land

-

-

-

-

-
Commercial speculative

-

-

-

-

-
All other

-

-

-

-

-
Residential

Investor

-

-

-

-

-
Multifamily

-

-

-

-

-
Owner occupied

803

853

803

356

-
Revolving and junior liens

-

-

-

23

-
Consumer

-

-

-

-

-
Total impaired loans with a recorded allowance

1,049

1,448

1,049

513

31
Total impaired loans

$
22,287

$
26,769

$
1,049

$
22,005

$
263

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

~~Tableof Contents~~

The specific allocation of the allowance for ~~loan~~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 ~~loan~~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 ~~loan~~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.

Tableof Contents

~~TDRs that were modified during~~Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

There was 0 TDR activity for the period ~~are as follows:~~

TDR Modifications

TDR Modifications

Quarter Ended September 30, 2017

Nine Months Ended September 30, 2017

# of

Pre-modification

Post-modification

# of

Pre-modification

Post-modification


contracts

recorded investment

recorded investment

contracts

recorded investment

recorded investment

Troubled debt restructurings

Real estate - residential

Owner occupied

HAMP1

1

$
36

$
33

1

$
36

$
33

Other2

1

42

42

1

42

42

Revolving and junior liens

HAMP1

1

49

49

1

49

49

Other2

1

49

33

7

448

418

Total

4

$
176

$
157

10

$
575

$
542

TDR Modifications

TDR Modifications

Quarter Ended September 30, 2016

Nine Months Ended September 30, 2016

# of

Pre-modification

Post-modification

# of

Pre-modification

Post-modification


contracts

recorded investment

recorded investment

contracts

recorded investment

recorded investment

Troubled debt restructurings

Real estate - commercial

Other2

-

$
-

$
-

2

$
312

$
211

Real estate - residential

Owner occupied

HAMP1

-

-

-

1

239

235

Revolving and junior liens

HAMP1

-

-

4

469

433

Other2

1

70

70

1

70

70

Total

1

$
70

$
70

8

$
1,090

$
949

1~~HAMP: Home Affordable Modification Program~~

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

ended March 31, 2021 and March 31, 2020. TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There was no0 TDR default activity for the ~~nine months~~periods ended ~~September 30, 2017,~~March 31, 2021, and ~~September 30, 2016,~~March 31, 2020, for loans that were restructured within the prior 12 month ~~period prior to default.~~period.

~~Tableof Contents~~

Note ~~5 – Allowance for Loan Losses~~

~~Changes in the allowance for loan losses by segment of loans based on method of impairment for three and nine months ended September 30, 2017, were as follows:~~

Real Estate

Real Estate

Real Estate

Allowance for loan losses:

Commercial

Leases

Commercial

Construction

Residential

Consumer

Other

Total
Three months ended September 30, 2017

Beginning balance

$
2,150

$
791

$
8,107

$
857

$
2,576

$
848

$
507

$
15,836
Charge-offs

13

98

22

19

7

82

-

241
Recoveries

6

-

43

11

459

45

6

570
(Release) Provision

(104)

77

505

165

(607)

(1)

265

300
Ending balance

$
2,039

$
770

$
8,633

$
1,014

$
2,421

$
810

$
778

$
16,465

Nine months ended September 30, 2017

Beginning balance

$
1,629

$
633

$
9,547

$
389

$
2,692

$
833

$
435

$
16,158
Charge-offs

20

215

300

23

1,178

262

-

1,998
Recoveries

13

-

124

89

850

166

13

1,255
Provision (Release)

417

352

(738)

559

57

73

330

1,050
Ending balance

$
2,039

$
770

$
8,633

$
1,014

$
2,421

$
810

$
778

$
16,465

Ending balance: Individually evaluated for impairment

$
-

$
-

$
-

$
-

$
6

$
-

$
-

$
6
Ending balance: Collectively evaluated for impairment

$
2,039

$
770

$
8,633

$
1,014

$
2,415

$
810

$
778

$
16,459

Loans:

Ending balance

$
257,356

$
69,305

$
739,136

$
94,868

$
419,583

$
2,770

$
11,173

$
1,594,191
Ending balance: Individually evaluated for impairment

$
207

$
196

$
3,147

$
205

$
16,323

$
8

$
-

$
20,086
Ending balance: Collectively evaluated for impairment

$
257,149

$
69,109

$
735,989

$
94,663

$
403,260

$
2,762

$
11,173

$
1,574,105

~~Changes in the allowance for loan losses by segment of loans based on method of impairment for three and nine months ended September 30, 2016, were as follows:~~

Real Estate

Real Estate

Real Estate

Allowance for loan losses:

Commercial

Leases

Commercial

Construction

Residential

Consumer

Other

Total
Three months ended September 30, 2016

Beginning balance

$
1,420

$
275

$
8,954

$
380

$
2,933

$
862

$
998

$
15,822
Charge-offs

76

-

792

9

220

100

-

1,197
Recoveries

10

-

27

60

199

57

5

358
Provision (Release)

141

71

753

39

(577)

118

(545)

-
Ending balance

$
1,495

$
346

$
8,942

$
470

$
2,335

$
937

$
458

$
14,983

Nine months ended September 30, 2016

Beginning balance

$
2,041

$
55

$
9,013

$
265

$
1,694

$
1,190

$
1,965

$
16,223
Charge-offs

95

13

1,484

9

657

250

-

2,508
Recoveries

22

-

255

71

718

184

18

1,268
(Release) Provision

(473)

304

1,158

143

580

(187)

(1,525)

-
Ending balance

$
1,495

$
346

$
8,942

$
470

$
2,335

$
937

$
458

$
14,983

Ending balance: Individually evaluated for impairment

$
-

$
-

$
264

$
-

$
250

$
-

$
-

$
514
Ending balance: Collectively evaluated for impairment

$
1,495

$
346

$
8,678

$
470

$
2,085

$
937

$
458

$
14,469

Loans:

Ending balance

$
136,819

$
47,215

$
617,280

$
28,786

$
357,846

$
3,325

$
11,581

$
1,202,852
Ending balance: Individually evaluated for impairment

$
583

$
-

$
8,426

$
76

$
14,038

$
-

$
-

$
23,123
Ending balance: Collectively evaluated for impairment

$
136,236

$
47,215

$
608,854

$
28,710

$
343,808

$
3,325

$
11,581

$
1,179,729

~~Tableof Contents~~

~~Note 6~~4 – Other Real Estate Owned

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


	Quarters Ended				Nine Months Ended
	September 30,				September 30,

									Three Months Ended
									March 31,
Other real estate owned	2017		2016		2017		2016		2021		2020
Balance at beginning of period	$	11,724	$	16,252	$	11,916	$	19,141	$	2,474	$	5,004
Property additions		176		255		3,796		1,223
Property improvements		-		4		-		16
Property additions, net of acquisition adjustments										-		491
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		1,956		2,002		5,058		4,931		305		288
Period valuation adjustments		920		365		1,630		1,305		6		158
Balance at end of period	$	9,024	$	14,144	$	9,024	$	14,144	$	2,163	$	5,049

Activity in the valuation allowance was as follows:


	Quarters Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

									Three Months Ended
									March 31,
									2021		2020
Balance at beginning of period	$	8,304	$	13,377	$	9,982	$	14,127	$	1,643	$	6,712
Provision for unrealized losses		920		365		1,630		1,305		6		158
Reductions taken on sales		(421)		(488)		(2,809)		(2,178)		-		(466)
Balance at end of period	$	8,803	$	13,254	$	8,803	$	13,254	$	1,649	$	6,404

Expenses related to OREO, net of lease revenue includes:


	Quarters Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016

									Three Months Ended
									March 31,
									2021		2020
Gain on sales, net	$	(276)	$	(249)	$	(454)	$	(316)	$	(20)	$	(23)
Provision for unrealized losses		920		365		1,630		1,305		6		158
Operating expenses		221		361		1,037		1,217		54		102
Less:
Lease revenue		185		51		285		163		4		-
Net OREO expense	$	680	$	426	$	1,928	$	2,043	$	36	$	237

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 75 – Deposits

Major classifications of deposits were as follows:


	September 30, 2017		December 31, 2016

					March 31, 2021		December 31, 2020
Noninterest bearing demand	$	556,874	$	513,688	$	982,664	$	909,505
Savings		260,268		256,159		429,256		399,057
NOW accounts		417,054		419,417		522,760		486,612
Money market accounts		270,647		275,273		338,921		316,465
Certificates of deposit of less than $100,000		219,152		228,993		193,291		200,107
Certificates of deposit of $100,000 through $250,000		114,373		110,992		132,514		164,982
Certificates of deposit of more than $250,000		50,747		62,263		57,136		60,345
Total deposits	$	1,889,115	$	1,866,785	$	2,656,542	$	2,537,073

~~Tableof Contents~~

Note 86 – Borrowings

The following table is a summary of borrowings as of ~~September 30, 2017,~~March 31, 2021, and December 31, ~~2016.~~2020. Junior subordinated debentures are discussed in more detail in Note 9:7:


	September 30, 2017		December 31, 2016

					March 31, 2021		December 31, 2020
Securities sold under repurchase agreements	$	26,853	$	25,715	$	77,321	$	66,980
FHLBC advances1		125,000		70,000
Junior subordinated debentures		57,627		57,591		25,773		25,773
Senior notes		44,033		43,998		44,402		44,375
Notes payable and other borrowings						22,314		23,393
Total borrowings	$	253,513	$	197,304	$	169,810	$	160,521

1~~Included in other short-term borrowings on the balance sheet.~~

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 ~~$26.9~~$77.3 million at ~~September 30, 2017,~~March 31, 2021, and ~~$25.7~~$67.0 million at December 31, ~~2016.~~2020. The fair value of the pledged collateral was ~~$41.5~~$114.8 million at ~~September 30, 2017~~March 31, 2021, and ~~$43.0~~$94.4 million at December 31, ~~2016.~~2020. At ~~September 30, 2017,~~March 31, 2021, there were no0 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, 2017,~~March 31, 2021 and December 31, 2020 the Bank had ~~$125.0 million in~~0 short-term advances outstanding under the FHLBC. The Bank also assumed $23.4 million of long-term FHLBC ~~as compared~~advances with the ABC Bank acquisition in 2018. At March 31, 2021, one advance remains in long-term status, with a total outstanding balance of $6.3 million, at a 2.83% interest rate, and is scheduled to ~~$70.0 million outstanding~~mature on February 2, 2026. FHLBC stock as of ~~December~~March 31, ~~2016. As of September 30, 2017, FHLBC stock held~~2021, was valued at ~~$5.6~~$3.7 million, and any potential FHLBC advances were collateralized by ~~securities with a fair value of $87.4 million and~~ loans with a principal balance of ~~$251.3~~$631.4 million, which carried a ~~FHLBC calculated~~FHLBC-calculated combined collateral value of ~~$273.8~~$457.7 million. The Company had excess collateral of ~~$74.5~~$330.2 million available to secure borrowings at ~~September 30, 2017.~~March 31, 2021.

The Company ~~completed a debt retirement and simultaneous senior debt offering in the fourth quarter of 2016. Subordinated debt of $45.0~~also has $44.4 million ~~and $500,000~~ of senior notes outstanding, ~~were paid off with the proceeds~~net of ~~a $45.0 million senior notes~~deferred issuance costs, as of March 31, 2021 and ~~cash on hand.~~December 31, 2020. The senior notes ~~mature~~were issued in December 2016 with a ten ~~years,~~year maturity, and terms include interest payable semiannually at 5.75% for five years. Beginning December 2021, the senior debt will pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points. The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. ~~Debt~~As of March 31, 2021, and December 31, 2020, unamortized debt issuance costs ~~incurred for~~related to the senior notes ~~issuance totaled $1.0 million,~~were $598,000 and ~~are being deferred~~$625,000, respectively, and ~~recorded to expense over the ten year term of the notes. The unamortized costs~~ are included as a reduction toof 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.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

~~Note 9 – Junior Subordinated Debentures~~Notes to Consolidated Financial Statements

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

~~The~~On February 24, 2020, the Company ~~completed~~originated a $20.0 million term note, of which $16.0 million is outstanding as of March 31, 2021, with a correspondent bank related to the ~~sale~~Company’s redemption of ~~$27.5 million of~~the 7.80% cumulative trust preferred securities issued by ~~its unconsolidated subsidiary,~~ Old Second Capital Trust I and related junior subordinated debentures. See the discussion in ~~June 2003. An additional $4.1~~Note 7 – Junior Subordinated Debentures. The term note was issued for a three year term at one-month Libor plus 175 basis points, requires principal and interest payments quarterly, and the balance of this note is included within Notes Payable and Other Borrowings on the Consolidated Balance Sheet. The Company also has an undrawn line of credit of $20.0 million with a correspondent bank to be used for short-term funding needs; advances under this line can be outstanding up to 360 days from the date of issuance. This line of credit has not been utilized since early 2019.

Note 7 – 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 ~~sold~~originally issued in ~~July 2003. The trust preferred securities may remain outstanding~~2003 for a ~~30-year~~ term ~~but,~~of 30 years at 7.80%, and subject to regulatory approval, ~~can~~were able to be called in whole or in part by the Company after June 30, 2008. ~~When not~~The Company received regulatory approval to redeem the debentures in ~~deferral, distributions~~early 2020, and notified OSBCP stockholders of the redemption in late January 2020. Cash disbursed for the redemption, including accrued interest on the ~~securities are payable quarterly at an annual rate~~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 6 – Borrowings. Upon redemption of ~~7.80%.~~ 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 a new $32.6 million subordinated debenture to Old Second Capital Trust I 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 Company issued an additional~~ $25.0 million of cumulative trust preferred securities through a private placement completed by ~~an additional,~~another unconsolidated subsidiary, Old Second Capital Trust II, in April 2007. These trust preferred securities also mature in 30 years, but subject to the aforementioned regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017. The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017, and float at 150 basis points over three-month LIBOR thereafter. ~~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, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of ~~4.30% as of September 30, 2017,~~4.41% for the quarter ended March 31, 2021, compared to the rate paid ~~prior to June 15, 2017~~for the quarter ended March 31, 2020, of ~~6.77%~~4.40%. The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering. The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities. ~~Both of the~~

The junior subordinated debentures issued by the Company are disclosed on the Consolidated Balance Sheet, ~~as junior subordinated debentures~~ and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of ~~September 30, 2017,~~March 31, 2021, and December 31, ~~2016,~~2020, the remaining unamortized debt issuance costs related to the junior subordinated debentures were

~~Tableof Contents~~

~~$752,000 and $787,000 respectively,~~$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 108 – Equity Compensation Plans

Stock-based awards are outstanding under the Company’s ~~2008~~2019 Equity Incentive Plan (the ~~“2008~~“2019 Plan”~~) and the Company’s 2014 Equity Incentive Plan (the “2014 Plan,” and together with the 2008 Plan, the “Plans”~~). The ~~2014~~2019 Plan was approved at the ~~2014~~May 2019 annual stockholders’ meeting and the number of ~~stockholders; a maximum of 375,000~~authorized shares ~~were authorized to be issued~~ under ~~this plan.~~the 2019 Plan was fixed at 600,000. Following approval of the ~~2014~~2019 Plan, no further awards ~~will~~were to be granted under ~~the 2008 Plan or~~ any other prior Company equity compensation plan.At the May 2016 annual stockholders meeting, an amendment to the 2014 Plan authorized an additional 600,000 shares to be issued, which resulted in a total of 975,000 shares authorized for issuance under this plan. The ~~2014~~2019 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation ~~rights.~~rights (“SARs”). Awards may be granted to selected directors, ~~and~~ officers, employees or ~~employees~~eligible service providers under the ~~2014~~2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors. As of ~~September 30, 2017, 453,209~~March 31, 2021, 225,020 shares remained available for issuance under the ~~2014~~2019 Plan.

~~There were no stock options granted or exercised~~Under the 2019 Plan, unless otherwise provided in an award agreement, upon the ~~third quarter~~occurrence of ~~2017 and 2016. All stock options are granted for~~ a ~~term of ten years. There is no unrecognized compensation cost related to unvested stock options as~~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 ~~Company’s common stock have~~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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

vesting of an award is conditioned upon the achievement of performance measures, then such vesting will generally be subject to the following: if, at the time of the change in control, the performance measures are less than 50% attained (pro rata based upon the time of the period through the change in control), the award will become vested and exercisable on a fractional basis with the numerator being equal to the percentage of attainment and the denominator being 50%; and if, at the time of the change in control, the performance measures are at least 50% attained (pro rata based upon the time of the period through the change in control), the award will become fully ~~vested.~~

~~A summary of stock option activity~~earned and vested immediately upon the change in ~~the Plans for the nine months ended September 30, 2017, is as follows:~~

Weighted-

Weighted

Average

Average

Remaining

Exercise

Contractual

Aggregate


Shares

Price

Term (years)

Intrinsic Value

Beginning outstanding

94,500

$
25.82

-

-
Canceled

-

-

-

-
Expired

-

-

-

-
Exercised

-

-

-

-
Ending outstanding

94,500

$
25.82

0.3

$
-

Exercisable at end of period

94,500

$
25.82

0.3

$
-

control. Generally, restricted stock and restricted stock units granted under the Plans vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until the vest date.

Awards ~~under the 2008 Plan will become fully vested upon a merger or change in control~~ of the Company. Under the 2014 Plan, upon a change in control of the Company, if (i) the 2014 Plan is not an obligation of the successor entity following the change in control, or (ii) the 2014 Plan is an obligation of the successor entity following the change in control and the participant incurs an involuntary termination, then the stock options, stock appreciation rights, stock awards and cash incentive awards under the 2014 Plan will become fully exercisable and vested. Performance-based awards generally will vest based upon the level of achievement of the applicable performance measures through the change in control.

~~The Company granted~~ restricted stock ~~under its equity compensation plans beginning in 2005 and it began granting restricted stock units in February 2009. Restricted stock awards~~ 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. ~~Restricted~~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 ~~161,500~~217,964 and 137,944 restricted ~~awards~~stock units issued under the ~~2014~~2019 Plan during the ~~nine~~three months ended ~~September 30, 2017. There were 130,000 restricted awards issuedduring the nine months ended September 30, 2016.~~March 31, 2021 and March 31, 2020, respectively. Compensation expense is recognized over the vesting period of the restricted ~~award~~stock units based on the market value of the award on the issue date. Total compensation cost that has been recorded for the ~~2014~~ Plan was ~~$925,100 and $485,000~~$125,000 in the first ~~nine~~three months of ~~2017~~2021 and ~~2016, respectively.~~$735,000 for the first three months of 2020.

~~Tableof Contents~~

A summary of changes in the Company’s unvested restricted awards for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2021, is as follows:


	September 30, 2017
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Nonvested at January 1	409,000	$	5.89

				March 31, 2021
					Weighted
				Restricted	Average
				Stock Shares	Grant Date
				and Units	Fair Value
Unvested at January 1				532,609	$	13.15
Granted	161,500		11.04	217,964		11.32
Vested	(91,500)		5.07	(191,653)		13.95
Forfeited	(14,000)		7.53	(42,111)		14.15
Nonvested at September 30	465,000	$	7.79
Unvested at March 31				516,809	$	11.99

Total unrecognized compensation cost of restricted awards was ~~$2.0~~$4.0 million as of ~~September 30, 2017,~~March 31, 2021, which is expected to be recognized over a weighted-average period of ~~2.11~~2.27 years. ~~Total unrecognized compensation cost~~

Tableof ~~restricted awards was $1.1 million as of September 30, 2016, which was expected~~Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to ~~be recognized over a weighted-average period of 1.99 years.~~Consolidated Financial Statements

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

Note 119 – Earnings Per Share

The earnings per share, – both basic and diluted, – are ~~included below~~ as ~~of September 30 (in thousands except for share and per share data):~~follows:


		Quarters Ended September 30,				Nine Months Ended September 30,
		2017		2016		2017		2016

										Three Months Ended March 31,
										2021		2020
Basic earnings per share:
Weighted-average common shares outstanding			29,627,086		29,554,716		29,591,811		29,524,796		29,225,775		29,929,763
Net income		$	8,077	$	3,499	$	17,650	$	10,666	$	11,879	$	275
Basic earnings per share		$	0.27	$	0.12	$	0.60	$	0.36	$	0.41	$	0.01

Diluted earnings per share:
Weighted-average common shares outstanding			29,627,086		29,554,716		29,591,811		29,524,796		29,225,775		29,929,763
Dilutive effect of nonvested restricted awards1			473,967		282,228		425,081		303,221
Dilutive effect of stock options			2,556		1,238		2,473		413
Dilutive effect of unvested restricted awards ¹											558,982		560,842
Diluted average common shares outstanding			30,103,609		29,838,182		30,019,365		29,828,430		29,784,757		30,490,605

Net Income		$	8,077	$	3,499	$	17,650	$	10,666	$	11,879	$	275
Diluted earnings per share		$	0.27	$	0.12	$	0.59	$	0.36	$	0.40	$	0.01

Number of antidilutive options and warrants excluded from the diluted earnings per share calculation			900,839		967,339		900,839		977,426



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.

The above earnings per share calculation did not include a warrant for 815,339 shares of common stock, at an exercise price of $13.43 per share, that was outstanding as of September 30, 2017, and September 30, 2016, because the warrant was anti-dilutive. Of note, the ten year warrant was issued in 2009, and was sold at auction by the Treasury in June 2013 to a third party investor.

Note 12 10 – 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 ~~economic environment, the Bank’s current level of nonperforming assets and the~~ risk-based capital regulatory guidelines, the Bank’s Board of Directors has ~~determined that~~established an internal guideline requiring the Bank ~~should~~to maintain a Tier 1 leverage capital ratio at or above ~~eight~~8 percent (8%) and a total risk-based capital ratio at or above ~~twelve~~12 percent (12%). At ~~September 30, 2017,~~March 31, 2021, the Bank exceeded those thresholds.

At ~~September 30, 2017,~~March 31, 2021, the Bank’s Tier 1 capital leverage ratio was ~~10.63%~~10.78%, an increase of 394 basis ~~point~~points from December 31, ~~2016,~~2020, and is well above the 8.00% objective. The Bank’s total capital ratio was ~~13.52%~~15.80%, an increase of 780 basis points from December 31, ~~2016,~~2020, and also ~~modestly~~well above the objective of 12.00%.

~~Tableof Contents~~

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, 2017,~~March 31, 2021, and December 31, ~~2016.~~2020.

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015. The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” generally holding companies with consolidated assets of less than $3 billion. The Company is currently considered a “small bank holding company.” If we have total assets in excess of $3.0 billion as of June 30, 2021, we will no longer be considered a small bank holding company in March of 2022. A detailed discussion of the Basel III Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, ~~2016,~~2020, under the heading “Supervision and Regulation.”

At ~~September 30, 2017,~~March 31, 2021, and December 31, ~~2016,~~2020, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


					Minimum Capital				To Be Well Capitalized Under
					Adequacy with Capital				Prompt Corrective
	Actual				Conservation Buffer if applicable1				Action Provisions2
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2017


																Minimum Capital				Well Capitalized
																Adequacy with Capital				Under Prompt Corrective
													Actual			Conservation Buffer, if applicable¹				Action Provisions²
													Amount		Ratio	Amount		Ratio		Amount		Ratio
March 31, 2021
Common equity tier 1 capital to risk weighted assets
Consolidated	$	170,622	8.88	%	$	110,482	5.750	%		N/A	N/A		$	282,302	12.43	$	158,979	7.000	%		N/A	N/A
Old Second Bank		243,109	12.67			110,330	5.750		$	124,720	6.50	%		331,118	14.59		158,864	7.000		$	147,517	6.50	%
Total capital to risk weighted assets
Consolidated		239,269	12.46			177,627	9.250			N/A	N/A			334,614	14.73		238,523	10.500			N/A	N/A
Old Second Bank		259,569	13.52			177,590	9.250			191,989	10.00			358,430	15.80		238,197	10.500			226,854	10.00
Tier 1 capital to risk weighted assets
Consolidated		221,579	11.54			139,207	7.250			N/A	N/A			307,302	13.53		193,057	8.500			N/A	N/A
Old Second Bank		243,109	12.67			139,111	7.250			153,502	8.00			331,118	14.59		192,906	8.500			181,559	8.00
Tier 1 capital to average assets
Consolidated		221,579	9.69			91,467	4.00			N/A	N/A			307,302	10.02		122,675	4.00			N/A	N/A
Old Second Bank		243,109	10.63			91,480	4.00			114,350	5.00			331,118	10.78		122,864	4.00			153,580	5.00

December 31, 2016

December 31, 2020
Common equity tier 1 capital to risk weighted assets
Consolidated	$	154,537	8.76	%	$	90,411	5.125	%		N/A	N/A		$	277,199	11.94	$	162,512	7.000	%		N/A	N/A
Old Second Bank		221,153	12.53			90,456	5.125		$	114,724	6.50	%		318,466	13.75		162,128	7.000		$	150,548	6.50	%
Total capital to risk weighted assets
Consolidated		216,769	12.29			152,126	8.625			N/A	N/A			331,178	14.26		243,855	10.500			N/A	N/A
Old Second Bank		237,306	13.45			152,176	8.625			176,436	10.00			347,408	15.00		243,186	10.500			231,605	10.00
Tier 1 capital to risk weighted assets
Consolidated		191,988	10.88			116,904	6.625			N/A	N/A			302,199	13.01		197,440	8.500			N/A	N/A
Old Second Bank		221,153	12.53			116,930	6.625			141,199	8.00			318,466	13.75		196,870	8.500			185,289	8.00
Tier 1 capital to average assets
Consolidated		191,988	8.90			86,287	4.00			N/A	N/A			302,199	10.21		118,393	4.00			N/A	N/A
Old Second Bank		221,153	10.24			86,388	4.00			107,985	5.00			318,466	10.74		118,609	4.00			148,262	5.00

¹~~As of September 30, 2017, amounts~~Amounts are shown inclusive of a capital conservation buffer of ~~1.25%; as compared~~2.50%. Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to ~~December 31, 2016, of 0.625%~~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.

²The 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 is not recognized in regulatory capital, in addition to the $3.8 million

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Day 1 impact of CECL adoption, will be phased in at 25% per year beginning January 1, 2022. As of March 31, 2021, the capital measures of the Company exclude $5.1 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 ~~0.625% for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter 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.

24Stock Repurchase Program

~~Table~~In September 2019, our board of ~~Contents~~

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

Note 13 11 – Fair Value Measurements

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

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

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

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

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

●

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

●

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

●

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

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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.

●

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 ~~loan~~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 ~~the lower of carrying amount or~~ fair value, less costs to sell. Fair values are based on third party appraisals of the property,

~~Tableof Contents~~

resulting in a Level 3 ~~classification.~~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.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

The tables below present the balance of assets and liabilities at ~~September 30, 2017,~~March 31, 2021, and December 31, ~~2016,~~2020, respectively, measured by the Company at fair value on a recurring basis:


	September 30, 2017
	Level 1		Level 2		Level 3		Total

									March 31, 2021
									Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,990	$	-	$	-	$	3,990	$	4,102	$	-	$	-	$	4,102
U.S. government agencies		-		13,451		-		13,451		-		6,361		-		6,361
U.S. government agencies mortgage-backed		-		11,030		-		11,030		-		70,602		-		70,602
States and political subdivisions		-		216,672		12,360		229,032		-		237,505		4,641		242,146
Corporate bonds		-		10,577		-		10,577		-		34,843		-		34,843
Collateralized mortgage obligations		-		77,894		2,492		80,386		-		74,936		-		74,936
Asset-backed securities		-		131,759		-		131,759		-		130,368		-		130,368
Collateralized loan obligations		-		53,259		-		53,259		-		29,922		-		29,922
Loans held-for-sale		-		1,641		-		1,641		-		7,842		-		7,842
Mortgage servicing rights		-		-		6,684		6,684		-		-		5,889		5,889
Interest rate swap agreements		-		128		-		128		-		6,126		-		6,126
Mortgage banking derivatives		-		289		-		289		-		1,234		-		1,234
Total	$	3,990	$	516,700	$	21,536	$	542,226	$	4,102	$	599,739	$	10,530	$	614,371


Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	1,566	$	-	$	1,566	$	-	$	7,147	$	-	$	7,147
Total	$	-	$	1,566	$	-	$	1,566	$	-	$	7,147	$	-	$	7,147


	December 31, 2016
	Level 1		Level 2		Level 3		Total

									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	$	-	$	41,534	$	-	$	41,534		-		17,209		-		17,209
States and political subdivisions		-		46,477		22,226		68,703		-		244,940		4,319		249,259
Corporate bonds		-		10,630		-		10,630
Collateralized mortgage obligations		-		167,808		3,119		170,927		-		56,585		-		56,585
Asset-backed securities		-		138,407		-		138,407		-		131,818		-		131,818
Collateralized loan obligations		-		101,637		-		101,637		-		30,533		-		30,533
Loans held-for-sale		-		4,918		-		4,918		-		12,611		-		12,611
Mortgage servicing rights		-		-		6,489		6,489		-		-		4,224		4,224
Interest rate swap agreements		-		673		-		673		-		9,388		-		9,388
Mortgage banking derivatives		-		287		-		287		-		840		-		840
Total	$	-	$	512,371	$	31,834	$	544,205	$	4,117	$	510,581	$	8,543	$	523,241


Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	1,667	$	-	$	1,667	$	-	$	13,159	$	-	$	13,159
Total	$	-	$	1,667	$	-	$	1,667	$	-	$	13,159	$	-	$	13,159

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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, 2017
	Securities available-for-sale
	Collateralized		States and		Mortgage
	Mortgage		Political		Servicing
	Obligation		Subdivisions		Rights
Beginning balance January 1, 2017	$	3,119	$	22,226	$	6,489

							Three Months Ended March 31, 2021
							Securities available-for-sale
							States and		Mortgage
							Political		Servicing
							Subdivisions		Rights
Beginning balance January 1, 2021							$	4,319	$	4,224
Total gains or losses
Included in earnings (or changes in net assets)		32		-		(354)
Included in earnings								(3)		1,485
Included in other comprehensive income		7		(501)		-		299		-
Purchases, issuances, sales, and settlements
Purchases		-		10,994		-		58		-
Issuances		-		-		951		-		552
Settlements		(666)		(20,359)		(402)		(32)		(372)
Ending balance September 30, 2017	$	2,492	$	12,360	$	6,684
Ending balance March 31, 2021							$	4,641	$	5,889


	Nine Months Ended September 30, 2016
	Securities available-for-sale
	States and		Mortgage
	Political		Servicing
	Subdivisions		Rights
Beginning balance January 1, 2016	$	111	$	5,847
Transfers out of Level 3		(42)		-

					Three Months Ended March 31, 2020
					Securities available-for-sale
					States and		Mortgage
					Political		Servicing
					Subdivisions		Rights
Beginning balance January 1, 2020					$	5,419	$	5,935
Total gains or losses
Included in earnings (or changes in net assets)		-		(1,394)
Included in earnings						(6)		(1,859)
Included in other comprehensive income		9		-		(325)		-
Purchases, issuances, sales, and settlements
Purchases						6,100		-
Issuances		-		1,148		-		307
Settlements		(78)		(526)		(31)		(275)
Ending balance September 30, 2016	$	-	$	5,075
Ending balance March 31, 2020					$	11,157	$	4,108

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of ~~September 30, 2017:~~March 31, 2021:

Weighted

Measured at fair value

Unobservable

Average

on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Mortgage servicing rights

5,889

Discounted Cash Flow

Discount Rate

11.0 - 15.0%

11.0

Prepayment Speed

4.7 - 41.7%

13.5

Weighted
Measured at fair value

Unobservable

Average
on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Mortgage servicing rights

$
6,684

Discounted Cash Flow

Discount Rate

10.0 - 1576.2%

10.2
%

Prepayment Speed

7.0 - 68.3%

10.0
%

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, ~~2016:~~2020:

Weighted

Weighted

Measured at fair value

Unobservable

Average

Unobservable

Average

on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Mortgage servicing rights

6,489

Discounted Cash Flow

Discount Rate

10.0 - 17.0%

10.2

4,224

Discounted Cash Flow

Discount Rate

11.0 - 15.0%

11.0

Prepayment Speed

6.5 - 77.8%

9.6

Prepayment Speed

5.5 - 59.1

19.5

~~Tableof Contents~~

In addition to the above, Level 3 fair value measurement included ~~$12.4~~$4.6 million for state and political subdivisions representing various local municipality securities ~~and $2.5 million of collateralized mortgage obligations~~ at ~~September 30, 2017. Both of these were~~March 31, 2021. This was classified as securities available-for-sale, and ~~were~~was valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input. The state and political subdivisions securities balance in Level 3 fair value at ~~September 30, 2016,~~March 31, 2020, was ~~zero; the~~$11.2 million. These securities were ~~transferred to Level 3 in the fourth quarter of 2016. Given the small dollar amount~~classified as securities available-for-sale, and ~~size of the municipality involved, this is categorized as Level 3~~were valued using a discount based on market spreads of similar assets, but the ~~payment stream received by the Company from the municipality. That payment stream is otherwise~~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 ~~impaired~~individually evaluated (formerly, impaired) loans and OREO. For assets measured at fair value on a nonrecurring basis at ~~September 30, 2017,~~March 31, 2021, and December 31, ~~2016,~~2020, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:


	September 30, 2017
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	45	$	45

									March 31, 2021
									Level 1		Level 2		Level 3		Total
Individually evaluated loans¹									$	-	$	-	$	7,542	$	7,542
Other real estate owned, net2		-		-		9,024		9,024		-		-		2,163		2,163
Total	$	-	$	-	$	9,069	$	9,069	$	-	$	-	$	9,705	$	9,705

¹Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of ~~$51,000~~$10.4 million and a valuation allowance of ~~$6,000~~$2.9 million resulting in ~~a decrease~~an increase of specific allocations within the allowance for ~~loan~~credit losses on loans of ~~$92,000~~$269,000 for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2021.

²OREO is measured at ~~the lower of carrying or~~ fair value, less costs to sell, and had a net carrying amount of ~~$9.0~~$2.2 million at March 31, 2021, which is made up of the outstanding balance of ~~$18.7~~$3.8 million, net of a valuation allowance of ~~$8.8 million and participations of $900,000 at September 30, 2017.~~$1.6 million.


	December 31, 2016
	Level 1		Level 2		Level 3		Total
Impaired loans1	$	-	$	-	$	-	$	-

									December 31, 2020
									Level 1		Level 2		Level 3		Total
Individually evaluated loans¹									$	-	$	-	$	9,675	$	9,675
Other real estate owned, net2		-		-		11,916		11,916		-		-		2,474		2,474
Total	$	-	$	-	$	11,916	$	11,916	$	-	$	-	$	12,149	$	12,149

¹Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans; had a carrying amount of $12.3 million and a valuation allowance of ~~$1.0~~$2.6 million resulting in an increase of specific allocations within the allowance for ~~loan~~credit losses on loans of ~~$1.0~~$1.4 million for the year ended December 31, ~~2016.~~2020.

²OREO is measured at ~~the lower of carrying or~~ fair value, less costs to sell, and had a net carrying amount of ~~$11.9~~$2.5 million at December 31, 2020, which is made up of the outstanding balance of ~~$23.5~~$4.1 million, net of a valuation allowance of ~~$10.0 million and participations of $1.6 million, at December 31, 2016.~~$1.6 million.

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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 1412 – 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. ~~Fair~~March 31, 2021 and December 31, 2020, the fair values of loans ~~were~~and leases are estimated on an exit price basis incorporating discounts for ~~portfolios of loans with similar financial characteristics, such as type~~credit, liquidity and ~~fixed or variable interest rate terms. Cash flows were discounted using current rates at which similar loans would be made to borrowers with similar ratings and for similar maturities.~~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.

~~Tableof Contents~~

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


	September 30, 2017
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3

											March 31, 2021
											Carrying		Fair
											Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	32,772	$	32,772	$	32,772	$	-	$	-	$	25,448	$	25,448	$	25,448	$	-	$	-
Interest bearing deposits with financial institutions		14,730		14,730		14,730		-		-
Interest earning deposits with financial institutions												415,497		415,497		415,497		-		-
Securities available-for-sale		533,484		533,484		3,990		514,642		14,852		593,280		593,280		4,102		584,537		4,641
FHLBC and FRBC Stock		10,393		10,393		-		10,393		-
FHLBC and FRBC stock												9,917		9,917		-		9,917		-
Loans held-for-sale		1,641		1,641		-		1,641		-		7,842		7,842		-		7,842		-
Loans, net		1,577,726		1,568,457		-		-		1,568,457
Accrued interest receivable		8,669		8,669		-		8,669		-

Net loans												1,928,658		1,920,676		-		-		1,920,676
Interest rate swap agreements												6,126		6,126		-		6,126		-
Interest rate lock commitments and forward contracts												1,234		1,234		-		1,234		-
Interest receivable on securities and loans												9,476		9,476		-		9,476		-

Financial liabilities:
Noninterest bearing deposits	$	556,874	$	556,874	$	556,874	$	-	$	-	$	982,664	$	982,664	$	982,664	$	-	$	-
Interest bearing deposits		1,332,241		1,329,668		-		1,329,668		-		1,673,878		1,675,943		-		1,675,943		-
Securities sold under repurchase agreements		26,853		26,853		-		26,853		-		77,321		77,321		-		77,321		-
Other short-term borrowings		125,000		125,000		-		125,000		-
Junior subordinated debentures		57,627		59,524		33,320		26,204		-		25,773		19,511		-		19,511		-
Senior notes		44,033		46,958		-		46,958		-		44,402		44,837		44,837		-		-
Note payable and other borrowings												22,314		22,815		-		22,815		-
Interest rate swap agreements		1,439		1,439		-		1,439		-		7,106		7,106		-		7,106		-
Borrowing interest payable		773		773		-		773		-
Deposit interest payable		573		573		-		573		-
Interest payable on deposits and borrowings												999		999		-		999		-

December 31, 2016

Carrying

Fair


Amount

Value

Level 1

Level 2

Level 3
Financial assets:

Cash and due from banks

$
33,805

$
33,805

$
33,805

$
-

$
-
Interest bearing deposits with financial institutions

13,529

13,529

13,529

-

-
Securities available-for-sale

531,838

531,838

-

506,493

25,345
FHLBC and FRBC Stock

7,918

7,918

-

7,918

-
Loans held-for-sale

4,918

4,918

-

4,918

-
Loans, net

1,462,651

1,453,429

-

-

1,453,429
Accrued interest receivable

5,928

5,928

-

5,928

-

Financial liabilities:

Noninterest bearing deposits

$
513,688

$
513,688

$
513,688

$
-

$
-
Interest bearing deposits

1,353,097

1,351,000

-

1,351,000

-
Securities sold under repurchase agreements

25,715

25,715

-

25,715

-
Other short-term borrowings

70,000

70,000

-

70,000

-
Junior subordinated debentures

57,591

55,163

32,404

22,759

-
Subordinated debenture

43,998

43,998

-

43,998

-
Interest rate swap agreements

994

994

-

994

-
Borrowing interest payable

202

202

-

202

-
Deposit interest payable

599

599

-

599

-

Tableof Contents

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
Interest rate swap agreements		9,388		9,388		-		9,388		-
Interest rate lock commitments and forward contracts		840		840		-		840		-
Interest receivable on securities and loans		9,698		9,698		-		9,698		-

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

Note 1513 – 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 ~~Derivative Transactions~~

~~To meet the financing needs~~economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its ~~customers,~~core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the ~~Bank, as a subsidiary~~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, is a party~~Company’s known or expected cash receipts and its known or expected cash payments principally related to ~~various financial instruments with off-balance-sheet risk~~the Company’s loan portfolio.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in the normal course of business. These off-balance-sheet financial instruments include commitments to originate and sell loans as well as financial standby, performance standby and commercial letters of credit. The instruments involve, to varying degrees, elements of credit andusing interest rate ~~risk in excess of the amount recognized in the consolidated balance sheet. The Bank’s~~derivatives are to add stability to interest expense and to manage its exposure to credit loss for loan commitments and letters of credit is represented by the dollar amount of those instruments. Management generally uses the same credit policies and collateral requirements in making commitments and conditional obligations as it does for on-balance-sheet instruments.

~~Tableof Contents~~

~~Interest Rate Swap Designated as a Cash Flow Hedge~~

~~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, 2017, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other assets with changes in fair value recorded in other comprehensive income. 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. Management concluded that it would be advantageous to enter this transaction given thatmovements. To accomplish these objectives, the Company ~~has trust preferred securitiesthat changed from fixed rate to floating rate on June 15, 2017. The cash flow hedge has a maturity date of June 15, 2037.~~

~~Summary information about the~~primarily uses interest rate ~~swap designated~~swaps as ~~a cash flow hedge is as follows:~~

As of

September 30, 2017

December 31, 2016
Notional amount

$
25,774

$
25,774

Unrealized loss

(1,439)

(994)

~~Other Interest Rate Swaps~~

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. Per contractual requirements with the correspondent financial institution, the Bank had $4.2 million in securities available-for-sale pledged to support interest rate swap activity with one correspondent financial institution at September 30, 2017. The Bank had $6.2 million in securities pledged to support interest rate swap activity with one correspondent financial institution at December 31, 2016.

In connection with each transaction, the Bank agreed to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Bank agreed to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to convert a variable rate loan to a fixed rate loan and is part of ~~the Company’s~~its interest rate risk management strategy. ~~Because~~Interest rate swaps designated as cash flow hedges involve the ~~Bank acts~~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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the ~~client,~~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 ~~underlying derivative contracts offset each other~~customer derivatives and ~~do not generally affect~~ the results of operations. Fair value measurements include an assessment of credit risk related to the client’s ability to perform on their contract position, however, and valuation estimates related to that exposureoffsetting derivatives with financial counterparties are ~~discussed~~recognized directly in Note 13 above. At September 30, 2017, the notional amount of non-hedging interest rate swaps was $349.4 million with a weighted average maturity of 6.7 years. At December 31, 2016, the notional amount of non-hedging interest rate swaps was $85.8 million with a weighted average maturity of 7.3 years. The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.earnings.

The ~~Bank~~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.

30Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

~~Tableof Contents~~

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

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

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging ~~instruments as~~instruments. These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. The Bank had $17.2 million of ~~September 30, 2017,~~cash collateral held by 1 correspondent financial institution to support interest rate swap activity and ~~periodic changes in~~0 investment securities were required to be pledged to any correspondent financial institution at March 31, 2021 and December 31, 2020. At March 31, 2021, the ~~values~~notional amount of ~~the~~non-hedging interest rate swaps was $177.7 million with a weighted average maturity of 5.6 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 years. The Bank offsets derivative assets and liabilities that are ~~reported in other noninterest income. Periodic changes in~~subject to a master netting arrangement.

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

Tableof 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


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

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	27	177,709	Other Assets	4,294	Other Liabilities	4,294
Interest rate lock commitments and forward contracts	150	57,494	Other Assets	1,234	Other Liabilities	-
Other contracts	3	18,857	Other Assets	-	Other Liabilities	41
Total derivatives not designated as hedging instruments				5,528		4,335


			December 31, 2020
	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
Total derivatives designated as hedging instruments				2,697		6,380

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	28	189,126	Other Assets	6,691	Other Liabilities	6,691
Interest rate lock commitments and forward contracts	205	84,472	Other Assets	840	Other Liabilities	-
Other contracts	4	26,523	Other Assets	-	Other Liabilities	88
Total derivatives not designated as hedging instruments				7,531		6,779

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

The fair value and cash flow hedge accounting related to ~~mortgage loan origination are reported~~derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other Comprehensive Income (“AOCI”) and the Income Statement. The loss recognized in ~~the net gain~~AOCI on ~~sales of mortgage loans.~~

Asset Derivatives

Liability Derivatives

Notional or

Contractual

Balance Sheet

Balance Sheet


Amount

Location

Fair Value

Location

Fair Value
Interest rate swap contracts net of credit valuation

$
349,367

Other Assets

$
128

Other Liabilities

$
128
Interest rate lock commitments and forward contracts

28,591

Other Assets

289

N/A

-
Total

$
417

$
128

~~The following table presents~~ derivatives ~~not designated as hedging instruments~~totaled $705,000 as of ~~December~~March 31, ~~2016.~~2021, and $4.1 million as of March 31, 2020. The amount of the gain or (loss) reclassified from AOCI to interest income or interest expense on the income statement totaled $12,000 and ($86,000) for the three months ended March 31, 2021, and March 31, 2020, respectively.

Asset Derivatives

Liability Derivatives

Notional or

Contractual

Balance Sheet

Balance Sheet


Amount

Location

Fair Value

Location

Fair Value
Interest rate swap contracts net of credit valuation

$
85,807

Other Assets

$
673

Other Liabilities

$
673
Interest rate lock commitments and forward contracts

31,980

Other Assets

287

N/A

-
Total

$
960

$
673

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.

Tableof Contents

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, 2017,~~March 31, 2021, and December 31, ~~2016.~~2020.

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


	March 31, 2021						December 31, 2020
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	329	$	8,979	$	9,308	$	329	$	9,051	$	9,380
Commercial standby		-		-		-		-		-		-
Performance standby		356		6,514		6,870		356		4,517		4,873
		685		15,493		16,178		685		13,568		14,253
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	685	$	15,560	$	16,245	$	685	$	13,635	$	14,320

Unused loan commitments:	$	124,118	$	320,101	$	444,219	$	88,883	$	316,298	$	405,181

As of March 31, 2021, the Company evaluated current market conditions, including the impacts related to COVID-19 and market interest rates during the first quarter of 2021, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments ~~(in thousands):~~totaled $3.5 million. The increase in the ACL for unfunded commitments of $470,000 for the first quarter of 2021, compared to the prior quarter end, is primarily related to an increase in the commercial unfunded commitments funding rate assumptions based on our analysis of the last 12 months of utilization. The Company will continue to assess the credit risk at least quarterly, and adjust the allowance for unfunded commitments, which is carried within other liabilities on our Consolidated Balance Sheet, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

September 30, 2017

December 31, 2016


Fixed

Variable

Total

Fixed

Variable

Total

Letters of credit:

Borrower:

Financial standby

$
177

$
3,748

$
3,925

$
137

$
4,047

$
4,184

Commercial standby

-

122

122

-

126

126

Performance standby

66

7,912

7,978

83

8,498

8,581

243

11,782

12,025

220

12,671

12,891

Non-borrower:

Performance standby

-

422

422

95

525

620

Total letters of credit

$
243

$
12,204

$
12,447

$
315

$
13,196

$
13,511

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

Overview

The ~~Company is a financial services company with its main headquarters located in Aurora, Illinois. The Company is~~following discussion provides additional information regarding our operations for the ~~holding company of Old Second National Bank (the “Bank”), a national banking organization headquartered in Aurora, Illinois, that provides commercial~~three months ended March 31, 2021, compared to the three months ended March 31, 2020, and retail banking services, as well as a full complement of trust and wealth management services. The Company has offices located in Cook, Kane, Kendall, DeKalb, DuPage, LaSalle and Will counties in Illinois. The following management’s discussion and analysis presents information concerning our financial condition ~~as of September 30, 2017, as~~at March 31, 2021, compared to December 31, ~~2016, and the results of operations for the three and nine months September 30, 2017, and September 30, 2016.~~2020. This discussion ~~and analysis is best~~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, ~~2016.~~2020. The results of operations for the ~~quarter September 30, 2017,~~three months ended March 31, 2021, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and March 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 29 banking centers located in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle and Will counties in Illinois. These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services. We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to provide for the financial services needs of the communities in which we operate. We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area. We also have extensive wealth management services, which includes a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts and employee benefit plan administration services.

Recent Events—COVID-19

The COVID-19 pandemic continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world.

The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of our clients. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets. Market interest rates, after falling to historically low levels due to the COVID-19 pandemic through the second quarter of 2020, have generally stabilized, while intermediate and longer-term Treasury rates have begun to rise. The low interest rate environment, and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on our business, financial condition and results of operations. For instance, the pandemic has had negative effects on our interest income, ACL, and certain transaction-based line items of noninterest income. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strain, and the ability for customers and businesses to return to their pre-pandemic routine.

Results of Operation and Financial Condition

We are monitoring the impact of the COVID-19 pandemic on our results of operation and financial condition. To date, 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

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loss scenarios that may occur due to the exhaustion of federal stimulus funds or a decrease in market valuations. Accordingly, we 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 methodology and the expected impact of the COVID-19 pandemic and market interest rate reductions in anticipation of continued market risk and uncertainty. During the first quarter of 2021, unemployment expectations and other market indicators reflected an improving economic outlook, which resulted in a net benefit of $3.0 million in our provision for credit losses, comprised of a $3.5 million reserve release on loans and an additional $470,000 of expense in our provision for credit losses on unfunded commitments.

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

As of March 31, 2021 and December 31, 2020, we had $18.6 million of goodwill. At November 30, 2020, 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 March 31, 2021, we have executed 504 of these deferrals on loan balances of $237.7 million since March 31, 2020. In accordance with interagency guidance issued in March 2020, these short term deferrals were not considered troubled debt restructurings. As of March 31, 2021, 464 loans previously in deferral status, representing loan balances of $218.5 million, had resumed payments or paid off, and 40 loans totaling $19.2 million remained in active deferral status, of which only $4.3 million were in nonaccrual status. We also suspended late fees for consumer loans through June 30, 2020, and, although consumer late fees have been reinstated, we will continue to evaluate any late fee suspension based on the borrower’s financial situation and prior payment history. In addition, we paused new foreclosure and repossession actions through March 31, 2021, and will continue to re-evaluate these activities based on the ongoing COVID-19 pandemic. These programs may negatively impact our revenue and other results of operations in the near term and, if not effective in mitigating the effect of COVID-19 on our customers, may adversely affect our business and results of operations more substantially over a longer period of time. Future governmental actions may require these and other types of customer-related responses.

We are also participating in the CARES Act. During 2020, as part of the first round of the SBA PPP program, we processed 746 PPP loan applications, representing a total of $136.7 million. In early October, we started the application process for PPP loan forgiveness, and have received $90.8 million of funds from payment forgiveness as of March 31, 2021. We expect this application process to continue through the second quarter of 2021, with funds to be received from the SBA for the forgiven loans into the third quarter of 2021. Due to the governmental authorization of the second round of the SBA PPP in late 2020, we originated an additional $58.3 million on 481 PPP loans in the first quarter of 2021, and anticipate filing for forgiveness of these loans with the SBA in the latter half of 2021. We recorded $504,000 of net fee income on PPP loans in the first quarter of 2021, and as of March 31, 2021, unearned net fee income on both first and second round PPP loans totaled $2.5 million. In addition, as of March 31, 2021, we had originated two loans for $305,000 under the Main Street Lending Program.

Capital and Liquidity

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

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

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

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Financial Overview

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

The following provides an overview of some of the factors impacting our financial performance ~~as nonperforming loan totals remain at low levels and strong sales efforts have driven loan growth and portfolio diversity. The Company generated increased net interest income in~~for the three month period ended ~~September 30, 2017, as~~March 31, 2021, compared to the like period ended ~~September 30, 2016. The Company’s noninterest income growth also contributed~~March 31, 2020:

●

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

●

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

●

The provision for credit losses resulted in a $3.0 million net benefit driven by a reserve release in the first quarter of 2021, consisting of a $3.5 million reserve release related to loans and a provision for credit loss expense of $470,000 related to unfunded commitments, compared to a provision for credit losses of $8.0 million recorded in the first 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 a $1.7 million allowance for credit losses related to unfunded commitments as of January 1, 2020. The provision expense recorded in 2020 was impacted by both our adoption of the new CECL methodology and the expected impact, as of March 31, 2020, of the COVID-19 pandemic on future losses.

●

Noninterest income was $11.3 million for the first quarter of 2021, compared to $6.3 million for the first quarter of 2020. The increase in 2021 was primarily due to a $4.9 million increase in mortgage banking revenue, primarily stemming from a more favorable mark to market adjustments on MSRs of $3.2 million, and a $1.5 million increase in net gain on sales of mortgage loans. In addition, a net increase of $383,000 was recorded related to the cash surrender value of bank owned life insurance (“BOLI”) for the first quarter of 2021, compared the first quarter of 2020, as market interest rates have partially recovered from the lows experienced at the end of the first quarter of 2020. Partially offsetting these increases was a reduction of $531,000 in service charges on deposits due to a reduction in overdraft fees stemming from COVID-19 related commercial and consumer spending declines.

●

Noninterest expense was $21.7 million for the first quarter of 2021, compared to $21.0 million for the first quarter of 2020, an increase of $736,000, or 3.5%. The increase in 2021 was primarily due to an increase in salaries and employee benefits expense driven by an increase in annual officer incentive expense and related payroll taxes and Company 401K match, increases in occupancy, furniture and equipment expense and an increase in FDIC insurance expense related to assessment credits received in 2020.

●

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

●

Asset quality remained consistent with nonperforming loans as a percent of total loans remaining steady at 1.1% as of March 31, 2021, December 31, 2020, and March 31, 2020.

●

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

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Critical Accounting Policies

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

Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the ~~third~~year ended December 31, 2020. There have been no material changes to our critical accounting policies or the estimates made pursuant to those policies during the most recent quarter ~~and nine months ended September 30, 2017 as compared~~from those disclosed in our 2020 Annual Report in Form 10-K.

Non-GAAP Financial Measures

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

Results of Operations

Overview

Three months ended March 31, 2021 and 2020

Our income before taxes was $16.1 million in the first quarter of 2021 compared to a pretax loss of $6,000 in the first quarter of 2020. This increase in pretax income was primarily due to a net benefit of $3.0 million related to the provision for credit losses driven primarily by a reserve release on loans in the first quarter of 2021, compared to provision expense of $8.0 million in the first quarter of 2020. In addition, noninterest income ~~for~~increased $5.0 million in the ~~third~~first quarter ~~and nine months~~ of ~~2017 was partially offset by~~2021, compared to the first quarter of 2020, primarily due to growth in mortgage banking revenue, which increased $4.9 million due to more favorable mark to market adjustments on MSRs and an increase in ~~noninterest expense. Noninterest expenses were negatively impacted primarily by an~~net gain on sales of mortgage loans due to higher origination volumes in the low rate environment. Net interest income also increased $885,000 in the first quarter of 2021, compared to the first quarter of 2020. Partially offsetting these increases to net income was a $736,000 increase in noninterest expense in the first quarter of 2021, compared to the first quarter of 2020, primarily due to growth in salaries and employee ~~costs~~benefits expenses, occupancy, furniture and equipment, and FDIC insurance costs. Our net income was $11.9 million, or $0.40 per diluted share, for the first quarter of 2021, compared to net income of $275,000, or $0.01 per diluted share, for the first quarter of 2020.

Net interest and dividend income was $23.5 million in the first quarter of 2021, compared to $22.7 million in the first quarter of 2020. The $885,000 increase was primarily driven by a $2.9 million reduction in interest expense, due to the redemption of the Old Second Capital Trust I trust preferred securities and related subordinated debentures in the first quarter of 2020, as well as the market interest rate reductions year over year, which contributed to the decrease in the cost of deposit interest expense related to time deposits of $1.3 million, and savings, NOW and money market accounts of $394,000. Interest and dividend income also decreased in the first quarter of 2021 compared to the first quarter of 2020, but at a lesser rate than the decline in interest expense. A $2.1 million decrease in interest and

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dividend income in the first quarter of 2021, compared to the first quarter of 2020, was driven by the reduction in market interest rates on loans and securities. Loan growth of $2.4 million was recorded in the year over year ~~periods. Finally, an~~period, but interest income ~~tax benefit was recorded~~on loans declined $1.4 million in the ~~third~~first quarter of ~~2017 due to a State of Illinois tax rate increase; this credit had a significantly favorable impact which contributed~~2021, compared to the ~~increase~~like period in ~~net~~2020. Securities available-for-sale increased $143.6 million as of March 31, 2021, compared to March 31, 2020, but interest income recorded on securities available-for-sale decreased $696,000 in the year over year ~~periods~~period.

Management has remained diligent in reviewing our loan portfolio to analyze and determine if charge-offs are required. Average loan growth, including loans held for ~~the quarter and nine months.~~

~~Results of Operations~~

~~Net income before taxes of $9.9 million~~sale, in the ~~third~~first quarter of ~~2017 compares to $5.4 million in the third quarter of 2016. When~~2021, compared to the ~~third~~first quarter of ~~2016,~~2020, totaled $64.4 million, stemming primarily from 481 PPP loans originated in the ~~third quarter~~first quarters of ~~2017 reflected higher levels~~2021 totaling $58.3 million, as well organic growth primarily in our commercial, leases, commercial real estate-investor and construction portfolios.

Net Interest Income

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

Three months ended March 31, 2021 and 2020

Our net interest and dividend income increased by $885,000 to $23.5 million, for the first quarter of 2021, from $22.7 million for the first quarter of 2020. This increase was attributable to a ~~provision~~$2.9 million, or 61.4%, decrease in interest expense for ~~loan loss~~the first quarter of ~~$300,000,~~2021 compared to the first quarter of 2020, partially offset by a $2.1 million decrease in interest and ~~increased levels of noninterest income and noninterest expense. Noninterest income~~dividend income. The decline in interest expense was due to lower rates for all interest earning deposits in the ~~2017 period was favorably impacted by net gains recorded on securities portfolio sales as compared to net losses in the like prior year period,~~first quarter of 2021, as well as ~~an increase~~the redemption of the Old Second Capital Trust I preferred securities and related subordinated debentures in ~~trust revenue~~the first quarter of 2020, which increased interest expense by $635,000 due to ~~growth in our customer base. Noninterest expense increased in~~ the ~~third~~acceleration of unamortized debt issuance costs. Net interest and dividend income for the first quarter of ~~2017 when~~2021 reflected a decrease of $334,000, or 1.4%, compared to the ~~third~~fourth quarter of ~~2016~~2020.

Average earning assets for the first quarter of 2021 were $2.92 billion, reflecting an increase of $116.8 million, or 4.2%, compared to the fourth quarter of 2020, and an increase of $457.5 million, or 18.6%, compared to the first quarter of 2020. Average interest earning deposits with financial institutions totaled $359.6 million for the first quarter of 2021, which reflected an increase of $84.5 million compared to the fourth quarter of 2020, and an increase of $331.6 million compared to the first quarter of 2020. The yield on average interest earning deposits decreased to ten basis points for the first quarter of 2020, from 108 basis points for the first quarter of 2020, which drove the overall reduction in the yield on interest earning assets year over year. Total average loans, including loans held-for-sale, totaled $2.01 billion in the first quarter of 2020, which reflected a decrease of $18.0 million compared to the fourth quarter of 2020, but an increase of $69.4 million compared to the first quarter of 2020. The growth in average loan balances year over year was primarily due to an increase in ~~salaries~~commercial loans related to PPP loan originations, and employee benefits due to higher insurance costs, as well as an increase in OREO related valuation costs. An income tax benefit of $1.6 million was recorded in the third quarter of 2017 due to a State of Illinois tax rate change; this nonrecurring item increased the Company’s deferred tax asset by a like amount.

Net income before taxes of $23.7 million for the nine months ended September 30, 2017 was favorable as compared to the $16.5 million pretax income for the nine months ended September 30, 2016. Net interest margin was the largest contributor to this favorable variance, as loan growth and securities repositioning have resulted in increased volumes and more favorable yields for the year to date period.

Management has remained diligent with loan portfolio review to analyze loan quality and decide whether charge-offs are required. In the third quarter of 2017, management’s review of the loan portfolio concluded that an additional provision for loan losses should be recorded of $300,000, stemming from third quarter 2017 loan growth and collateral shortfalls on a few credits as a result of updated appraisals. The allowance for loan losses was adequate and appropriate for estimated incurred losses at September 30, 2016; neither a loan loss reserve release nor an additional loan loss provision was deemed necessary for the like 2016 quarter.

Earnings for the third quarter of 2017 were $0.27 per diluted share on $8.1 million of net income as compared to $0.12 per diluted share on net income of $3.5 million for the third quarter of 2016. For the nine month period ended September 30, 2017, earnings were $0.59 per diluted share on $17.7 million of net income, as compared to $0.36 per diluted share on $10.7 million of income for the prior year like period. Earningsorganic growth in our leases, commercial real estate-investor, and construction loan portfolios. This growth in loan volumes was offset by the ~~2017 period, as compared to~~reduction in market interest rates over the ~~like 2016 period, stems from the acquisition of the Chicago branch of Talmer Bank and Trust,~~past year, which ~~was completed on October 28, 2016. This acquisition~~ resulted in a ~~cash payment~~decrease in interest income of ~~$181.5~~$1.4 million ~~for~~related to loans net of purchased loan discount totaling $221.0 million, deposits of $48.9 million, goodwill of $8.4 million, core deposit intangible of $659,000, and other immaterial assets and liabilities. The performance of the acquired loan portfolio, security portfolio restructuring to higher yielding instruments, and robust organic loan growth in the year over year ~~period were~~period. For the ~~primary factors driving~~first quarter of 2021, the ~~earnings increase for the 2017 third quarter and year to date periods.~~

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~~Net Interest Income~~

~~Net interest and dividend income increased by $3.9 million from $15.3 million for the quarter ended September 30, 2016, to $19.3 million for the quarter ended September 30, 2017. Total~~yield on average loans ~~including loans held-for-sale, increased by $44.3 million in the third quarter of 2017 as~~decreased to 4.48%, compared to the ~~second~~yield on average loans of 4.51% for the fourth quarter of ~~2017,~~2020, and ~~$361.9~~4.89% for the first quarter of 2020. Securities also reflected a reduction in interest income year over year, due to decreases in market interest rates over the past year, partially offset by growth in volumes. Total average securities for the first quarter of 2021 increased $50.3 million asfrom the fourth quarter of 2020, and increased $56.5 million from the first quarter of 2020. The yield on average securities declined to 2.49% for the first quarter of 2021, compared to 2.55% for the fourth quarter of 2020 and 3.39% for first quarter of 2020.

Average interest bearing liabilities increased $68.0 million, or 3.9%, in the first quarter of 2021, compared to the ~~third~~fourth quarter of ~~2016. Average earning assets were $2.12 billion for the third quarter of 2017, which reflected an increase of $6.4~~2020, and increased $161.0 million, or 9.8%, compared to the ~~second~~first quarter of ~~2017,~~2020. The growth in average interest bearing deposits of $59.0 million from the prior linked quarter and ~~an increase of $212.5~~$162.2 million ~~as compared to~~from the ~~third~~first quarter of ~~2016. The significant increase in interest and dividend income of $3.9 million, or 25.6%, in the three months ended September 30, 2017 as compared to the like 2016 period,~~2020 was ~~driven by growth in the loan portfolio~~ primarily due to federal stimulus funds received by depositors and growth in depositor liquidity due to market uncertainty related to the ~~Talmer branch acquisition.~~COVID-19 pandemic. In addition, we experienced growth in average noninterest bearing deposits of $33.7 million from the ~~average yield on the securities portfolio increased by 103 basis points in~~prior linked quarter, and $260.3 million from the year over year period, as reductions in market interest rates over the past year have provided less incentive to maintain funds in interest bearing deposits.

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Due to the significant increase in cash and due ~~to portfolio repositioning to higher yielding tax exempt securities; the~~from banks stemming from federal stimulus funds received and PPP loan forgiveness, we had no average ~~tax exempt securities portfolio increased by $185.5 million, and earned 138 basis points more~~other short-term borrowings, which consist of FHLBC advances, in the ~~third~~first quarter of ~~2017 as~~2021, compared to the ~~third~~$5.4 million in the fourth quarter of ~~2016.~~

~~Quarterly~~2020 and $23.1 million in the first quarter of 2020. The average rate paid on short-term FHLBC advances was impacted by the reduction in interest ~~bearing liabilities as~~rates in 2020, resulting in an average rate of ~~September 30, 2017, decreased $11.9 million, or 0.8%,~~0.88% for the fourth quarter of 2020, compared to ~~June 30, 2017, but increased $87.8~~1.90% for the first quarter of 2020. As of March 31, 2021, notes payable and other borrowings consisted of one long-term FHLBC advance of $6.3 million, ~~or 6.0%, when compared to September 30, 2016. Growth from the prior year like period was due to the Talmer branch purchase of $48.9~~and $16.0 million ~~of commercial deposits, as well as organic commercial deposit growth. As the deposit growth~~outstanding on a term note with a correspondent bank originated in the ~~year over year period was driven by commercial demand accounts, the cost~~first quarter of funds did not materially increase from this volume change. However, each quarter presented reflects an increase in the FHLBC borrowing, which is within other short-term borrowings, as this facility was used2020 to fund ~~loan growth. The cost~~our redemption of ~~interest bearing liabilities~~the Old Second Capital Trust I trust preferred securities and related junior subordinated debentures of $32.6 million. This redemption occurred in March 2020 and was the ~~third quarter~~primary cause of ~~2017 increased to 80 basis points from 67~~the decrease of 721 basis points in the ~~third~~cost of the average junior subordinated debentures for the first quarter of ~~2016, primarily due~~2021 compared to the ~~senior note issuance in late 2016. The $45.0 million senior debt issuance, at an average cost of 6.11% in the third~~first quarter of ~~2017 net~~2020. The rate paid on the redeemed junior subordinated debentures was 7.8%, in comparison to the rate to be paid going forward on the newly executed $20.0 million term note of issuance costs, replaced the prior subordinated notes outstanding, which had an average cost of 2.13% in the third quarter of 2016. This issuance resulted in a $430,000 increase to interest expense, which drove the overall higher cost of funds in 2017.one month Libor plus 175 basis points.

~~The~~Our net interest margin, ~~(on a tax-equivalent basis),~~ expressed as a percentage of average earning assets, was ~~3.77% in~~3.27% for the ~~third~~first quarter of ~~2017,~~2021, reflecting ~~an increase of 6~~a 12 basis ~~points~~point decrease from the ~~second~~fourth quarter of ~~2017,~~2020, and ~~growth of 55~~a 44 basis ~~points~~point decrease from the ~~third~~first quarter of ~~2016.~~2020. Our net interest margin, on a tax-equivalent (TE) basis, expressed as a percentage of average earning assets, was 3.32% for the first quarter of 2021, reflecting a 12 basis point decrease from the fourth quarter of 2020, and a 45 basis point decrease from the first quarter of 2020. The average tax-equivalent yield on earning assets ~~increased~~decreased to ~~4.32%~~3.58% for the ~~third~~first quarter of ~~2017, as~~2021, compared to ~~3.70%~~3.74% for the ~~third~~fourth quarter of ~~2016. Increases~~2020, and 4.55% for the first quarter of 2020. The decreases in net interest margin and the yield on average earning assets for the ~~third~~first quarter of ~~2017 as~~2021, compared to ~~prior periods presented~~the fourth quarter of 2020, was primarily attributable to growth in lower yielding interest earning deposits with financial institutions, as well as a decline in loan volumes and ~~rates,~~interest rate reductions which impacted loans and securities in the first quarter of 2021. Average PPP loans for the first quarter of 2021 totaled $94.1 million, which resulted in an increase to our net interest margin (TE) of one basis point for the quarter as ~~well as~~$27.8 million of these loans were forgiven in the ~~securities portfolio repositioning to higher yielding tax exempt holdings, as discussed above.~~first quarter of 2021, which accelerated the unamortized fee recognition on these loans. The cost of funds on interest bearing liabilities was ~~0.80%~~0.41% for the ~~third~~first quarter of ~~2017 and 0.67%~~2021, 0.49% for the ~~third~~fourth quarter of ~~2016.~~

~~Tax equivalent net interest~~2020, and ~~dividend income increased by $11.5 million from $46.3 million~~1.17% for the ~~nine months ended September 30, 2016, to $57.8 million for~~first quarter of 2020. The decrease in our cost of funds in the ~~nine months ended September 30, 2017. Average earning assets for the nine months ended September 30, 2017 increased $188.4 million as~~first quarter of 2021 compared to the ~~like average period in 2016,~~fourth quarter of 2020 and the first quarter of 2020 was primarily driven by a decline in the rates paid on deposits, a decline in volume and rates paid on short-term borrowings, and the redemption of our junior subordinated debentures in the first quarter of 2020 which resulted in the average yield on ~~average earning assets~~our junior subordinated debentures of 4.41% for the ~~nine months~~first quarter of ~~2017 was 4.22% as~~2021, compared to ~~3.69% for~~11.62% in the ~~like 2016 period. Average interest bearing liabilities for the nine months ended September 30, 2017, increased $74.5 million, or 5.0%, when compared to like~~ prior year ~~period. Net interest margin for the nine months ended September 30, 2017, was 3.68%, as compared to 3.23% for the nine months ended September 30, 2016, for an increase of 45 basis points.~~like quarter.

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

The following ~~tables set~~table sets forth certain information relating to ~~the Company’s~~our average consolidated balance ~~sheets~~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 onin the following tables have been adjusted to a non-GAAP ~~tax equivalent (“TE”)~~TE basis using a marginal rate of ~~35%~~21% in 2021 and 2020 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,
Tax Equivalent Income / Expense and Rates
(Dollars in thousands - unaudited)

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

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

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

~~TAX EQUIVALENT INTEREST AND RATES~~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 and 2020.

~~(In thousands - unaudited)~~

Quarters Ended

September 30, 2017

June 30, 2017

September 30, 2016

Average

Rate

Average

Rate

Average

Rate

Balance

Interest

%

Balance

Interest

%

Balance

Interest

%
Assets

Interest bearing deposits with financial institutions
$
11,685

$
37

1.24

$
11,938

$
31

1.03

$
50,054

$
64

0.50
Securities:

Taxable

327,892

2,424

2.96

361,504

2,607

2.88

624,844

3,954

2.53
Non-taxable (TE)

220,540

2,504

4.54

225,182

2,536

4.50

35,046

277

3.16
Total securities

548,432

4,928

3.59

586,686

5,143

3.51

659,890

4,231

2.56
Dividends from FHLBC and FRBC

8,339

94

4.51

7,699

92

4.78

7,918

83

4.19
Loans and loans held-for-sale1

1,553,473

18,265

4.60

1,509,188

17,445

4.57

1,191,574

13,567

4.46
Total interest earning assets

2,121,929

23,324

4.32

2,115,511

22,711

4.26

1,909,436

17,945

3.70
Cash and due from banks

31,028

-

-

39,425

-

-

41,344

-

-
Allowance for loan losses

(16,478)

-

-

(15,779)

-

-

(15,767)

-

-
Other noninterest bearing assets

185,906

-

-

189,928

-

-

190,213

-

-
Total assets
$
2,322,385

$
2,329,085

$
2,125,226

Liabilities and Stockholders' Equity

NOW accounts
$
422,913

$
108

0.10

$
432,248

$
107

0.10

$
384,588

$
89

0.09
Money market accounts

273,440

85

0.12

280,482

86

0.12

265,135

64

0.10
Savings accounts

262,573

46

0.07

265,066

40

0.06

257,808

40

0.06
Time deposits

389,037

1,077

1.10

392,779

1,025

1.05

401,999

931

0.92
Interest bearing deposits

1,347,963

1,316

0.39

1,370,575

1,258

0.37

1,309,530

1,124

0.34
Securities sold under repurchase agreements

32,800

4

0.05

35,652

4

0.05

31,892

1

0.01
Other short-term borrowings

72,065

220

1.19

58,572

146

0.99

22,174

22

0.39
Junior subordinated debentures

57,621

930

6.46

57,609

1,059

7.35

57,573

1,084

7.53
Senior notes

44,021

672

6.11

43,995

672

6.11

-

-

-
Subordinated debt

-

-

-

-

-

-

45,000

245

2.13
Notes payable and other borrowings

-

-

-

-

-

-

500

2

1.57
Total interest bearing liabilities

1,554,470

3,142

0.80

1,566,403

3,139

0.80

1,466,669

2,478

0.67
Noninterest bearing deposits

551,768

-

-

557,265

-

-

472,599

-

-
Other liabilities

19,395

-

-

18,047

-

-

15,539

-

-
Stockholders' equity

196,752

-

-

187,370

-

-

170,419

-

-
Total liabilities and stockholders' equity
$
2,322,385

$
2,329,085

$
2,125,226

Net interest income (TE)

$
20,182

$
19,572

$
15,467

Net interest income (TE)

to total earning assets

3.77

3.71

3.22
Interest bearing liabilities to earning assets

73.26
%

74.04
%

76.81
%

1²Interest income from loans is shown on a TEtax equivalent basis, which is a non-GAAP financial measure, as discussed ~~below~~in the table on page 50, and includes fees of ~~$722,000, $573,000~~$1.3 million, $2.3 million, and ~~$700,000~~$294,000 for the ~~third~~first quarter of ~~2017,~~2021, the fourth quarter of ~~2016~~2020, and the ~~third~~first quarter of ~~2016,~~2020, respectively. Nonaccrual loans are included in the above-stated average balances.

~~Table~~Reconciliation of ~~Contents~~

Analysis of Average Balances,
Tax Equivalent Interest and Rates
Nine Months Ended September 30, 2017, and 2016
(In thousands - unaudited)

2017

2016

Average

Rate

Average

Rate

Balance

Interest

%

Balance

Interest

%
Assets

Interest bearing deposits with financial institutions
$
11,913

$
91

1.01

$
25,960

$
98

0.50
Securities:

Taxable

370,161

7,994

2.88

682,997

12,547

2.45
Non-taxable (TE)

196,120

6,443

4.38

36,340

891

3.27
Total securities

566,281

14,437

3.40

719,337

13,438

2.49
Dividends from FHLBC and FRBC

7,886

271

4.58

7,955

251

4.21
Loans and loans held-for-sale1

1,516,872

52,365

4.55

1,161,312

39,778

4.50
Total interest earning assets

2,102,952

67,164

4.22

1,914,564

53,565

3.69
Cash and due from banks

34,670

-

-

32,617

-

-
Allowance for loan losses

(16,184)

-

-

(16,145)

-

-
Other noninterest bearing assets

189,533

-

-

193,443

-

-
Total assets
$
2,310,971

$
2,124,479

Liabilities and Stockholders' Equity

NOW accounts
$
427,242

$
316

0.10

$
383,870

$
261

0.09
Money market accounts

279,143

254

0.12

272,657

198

0.10
Savings accounts

262,352

125

0.06

258,062

118

0.06
Time deposits

392,049

3,081

1.05

404,210

2,622

0.87
Interest bearing deposits

1,360,786

3,776

0.37

1,318,799

3,199

0.32
Securities sold under repurchase agreements

32,764

10

0.04

35,022

3

0.01
Other short-term borrowings

62,308

472

1.00

26,040

66

0.33
Junior subordinated debentures

57,609

3,073

7.11

57,561

3,251

7.53
Senior notes

43,998

2,017

6.11

-

-

-
Subordinated debt

-

-

-

45,000

727

2.12
Notes payable and other borrowings

-

-

-

500

6

1.58
Total interest bearing liabilities

1,557,465

9,348

0.80

1,482,922

7,252

0.65
Noninterest bearing deposits

544,925

-

-

465,094

-

-
Other liabilities

20,814

-

-

13,037

-

-
Stockholders' equity

187,767

-

-

163,426

-

-
Total liabilities and stockholders' equity
$
2,310,971

$
2,124,479

Net interest income (TE)

$
57,816

$
46,313

Net interest income (TE) to total earning assets

3.68

3.23
Interest bearing liabilities to earning assets

74.06
%

77.45
%

1Interest income from loans is shown on a TE basis as discussed below and includes fees of $1.8 million for the first nine months of 2017 and 2016. Nonaccrual loans are included in the above-stated average balances.

~~Tableof Contents~~

Tax-Equivalent Non-GAAP Financial Measures

Management, in order to evaluate and measure performance, uses certain non-GAAP performance measures and ratios. This includes tax-equivalent net interest income (including its individual components) and net interest margin (including its individual components) to total average interest earning assets. Management believes that these measures and ratios provide users of the financial information with a more accurate view of the performance of the interest earning assets and interest bearing liabilities and of the Company’s operating efficiency for comparison purposes. Other financial holding companies may define or calculate these measures and ratios differently. See the tables and notes below for supplemental data and the corresponding reconciliations to GAAP financial measures for the three month periods ended September 30, 2017, June 30, 2017, and September 30, 2016, and the nine month periods ended September 30, 2017 and 2016.

Net interest and dividend income (TE) and net interest income (TE) to average interest earning assets are non-GAAP measures that have been adjusted toon a ~~non-GAAP~~ TE basis using a marginal rate of ~~35%~~21% for 2021 and 2020 to more appropriately compare returns on tax-exempt loans and securities to other earning assets. The table below provides a reconciliation of each non-GAAP TE(TE) measure to the GAAP equivalent for the periods indicated:

Quarters Ended

Nine Months Ended

September 30,

June 30,

September 30,

September 30,


2017

2017

2016


2017

2016

Net Interest Margin

Interest income (GAAP)

$
22,425

$
21,800

$
17,825

$
64,841

$
53,183

Taxable-equivalent adjustment:

Loans

23

23

23

68

70

Securities

876

888

97

2,255

312

Interest income (TE)

23,324

22,711

17,945

67,164

53,565

Interest expense (GAAP)

3,142

3,139

2,478

9,348

7,252

Net interest income (TE)

$
20,182

$
19,572

$
15,467

$
57,816

$
46,313

Net interest income  (GAAP)

$
19,283

$
18,661

$
15,347

$
55,493

$
45,931

Average interest earning assets

$
2,121,929

$
2,115,511

$
1,909,436

$
2,102,952

$
1,914,564

Net interest margin (GAAP)

3.61
%

3.54
%

3.20
%

3.53
%

3.20
%
Net interest margin  (TE)

3.77
%

3.71
%

3.22
%

3.68
%

3.23
%

Tableof Contents


	Three Months Ended
	March 31,			December 31,			March 31,
Net Interest Margin	2021			2020			2020


Interest income (GAAP)	$	25,391		$	26,006		$	27,451
Taxable-equivalent adjustment:
Loans		4			3			3
Securities		348			344			387
Interest and dividend income (TE)		25,743			26,353			27,841
Interest expense (GAAP)		1,848			2,129			4,793
Net interest income (TE)	$	23,895		$	24,224		$	23,048
Paycheck Protection Program ("PPP") loan - interest and net fee income		741			1,777			NA
Net interest income (TE) - excluding PPP loans	$	23,154			22,447			23,048
Net interest income (GAAP)	$	23,543		$	23,877		$	22,658
Average interest earning assets	$	2,916,496		$	2,799,693		$	2,459,007
Average PPP loans	$	94,149		$	111,491			N/A
Average interest earning assets, excluding PPP loans	$	2,822,347			2,688,202			2,459,007
Net interest margin (GAAP)		3.27	%		3.39	%		3.71	%
Net interest margin (TE)		3.32	%		3.44	%		3.77	%
Core net interest margin (TE - excluding PPP loans)		3.33	%		3.32	%		3.77	%

Tableof Contents

~~Asset Quality~~Noninterest Income

Three months ended March 31, 2021 and 2020

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


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

Noninterest income increased $2.5 million, or 28.6%, in the first quarter of 2021, compared to the fourth quarter of 2020, and increased $5.0 million, or 78.7%, compared to the first quarter of 2020. The increase from both the linked quarter and the prior year quarter was primarily driven by an increase in residential mortgage banking revenue, primarily due to favorable adjustments on the mark to market valuation of MSRs and net gain on sales of mortgage loans, both stemming from the low market interest rate environment over the past year. In addition, the change in cash surrender value of BOLI increased from both the linked quarter and the year over year period due to market interest rate growth since March 31, 2020. Wealth management income also increased from both the linked quarter and year over year, as the valuation of assets under management increased due to market interest rate growth, which impacted fees assessed.

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

Tableof Contents

Noninterest Expense

Three months ended March 31, 2021 and 2020

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


										1st Quarter 2021
Noninterest Expense	Three Months Ended									Percent Change From
(Dollars in thousands)	March 31,			December 31,			March 31,			December 31,	March 31,
	2021			2020			2020			2020	2020
Salaries	$	9,216		$	9,978		$	9,761		(7.6)	(5.6)
Officers incentive		1,653			680			958		143.1	72.5
Benefits and other		2,637			2,043			2,199		29.1	19.9
Total salaries and employee benefits		13,506			12,701			12,918		6.3	4.6
Occupancy, furniture and equipment expense		2,467			2,259			2,301		9.2	7.2
Computer and data processing		1,298			1,335			1,335		(2.8)	(2.8)
FDIC insurance		201			194			57		3.6	252.6
General bank insurance		276			266			246		3.8	12.2
Amortization of core deposit intangible asset		120			120			128		-	(6.3)
Advertising expense		60			70			109		(14.3)	(45.0)
Card related expense		593			583			532		1.7	11.5
Legal fees		55			285			131		(80.7)	(58.0)
Other real estate owned expense, net		36			146			237		(75.3)	(84.8)
Other expense		3,126			3,294			3,008		(5.1)	3.9
Total noninterest expense	$	21,738		$	21,253		$	21,002		2.3	3.5
Efficiency ratio (GAAP)¹		63.98	%		61.87	%		66.28	%
Adjusted efficiency ratio (non-GAAP)²		63.16	%		61.10	%		65.48	%

N/M - Not meaningful

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

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits and OREO expenses, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI.

See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” on page 48 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

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

The increase in noninterest expense for the first quarter of 2021 compared to the linked quarter and prior year quarter was also due to an increase in occupancy, furniture and equipment expense, FDIC insurance expense and general bank insurance expense. FDIC insurance expense increased $144,000 year over year due to assessment credits received in the first quarter of 2020, and general bank insurance expense increased year over year due to an increase in policy costs. These increases were partially offset by decreases in legal fees of $230,000 and $76,000 for the linked quarter and year over year, respectively, due to a decline in loan volumes and related legal fees, as

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well as reductions in other real estate owned expense, net, of $110,000 and $201,000 for the linked quarter and year over year, respectively, due to a reduction in other real estate held.

Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures


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


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

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

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

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Income Taxes

We recorded income tax expense of $4.2 million for the first quarter of 2021 on $16.1 million of pretax income, compared to income tax expense of $3.4 million on $11.4 million of pretax income in the fourth quarter of 2020, and an income tax benefit of $281,000 on $6,000 of pretax loss in the first quarter of 2020. The effective tax rate was 26.2% for the first quarter of 2021 and 29.5% for the fourth quarter of 2020; the effective tax rate was not meaningful for the first quarter of 2020, due to the pretax loss.

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

Financial Condition

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


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

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

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							March 31, 2021
Loans	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Commercial	$	392,380	$	407,159	$	364,626	(3.6)	7.6
Leases		138,240		141,601		126,237	(2.4)	9.5
Commercial real estate - Investor		567,475		582,042		503,905	(2.5)	12.6
Commercial real estate - Owner occupied		326,857		333,070		349,595	(1.9)	(6.5)
Construction		93,745		98,486		78,159	(4.8)	19.9
Residential real estate - Investor		52,176		56,137		69,429	(7.1)	(24.8)
Residential real estate - Owner occupied		107,303		116,388		129,982	(7.8)	(17.4)
Multifamily		178,258		189,040		195,297	(5.7)	(8.7)
HELOC		75,604		80,908		93,165	(6.6)	(18.8)
HELOC - Purchased		17,078		19,487		30,880	(12.4)	(44.7)
Other ⁽¹⁾		10,509		10,533		15,929	(0.2)	(34.0)
Total loans	$	1,959,625	$	2,034,851	$	1,957,204	(3.7)	0.1

¹The “Other” segment includes consumer and overdrafts.

Total loans were $1.96 billion as of March 31, 2021, a decrease of $75.2 million from December 31, 2020. The decrease in total loans in the first quarter of 2021 was due primarily to forgiveness of 294 PPP loans that totaled $27.8 million within commercial loans, as well as reduction in all loan segments due to paydowns as commercial and consumer liquidity increased primarily due to the receipt of federal stimulus funds and decreases in capital expenditures during the COVID-19 pandemic. Total loans increased $2.4 million from March 31, 2020 to March 31, 2021, primarily due to loan growth in our commercial loans related to PPP loan originations and organic growth in our leases, commercial real estate-investor, and construction loan portfolios, partially offset by reductions in our commercial real estate-owner occupied, residential real estate-investor, residential real estate-owner occupied, HELOC, and HELOC-purchased portfolios. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) are carried on a gross basis (rather than net of the associated credit loss estimate), and the expected credit losses for PCD loans are estimated and separately recognized as part of the ACL.

The ~~Company recorded~~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 ~~provision for~~corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio. These categories comprised 72.4% of the portfolio as of March 31, 2021, compared to 72.5% of the portfolio as of December 31, 2020. We continue to oversee and seek to manage our loan ~~losses expense of $300,000~~portfolio in the third quarter of 2017. On a quarterly basis, management estimates the amount required and records the appropriate provision or release to maintain an adequate reserve for all potential and estimated loan losses.accordance with interagency guidance on risk management.

Asset Quality

Nonperforming loans ~~increased~~consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or greater past due. Remediation work continues in all segments. Nonperforming loans decreased by ~~$270,000~~$1.8 million to $21.2 million at ~~September 30, 2017,~~March 31, 2021 from ~~$16.0~~$23.0 million at December 31, ~~2016.~~2020. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, the Company determined had experienced a more-than-insignificant deterioration in credit quality since origination. 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. Credit metrics continue to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans as a percent of total loans ~~decreased to 1.0% as of September 30, 2017, from~~were 1.1% as of March 31, 2021, December 31, ~~2016,~~2020, and ~~1.4% as of September 30, 2016.~~March 31, 2020. The distribution of ~~the Company’s~~our nonperforming loans is ~~included~~shown in the following table.

September 30, 2017

Nonperforming Loans
As of

Percent Change From

(in thousands)
September 30,

December 31,

September 30,

December 31,

September 30,

2017

2016

2016

2016

2016

Real estate-construction
$
205

$
281

$
76

(27.0)

169.7

Real estate-residential:

Investor

492

936

1,364

(47.4)

(63.9)

Multifamily

4,757

-

-

N/M

N/M

Owner occupied

4,266

6,552

5,755

(34.9)

(25.9)

Revolving and junior liens

1,977

2,240

2,257

(11.7)

(12.4)

Real estate-commercial, nonfarm

3,631

5,386

7,345

(32.6)

(50.6)

Real estate-commercial, farm

383

-

-

N/M

N/M

Commercial

207

240

583

(13.8)

(64.5)

Leases

345

366

-

(5.7)

N/M

Other

8

-

-

N/M

N/M

Total nonperforming loans
$
16,271

$
16,001

$
17,380

1.7

(6.4)

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							March 31, 2021
Nonperforming Loans	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Commercial	$	933	$	1,125	$	2,418	(17.1)	(61.4)
Leases		2,562		2,801		187	(8.5)	N/M
Commercial real estate - Investor		1,913		1,632		1,809	17.2	5.7
Commercial real estate - Owner occupied		7,427		9,262		7,436	(19.8)	(0.1)
Construction		128		-		2,800	N/M	(95.4)
Residential real estate - Investor		855		1,085		859	(21.2)	(0.5)
Residential real estate - Owner occupied		3,567		3,561		4,736	0.2	(24.7)
Multifamily		2,398		2,437		69	(1.6)	N/M
HELOC		1,000		1,142		1,400	(12.4)	(28.6)
HELOC - Purchased		-		-		114	-	(100.0)
Other ¹		399		-		9	N/M	N/M
Total nonperforming loans	$	21,182	$	23,045	$	21,837	(8.1)	(3.0)

N/M - Not ~~Meaningful~~meaningful

¹ The “Other” segment includes consumer and overdrafts.

~~Nonperforming loans consist~~

The components of ~~nonaccrual loans,~~our nonperforming ~~restructured accruing loans~~assets are shown in the following table.


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


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

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

Loan charge-offs, net of recoveries, for the current quarter, prior linked quarter and ~~loans 90 days or greater past due. Remediation work continues~~year over year quarter are shown in ~~all segments.~~the following table.

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Loan Charge-offs, Net of Recoveries	Three Months Ended
(Dollars in thousands)	March 31,		% of	December 31,		% of	March 31,		% of
	2021		Total¹	2020		Total¹	2020		Total¹
Commercial	$	(18)	3.1	$	(93)	(169.1)	$	85	7.6
Leases		-	-		(11)	(20.0)		-	-
Commercial real estate - Investor		(20)	3.4		471	856.4		(8)	(0.7)
Commercial real estate - Owner occupied		(205)	35.2		86	156.4		1,108	98.8
Construction		-	-		(171)	(310.9)		-	-
Residential real estate - Investor		(266)	45.7		(12)	(21.8)		(21)	(1.9)
Residential real estate - Owner occupied		(49)	8.4		(130)	(236.4)		(22)	(2.0)
Multifamily		-	-		-	-		-	-
HELOC		(12)	2.1		(97)	(176.4)		(58)	(5.2)
HELOC - Purchased		-	-		-	-		-	-
Other ²		(12)	2.1		12	21.8		38	3.4
Net (recoveries) charge-offs	$	(582)	100.0	$	55	100.0	$	1,122	100.0

Loan Charge-offs, net of recoveries
Quarters Ended
(in thousands)
September 30,

% of

June 30,

% of

September 30,

% of

2017

Total1

2017

Total1

2016

Total1
Real estate-construction

Homebuilder
$
-

-

$
(1)

(0.2)

$
(7)

(0.8)
Land

-

-

(48)

(7.3)

(2)

(0.2)
All other

8

(2.4)

(11)

(1.7)

(42)

(5.0)
Total real estate-construction

8

(2.4)

(60)

(9.2)

(51)

(6.0)
Real estate-residential

Investor

(28)

8.5

(16)

(2.4)

(3)

(0.4)
Multifamily

(17)

5.2

129

19.7

(13)

(1.5)
Owner occupied

(40)

12.2

723

110.4

(75)

(8.9)
Revolving and junior liens

(367)

111.5

(109)

(16.6)

112

13.3
Total real estate-residential

(452)

137.4

727

111.1

21

2.5
Real estate-commercial, nonfarm

Owner general purpose

-

-

(1)

(0.2)

-

-
Owner special purpose

-

-

(6)

(0.9)

(3)

(0.4)
Non-owner general purpose

(43)

13.1

(39)

(6.0)

132

15.7
Non-owner special purpose

-

-

-

-

636

75.8
Retail properties

22

(6.80)

4

0.6

-

-
Total real estate-commercial, nonfarm

(21)

6.3

(42)

(6.5)

765

91.1
Real estate-commercial, farm

-

-

-

-

-

-
Commercial

7

(2.1)

1

0.2

66

7.9
Leases

98

(29.8)

-

-

-

-
Consumer

37

(11.2)

34

5.2

43

5.1
Other

(6)

1.8

(5)

(0.8)

(5)

(0.6)
Net (recoveries) / charge-offs
$
(329)

100.0

$
655

100.0

$
839

100.0

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

² The “Other” segment includes consumer and overdrafts.

Net recoveries of $582,000 were recorded for the ~~third~~first quarter of ~~2017 reflected~~2021, compared to net charge-offs of $55,000 for the fourth quarter of 2020, and net charge-offs $1.1 million for the first quarter of 2020, reflecting continuing management attention to credit ~~quality. Gross charge-offs for the quarter ended September 30, 2017 were $241,000 compared to $1.2 million for the quarter ended September 30, 2016. Gross~~quality and remediation efforts. The net recoveries for the ~~quarter ended September 30, 2017 were $570,000 compared to $358,000 for the quarter ended September 30, 2016. In comparison to the linked quarter, the third~~first quarter of ~~2017~~2021 were primarily due to recoveries on two large charge-offs recorded prior to 2021. We have continued ~~to reflect~~our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

September 30, 2017

Classified Loans
As of

Percent Change From

(in thousands)
September 30,

December 31,

September 30,

December 31,

September 30,

2017

2016

2016

2016

2016

Real estate-construction
$
380

$
458

$
254

(17.0)

49.6

Real estate-residential:

Investor

648

1,096

1,171

(40.9)

(44.7)

Multifamily

4,757

-

-

N/M

N/M

Owner occupied

4,418

7,225

6,432

(38.9)

(31.3)

Revolving and junior liens

1,977

2,340

3,078

(15.5)

(35.8)

Real estate-commercial, nonfarm

7,633

9,946

13,220

(23.3)

(42.3)

Real estate-commercial, farm

2,495

1,782

1,801

40.0

N/M

Commercial

382

2,527

1,519

(84.9)

(74.9)

Leases

1,031

1,109

783

(7.0)

31.7

Consumer

8

1

1

N/M

N/M

Total classified loans
$
23,729

$
26,484

$
28,259

(10.4)

(16.0)

~~N/M -~~ ~~Not Meaningful~~

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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 ~~the Company~~we will sustain some loss if deficiencies remain uncorrected.

~~Classified~~

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


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

N/M - Not meaningful

¹ The “Other” segment includes consumer and overdrafts.

Tableof Contents

Total classified loans and ~~OREO.~~classified assets decreased as of March 31, 2021, from the levels at both December 31, 2020 and March 31, 2020, primarily due to continued 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. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ~~allowance for loan and lease losses~~ACL on loans as another measure of overall change in loan related asset ~~quality. This~~quality, which is referred to as the “classified assets ratio.” The classified assets ratio ~~ended at 12.62%~~was 11.60% for the period ended ~~September 30, 2017.~~March 31, 2021, compared to 12.64% as of December 31, 2020, and 15.26% as of March 31, 2020. The decrease in the classified assets ratio for the period ended March 31, 2021, compared to March 31, 2020, is also due to the remediation efforts and borrower liquidity noted above, as well as growth in our capital level over the past year.

Allowance for ~~Loan~~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 benefit of $3.0 million in our provision for credit losses due to a reserve release for the first quarter of 2021, comprised of a $3.5 million reserve release to loans and $470,000 of additional provision expense for credit losses on unfunded commitments, compared to no provision for credit losses recorded in the fourth quarter of 2020, and an $8.0 million provision for credit losses recorded for the first quarter of 2020, due to both our adoption of the CECL accounting standard on January 1, 2020 and the potential impact of the COVID-19 pandemic. In the first quarter of 2021, we determined a reserve release on loans was appropriate, after considering our net recoveries for the quarter of $582,000, 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 $470,000 provision for credit losses on unfunded commitments in the first 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.

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 1.6% as of March 31, 2021, compared to 1.7% and 1.6% at December 31, 2020, and March 31, 2020, respectively. See Item 2 – Critical Accounting Policies in the Management Discussion and Analysis in this report for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

Tableof Contents

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


		Three Months Ended
	March 31,			December 31,			March 31,
	2021			2020			2020
Allowance at beginning of period	$	33,855		$	32,918		$	19,789
Charge-offs:
Commercial		2			(85)			97
Leases		-			87			-
Commercial real estate - Investor		-			497			13
Commercial real estate - Owner occupied		3			217			1,109
Construction		-			-			-
Residential real estate - Investor		-			-			-
Residential real estate - Owner occupied		-			-			1
Multifamily		-			-			-
HELOC		12			42			83
Other ¹		25			52			98
Total charge-offs		42			810			1,401
Recoveries:
Commercial		20			8			12
Leases		-			98			-
Commercial real estate - Investor		20			26			21
Commercial real estate - Owner occupied		208			131			1
Construction		-			171			-
Residential real estate - Investor		266			12			21
Residential real estate - Owner occupied		49			130			23
Multifamily		-			-			-
HELOC		24			139			141
Other ¹		37			40			60
Total recoveries		624			755			279
Net (recoveries) charge-offs		(582)			55			1,122
Adoption of ASC 326		-			-			5,879
Provision for credit losses on loans		(3,470)			992			5,499
Allowance at end of period	$	30,967		$	33,855		$	30,045

Average total loans (exclusive of loans held-for-sale)	$	2,006,157		$	2,023,238		$	1,941,760
Net charge-offs / (recoveries) to average loans		(0.03)	%		0.00	%		0.06	%
Allowance at period end to average loans		1.54	%		1.67	%		1.55	%

¹ The “Other” segment includes consumer and overdrafts.

Quarters Ended

Nine Months Ended

September 30,

June 30,

September 30,

September 30,

September 30,

2017

2017

2016

2017

2016

Allowance at beginning of period
$
15,836

$
15,741

$
15,822

$
16,158

$
16,223

Charge-offs:

Commercial

13

6

76

20

95

Leases

98

-

-

215

13

Real estate - commercial

22

4

792

300

1,484

Real estate - construction

19

-

9

23

9

Real estate - residential

7

976

220

1,178

657

Consumer

82

80

100

262

250

Other

-

-

-

-

-

Total charge-offs

241

1,066

1,197

1,998

2,508

Recoveries:

Commercial

6

5

10

13

22

Leases

-

-

-

-

-

Real estate - commercial

43

46

27

124

255

Real estate - construction

11

60

60

89

71

Real estate - residential

459

249

199

850

718

Consumer

45

46

57

166

184

Other

6

5

5

13

18

Total recoveries

570

411

358

1,255

1,268

Net (recoveries) / charge-offs

(329)

655

839

743

1,240

Loan loss reserve provision

300

750

-

1,050

-

Allowance at end of period
$
16,465

$
15,836

$
14,983

$
16,465

$
14,983

Average total loans (exclusive of loans held-for-sale)
$
1,550,229

$
1,505,572

$
1,186,279

$
1,513,693

$
1,157,159

Net (recoveries) / charge-offs to average loans

(0.02)
%

0.04
%

0.07
%

0.05
%

0.11
%

Allowance at period end to average loans

1.06
%

1.05
%

1.26
%

1.09
%

1.29
%

Ending balance: Individually evaluated for impairment
$
6

$
98

$
514

$
6

$
514

Ending balance: Collectively evaluated for impairment
$
16,459

$
15,738

$
14,469

$
16,459

$
14,469

The coverage ratio of the ~~allowance for loan losses~~ACL on loans to nonperforming loans was ~~101.2%~~146.2% as of ~~September 30, 2017,~~March 31, 2021, which was a ~~minimal reduction~~decrease from the coverage ratio of ~~101.4%~~146.9% as of ~~June 30, 2017,~~December 31, 2020, but ~~greater than the 86.2% coverage ratio~~an increase from 137.6% as of ~~September 30, 2016.~~March 31, 2020. When measured as a percentage of average loans, ~~as of September 30, 2017,~~our total allowance for loan and lease losses increased to 1.06% of total loans from 1.05% as of June 30, 2017, and decreased from 1.26% of average loans at September 30, 2016. The total allowance for loan and lease losses as a percent of total period endACL on loans was ~~1.15% as~~1.54% for the three months ended March 31, 2021, and 1.55% for the like period of September 30, 2017, excluding the loans acquired from the Talmer branch acquisition, which are effectively “reserved” for potential future losses in the remaining $667,000 credit mark component of the purchase accounting discount recorded. March 31, 2020, reflecting minimal change year over year.

In management’s judgment, an adequate ~~allowance for estimated losses~~ACL has been established ~~for inherent~~to encompass the current lifetime expected credit losses at ~~September 30, 2017,~~March 31, 2021, and general changes in lending policy, procedures and staffing, as well as other external ~~factors.~~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. ~~Loan loss provision for~~Further delayed recovery or further deterioration in market conditions related to COVID-19 and the ~~quarter ended September 30, 2017, increased $300,000 as compared to like quarter~~associated impacts on our customers, changes in business climates and the condition of ~~2016 and decreased $450,000 as compared to second quarter~~collateral at the time of ~~2017.~~default or repossession may revise our current expectations of future credit losses in future reporting periods.

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Other Real Estate Owned

As of ~~September 30, 2017,~~March 31, 2021, OREO ~~ended at $9.0 million. This compares to $11.7~~totaled $2.2 million, reflecting a $311,000 reduction from the $2.5 million at ~~June 30, 2017,~~December 31, 2020, and ~~$14.1~~a $2.9 million reduction from the $5.0 million at ~~September 30, 2016. New additions to the OREO portfolio~~March 31, 2020. One property sale of $176,000 in the third quarter of 2017 were minimal. Valuation write-downs continued with an expense of $920,000 in the third quarter of 2017, the majority of which was recorded on three properties, compared to $392,000 in the second quarter of 2017 and $365,000 in the third quarter of 2016. The OREO$305,000 net book value ~~decreased in the first nine months of 2017 due~~and no transfers to ~~24 property sales, net of a participation purchase. These sales provided $5.5 million in total proceeds, including net gains on~~ OREO ~~sales of $454,000. In addition, net valuation reserve write-downs of $1.6 million on 35 OREO properties~~from loans were recorded in the first ~~nine months~~quarter of ~~2017; both~~2021. There were two property additions totaling $491,000 in the first quarter of ~~these reductions were partially offset by 13~~2020. The net book value of four property ~~transfers into~~disposals in the first quarter of 2020 totaled $288,000. Valuation write-downs occurred in the first quarter of 2021 which totaled $6,000, compared to $93,000 of OREO ~~from nonaccrual or fixed asset status totaling $3.8 million.~~valuation write-downs in the fourth quarter of 2020, and $158,000 of valuation write-downs recorded in the first quarter of 2020.

September 30, 2017
OREO
Quarters Ended

Percent Change From
(in thousands)
September 30,

June 30,

September 30,

June 30,

September 30,

2017

2017

2016

2017

2016
Beginning balance
$
11,724

$
13,481

$
16,252

(13.0)

(27.9)

Property additions

176

204

255

(13.7)

(31.0)

Property improvements

-

-

4

N/M

N/M

Less:

Property disposals

1,956

1,569

2,002

24.7

(2.3)

Period valuation adjustments

920

392

365

134.7

152.1

Total other real estate owned
$
9,024

$
11,724

$
14,144

(23.0)

(36.2)


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

~~N/M -~~ ~~Not Meaningful~~

In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future. Of note, properties valued in total at ~~$5.2~~$1.4 million, or approximately ~~57.5%~~65.8% of total OREO at ~~September 30, 2017,~~March 31, 2021, have been in OREO for five years or more. The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.





OREO Properties by Type
(in thousands)	September 30, 2017				December 31, 2016				September 30, 2016
		Amount	% of Total			Amount	% of Total			Amount	% of Total
(Dollars in thousands)													March 31, 2021				December 31, 2020				March 31, 2020
														Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	937	11	%	$	225	2	%	$	1,218	9	%	$	430	20	%	$	430	17	%	$	450	9	%
Lots (single family and commercial)		5,536	61	%		7,322	61	%		8,795	62	%		1,381	64	%		1,387	57	%		3,747	74	%
Vacant land		628	7	%		636	5	%		636	4	%		352	16	%		352	14	%		41	1	%
Multi-family		-	0	%		264	2	%		264	2	%
Commercial property		1,923	21	%		3,469	30	%		3,231	23	%		-	0	%		305	12	%		811	16	%
Total OREO properties	$	9,024	100	%	$	11,916	100	%	$	14,144	100	%

Total other real estate owned													$	2,163	100	%	$	2,474	100	%	$	5,049	100	%

Deposits and Borrowings


							March 31, 2021
Deposits	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Noninterest bearing demand	$	982,664	$	909,505	$	702,598	8.0	39.9
Savings		429,256		399,057		338,134	7.6	26.9
NOW accounts		522,760		486,612		428,419	7.4	22.0
Money market accounts		338,921		316,465		277,018	7.1	22.3
Certificates of deposit of less than $100,000		193,291		200,107		231,704	(3.4)	(16.6)
Certificates of deposit of $100,000 through $250,000		132,514		164,982		150,185	(19.7)	(11.8)
Certificates of deposit of more than $250,000		57,136		60,345		67,584	(5.3)	(15.5)
Total deposits	$	2,656,542	$	2,537,073	$	2,195,642	4.7	21.0

3rd Quarter 2017

Noninterest Income

Quarters Ended

Percent Change From

(in thousands)

September 30,

June 30,

September 30,

June 30,

September 30,


2017

2017

2016

2017

2016

Trust income

$
1,468

$
1,638

$
1,403

(10.4)

4.6

Service charges on deposits

1,722

1,615

1,756

6.6

(1.9)

Residential mortgage banking revenue

1,547

1,711

2,789

(9.6)

(44.5)

Securities gain (loss), net

102

(131)

(1,959)

177.9

105.2

Increase in cash surrender value of BOLI

362

350

383

3.4

(5.5)

Debit card interchange income

1,075

1,081

1,013

(0.6)

6.1

Gain on disposal and transfer of fixed assets

-

12

-

N/M

N/M

Other income

1,567

1,041

1,209

50.5

29.6

Total noninterest income

$
7,843

$
7,317

$
6,594

7.2

18.9

~~N/M~~ ~~- Not Meaningful~~

~~Tableof Contents~~

Of the noninterest income categories, securities gain (loss), net, experienced the largest increases on both a linked quarter and year over year basis, as shown above, primarily due to more favorable investment sales in 2017. The net security losses incurred in 2016 were necessary for liquidity purposes due to funding needs related to the Talmer branch purchase. Mortgage banking revenues have decreased over the last year as the rising rate environment has reduced originations and refinancing; mortgage loans held for sale originations are $34.1 million less year to date 2017 than the prior year to date period. Finally, the favorable variance in other income was driven by growth in commercial loan swap fee income; $547,000 of commercial loan swap fee income was recorded in the third quarter of 2017, as compared to $175,000 in the third quarter of 2016.

3rd Quarter 2017

Noninterest Expense

Quarters Ended

Percent Change From

(in thousands)

September 30,

June 30,

September 30,

June 30,

September 30,


2017

2017

2016

2017

2016

Salaries

$
7,704

$
7,972

$
7,205

(3.4)

6.9

Bonus

1,114

854

521

30.4

113.8

Benefits and other

1,231

1,719

1,288

(28.4)

(4.4)

Total salaries and employee benefits

10,049

10,545

9,014

(4.7)

11.5

Occupancy, furniture and equipment expense

1,482

1,462

1,500

1.4

(1.2)

Computer and data processing

1,081

1,112

1,105

(2.8)

(2.2)

FDIC insurance

199

165

228

20.6

(12.7)

General bank insurance

246

264

269

(6.8)

(8.6)

Amortization of core deposit intangible asset

24

25

-

(4.0)

N/M

Advertising expense

255

452

430

(43.6)

(40.7)
��
Debit card interchange expense

285

399

363

(28.6)

(21.5)

Legal fees

162

184

242

(12.0)

(33.1)

Other real estate owned expense, net

680

539

426

26.2

59.6

Other expense

2,455

2,839

3,005

(13.5)

(18.3)

Total noninterest expense

$
16,918

$
17,986

$
16,582

(5.9)

2.0

Efficiency ratio (defined below)

57.66
%

64.03
%

66.21
%

~~N/M -~~ ~~Not Meaningful~~

The efficiency ratio shown in the table above is calculated as noninterest expense excluding OREO expenses, amortization of core deposits and acquisition costs, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains and losses on securities and includes a tax equivalent adjustment on the increase in cash surrender value of BOLI.

Third quarter 2017 noninterest expense decreased $1.1 million from the second quarter of 2017, and increased $336,000 from the third quarter of 2016. These variances are primarily due to salary and employee benefit related cost fluctuations due to certain one-time costs recorded in 2017, as well as an increase in employee insurance premiums in 2017. The second quarter of 2017 included a one-time cost incurred related to executive relocation and recruitment of $294,000, as well as higher levels of employee insurance costs as compared to the prior year. Although the overall employee count has not significantly increased in the year over year period, the hiring of additional staff in compliance and risk management roles has increased the overall wage base of the Company. A reduction in debit card interchange expense was recorded in the third quarter of 2017 due to reversal of an accrual related to the debit card rewards program. Finally, other expense has declined over the last year due to reductions in loan related expenses, including remediation costs as the loan portfolio quality continues to improve.

Other expenses have minimal fluctuations, as continued efficiencies with operational processes have contributed to maintaining the majority of noninterest expense components with insignificant variation.

~~Income Taxes~~

~~The Company recorded a tax expense of $1.8 million on $9.9 million pre-tax income for the third quarter of 2017.~~ Income tax expense reflected all relevant statutory tax rates and GAAP accounting. The effective tax rate for the third quarter of 2017 was 18.5%, a decrease from 28.9% in the second quarter of 2017 and 34.7% in the third quarter of 2016. A nonrecurring income tax benefit of $1.6 million was recorded in the third quarter of 2017, stemming from the State of Illinois tax rate increase effective July 1, 2017, which increased the Company’s net deferred tax asset by a like amount. In addition, the impact of the tax exempt securities growth in the first and second quarters of 2017 contributed to the tax rate decrease in the third quarter of 2017 as compared to the prior year.

There have been no significant changes in the Company’s ability to utilize the deferred tax assets through September 30, 2017. The Company has no valuation reserve on the deferred tax assets as of September 30, 2017.

~~Tableof Contents~~

~~Financial Condition~~

Total ~~assets increased $109.2 million from $2.25 billion as of December 31, 2016, to $2.36~~deposits were $2.66 billion at ~~September 30, 2017, due primarily to organic loan growth. Total loans increased $115.4~~March 31, 2021, which reflects a $119.5 million ~~or 7.8%, when compared to December 31, 2016, which was funded by significant deposit growth and FHLBC advances. Securities increased a modest $1.6 million in~~increase from total ~~but the securities portfolio experienced select significant shifts in type~~deposits of ~~investments held year to date.~~

September 30, 2017
Securities

As of

Percent Change From
(in thousands)

September 30,

December 31,

September 30,

December 31,

September 30,


2017

2016

2016

2016

2016
Securities available-for-sale, at fair value

U.S. Treasuries

$
3,990

$
-

$
-

N/M

N/M
U.S. government agencies

13,451

-

1,503

N/M

N/M
U.S. government agencies mortgage-backed

11,030

41,534

43,723

(73.4)

(74.8)
States and political subdivisions

229,032

68,703

22,254

233.4

929.2
Corporate bonds

10,577

10,630

10,730

(0.5)

(1.4)
Collateralized mortgage obligations

80,386

170,927

204,390

(53.0)

(60.7)
Asset-backed securities

131,759

138,407

140,173

(4.8)

(6.0)
Collateralized loan obligations

53,259

101,637

108,284

(47.6)

(50.8)
Total securities

$
533,484

$
531,838

$
531,057

0.3

0.5

~~N/M~~ ~~- Not Meaningful~~

~~The securities portfolio ended the third quarter of 2017 at $533.5 million, an increase of $1.6 million from $531.8 million~~$2.54 billion at December 31, ~~2016,~~2020, and an increase of ~~$2.4~~$460.9 million from ~~September 30, 2016. Available-for-sale purchases during~~total deposits of $2.20 billion at March 31, 2020. The increase in deposits at March 31, 2021, compared to both December 31, 2020, and March 31, 2020, was due to increases in noninterest bearing demand,

Tableof Contents

savings, NOW, and money market accounts, with decreases noted in all maturity categories of certificates of deposit. These total deposit increases in the ~~third~~linked quarter ~~of 2017 and~~as well as the year over year periods were primarily ~~tax exempt state~~due to federal stimulus funds received by depositors and ~~political subdivisions securities; treasuries and government agencies also increased~~a decrease in ~~the period ending September 30, 2017. This portfolio repositioning was performed to enhance overall asset yield~~consumer spending due to the rising interest rate environment. During the third quarter of 2017 security sales resulted in net realized gains of $102,000, as compared to net realized losses of $193,000 for the fourth quarter of 2016 and losses of $2.0 million for the third quarter of 2016.COVID-19 pandemic.

~~Loans~~

Total loans were $1.59 billion as of September 30, 2017, an increase of $115.4 million from the total as of December 31, 2016, driven by growth in the commercial, real estate-construction and leases portfolios. In addition, a home equity portfolio purchase of $16.7 million from TCF Bank in the second quarter of 2017 contributed to the total residential real estate growth of $41.7 million for the 2017 year to date period. Loan portfolio repositioning continued to drive reductions in commercial real estate concentrations, and to grow commercial and lease financing to diversify the portfolio. Total loans increased $391.7 million from September 30, 2016, due to the organic growth previously discussed as well as $221.0 million of loans from the Talmer branch purchase.

September 30, 2017
Loans
As of

Percent Change From
(in thousands)
September 30,

December 31,

September 30,

December 31,

September 30,

2017

2016

2016

2016

2016
Commercial
$
257,356

$
228,113

$
136,819

12.8

88.1
Leases

69,305

55,451

47,215

25.0

46.8
Real estate - commercial

739,136

736,247

617,280

0.4

19.7
Real estate - construction

94,868

64,720

28,786

46.6

229.6
Real estate - residential

419,583

377,851

357,846

11.0

17.3
Consumer

2,770

3,237

3,325

(14.4)

(16.7)
Other

10,550

11,973

10,517

(11.9)

0.3

1,593,568

1,477,592

1,201,788

7.8

32.6
Net deferred loan costs

623

1,217

1,064

(48.8)

(41.4)
Total loans
$
1,594,191

$
1,478,809

$
1,202,852

7.8

32.5

The quality of the loan portfolio is impacted by not only Company credit decisions but also the economic health of the communities in which the Company operates. As the Company is located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial, residential, and construction) has been and continues to be a sizeable portion of the portfolio. These categories comprised 78.6% of the portfolio as of September 30, 2017, compared to 79.7% of the portfolio as of

~~Tableof Contents~~

~~December 31, 2016. The Company continues to oversee and manage its loan portfolio in accordance with interagency guidance on risk management.~~

~~Deposits and Borrowings~~

September 30, 2017
Deposits
As of

Percent Change From
(in thousands)
September 30,

December 31,

September 30,

December 31,

September 30,

2017

2016

2016

2016

2016
Noninterest bearing demand
$
556,874

$
513,688

$
473,477

8.4

17.6
Savings

260,268

256,159

253,454

1.6

2.7
NOW accounts

417,054

419,417

391,188

(0.6)

6.6
Money market accounts

270,647

275,273

259,495

(1.7)

4.3
Certificates of deposit of less than $100,000

219,152

228,993

230,748

(4.3)

(5.0)
Certificates of deposit of $100,000 through $250,000

114,373

110,992

105,868

3.0

8.0
Certificates of deposit of more than $250,000

50,747

62,263

63,152

(18.5)

(19.6)
Total deposits
$
1,889,115

$
1,866,785

$
1,777,382

1.2

6.3

Total deposits were $1.89 billion on September 30, 2017, which reflects a $22.3 million increase from total deposits of $1.87 billion as of December 31, 2016, and a $111.7 million increase from $1.78 billion as of September 30, 2016. Total noninterest bearing demand accounts experienced increases of $43.2 million, or 8.4%, in volumes for the first nine months of 2017, while certificates of deposit reflected a decrease of $18.0 million, or 4.5%, for the same period. Growth in deposits in the third quarter of 2017 was attributed to seasonal tax refunds, as well as strong commercial demand deposit growth stemming from seasonal and operational funds increases as well as growth in commercial loan clients. The total deposit growth of 6.3% in the year over year period is also partially attributable to the $48.9 million of deposits acquired with the Talmer branch purchase in 2016.

In addition to deposits, ~~the Bank~~we obtained funding from other sources in all periods presented. Securities sold under repurchase agreements totaled ~~$26.9~~$77.3 million at ~~September 30, 2017, an~~March 31, 2021, a $10.3 million, or 15.4%, increase from ~~$25.7~~$67.0 million at December 31, ~~2016. The Bank also recorded an~~2020, and a $51.2 million increase from March 31, 2020. Our notes payable and other borrowings is comprised of one remaining $6.3 million long-term FHLBC advance, which matures on February 2, 2026, and $16.0 million outstanding on a $20.0 million term note originated with a correspondent bank in the first quarter of ~~$125.0~~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 $22.3 million as of March 31, 2021, decreased $1.1 million from ~~Federal Home Loan Bank of Chicago at September 30, 2017, as compared to $70.0 million at~~ December 31, ~~2016.~~2020, and decreased $4.3 million from March 31, 2020.

The Company is indebted on senior notes originated in December 2016, totaling ~~$44.0~~$44.4 million, net of deferred issuance costs, ~~which were issued in the fourth quarter~~as of ~~2016.~~March 31, 2021. These notes mature in December 2026, and include interest payable ~~semiannually~~semi-annually at 5.75% for five years. Beginning December 2021, the interest becomes payable quarterly at three month LIBOR plus 385 basis points. The Company is also indebted on ~~$57.6~~$25.8 million, net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its ~~two~~ statutory trust ~~subsidiaries, Old Second Capital Trust I and~~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 ~~was initiated~~ which resulted in the total interest rate paid on this debt of ~~4.30%~~4.41% as of ~~September 30, 2017,~~March 31, 2021, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017, rate reset. The Company also redeemed $32.6 million of trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust I, on March 2, 2020, as noted above. The cash paid at redemption of $33.0 million included accrued interest of $438,000 on the debentures, and resulted in a payment of $10.13 per preferred share.

Capital

As of ~~September 30, 2017,~~March 31, 2021, total stockholders’ equity was ~~$200.8~~$311.1 million, which was an increase of ~~$25.6~~$4.0 million from ~~$175.2~~$307.1 million as of December 31, ~~2016.~~2020. This increase is ~~directly~~ attributable to ~~nine months~~an increase in retained earnings of $11.6 million, comprised of net income ~~in 2017 and~~year to date of $11.9 million, less a reduction to retained earnings $300,000 for payment of dividends to our common stockholders in the first quarter of 2021. In addition, a decrease to accumulated other comprehensive income of $1.5 million was recorded due to a net ~~loss, offset slightly~~decrease in unrealized gains on available-for-sale securities, net of unrealized losses on swaps. Total stockholders’ equity was reduced by ~~$888,000~~an increase of ~~dividends paid~~$3.9 million to our treasury stock in the first quarter of 2021, primarily due to repurchases of our common ~~shareholders~~shares pursuant to our stock repurchase program.

In the third quarter of 2019, our Board of Directors authorized a stock repurchase program, under which we were authorized to repurchase up to approximately 1.5 million shares (or approximately 5%) of our outstanding common stock through open market purchases, trading plans established in ~~2017.~~accordance with U.S. Securities and Exchange Commission rules, privately negotiated transactions, or by other means. The stock repurchase program expired on September 19, 2020; however, we received a notice of non-objection from the Federal Reserve Bank of Chicago to extend the previously authorized stock repurchase program through October 20, 2021. The actual means and timing of any repurchases, quantity of purchased shares and prices will be, subject to certain limitations, at the discretion of management and will depend on a number of factors, including, without limitation, market prices of our common stock, general market and economic condition, and applicable legal and regulatory requirements. These share purchases are anticipated to be funded by our cash on hand. During the first quarter of 2021, we repurchased 455,134 shares of our common stock at a weighted average price of $12.31 per share pursuant to our stock repurchase program. To date, we have repurchased 1,174,407 shares of our common stock at a weighted average price of $9.45 per share, under our stock repurchase program.

~~In 2015,~~

Tableof Contents

The following table shows the regulatory capital ratios and the current well capitalized regulatory requirements for the Company ~~redeemed all outstanding shares~~and the Bank as of the ~~Company’s Series B preferred stock;~~dates indicated:


	Minimum Capital		Well Capitalized
	Adequacy with		Under Prompt
	Capital Conservation		Corrective Action		March 31,		December 31,		March 31,
	Buffer, if applicable¹		Provisions²		2021		2020		2020
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		12.43	%	11.94	%	10.85	%
Total risk-based capital ratio	10.50	%	N/A		14.73	%	14.26	%	13.09	%
Tier 1 risk-based capital ratio	8.50	%	N/A		13.53	%	13.01	%	11.93	%
Tier 1 leverage ratio	4.00	%	N/A		10.02	%	10.21	%	10.57	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	14.59	%	13.75	%	12.89	%
Total risk-based capital ratio	10.50	%	10.00	%	15.80	%	15.00	%	14.07	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	14.59	%	13.75	%	12.89	%
Tier 1 leverage ratio	4.00	%	5.00	%	10.78	%	10.74	%	11.36	%

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.

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 adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition. The cumulative amount that is not recognized in regulatory capital, in addition to the $3.8 million Day One impact of CECL adoption, will be phased in at 25% per year beginning January 1, 2022. As of March 31, 2021, the capital measures of the Company exclude $5.1 million, which is the modified CECL transition adjustment.

As of March 31, 2021, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the now fully phased-in capital conservation buffer requirements. In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, decreased from 10.10% at December 31, 2020, to 9.82% at March 31, 2021. Our GAAP tangible common equity to tangible assets ratio was 9.23% at March 31, 2021, compared to 9.48% as of ~~September 30, 2015, no shares of the Series B Stock remained outstanding~~. After this redemption, the Company’s total stockholders’ equity continues to include $4.8 million to reflect the value of a ten year warrant to purchase shares of its common stock, with an exercise price of $13.43 per share, issued in January 2009 as part of the original Series B issuance. A discussion of the 2009 issuance, including this warrant, is included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Form 10-K for the year ended December 31, ~~2016, under the heading “Capital”.~~

~~Tableof Contents~~

~~The Company’s~~2020. Our non-GAAP tangible common equity to tangible assets ratio, ~~was 8.16%~~which management also considers a valuable performance measurement for capital analysis, decreased from 9.49% at ~~September 30, 2017, compared to 7.41% as of~~ December 31, ~~2016,~~2020, to 9.24% at March 31, 2021, due to the growth in total tangible assets.

In November 2019, the federal banking agencies published final rules to provide an optional simplified measure of capital adequacy for qualifying community banking organizations, which we refer to as the community bank leverage ratio (“CBLR”) framework. Generally, under the CBLR framework, qualifying community banking organizations with total assets of less than $10 billion, and ~~8.12% at September 30, 2016.~~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.

(unaudited)

As of September 30,

As of December 31,

As of September 30,
(in thousands)

2017

2016

2016

Tier 1 capital

Total equity

$
200,763

$
175,210

$
171,627
Tier 1 adjustments:

Trust preferred securities allowed

55,395

47,997

48,728
Cumulative other comprehensive loss

632

8,762

7,437
Disallowed intangible assets

(8,830)

(8,761)

-
Disallowed deferred tax assets

(26,381)

(31,220)

(32,882)
Tier 1 capital

$
221,579

$
191,988

$
194,910

Tangible common equity

Total Equity

$
200,763

$
175,210

$
171,627
Less: Intangible assets

8,830

8,761

-
Tangible common equity

$
191,933

$
166,449

$
171,627

Tangible assets

Total assets

$
2,360,407

$
2,251,188

$
2,112,751
Less: Goodwill and intangible assets

8,830

8,761

-
Tangible assets

$
2,351,577

$
2,242,427

$
2,112,751

Tableof Contents

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


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

Total Equity	$	311,113		$	311,113		$	307,087		$	307,087
Less: Goodwill and intangible assets		20,661			20,661			20,781			20,781
Add: Limitation of exclusion of core deposit intangible (80%)		N/A			411			N/A			435
Adjusted goodwill and intangible assets		20,661			20,250			20,781			20,346
Tangible common equity	$	290,452		$	290,863		$	286,306		$	286,741
Tangible assets
Total assets	$	3,166,652		$	3,166,652		$	3,040,837		$	3,040,837
Less: Adjusted goodwill and intangible assets		20,661			20,250			20,781			20,346
Tangible assets	$	3,145,991		$	3,146,402		$	3,020,056		$	3,020,491

Common equity to total assets		9.82	%		9.82	%		10.10	%		10.10	%
Tangible common equity to tangible assets		9.23	%		9.24	%		9.48	%		9.49	%

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

Net cash inflows from operating activities were ~~$28.5~~$15.4 million during the first ~~nine~~three months of ~~2017,~~2021, compared with net cash inflows of ~~$17.2~~$9.0 million in the same period ~~in 2016. Proceeds from sales~~ of 2020. Funds used to originate loans held-for-sale, net of ~~funds used to originate~~proceeds from sales of loans held-for-sale, were a source of inflows for the first ~~nine~~three months of ~~2017~~2021 and ~~2016.~~outflows for the like period of 2020. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the ~~first nine~~three months ended March 31, 2021, but were a source of ~~2017 and 2016.~~inflows for the like period of 2020. The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash outflows from investing activities were ~~$105.7~~$26.6 million in the ~~first nine~~three months ~~of 2017,~~ended March 31, 2021, compared to net cash ~~inflows~~outflows of ~~$117.4 million~~$220,000 in the same period in ~~2016.~~2020. In the first ~~nine~~three months of ~~2017,~~2021, securities transactions accounted for net outflows of $102.4 million, and the principal change on loans accounted for net inflows of $75.9 million. In the first three months of 2020, securities transactions accounted for net inflows of ~~$10.8~~$28.1 million, and net principal ~~disbursed~~ on loans funded accounted for net outflows of ~~$118.7 million. In the first nine months of 2016, securities transactions accounted for net inflows of $184.4 million, and net principal disbursed on loans accounted for net outflows of $71.6~~$27.7 million. Proceeds from sales of OREO accounted for ~~$5.5 million~~$325,000 and ~~$5.2 million~~$311,000 in investing cash inflows for the ~~first nine~~three months ~~of 2017~~ended March 31, 2021 and ~~2016,~~2020, respectively.

Net cash inflows from financing activities in the ~~first nine~~three months ~~of 2017~~ended March 31, 2021 were ~~$77.3~~$122.3 million, compared with net cash inflows of ~~$15.0~~$13.7 million in the ~~first nine~~three months ~~of 2016.~~ended March 31, 2020. Net deposit inflows in the first ~~nine~~three months of ~~2017~~2021 were ~~$22.3~~$119.5 million compared to net deposit inflows of ~~$18.3~~$68.9 million in the first ~~nine~~three months of ~~2016.~~2020. Other short-term borrowings had no net cash ~~inflows related~~outflows in the first three months of 2021, compared to ~~FHLBC advances of $55.0~~$42.1 million in the first ~~nine~~three months of ~~2017 and outflows of $15.0 million in the first nine months of 2016.~~2020. Changes in securities sold under repurchase agreements accounted for ~~$1.1~~$10.3 million and ~~$12.5~~$2.5 million in net inflows for the three months ended March 31, 2021 and 2020, respectively. The redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures resulted in cash outflows of $32.6 million in the first ~~nine months~~quarter of ~~2017 and 2016, respectively.~~2020, which was partially offset by a $20.0 million term note cash inflow which was originated to partially fund this trust preferred redemption; $16.0 million of this term note remains outstanding as of March 31, 2021.

Tableof Contents

Cash and cash equivalents for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2021, totaled ~~$47.5~~$440.9 million, as compared to ~~$189.9~~$73.1 million as of ~~September 30, 2016. The significantly higher balance at~~March 31, 2020. In addition to cash and cash equivalents on hand or held as deposits with other financial institutions, we rely on funding sources from customer deposits, cash flows from securities available-for-sale and loans, and a line of credit with the ~~end~~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 ~~2016 period was in anticipation~~ordinary course of our business. Additional sources of funding include a $20 million undrawn line of credit held by the ~~$181.5 million paid for the Talmer branch purchase in October 2016.~~Company with a third party financial institution, as well as unpledged securities available-for-sale.

~~Tableof Contents~~

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

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

In ~~June 2017,~~the first quarter of 2020 the Federal Reserve ~~raised short-term interest rates by~~cut the Fed Funds rate three times down to a target range of 0% to 0.25%. ~~There is a general market expectation that~~Additionally, the Federal Reserve ~~will move short-term rates higher~~has been aggressively purchasing various assets since March 2020 in ~~December~~an effort to stabilize the economy from the continuing effects of ~~2017. Generally,~~COVID-19. Overall, the Federal Reserve’s balance sheet has increased from about $4.2 trillion in early March 2020 to about $7.7 trillion as of March 31, 2021, the current pace of asset purchases is expected to continue. Despite the market pricing in a rate hike in late 2022, the Federal Reserve ~~actions have not had a significant impact on long-term rates, although Federal Reserve officials have announced a schedule~~maintained the statement that the Fed Funds rate will remain in the 0% to ~~end reinvestment in their securities portfolio starting October 2017, which could result in increases in long-term rates. The Company manages~~0.25% range through 2023. We manage interest rate risk within guidelines established by a policy which ~~limits~~are intended to limit the amount of rate exposure. In practice, we seek to manage our interest rate risk exposure ~~is maintained~~ well within ~~those guidelines.~~ our guidelines so that such exposure does not pose a material risk to our future earnings.

~~The Company manages~~

We seek to manage various market risks in ~~its~~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 ~~the Company’s~~our business activities and operations. In addition, since ~~the Company does~~we do not hold a trading portfolio, ~~it is~~we are not exposed to significant market risk from trading activities. ~~The Company’s~~Our interest rate risk exposures ~~estimated~~ at ~~September 30, 2017,~~March 31, 2021 and December 31, ~~2016,~~2020 are outlined in the table below.

~~The Company's~~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. ~~The Company's ALCO~~Our asset-liability committee seeks to manage interest rate risk under a variety of rate environments by structuring ~~the Company's~~our balance sheet and off-balance sheet positions, which ~~include~~includes interest rate swap derivatives as discussed in Note 1520 of ~~the~~our consolidated financial statements included in this ~~quarterly~~annual report. ~~The~~We seek to monitor and manage interest rate risk ~~is monitored and managed~~ within approved policy guidelines and limits.

~~The Company utilizes~~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 ~~the Company~~us are incorporated into the simulation model. Earnings at risk isare calculated by comparing the net interest income of a stable interest rate environment to the net interest income of a different interest rate ~~environments~~environment in order to determine the percentage change. Significant declines in interest rates that occurred during the first half of 2012 have made it impossible to calculate valid interest rate scenarios for rate declines of 2.0% or more, a situation that continues to date. As of ~~September 30, 2017 and~~ December 31, ~~2016, the Company’s analyses reflected~~2020, we had notable amounts of earnings gains (in both dollars and percentage) should interest rates ~~rise, and earnings reductions should~~rise. Due to relatively low current market interest rates, ~~fall.~~it was not possible to calculate any down rate scenarios because many of the market interest rates would fall below zero in that scenario. The ~~changes~~projected increases in income across ~~the various~~all up rate interest rate shock scenarios as of ~~September 30, 2017~~March 31, 2021 were ~~similar to those increases in Federal Home Loan Bank borrowings. Overall, management considers~~moderately lower than December 31, 2020. This was primarily the ~~current level~~result of interest rate risks to be moderate, but intends to continue closely monitoring changes in that risk in case corrective actions might be needed in the future. Federal funds rate and the Bank’s prime rate remained unchanged at 1.25% and 4.25%, respectively.a second round of PPP loans.

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% ~~and~~, 1%, and ~~an increase of~~ 2% ~~assuming~~and no change in the slope of the yield curve. Due to the low interest rate environment, it was not possible to calculate any down rate scenarios because rates would fall below zero in all down rate scenarios.

Tableof Contents

Analysis of Net Interest Income Sensitivity

Analysis of Net Interest Income Sensitivity
(dollars in thousands)

Immediate Changes in Rates



(1.0)
%


(0.5)
%


0.5
%


1.0
%


2.0
%
September 30, 2017

Dollar change

$
(4,860)

$
(2,159)

$
1,175

$
2,393

$
4,630

Percent change

(6.5)
%

(2.9)
%

1.6
%

3.2
%

6.2
%

December 31, 2016

Dollar change

$
(4,404)

$
(2,141)

$
1,145

$
2,406

$
4,866

Percent change

(6.6)
%

(3.2)
%

1.7
%

3.6
%

7.3
%

(Dollars in thousands)


	Analysis of Net Interest Income Sensitivity
	Immediate Changes in Rates
		(2.0)	%	(1.0)	%	(0.5)	%		0.5	%		1.0	%		2.0	%
March 31, 2021
Dollar change		N/M		N/M		N/M		$	2,793		$	5,985		$	12,200
Percent change		N/M		N/M		N/M			3.2	%		6.9	%		14.1	%

December 31, 2020
Dollar change		N/M		N/M		N/M		$	3,405		$	6,879		$	13,145
Percent change		N/M		N/M		N/M			3.9	%		7.8	%		14.9	%

N/M - Not meaningful

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

~~Tableof Contents~~

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of ~~September 30, 2017.~~March 31, 2021. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of ~~September 30, 2017,~~March 31, 2021, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended ~~September 30, 2017,~~March 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Forward-looking Statements~~

~~This document (including information incorporated by reference) contains,~~The design of any system of controls and ~~future oral and written statements~~procedures is based in part upon certain assumptions about the likelihood of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, 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. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries, are detailed in the “Risk Factors” section included under Item 1.A. of Part I of the Company’s most recent Annual Report in Form 10-K. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1.A. Risk Factors

~~There have been no material changes from the risk factors set forth~~Investing in ~~Part I,~~shares of our common stock involves certain risks, including those identified and described in Item ~~1.A. “Risk Factors,”~~1A. of ~~the Company’s~~our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016 and the risk factors set forth~~2020, as well as cautionary statements contained in this Quarterly Report on Form 10-Q, including those under the ~~heading “Risk Factors”~~caption “Cautionary Note Regarding Forward-Looking Statements” and in our other filings with the ~~Company’s Registration Statement~~ SEC.

Tableof Form S-3 (File No. 333-219680), which are incorporated herein by reference. Please refer to those sections of the Company’s Form 10-K and Registration Statement on Form S-3 for disclosures regarding the risks and uncertainties related to the Company’s business.Contents

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

Stock Repurchases

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 the Company 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.

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

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


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

(1)

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

~~None.~~

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

~~N/A~~

Item 5. Other Information

None.

Tableof Contents

Item 6. Exhibits

Exhibits:



10.1	~~First Amendment~~Compensation and Benefits Assurance Agreement dated as of March 16, 2021, between Old Second Bancorp, Inc. ~~Employment Agreement with James Eccher, dated as of September 1, 2017~~and Richard A. Gartelmann, Jr., Executive Vice President (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on ~~September 1, 2017)~~March 19, 2021).

~~10.2~~31.1	~~Form of Compensation and Benefits Assurance Agreement (incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed on September 1, 2017).~~

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

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

32.1
~~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
~~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, 2017,~~March 31, 2021, and December 31, ~~2016;~~2020; (ii) Consolidated Statements of Income for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016;~~2020; (iii) Consolidated Statements of Stockholders’ Equity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016;~~2020; (iv) Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2021 and ~~2016;~~2020; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

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

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

Tableof Contents

SIGNATURES

~~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~~May 7, ~~2017~~2021

Tableof Contents


	PART I
	~~PART I~~
		Page Number
Item 1.	Financial Statements	3 5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32 38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
~~Item 4.~~	~~Controls and Procedures~~	45
	~~PART II~~
		59
Item 1.4.	~~Legal Proceedings~~Controls and Procedures	45 60
	PART II

Item ~~1.A.~~1.	~~Risk Factors~~Legal Proceedings	45 60
Item 2.1.A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45 61
Item 3.	Defaults Upon Senior Securities	45 61
Item 4.	Mine Safety Disclosure	45 61
Item 5.	Other Information	45 61
Item 6.	Exhibits	46
		62

	Signatures	47 63


	(unaudited)
	September 30,		December 31,
	2017		2016
Assets
Cash and due from banks	$	32,772	$	33,805
Interest bearing deposits with financial institutions		14,730		13,529
Cash and cash equivalents		47,502		47,334
Securities available-for-sale, at fair value		533,484		531,838
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		10,393		7,918
Loans held-for-sale		1,641		4,918
Loans		1,594,191		1,478,809
Less: allowance for loan losses		16,465		16,158
Net loans		1,577,726		1,462,651
Premises and equipment, net		37,971		38,977
Other real estate owned		9,024		11,916
Mortgage servicing rights, net		6,684		6,489
Goodwill and core deposit intangible		8,944		9,018
Bank-owned life insurance ("BOLI")		61,403		60,332
Deferred tax assets, net		42,394		53,464
Other assets		23,241		16,333
Total assets	$	2,360,407	$	2,251,188

Liabilities
Deposits:
Noninterest bearing demand	$	556,874	$	513,688
Interest bearing:
Savings, NOW, and money market		947,969		950,849
Time		384,272		402,248
Total deposits		1,889,115		1,866,785
Securities sold under repurchase agreements		26,853		25,715
Other short-term borrowings		125,000		70,000
Junior subordinated debentures		57,627		57,591
Senior notes		44,033		43,998
Other liabilities		17,016		11,889
Total liabilities		2,159,644		2,075,978

Stockholders’ Equity
Common stock		34,626		34,534
Additional paid-in capital		117,458		116,653
Retained earnings		145,767		129,005
Accumulated other comprehensive loss		(632)		(8,762)
Treasury stock		(96,456)		(96,220)
Total stockholders’ equity		200,763		175,210
Total liabilities and stockholders’ equity	$	2,360,407	$	2,251,188


	September 30, 2017		December 31, 2016
	Common		Common
	Stock		Stock
Par value	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000
Shares issued		34,625,734		34,534,234
Shares outstanding		29,627,086		29,556,216
Treasury shares		4,998,648		4,978,018


	(unaudited)
	Nine Months Ended September 30,
Supplemental cash flow information	2017		2016
Income taxes paid, net	$	230	$	160
Interest paid for deposits		3,802		3,142
Interest paid for borrowings		4,890		4,021
Non-cash transfer of loans to other real estate owned		3,701		1,223
Non-cash transfer of premises to other real estate owned		95		-
Non-cash transfer of securities held-to-maturity to securities available-for-sale		-		244,823


							Accumulated
			Additional				Other				Total
	Common		Paid-In		Retained		Comprehensive		Treasury		Stockholders’
	Stock		Capital		Earnings		Loss		Stock		Equity
Balance, December 31, 2015	$	34,427	$	115,918	$	114,209	$	(12,659)	$	(95,966)	$	155,929
Net income						10,666						10,666
Other comprehensive income, net of tax								5,222				5,222
Dividends declared and paid						(592)						(592)
Vesting of restricted stock		106		(106)								-
Tax effect from vesting of restricted stock				174								174
Stock based compensation				482								482
Purchase of treasury stock										(254)		(254)
Balance, September 30, 2016	$	34,533	$	116,468	$	124,283	$	(7,437)	$	(96,220)	$	171,627

Balance, December 31, 2016	$	34,534	$	116,653	$	129,005	$	(8,762)	$	(96,220)	$	175,210
Net income						17,650						17,650
Other comprehensive income, net of tax								8,130				8,130
Dividends declared and paid						(888)						(888)
Vesting of restricted stock		92		(92)								-
Stock based compensation				897								897
Purchase of treasury stock										(236)		(236)
Balance, September 30, 2017	$	34,626	$	117,458	$	145,767	$	(632)	$	(96,456)	$	200,763


	Less than 12 months					12 months or more
September 30, 2017	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. Treasuries	1	$	11	$	3,990	-	$	-	$	-	1	$	11	$	3,990
U.S. government agencies	2		39		6,701	-		-		-	2		39		6,701
U.S. government agencies mortgage-backed	2		13		2,089	4		106		4,096	6		119		6,185
States and political subdivisions	7		789		24,843	-		-		-	7		789		24,843
Corporate bonds	-		-		-	3		266		10,078	3		266		10,078
Collateralized mortgage obligations	4		238		21,281	8		1,297		43,684	12		1,535		64,965
Asset-backed securities	1		265		4,293	9		3,383		76,725	10		3,648		81,018
Collateralized loan obligations	1		49		7,948	-		-		-	1		49		7,948
Total securities available-for-sale	18	$	1,404	$	71,145	24	$	5,052	$	134,583	42	$	6,456	$	205,728



		Quarter Ended				Nine Months Ended
		September 30,				September 30,
Securities available-for-sale	2017		2016		2017		2016
Gross realized gains on securities	$	474	$	1,380	$	911	$	1,518
Gross realized losses on securities		(371)		(3,339)		(1,076)		(3,538)
Securities realized gains (losses), net	$	103	$	(1,959)	$	(165)	$	(2,020)


															Recorded
															Investment
															90 days or
					90 Days or										Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past								Due and
September 30, 2017	Past Due		Past Due		Due		Due		Current		Nonaccrual		Total Loans		Accruing
Commercial	$	-	$	89	$	-	$	89	$	257,060	$	207	$	257,356	$	-
Leases		-		685		149		834		68,275		196		69,305		156
Real estate - commercial
Owner occupied general purpose		253		-		537		790		154,429		457		155,676		561
Owner occupied special purpose		513		-		-		513		172,866		359		173,738		-
Non-owner occupied general purpose		649		-		-		649		251,933		1,165		253,747		-
Non-owner occupied special purpose		-		248		-		248		93,498		-		93,746		-
Retail properties		-		-		-		-		45,149		1,113		46,262		-
Farm		-		-		383		383		15,584		-		15,967		387
Real estate - construction
Homebuilder		-		-		-		-		2,644		-		2,644		-
Land		-		-		-		-		3,235		-		3,235		-
Commercial speculative		-		-		-		-		34,817		-		34,817		-
All other		63		-		-		63		53,904		205		54,172		-
Real estate - residential
Investor		-		-		-		-		52,361		492		52,853		-
Multifamily		-		-		-		-		117,544		4,757		122,301		-
Owner occupied		40		-		-		40		124,414		4,127		128,581		-
Revolving and junior liens		732		22		100		854		113,956		1,038		115,848		103
Consumer		2		-		-		2		2,760		8		2,770		-
Other1		1		-		-		1		11,172		-		11,173		-
Total	$	2,253	$	1,044	$	1,169	$	4,466	$	1,575,601	$	14,124	$	1,594,191	$	1,207


September 30, 2017			Special
	Pass		Mention		Substandard 1		Doubtful		Total
Commercial	$	245,603	$	11,371	$	382	$	-	$	257,356
Leases		68,274		-		1,031		-		69,305
Real estate - commercial
Owner occupied general purpose		153,039		1,274		1,363		-		155,676
Owner occupied special purpose		172,216		1,163		359		-		173,738
Non-owner occupied general purpose		250,497		2,085		1,165		-		253,747
Non-owner occupied special purpose		90,113		-		3,633		-		93,746
Retail Properties		43,922		1,227		1,113		-		46,262
Farm		13,472		-		2,495		-		15,967
Real estate - construction
Homebuilder		2,644		-		-		-		2,644
Land		3,235		-		-		-		3,235
Commercial speculative		34,817		-		-		-		34,817
All other		52,898		894		380		-		54,172
Real estate - residential
Investor		52,205		-		648		-		52,853
Multifamily		117,544		-		4,757		-		122,301
Owner occupied		123,600		563		4,418		-		128,581
Revolving and junior liens		113,871		-		1,977		-		115,848
Consumer		2,762		-		8		-		2,770
Other		11,173		-		-		-		11,173
Total	$	1,551,885	$	18,577	$	23,729	$	-	$	1,594,191


							Nine Months Ended
	As of September 30, 2017						September 30, 2017
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	207	$	360	$	-	$	123	$	-
Leases		196		227		-		281		-
Commercial real estate
Owner occupied general purpose		457		495		-		1,169		-
Owner occupied special purpose		359		509		-		372		-
Non-owner occupied general purpose		1,218		1,592		-		1,481		2
Non-owner occupied special purpose		-		-		-		507		-
Retail properties		1,113		1,199		-		1,146		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		37		-
All other		205		231		-		206		-
Residential
Investor		1,374		1,627		-		1,607		36
Multifamily		4,757		4,965		-		2,379		-
Owner occupied		8,150		9,524		-		8,987		119
Revolving and junior liens		1,991		2,173		-		2,237		27
Consumer		8		8		-		104		-
Total impaired loans with no recorded allowance		20,035		22,910		-		20,636		184

With an allowance recorded
Commercial		-		-		-		-		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		-		-		-		-		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		-		-		-		123		-
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		-		-
Residential
Investor		-		-		-		-		-
Multifamily		-		-		-		-		-
Owner occupied		-		-		-		402		-
Revolving and junior liens		51		51		6		26		2
Consumer		-		-		-		-		-
Total impaired loans with a recorded allowance		51		51		6		551		2
Total impaired loans	$	20,086	$	22,961	$	6	$	21,187	$	186


							Nine Months Ended
	As of December 31, 2016						September 30, 2016
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded
Commercial	$	240	$	388	$	-	$	326	$	-
Leases		366		371		-		-		-
Commercial real estate
Owner occupied general purpose		1,881		2,131		-		2,412		66
Owner occupied special purpose		385		518		-		580		-
Non-owner occupied general purpose		1,744		2,010		-		1,655		2
Non-owner occupied special purpose		1,013		1,649		-		506		-
Retail properties		1,179		1,235		-		990		-
Farm		-		-		-		636		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		74		81		-		80		-
All other		207		221		-		-		-
Residential
Investor		1,841		2,308		-		1,864		35
Multifamily		-		-		-		-		-
Owner occupied		9,824		11,391		-		9,916		120
Revolving and junior liens		2,484		3,018		-		2,527		9
Consumer		-		-		-		-		-
Total impaired loans with no recorded allowance		21,238		25,321		-		21,492		232

With an allowance recorded
Commercial		-		-		-		2		-
Leases		-		-		-		-		-
Commercial real estate
Owner occupied general purpose		-		-		-		-		-
Owner occupied special purpose		-		-		-		-		-
Non-owner occupied general purpose		246		595		246		132		31
Non-owner occupied special purpose		-		-		-		-		-
Retail properties		-		-		-		-		-
Farm		-		-		-		-		-
Construction
Homebuilder		-		-		-		-		-
Land		-		-		-		-		-
Commercial speculative		-		-		-		-		-
All other		-		-		-		-		-
Residential
Investor		-		-		-		-		-
Multifamily		-		-		-		-		-
Owner occupied		803		853		803		356		-
Revolving and junior liens		-		-		-		23		-
Consumer		-		-		-		-		-
Total impaired loans with a recorded allowance		1,049		1,448		1,049		513		31
Total impaired loans	$	22,287	$	26,769	$	1,049	$	22,005	$	263


	TDR Modifications					TDR Modifications
	Quarter Ended September 30, 2017					Nine Months Ended September 30, 2017
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - residential
Owner occupied
HAMP1	1	$	36	$	33	1	$	36	$	33
Other2	1		42		42	1		42		42
Revolving and junior liens
HAMP1	1		49		49	1		49		49
Other2	1		49		33	7		448		418
Total	4	$	176	$	157	10	$	575	$	542


	TDR Modifications					TDR Modifications
	Quarter Ended September 30, 2016					Nine Months Ended September 30, 2016
	# of	Pre-modification		Post-modification		# of	Pre-modification		Post-modification
	contracts	recorded investment		recorded investment		contracts	recorded investment		recorded investment
Troubled debt restructurings
Real estate - commercial
Other2	-	$	-	$	-	2	$	312	$	211
Real estate - residential
Owner occupied
HAMP1	-		-		-	1		239		235
Revolving and junior liens
HAMP1	-		-			4		469		433
Other2	1		70		70	1		70		70
Total	1	$	70	$	70	8	$	1,090	$	949


					Real Estate		Real Estate		Real Estate
Allowance for loan losses:	Commercial		Leases		Commercial		Construction		Residential		Consumer		Other		Total
Three months ended September 30, 2017
Beginning balance	$	2,150	$	791	$	8,107	$	857	$	2,576	$	848	$	507	$	15,836
Charge-offs		13		98		22		19		7		82		-		241
Recoveries		6		-		43		11		459		45		6		570
(Release) Provision		(104)		77		505		165		(607)		(1)		265		300
Ending balance	$	2,039	$	770	$	8,633	$	1,014	$	2,421	$	810	$	778	$	16,465

Nine months ended September 30, 2017
Beginning balance	$	1,629	$	633	$	9,547	$	389	$	2,692	$	833	$	435	$	16,158
Charge-offs		20		215		300		23		1,178		262		-		1,998
Recoveries		13		-		124		89		850		166		13		1,255
Provision (Release)		417		352		(738)		559		57		73		330		1,050
Ending balance	$	2,039	$	770	$	8,633	$	1,014	$	2,421	$	810	$	778	$	16,465

Ending balance: Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	6	$	-	$	-	$	6
Ending balance: Collectively evaluated for impairment	$	2,039	$	770	$	8,633	$	1,014	$	2,415	$	810	$	778	$	16,459

Loans:
Ending balance	$	257,356	$	69,305	$	739,136	$	94,868	$	419,583	$	2,770	$	11,173	$	1,594,191
Ending balance: Individually evaluated for impairment	$	207	$	196	$	3,147	$	205	$	16,323	$	8	$	-	$	20,086
Ending balance: Collectively evaluated for impairment	$	257,149	$	69,109	$	735,989	$	94,663	$	403,260	$	2,762	$	11,173	$	1,574,105


				Weighted-
		Weighted		Average
		Average		Remaining
		Exercise		Contractual	Aggregate
	Shares	Price		Term (years)	Intrinsic Value

Beginning outstanding	94,500	$	25.82	-		-
Canceled	-		-	-		-
Expired	-		-	-		-
Exercised	-		-	-		-
Ending outstanding	94,500	$	25.82	0.3	$	-

Exercisable at end of period	94,500	$	25.82	0.3	$	-


	As of
	September 30, 2017		December 31, 2016
Notional amount	$	25,774	$	25,774
Unrealized loss		(1,439)		(994)


			Asset Derivatives			Liability Derivatives
	Notional or
	Contractual		Balance Sheet			Balance Sheet
	Amount		Location	Fair Value		Location	Fair Value
Interest rate swap contracts net of credit valuation	$	349,367	Other Assets	$	128	Other Liabilities	$	128
Interest rate lock commitments and forward contracts		28,591	Other Assets		289	N/A		-
Total				$	417		$	128


	September 30, 2017						December 31, 2016
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	177	$	3,748	$	3,925	$	137	$	4,047	$	4,184
Commercial standby		-		122		122		-		126		126
Performance standby		66		7,912		7,978		83		8,498		8,581
		243		11,782		12,025		220		12,671		12,891
Non-borrower:
Performance standby		-		422		422		95		525		620
Total letters of credit	$	243	$	12,204	$	12,447	$	315	$	13,196	$	13,511


	Quarters Ended
	September 30, 2017						June 30, 2017						September 30, 2016
	Average					Rate	Average					Rate	Average					Rate
	Balance			Interest		%	Balance			Interest		%	Balance			Interest		%
Assets
Interest bearing deposits with financial institutions	$	11,685		$	37	1.24	$	11,938		$	31	1.03	$	50,054		$	64	0.50
Securities:
Taxable		327,892			2,424	2.96		361,504			2,607	2.88		624,844			3,954	2.53
Non-taxable (TE)		220,540			2,504	4.54		225,182			2,536	4.50		35,046			277	3.16
Total securities		548,432			4,928	3.59		586,686			5,143	3.51		659,890			4,231	2.56
Dividends from FHLBC and FRBC		8,339			94	4.51		7,699			92	4.78		7,918			83	4.19
Loans and loans held-for-sale1		1,553,473			18,265	4.60		1,509,188			17,445	4.57		1,191,574			13,567	4.46
Total interest earning assets		2,121,929			23,324	4.32		2,115,511			22,711	4.26		1,909,436			17,945	3.70
Cash and due from banks		31,028			-	-		39,425			-	-		41,344			-	-
Allowance for loan losses		(16,478)			-	-		(15,779)			-	-		(15,767)			-	-
Other noninterest bearing assets		185,906			-	-		189,928			-	-		190,213			-	-
Total assets	$	2,322,385					$	2,329,085					$	2,125,226

Liabilities and Stockholders' Equity
NOW accounts	$	422,913		$	108	0.10	$	432,248		$	107	0.10	$	384,588		$	89	0.09
Money market accounts		273,440			85	0.12		280,482			86	0.12		265,135			64	0.10
Savings accounts		262,573			46	0.07		265,066			40	0.06		257,808			40	0.06
Time deposits		389,037			1,077	1.10		392,779			1,025	1.05		401,999			931	0.92
Interest bearing deposits		1,347,963			1,316	0.39		1,370,575			1,258	0.37		1,309,530			1,124	0.34
Securities sold under repurchase agreements		32,800			4	0.05		35,652			4	0.05		31,892			1	0.01
Other short-term borrowings		72,065			220	1.19		58,572			146	0.99		22,174			22	0.39
Junior subordinated debentures		57,621			930	6.46		57,609			1,059	7.35		57,573			1,084	7.53
Senior notes		44,021			672	6.11		43,995			672	6.11		-			-	-
Subordinated debt		-			-	-		-			-	-		45,000			245	2.13
Notes payable and other borrowings		-			-	-		-			-	-		500			2	1.57
Total interest bearing liabilities		1,554,470			3,142	0.80		1,566,403			3,139	0.80		1,466,669			2,478	0.67
Noninterest bearing deposits		551,768			-	-		557,265			-	-		472,599			-	-
Other liabilities		19,395			-	-		18,047			-	-		15,539			-	-
Stockholders' equity		196,752			-	-		187,370			-	-		170,419			-	-
Total liabilities and stockholders' equity	$	2,322,385					$	2,329,085					$	2,125,226
Net interest income (TE)				$	20,182					$	19,572					$	15,467
Net interest income (TE)
to total earning assets						3.77						3.71						3.22
Interest bearing liabilities to earning assets		73.26	%					74.04	%					76.81	%


Analysis of Average Balances,
Tax Equivalent Interest and Rates
Nine Months Ended September 30, 2017, and 2016
(In thousands - unaudited)

	2017						2016
	Average					Rate	Average					Rate
	Balance			Interest		%	Balance			Interest		%
Assets
Interest bearing deposits with financial institutions	$	11,913		$	91	1.01	$	25,960		$	98	0.50
Securities:
Taxable		370,161			7,994	2.88		682,997			12,547	2.45
Non-taxable (TE)		196,120			6,443	4.38		36,340			891	3.27
Total securities		566,281			14,437	3.40		719,337			13,438	2.49
Dividends from FHLBC and FRBC		7,886			271	4.58		7,955			251	4.21
Loans and loans held-for-sale1		1,516,872			52,365	4.55		1,161,312			39,778	4.50
Total interest earning assets		2,102,952			67,164	4.22		1,914,564			53,565	3.69
Cash and due from banks		34,670			-	-		32,617			-	-
Allowance for loan losses		(16,184)			-	-		(16,145)			-	-
Other noninterest bearing assets		189,533			-	-		193,443			-	-
Total assets	$	2,310,971					$	2,124,479

Liabilities and Stockholders' Equity
NOW accounts	$	427,242		$	316	0.10	$	383,870		$	261	0.09
Money market accounts		279,143			254	0.12		272,657			198	0.10
Savings accounts		262,352			125	0.06		258,062			118	0.06
Time deposits		392,049			3,081	1.05		404,210			2,622	0.87
Interest bearing deposits		1,360,786			3,776	0.37		1,318,799			3,199	0.32
Securities sold under repurchase agreements		32,764			10	0.04		35,022			3	0.01
Other short-term borrowings		62,308			472	1.00		26,040			66	0.33
Junior subordinated debentures		57,609			3,073	7.11		57,561			3,251	7.53
Senior notes		43,998			2,017	6.11		-			-	-
Subordinated debt		-			-	-		45,000			727	2.12
Notes payable and other borrowings		-			-	-		500			6	1.58
Total interest bearing liabilities		1,557,465			9,348	0.80		1,482,922			7,252	0.65
Noninterest bearing deposits		544,925			-	-		465,094			-	-
Other liabilities		20,814			-	-		13,037			-	-
Stockholders' equity		187,767			-	-		163,426			-	-
Total liabilities and stockholders' equity	$	2,310,971					$	2,124,479
Net interest income (TE)				$	57,816					$	46,313
Net interest income (TE) to total earning assets						3.68						3.23
Interest bearing liabilities to earning assets		74.06	%					77.45	%


							September 30, 2017
Nonperforming Loans	As of						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2017		2016		2016		2016	2016
Real estate-construction	$	205	$	281	$	76	(27.0)	169.7
Real estate-residential:
Investor		492		936		1,364	(47.4)	(63.9)
Multifamily		4,757		-		-	N/M	N/M
Owner occupied		4,266		6,552		5,755	(34.9)	(25.9)
Revolving and junior liens		1,977		2,240		2,257	(11.7)	(12.4)
Real estate-commercial, nonfarm		3,631		5,386		7,345	(32.6)	(50.6)
Real estate-commercial, farm		383		-		-	N/M	N/M
Commercial		207		240		583	(13.8)	(64.5)
Leases		345		366		-	(5.7)	N/M
Other		8		-		-	N/M	N/M
Total nonperforming loans	$	16,271	$	16,001	$	17,380	1.7	(6.4)


Loan Charge-offs, net of recoveries	Quarters Ended
(in thousands)	September 30,		% of	June 30,		% of	September 30,		% of
	2017		Total1	2017		Total1	2016		Total1
Real estate-construction
Homebuilder	$	-	-	$	(1)	(0.2)	$	(7)	(0.8)
Land		-	-		(48)	(7.3)		(2)	(0.2)
All other		8	(2.4)		(11)	(1.7)		(42)	(5.0)
Total real estate-construction		8	(2.4)		(60)	(9.2)		(51)	(6.0)
Real estate-residential
Investor		(28)	8.5		(16)	(2.4)		(3)	(0.4)
Multifamily		(17)	5.2		129	19.7		(13)	(1.5)
Owner occupied		(40)	12.2		723	110.4		(75)	(8.9)
Revolving and junior liens		(367)	111.5		(109)	(16.6)		112	13.3
Total real estate-residential		(452)	137.4		727	111.1		21	2.5
Real estate-commercial, nonfarm
Owner general purpose		-	-		(1)	(0.2)		-	-
Owner special purpose		-	-		(6)	(0.9)		(3)	(0.4)
Non-owner general purpose		(43)	13.1		(39)	(6.0)		132	15.7
Non-owner special purpose		-	-		-	-		636	75.8
Retail properties		22	(6.80)		4	0.6		-	-
Total real estate-commercial, nonfarm		(21)	6.3		(42)	(6.5)		765	91.1
Real estate-commercial, farm		-	-		-	-		-	-
Commercial		7	(2.1)		1	0.2		66	7.9
Leases		98	(29.8)		-	-		-	-
Consumer		37	(11.2)		34	5.2		43	5.1
Other		(6)	1.8		(5)	(0.8)		(5)	(0.6)
Net (recoveries) / charge-offs	$	(329)	100.0	$	655	100.0	$	839	100.0


							September 30, 2017
Classified Loans	As of						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2017		2016		2016		2016	2016
Real estate-construction	$	380	$	458	$	254	(17.0)	49.6
Real estate-residential:
Investor		648		1,096		1,171	(40.9)	(44.7)
Multifamily		4,757		-		-	N/M	N/M
Owner occupied		4,418		7,225		6,432	(38.9)	(31.3)
Revolving and junior liens		1,977		2,340		3,078	(15.5)	(35.8)
Real estate-commercial, nonfarm		7,633		9,946		13,220	(23.3)	(42.3)
Real estate-commercial, farm		2,495		1,782		1,801	40.0	N/M
Commercial		382		2,527		1,519	(84.9)	(74.9)
Leases		1,031		1,109		783	(7.0)	31.7
Consumer		8		1		1	N/M	N/M
Total classified loans	$	23,729	$	26,484	$	28,259	(10.4)	(16.0)


							September 30, 2017
OREO	Quarters Ended						Percent Change From
(in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2017		2017		2016		2017	2016
Beginning balance	$	11,724	$	13,481	$	16,252	(13.0)	(27.9)
Property additions		176		204		255	(13.7)	(31.0)
Property improvements		-		-		4	N/M	N/M
Less:
Property disposals		1,956		1,569		2,002	24.7	(2.3)
Period valuation adjustments		920		392		365	134.7	152.1
Total other real estate owned	$	9,024	$	11,724	$	14,144	(23.0)	(36.2)


							3rd Quarter 2017
Noninterest Income	Quarters Ended						Percent Change From
(in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2017		2017		2016		2017	2016
Trust income	$	1,468	$	1,638	$	1,403	(10.4)	4.6
Service charges on deposits		1,722		1,615		1,756	6.6	(1.9)
Residential mortgage banking revenue		1,547		1,711		2,789	(9.6)	(44.5)
Securities gain (loss), net		102		(131)		(1,959)	177.9	105.2
Increase in cash surrender value of BOLI		362		350		383	3.4	(5.5)
Debit card interchange income		1,075		1,081		1,013	(0.6)	6.1
Gain on disposal and transfer of fixed assets		-		12		-	N/M	N/M
Other income		1,567		1,041		1,209	50.5	29.6
Total noninterest income	$	7,843	$	7,317	$	6,594	7.2	18.9


							September 30, 2017
Deposits	As of						Percent Change From
(in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2017		2016		2016		2016	2016
Noninterest bearing demand	$	556,874	$	513,688	$	473,477	8.4	17.6
Savings		260,268		256,159		253,454	1.6	2.7
NOW accounts		417,054		419,417		391,188	(0.6)	6.6
Money market accounts		270,647		275,273		259,495	(1.7)	4.3
Certificates of deposit of less than $100,000		219,152		228,993		230,748	(4.3)	(5.0)
Certificates of deposit of $100,000 through $250,000		114,373		110,992		105,868	3.0	8.0
Certificates of deposit of more than $250,000		50,747		62,263		63,152	(18.5)	(19.6)
Total deposits	$	1,889,115	$	1,866,785	$	1,777,382	1.2	6.3


	(unaudited)
	As of September 30,		As of December 31,		As of September 30,
(in thousands)	2017		2016		2016

Tier 1 capital
Total equity	$	200,763	$	175,210	$	171,627
Tier 1 adjustments:
Trust preferred securities allowed		55,395		47,997		48,728
Cumulative other comprehensive loss		632		8,762		7,437
Disallowed intangible assets		(8,830)		(8,761)		-
Disallowed deferred tax assets		(26,381)		(31,220)		(32,882)
Tier 1 capital	$	221,579	$	191,988	$	194,910

Tangible common equity
Total Equity	$	200,763	$	175,210	$	171,627
Less: Intangible assets		8,830		8,761		-
Tangible common equity	$	191,933	$	166,449	$	171,627

Tangible assets
Total assets	$	2,360,407	$	2,251,188	$	2,112,751
Less: Goodwill and intangible assets		8,830		8,761		-
Tangible assets	$	2,351,577	$	2,242,427	$	2,112,751


	Analysis of Net Interest Income Sensitivity
(dollars in thousands)	Immediate Changes in Rates
		(1.0)	%		(0.5)	%		0.5	%		1.0	%		2.0	%
September 30, 2017
Dollar change	$	(4,860)		$	(2,159)		$	1,175		$	2,393		$	4,630
Percent change		(6.5)	%		(2.9)	%		1.6	%		3.2	%		6.2	%

December 31, 2016
Dollar change	$	(4,404)		$	(2,141)		$	1,145		$	2,406		$	4,866
Percent change		(6.6)	%		(3.2)	%		1.7	%		3.6	%		7.3	%