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~~2022


☐	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~~000-10537

(Exact name of Registrant as specified in its charter)


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

37 South River Street, Aurora, Illinois60507

(Address of principal executive offices) (Zip Code)

~~(630)~~ (630) 892-0202

(Registrant’s telephone number, including area code)

Not applicable

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

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


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

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

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~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 ☒

As of November ~~3, 2017,~~4, 2022, the Registrant ~~had 29,627,086~~has 44,573,958 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, but not limited to, management’s expectations regarding future plans, strategies and financial performance, including regulatory developments, industry and economic trends and estimates and assumptions underlying accounting policies. Forward-looking statements are based on our current beliefs, expectations and assumptions and on information currently available and, can be identified by the use of words such as “expects,” “seeks to,” “intends,” “believes,” “may,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “estimate,” “possible,” “likely” or the negative thereof as well as other similar words and expressions of the future. Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict as to timing, extent, likelihood and degree of occurrence, which could cause our actual results to differ materially from those anticipated in or by such statements. Potential risks and uncertainties include, but are not limited to, the following:

●

our ability to execute our growth strategy;

●

the continuing impact of COVID-19 and its variants on our business, our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

●

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

●

risks with respect to our ability to successfully expand and integrate businesses and operations that we acquire, such as our acquisition of West Suburban Bancorp, Inc., as well our ability to identify and complete future mergers or acquisitions;

●

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

●

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

●

the transition away from LIBOR to an alternative reference rate;

●

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

●

any negative perception of our reputation or financial strength;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

our ability to receive dividends from our subsidiaries;

●

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

●

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

●

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

●

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

●

increased costs of compliance, heightened regulatory capital requirements and other risks associated with changes in regulation and the current regulatory environment;

●

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

●

changes in trade policy and any related tariffs; and

●

each of the factors and risks under the heading “Risk Factors” in our 2021 Annual Report on Form 10-K and in subsequent filings we make with the SEC.

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

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)
	September 30,		December 31,
	2022		2021
Assets
Cash and due from banks	$	64,903	$	38,565
Interest earning deposits with financial institutions		51,251		713,542
Cash and cash equivalents		116,154		752,107
Securities available-for-sale, at fair value		1,609,759		1,693,632
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		19,413		13,257
Loans held-for-sale		1,297		4,737
Loans		3,869,334		3,420,804
Less: allowance for credit losses on loans		48,847		44,281
Net loans		3,820,487		3,376,523
Premises and equipment, net		77,301		88,005
Other real estate owned		1,561		2,356
Mortgage servicing rights, at fair value		11,461		7,097
Goodwill		86,478		86,332
Core deposit intangible		14,323		16,304
Bank-owned life insurance ("BOLI")		105,642		105,300
Deferred tax assets, net		49,620		6,100
Other assets		54,209		60,439
Total assets	$	5,967,705	$	6,212,189

Liabilities
Deposits:
Noninterest bearing demand	$	2,098,144	$	2,093,494
Interest bearing:
Savings, NOW, and money market		2,726,596		2,868,928
Time		456,619		503,810
Total deposits		5,281,359		5,466,232
Securities sold under repurchase agreements		35,497		50,337
Other short-term borrowings		25,000		-
Junior subordinated debentures		25,773		25,773
Subordinated debentures		59,275		59,212
Senior notes		44,559		44,480
Notes payable and other borrowings		10,000		19,074
Other liabilities		52,528		45,054
Total liabilities		5,533,991		5,710,162

Stockholders’ Equity
Common stock		44,705		44,705
Additional paid-in capital		201,700		202,443
Retained earnings		289,126		252,011
Accumulated other comprehensive (loss) income		(98,389)		8,768
Treasury stock		(3,428)		(5,900)
Total stockholders’ equity		433,714		502,027
Total liabilities and stockholders’ equity	$	5,967,705	$	6,212,189


	September 30, 2022		December 31, 2021
	Common		Common
	Stock		Stock
Par value	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000
Shares issued		44,705,150		44,705,150
Shares outstanding		44,572,544		44,461,045
Treasury shares		132,606		244,105

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

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)				(unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest and dividend income
Loans, including fees	$	46,614	$	21,315	$	121,209	$	64,337
Loans held-for-sale		22		39		111		132
Securities:
Taxable		9,116		1,854		21,071		5,301
Tax exempt		1,332		1,266		3,946		3,832
Dividends from FHLBC and FRBC stock		261		114		677		342
Interest bearing deposits with financial institutions		663		203		1,714		432
Total interest and dividend income		58,008		24,791		148,728		74,376
Interest expense
Savings, NOW, and money market deposits		380		209		1,124		667
Time deposits		335		330		877		1,239
Securities sold under repurchase agreements		10		15		30		67
Other short-term borrowings		44		-		44		-
Junior subordinated debentures		285		286		849		850
Subordinated debentures		546		547		1,639		1,064
Senior notes		728		673		1,791		2,019
Notes payable and other borrowings		111		113		309		355
Total interest expense		2,439		2,173		6,663		6,261
Net interest and dividend income		55,569		22,618		142,065		68,115
Provision for (release of) credit losses		4,500		(1,500)		5,050		(8,000)
Net interest and dividend income after provision for (release of) credit losses		51,069		24,118		137,015		76,115
Noninterest income
Wealth management		2,280		2,372		7,484		6,912
Service charges on deposits		2,661		1,368		7,063		3,784
Secondary mortgage fees		81		240		270		834
Mortgage servicing rights mark to market gain (loss)		548		(282)		3,608		(202)
Mortgage servicing income		514		572		1,612		1,646
Net gain on sales of mortgage loans		449		2,186		1,682		7,802
Securities (losses) gains, net		(1)		244		(34)		246
Change in cash surrender value of BOLI		146		406		342		1,163
Card related income		2,653		1,624		8,194		4,737
Other income		2,165		610		3,949		1,637
Total noninterest income		11,496		9,340		34,170		28,559
Noninterest expense
Salaries and employee benefits		21,011		12,964		62,310		39,366
Occupancy, furniture and equipment		4,119		2,418		10,864		7,188
Computer and data processing		2,543		1,477		12,817		4,079
FDIC insurance		659		211		1,771		604
General bank insurance		257		301		923		854
Amortization of core deposit intangible		657		113		1,981		348
Advertising expense		83		107		459		262
Card related expense		1,453		662		3,044		1,881
Legal fees		212		455		648		645
Consulting & management fees		607		248		1,746		914
Other real estate expense, net		22		25		97		138
Other expense		4,365		3,148		14,829		8,989
Total noninterest expense		35,988		22,129		111,489		65,268
Income before income taxes		26,577		11,329		59,696		39,406
Provision for income taxes		7,054		2,917		15,906		10,295
Net income	$	19,523	$	8,412	$	43,790	$	29,111

Basic earnings per share	$	0.43	$	0.30	$	0.98	$	1.01
Diluted earnings per share		0.43		0.29		0.97		0.99
Dividends declared per share		0.05		0.05		0.15		0.11

See accompanying notes to consolidated financial statements.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(unaudited)

(unaudited)

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)				(unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net Income	$	19,523	$	8,412	$	43,790	$	29,111

Unrealized holding losses on available-for-sale securities arising during the period		(41,163)		(3,007)		(146,477)		(4,483)
Related tax benefit		11,526		841		41,014		1,277
Holding losses, after tax, on available-for-sale securities		(29,637)		(2,166)		(105,463)		(3,206)

Less: Reclassification adjustment for the net (losses) gains realized during the period
Net realized (losses) gains		(1)		244		(34)		246
Related tax benefit (expense)		1		(69)		10		(70)
Net realized gains (losses) after tax		-		175		(24)		176
Other comprehensive loss on available-for-sale securities		(29,637)		(2,341)		(105,439)		(3,382)

Changes in fair value of derivatives used for cash flow hedges		(4,868)		218		(2,381)		1,207
Related tax benefit (expense)		1,360		(62)		663		(338)
Other comprehensive (loss) income on cash flow hedges		(3,508)		156		(1,718)		869

Total other comprehensive loss		(33,145)		(2,185)		(107,157)		(2,513)
Total comprehensive (loss) income	$	(13,622)	$	6,227	$	(63,367)	$	26,598



	Accumulated		Accumulated		Total
	Unrealized Gain		Unrealized Gain		Accumulated Other
	(Loss) on Securities		(Loss) on Derivative		Comprehensive
(unaudited)	Available-for -Sale		Instruments		Income/(Loss)
For the Three Months Ended
Balance, June 30, 2021	$	16,372	$	(1,938)	$	14,434
Other comprehensive (loss) income, net of tax		(2,341)		156		(2,185)
Balance, September 30, 2021	$	14,031	$	(1,782)	$	12,249

Balance, June 30, 2022	$	(64,663)	$	(581)	$	(65,244)
Other comprehensive loss, net of tax		(29,637)		(3,508)		(33,145)
Balance, September 30, 2022	$	(94,300)	$	(4,089)	$	(98,389)

For the Nine Months Ended
Balance, December 31, 2020	$	17,413	$	(2,651)	$	14,762
Other comprehensive (loss) income, net of tax		(3,382)		869		(2,513)
Balance, September 30, 2021	$	14,031	$	(1,782)	$	12,249

Balance, December 31, 2021	$	11,139	$	(2,371)	$	8,768
Other comprehensive loss, net of tax		(105,439)		(1,718)		(107,157)
Balance, September 30, 2022	$	(94,300)	$	(4,089)	$	(98,389)

See accompanying notes to consolidated financial statements.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

Nine Months Ended  September 30,

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)
	Nine Months Ended September 30,
	2022		2021
Cash flows from operating activities
Net income	$	43,790	$	29,111
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount amortization on securities		4,259		1,736
Securities losses (gains), net		34		(246)
Provision for (release of) credit losses		5,050		(8,000)
Originations of loans held-for-sale		(65,103)		(191,679)
Proceeds from sales of loans held-for-sale		69,263		207,339
Net gains on sales of mortgage loans		(1,682)		(7,802)
Mortgage servicing rights mark to market (gain) loss		(3,608)		202
Net accretion of discount on loans and unfunded commitments		(5,473)		(618)
Net change in cash surrender value of BOLI		(342)		(1,163)
Net gains on sale of other real estate owned		(163)		(40)
Provision for other real estate owned valuation losses		104		65
Depreciation of fixed assets and amortization of leasehold improvements		3,079		2,286
Net gains on disposal and transfer of fixed assets		(1,872)		-
Amortization of core deposit intangibles		1,981		348
Change in current income taxes receivable		7,279		329
Deferred tax (benefit) expense		(1,854)		1,796
Change in accrued interest receivable and other assets		1,036		2,973
Accretion of purchase accounting adjustment on time deposits		(1,207)		-
Change in accrued interest payable and other liabilities		3,314		13,016
Stock based compensation		2,176		1,113
Net cash provided by operating activities		60,061		50,766
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		231,483		91,931
Proceeds from sales of securities available-for-sale		3,303		35,075
Purchases of securities available-for-sale		(301,649)		(352,236)
Proceeds from sales of FHLBC/FRBC stock		2,561		-
Purchases of FHLBC/FRBC stock		(8,717)		-
Net change in loans		(443,628)		168,551
Proceeds from sales of other real estate owned, net of participations and improvements		941		607
Proceeds from disposition of premises and equipment		12,167		-
Net purchases of premises and equipment		(2,670)		(929)
Cash paid for acquisition, net of cash and cash equivalents acquired		(146)		-
Net cash used in investing activities		(506,355)		(57,001)
Cash flows from financing activities
Net change in deposits		(183,666)		177,256
Net change in securities sold under repurchase agreements		(14,840)		(24,018)
Net change in other short-term borrowings		25,000		-
Issuance of subordinated debentures, net of issuance costs		-		59,148
Repayment of term note		(3,000)		(3,000)
Net change in notes payable and other borrowings, excluding term note		(6,056)		(235)
Dividends paid on common stock		(6,650)		(3,177)
Purchase of treasury stock		(447)		(10,389)
Net cash (used in) provided by financing activities		(189,659)		195,585
Net change in cash and cash equivalents		(635,953)		189,350
Cash and cash equivalents at beginning of period		752,107		329,903
Cash and cash equivalents at end of period	$	116,154	$	519,253

~~Tableof Contents~~

~~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, June 30, 2021	$	34,957	$	120,572	$	255,536	$	14,434	$	(109,561)	$	315,938
Net income						8,412						8,412
Other comprehensive loss, net of tax								(2,185)				(2,185)
Dividends declared and paid, ($0.05 per share)						(1,435)						(1,435)
Stock based compensation				502								502
Balance, September 30, 2021	$	34,957	$	121,074	$	262,513	$	12,249	$	(109,561)	$	321,232

Balance, June 30, 2022	$	44,705	$	201,282	$	271,831	$	(65,244)	$	(3,670)	$	448,904
Net income						19,523						19,523
Other comprehensive loss, net of tax								(33,145)				(33,145)
Dividends declared and paid, ($0.05 per share)						(2,228)						(2,228)
Vesting of restricted stock				(304)						304		-
Stock based compensation				722								722
Purchase of treasury stock from taxes withheld on stock awards										(62)		(62)
Balance, September 30, 2022	$	44,705	$	201,700	$	289,126	$	(98,389)	$	(3,428)	$	433,714


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


Balance, December 31, 2021	$	44,705	$	202,443	$	252,011	$	8,768	$	(5,900)	$	502,027
Net income						43,790						43,790
Other comprehensive loss, net of tax								(107,157)				(107,157)
Dividends declared and paid, ($0.15 per share)						(6,675)						(6,675)
Vesting of restricted stock				(2,919)						2,919		-
Stock based compensation				2,176								2,176
Purchase of treasury stock from taxes withheld on stock awards										(447)		(447)
Balance, September 30, 2022	$	44,705	$	201,700	$	289,126	$	(98,389)	$	(3,428)	$	433,714

Tableof Contents

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,~~2022, are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017.~~2022. These interim consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, ~~2016.~~2021. Unless otherwise indicated, dollar amounts in the tables contained in the notes to the consolidated financial statements are in thousands. Certain items in prior periods have been reclassified to conform to the current presentation.

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

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

Recent Accounting Pronouncements

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

ASU 2018-16, ASU 2020-04 and ASU 2021-01 – In October 2018, the Financial Standards Board, or FASB, issued ASU No. 2018-16 “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting.” ASU 2018-16 adds the SOFR overnight index swap rate to the list of United States (U.S.) benchmark rates eligible for hedge accounting purposes, which is the fourth rate permissible to be used as a U.S. benchmark rate. This guidance is effective for annual and interim periods beginning after December 15, 2018, and we do not expect this guidance to have a material impact on the financial condition or liquidity of the Company. ASU 2020-04 and ASU 2021-01 Reference Rate Reform (Topic 848) were issued on March 12, 2020 and January 7, 2021, respectively, and each provide further guidance on optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships due to the discontinuation of LIBOR. In addition, on March 5, 2021, the International Swaps and Derivatives Association (“ISDA”) issued a statement with an “Index Cessation Event Announcement,” which confirmed the extension of the cessation of LIBOR-referenced rates from December 31, 2021, to June 30, 2023, for certain rate tenors.

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

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

The Company is currently reviewing ASU 2022-01 for the impact to derivative measurement and disclosures, and will assess any revisions needed for reporting purposes in the next quarter. We anticipate adopting ASU 2022-01 no later than January 1, 2023. We do not expect a material impact upon adoption.

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

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

Change in Significant Accounting Policies

Significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2021. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined.

~~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 FASB issued ASU No. 2016-13 “Measurement of Credit Losses on Financial Instruments (Topic 326).~~” 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 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 available-for-sale debt securities to have a credit loss recorded through an allowance rather than write-downs. ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019. The Company is assessing the impact of ASU 2016-13 on its accounting and disclosures, and is in the process of accumulating data and evaluating model options to support future risk assessments.

~~In March 2017, the FASB issued ASU No. 2017-08 “Receivables-Nonrefundable Fees and Other Costs – Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20)~~.” This ASU was issued to shorten 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 life of the instrument. This ASU does not change the current method of amortizing any discount over the contractual life of the debt security, 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 During the third quarter of ~~2017 on a modified retrospective basis, which required~~2022, the Company had no changes 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 the premium, which is $25.0 million as of September 30, 2017, is fully amortized. As a result of management’s analysis, the impact of the change insignificant accounting ~~principle as a result of ASU 2017-08 to adjust beginning of year retained earnings was considered insignificant and, accordingly, the impact was adjusted through current period earnings.~~policies or estimates.

~~In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging:Targeted Improvements to Accounting for Hedging Activities”.~~ The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company plans to adopt ASU 2017-12 on January 1, 2018. ASU 2017-12 requires a modified retrospective transition method in which the Company will recognize the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of the date of adoption. While the Company continues to assess all potential impacts of the standard, we currently expect adoption to have an immaterial impact on our consolidated financial statements.

Subsequent Events

On October ~~17, 2017, the Company’s~~18, 2022, our Board of Directors declared a cash dividend of ~~$0.01~~$0.05 per share payable on November ~~6, 2017,~~7, 2022, to stockholders of record as of October ~~27, 2017;~~28, 2022; dividends of ~~$296,000 were~~$2.2 million are scheduled to be paid to stockholders on November ~~6, 2017.~~7, 2022.

Note 2 – ~~Acquisitions~~Acquisition

On ~~October 28, 2016,~~December 1, 2021, the ~~Bank acquired the Chicago branch~~Company completed its acquisition of ~~Talmer Bank and Trust, the banking subsidiary of Talmer~~West Suburban Bancorp, Inc. (“~~Talmer”~~West Suburban”)~~. As~~, a bank holding company, and its wholly owned subsidiary, West Suburban Bank, based in Lombard, Illinois, with operations throughout our existing market footprint. This acquisition brought increased scale and new markets to the Company, and provided new product offerings and line of business opportunities. At closing, the Company acquired $2.94 billion of assets, $1.50 billion of loans, $1.07 billion of securities, and $2.69 billion of deposits, net of fair value adjustments. Under the terms of the merger agreement, each outstanding share of West Suburban common stock was exchanged for 42.413 shares of Company common stock, plus $271.15 of cash. This resulted in merger consideration of $295.2 million, based on the closing price of the Company’s common stock on the date of acquisition, which consisted of 15.7 million shares of the Company’s common stock and $100.7 million of cash. Goodwill of $67.9 million associated with the acquisition was recorded by the Company, which was the result of ~~this transaction,~~expected synergies, operational efficiencies and other factors.

The acquisition of West Suburban was accounted for as a business combination. We recorded the estimate of fair value based on initial valuations available at December 1, 2021. The determination of estimated fair value required management to make assumptions related to discount rates, expected future cash flows, market conditions and other future events that are often subjective in nature and may require adjustments. Estimated fair values which are subject to adjustment for up to one year after December 1, 2021 are considered final as of September 30, 2022. Adjustments and reclasses between deferred tax assets and current taxes receivable, which is reported within other

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

assets, were identified during the quarter ended September 30, 2022 based on further analysis after West Suburban Bank tax filings were made. Deferred tax assets increased $3.7 million, which was offset by a decrease in current taxes receivable of $3.9 million, which resulted in an increase to goodwill of $146,000. None of the $67.9 million of goodwill recorded ~~assets with a~~is expected to be deductible for income tax purposes.

The following table provides the preliminary purchase price allocation as of the December 1, 2021 closing date of the merger for the estimated fair value of ~~approximately $230.9~~the assets acquired and liabilities assumed, as recorded by the Company.


West Suburban Acquisition Summary
As of Date of Acquisition

	December 1, 2021
Assets
Cash and due from banks	$	16,794
Interest bearing deposits with financial institutions		232,880
Securities available-for-sale and held-to maturity, at fair value		1,067,517
FHLBC stock		3,340
Loans, net of allowance for credit losses Day One PCD loan adjustment		1,500,974
Premises and equipment		47,456
Other real estate owned		5,552
Core deposit intangible		14,772
Deferred tax assets		5,819
Other assets		48,838
Total assets	$	2,943,942

Liabilities
Noninterest bearing demand	$	1,070,980
Savings, NOW and money market		1,408,051
Time		215,205
Total deposits		2,694,236
Reserve for unfunded commitments		1,787
Other liabilities		20,629
Total liabilities		2,716,652

Cash consideration paid		100,679
Stock issued for acquisition		194,484
Total Liabilities Assumed and Cash and Stock Consideration Paid for Acquisition	$	3,011,815
Goodwill	$	67,873

Expenses related to the West Suburban acquisition totaled $650,000 and $9.5 million ~~including approximately $221.0~~for the three month and nine month periods ended September 30, 2022 respectively, and $13.2 million during the year ended December 31, 2021, and are reported within noninterest expense based on the line items impacted, which are primarily salaries and employee benefits, occupancy, furniture and equipment, computer and data processing, legal fees, and other expense in the Consolidated Statements of Income.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


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

The following table presents the carrying amount of all acquired loans as of September 30, 2022 and December 31, 2021, including loans that, as of the acquisition date, had not experienced 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.~~ more-than-insignificant deterioration in credit quality since origination (“non-PCD loans”):


Acquired Loan Detail	As of September 30, 2022						As of December 31, 2021
	PCD		Non-PCD		Total		PCD		Non-PCD		Total
West Suburban acquired loans	$	77,548	$	1,171,877	$	1,249,425	$	102,409	$	1,418,752	$	1,521,161
ABC Bank acquired loans		2,114		44,082		46,196		4,547		64,236		68,783
Talmer Bank acquired loans		-		16,048		16,048		-		45,858		45,858
Total acquired loans net book value	$	79,662	$	1,232,007	$	1,311,669	$	106,956	$	1,528,846	$	1,635,802
Accretion recorded on acquired loans year to date	$	782	$	4,121	$	4,903	$	401	$	565	$	966
Accretion recorded on acquired unfunded commitments year to date					$	670					$	74

Note 3 – Securities

Investment Portfolio Management

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

~~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~~$4.5 million at September 30, ~~2017,~~2022, and ~~$3.1~~$7.1 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.~~2021. FRBC stock was recorded at ~~$4.8~~$14.9 million at September 30, ~~2017,~~2022, and $6.2 million at December 31, ~~2016.~~2021.

The following ~~table summarizes~~tables summarize the amortized cost and fair value of the securities portfolio at September 30, ~~2017,~~2022, and December 31, ~~2016,~~2021, and the corresponding amounts of gross unrealized gains and losses:

Gross

Gross

Amortized

Unrealized

Unrealized

Fair
September 30, 2017

Cost

Gains

Losses

Value
Securities available-for-sale

U.S. Treasuries

$
4,001

$
-

$
(11)

$
3,990
U.S. government agencies

13,475

15

(39)

13,451
U.S. government agencies mortgage-backed

11,131

18

(119)

11,030
States and political subdivisions

224,648

5,173

(789)

229,032
Corporate bonds

10,823

20

(266)

10,577
Collateralized mortgage obligations

81,693

228

(1,535)

80,386
Asset-backed securities

134,542

865

(3,648)

131,759
Collateralized loan obligations

52,803

505

(49)

53,259
Total securities available-for-sale

$
533,116

$
6,824

$
(6,456)

$
533,484

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Gross

Gross

Amortized

Unrealized

Unrealized

Fair
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


				Gross		Gross
	Amortized			Unrealized		Unrealized		Fair
September 30, 2022	Cost¹		��	Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	223,910		$	-	$	(12,813)	$	211,097
U.S. government agencies		61,364			-		(5,401)		55,963
U.S. government agencies mortgage-backed		145,857			-		(18,231)		127,626
States and political subdivisions		243,515			1		(19,257)		224,259
Corporate bonds		10,000			-		(456)		9,544
Collateralized mortgage obligations		648,044			5		(60,203)		587,846
Asset-backed securities		227,130			23		(7,566)		219,587
Collateralized loan obligations		180,910			-		(7,073)		173,837
Total securities available-for-sale	$	1,740,730		$	29	$	(131,000)	$	1,609,759


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2021	Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	202,251	$	125	$	(37)	$	202,339
U.S. government agencies		62,587		-		(699)		61,888
U.S. government agencies mortgage-backed		172,016		856		(570)		172,302
States and political subdivisions		241,937		16,344		(672)		257,609
Corporate bonds		10,000		-		(113)		9,887
Collateralized mortgage obligations		673,238		2,014		(2,285)		672,967
Asset-backed securities		236,293		1,245		(661)		236,877
Collateralized loan obligations		79,838		3		(78)		79,763
Total securities available-for-sale	$	1,678,160	$	20,587	$	(5,115)	$	1,693,632

¹Excludes accrued interest receivable of $6.3 million and $4.3 million at September 30, 2022 and December 31, 2021, respectively, that is recorded in other assets on the consolidated balance sheet.

The fair value, amortized cost and weighted average yield of debt securities at September 30, ~~2017,~~2022, 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	$	8,816	1.10	%	$	8,617
Due after one year through five years		5,846	2.74			5,831		303,411	1.05			284,480
Due after five years through ten years		16,105	2.52			16,057		44,313	2.63			39,593
Due after ten years		227,596	2.98			231,757		182,249	3.02			168,173
		252,947	2.94			257,050
								538,789	1.85			500,863
Mortgage-backed and collateralized mortgage obligations		92,824	2.72			91,416		793,901	2.22			715,472
Asset-backed securities		134,542	2.41			131,759		227,130	3.39			219,587
Collateralized loan obligations		52,803	4.38			53,259		180,910	4.64			173,837
Total securities available-for-sale	$	533,116	2.91	%	$	533,484	$	1,740,730	2.51	%	$	1,609,759

At September 30, ~~2017,~~2022, the Company’s investments ~~include $110.6~~included $167.0 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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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~~$20.3 million, or ~~10.42%~~9.29%, of outstanding principal.

~~The~~At September 30, 2022, the Company ~~has invested in~~had no securities issued from ~~three originators that~~any one originator, other than the U.S. Government and its agencies, which 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

Securities with unrealized losses with no corresponding allowance for credit losses at September 30, ~~2017,~~2022 and December 31, ~~2016,~~2021, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):


	Less than 12 months					12 months or more
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

																Less than 12 months					12 months or more
September 30, 2022																in an unrealized loss position					in an unrealized loss position					Total
																Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. Treasuries	1	$	11	$	3,990	-	$	-	$	-	1	$	11	$	3,990	5	$	12,813	$	211,097	-	$	-	$	-	5	$	12,813	$	211,097
U.S. government agencies	2		39		6,701	-		-		-	2		39		6,701	2		1,987		27,188	7		3,414		28,775	9		5,401		55,963
U.S. government agencies mortgage-backed	2		13		2,089	4		106		4,096	6		119		6,185	126		16,766		122,905	6		1,465		4,721	132		18,231		127,626
States and political subdivisions	7		789		24,843	-		-		-	7		789		24,843	79		18,155		219,497	3		1,102		4,510	82		19,257		224,007
Corporate bonds	-		-		-	3		266		10,078	3		266		10,078	1		286		4,715	1		170		4,829	2		456		9,544
Collateralized mortgage obligations	4		238		21,281	8		1,297		43,684	12		1,535		64,965	205		48,552		505,601	15		11,651		77,102	220		60,203		582,703
Asset-backed securities	1		265		4,293	9		3,383		76,725	10		3,648		81,018	44		6,553		196,221	6		1,013		11,524	50		7,566		207,745
Collateralized loan obligations	1		49		7,948	-		-		-	1		49		7,948	26		5,735		134,712	8		1,338		39,125	34		7,073		173,837
Total securities available-for-sale	18	$	1,404	$	71,145	24	$	5,052	$	134,583	42	$	6,456	$	205,728	488	$	110,847	$	1,421,936	46	$	20,153	$	170,586	534	$	131,000	$	1,592,522


	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

																Less than 12 months					12 months or more
December 31, 2021																in an unrealized loss position					in an unrealized loss position					Total
																Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. Treasuries																1	$	37	$	49,719	-	$	-	$	-	1	$	37	$	49,719
U.S. government agencies																5		592		56,879	4		107		5,008	9		699		61,887
U.S. government agencies mortgage-backed	11	$	957	$	40,636	1	$	20	$	898	12	$	977	$	41,534	63		505		78,711	1		65		1,663	64		570		80,374
States and political subdivisions	12		273		35,241	-		-		-	12		273		35,241	7		55		8,430	1		617		4,051	8		672		12,481
Corporate bonds	1		183		4,817	2		153		5,328	3		336		10,145	2		113		9,887	-		-		-	2		113		9,887
Collateralized mortgage obligations	16		3,402		117,752	7		397		18,109	23		3,799		135,861	133		2,285		381,658	-		-		-	133		2,285		381,658
Asset-backed securities	4		328		17,604	12		7,997		107,112	16		8,325		124,716	20		608		103,819	3		53		3,276	23		661		107,095
Collateralized loan obligations	-		-		-	12		896		81,613	12		896		81,613	10		35		45,132	2		43		10,628	12		78		55,760
Total securities available-for-sale	44	$	5,143	$	216,050	34	$	9,463	$	213,060	78	$	14,606	$	429,110	241	$	4,230	$	734,235	11	$	885	$	24,626	252	$	5,115	$	758,861

~~Recognition~~Each quarter we perform an analysis to determine if any of ~~other-than-temporary impairment~~the unrealized losses on securities available-for-sale are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. Our assessment includes a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and our ability and intent to hold the security for a period of time sufficient for a recovery in value. We also consider the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. No credit losses were determined to be present as of September 30, 2022, as there was ~~not necessary~~no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the third quarter of 2022.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


		Three Months Ended					Nine Months Ended
		September 30,					September 30,
Securities available-for-sale	2022		2021			2022			2021
Proceeds from sales of securities	$	-	$	26,873		$	3,303		$	35,075
Gross realized gains on securities	$	-	$	262		$	-		$	267
Gross realized losses on securities ¹		(1)		(18)			(34)			(21)
Net realized (losses) gains	$	(1)	$	244		$	(34)		$	246
Income tax benefit (expense) on net realized (losses) gains	$	1	$	(69)		$	10		$	(70)
Effective tax rate applied		N/M		28.3	%		29.4	%		28.5	%

¹ The Company received proceeds of $7.5 million from the ~~three and~~call of available for sale investment securities for the nine months ended September 30, ~~2017 or 2016. The changes in fair value related primarily to interest rate fluctuations. Our review~~2022. A loss of ~~other-than-temporary impairment determined that there~~$1,000 was ~~no credit quality deterioration.~~recorded on the call of securities during the third quarter of 2022.

~~The following table presents net realized gains (losses) on securities available-for-sale for the quarters and nine months ended~~N/M -Not meaningful

As of September 30, ~~2017~~2022, securities valued at $578.5 million were pledged to secure deposits and ~~2016.~~borrowings, and for other purposes, an increase from $501.3 million of securities pledged at year-end 2021.

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 of the net realized losses in the prior year were incurred to meet the funding needs related to the Talmer branch acquisition in late 2016.~~

~~Tableof Contents~~

Note 4 – 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


	September 30, 2022		December 31, 2021
Commercial ¹	$	888,081	$	771,474
Leases		251,603		176,031
Commercial real estate – investor		941,910		799,928
Commercial real estate – owner occupied		876,951		731,845
Construction		176,700		206,132
Residential real estate �� investor		59,580		63,399
Residential real estate – owner occupied		220,969		213,248
Multifamily		322,856		309,164
HELOC		116,108		126,290
Other ²		14,576		23,293
Total loans		3,869,334		3,420,804
Allowance for credit losses on loans		(48,847)		(44,281)
Net loans ³	$	3,820,487	$	3,376,523

¹ Includes $2.4 million and $38.4 million of Paycheck Protection Program (“PPP”) loans at September 30, 2022 and December 31, 2021, respectively.

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

³ Excludes accrued interest receivable of $13.7 million and $9.2 million at September 30, 2022 and December 31, 2021, respectively, that is recorded in other assets on the consolidated balance sheet.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The ~~Company’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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

listed above represent ~~78.6%~~70.2% and ~~79.7%~~71.6% of the portfolio at September 30, ~~2017,~~2022, and December 31, ~~2016, respectively.~~2021, respectively, and include a mix of owner occupied and non-owner occupied commercial real estate, residential, construction and multifamily loans.

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



			(Release of)
	Beginning		Provision for						Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three months ended September 30, 2022
Commercial	$	14,114	$	(919)	$	67	$	47	$	13,175
Leases		1,736		(24)		178		-		1,534
Commercial real estate – investor		9,436		256		124		19		9,587
Commercial real estate – owner occupied		11,478		3,618		12		87		15,171
Construction		1,535		9		-		-		1,544
Residential real estate – investor		661		147		-		8		816
Residential real estate – owner occupied		1,869		149		-		113		2,131
Multifamily		2,434		33		-		63		2,530
HELOC		1,542		386		-		35		1,963
Other		583		(128)		103		44		396
	$	45,388	$	3,527	$	484	$	416	$	48,847



			Provision for
	Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Nine months ended September 30, 2022
Commercial	$	11,751	$	1,488	$	149	$	85	$	13,175
Leases		3,480		(1,768)		178		-		1,534
Commercial real estate – investor		10,795		(664)		604		60		9,587
Commercial real estate – owner occupied		4,913		10,289		133		102		15,171
Construction		3,373		(1,829)		-		-		1,544
Residential real estate – investor		760		33		-		23		816
Residential real estate – owner occupied		2,832		(919)		-		218		2,131
Multifamily		3,675		(1,208)		-		63		2,530
HELOC		2,510		(649)		-		102		1,963
Other		192		404		320		120		396
	$	44,281	$	5,177	$	1,384	$	773	$	48,847



			Provision for
	Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three months ended September 30, 2021
Commercial	$	2,601	$	82	$	23	$	25	$	2,685
Leases		3,388		(41)		4		-		3,343
Commercial real estate – investor		9,003		(799)		101		18		8,121
Commercial real estate – owner occupied		2,520		8		5		7		2,530
Construction		3,048		(175)		-		-		2,873
Residential real estate – investor		975		(287)		-		7		695
Residential real estate – owner occupied		1,866		(116)		-		18		1,768
Multifamily		3,266		(121)		183		-		2,962
HELOC		1,833		(23)		-		28		1,838
Other		139		19		53		29		134
	$	28,639	$	(1,453)	$	369	$	132	$	26,949

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

			Provision for
Allowance for credit losses	Beginning		(Release of)						Ending
Nine months ended September 30, 2021	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Commercial	$	2,812	$	43	$	232	$	62	$	2,685
Leases		3,888		(513)		32		-		3,343
Commercial real estate – investor		7,899		265		101		58		8,121
Commercial real estate – owner occupied		3,557		(1,213)		39		225		2,530
Construction		4,054		(1,181)		-		-		2,873
Residential real estate – investor		1,740		(1,328)		-		283		695
Residential real estate – owner occupied		2,714		(1,074)		-		128		1,768
Multifamily		3,625		(480)		183		-		2,962
HELOC		1,948		(222)		17		129		1,838
Other		1,618		(1,483)		108		107		134
	$	33,855	$	(7,186)	$	712	$	992	$	26,949

The ACL on loans excludes $4.4 million, $4.5 million and $2.2 million of allowance for unfunded commitments as of September 30, 2022, December 31, 2021 and September 30, 2021, respectively, recorded within Other Liabilities. The total ACL on unfunded commitments listed as of September 30, 2022 and December 31, 2021 excludes the purchase accounting adjustment of $1.0 million and $1.7 million, respectively, recorded due to our acquisition of West Suburban, which is also recorded within Other Liabilities, and is being accreted in interest income over the estimated life of the unused commitments.

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


			Accounts								ACL
September 30, 2022	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	895	$	8,748	$	4	$	1,090	$	10,737	$	1,453
Leases		-		-		1,821		-		1,821		11
Commercial real estate – investor		17,389		-		-		-		17,389		2,891
Commercial real estate – owner occupied		20,667		-		-		2,379		23,046		6,033
Construction		-		-		-		-		-		-
Residential real estate – investor		675		-		-		-		675		-
Residential real estate – owner occupied		1,773		-		-		-		1,773		248
Multifamily		672		-		-		-		672		-
HELOC		190		-		-		-		190		-
Other		-		-		-		-		-		-
Total	$	42,261	$	8,748	$	1,825	$	3,469	$	56,303	$	10,636


			Accounts								ACL
December 31, 2021	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	1,986	$	9,901	$	-	$	-	$	11,887	$	2,677
Leases		-		-		3,249		505		3,754		811
Commercial real estate – investor		5,693		-		-		-		5,693		-
Commercial real estate – owner occupied		9,147		-		-		2,490		11,637		362
Construction		2,104		-		-		-		2,104		992
Residential real estate – investor		925		-		-		-		925		-
Residential real estate – owner occupied		4,271		-		-		-		4,271		276
Multifamily		1,845		-		-		-		1,845		75
HELOC		1,006		-		-		-		1,006		190
Other		-		-		-		7		7		4
Total	$	26,977	$	9,901	$	3,249	$	3,002	$	43,129	$	5,387

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
September 30, 2022	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	1,228	$	1,012	$	1,153	$	3,393	$	884,688	$	888,081	$	-
Leases		602		187		67		856		250,747		251,603		-
Commercial real estate – investor		-		1,457		17,945		19,402		922,508		941,910		12,833
Commercial real estate – owner occupied		723		-		3,091		3,814		873,137		876,951		-
Construction		314		-		7,380		7,694		169,006		176,700		7,380
Residential real estate – investor		457		68		1,040		1,565		58,015		59,580		283
Residential real estate – owner occupied		644		424		2,451		3,519		217,450		220,969		235
Multifamily		1,023		-		672		1,695		321,161		322,856		-
HELOC		635		-		630		1,265		114,843		116,108		21
Other		33		8		-		41		14,535		14,576		-
Total	$	5,659	$	3,156	$	34,429	$	43,244	$	3,826,090	$	3,869,334	$	20,752


													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
December 31, 2021¹	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	3,407	$	1,413	$	1,828	$	6,648	$	764,826	$	771,474	$	1,396
Leases		125		-		1,571		1,696		174,335		176,031		-
Commercial real estate – investor		-		267		1,107		1,374		798,554		799,928		-
Commercial real estate – owner occupied		2,324		500		4,848		7,672		724,173		731,845		1,594
Construction		854		-		-		854		205,278		206,132		-
Residential real estate – investor		395		470		792		1,657		61,742		63,399		23
Residential real estate – owner occupied		1,994		591		3,077		5,662		207,586		213,248		97
Multifamily		-		1,046		-		1,046		308,118		309,164		-
HELOC		193		23		398		614		125,676		126,290		-
Other		50		46		23		119		23,174		23,293		-
Total	$	9,342	$	4,356	$	13,644	$	27,342	$	3,393,462	$	3,420,804	$	3,110

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

The table presents all nonaccrual loans as of September 30, 2022, and December 31, 2021:


Nonaccrual loan detail	September 30, 2022		With no ACL		December 31, 2021		With no ACL
Commercial	$	8,821	$	5,449	$	11,894	$	9,217
Leases		235		235		3,754		2,943
Commercial real estate – investor		5,112		2,018		5,694		5,694
Commercial real estate – owner occupied		9,581		7,035		11,637		11,205
Construction		145		145		160		160
Residential real estate – investor		1,097		1,097		876		876
Residential real estate – owner occupied		3,552		3,304		4,898		4,622
Multifamily		1,559		1,559		1,573		1,573
HELOC		2,022		2,022		1,042		852
Other		2		2		3		3
Total	$	32,126	$	22,866	$	41,531	$	37,145

The Company recognized $142,000 of interest on nonaccrual loans during the nine months ended September 30, 2022.

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

$
-

1 ~~The “Other” class includes overdrafts and net deferred costs.~~

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 September 30, 2022 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

Tableof Contents

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

Old Second Bancorp, Inc. and Subsidiaries

1 ~~The substandard credit~~Notes to Consolidated Financial Statements

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


	2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial
Pass	$	170,428	$	77,354	$	23,879	$	14,671	$	8,502	$	5,253	$	527,792	$	473	$	828,352
Special Mention		3,030		3,137		1,274		2,528		-		-		18,038		-		28,007
Substandard		5,407		2,976		3,214		12,833		15		60		7,217		-		31,722
Total commercial		178,865		83,467		28,367		30,032		8,517		5,313		553,047		473		888,081

Leases
Pass		122,629		69,757		30,415		21,531		5,628		1,408		-		-		251,368
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		93		142		-		-		-		-		235
Total leases		122,629		69,757		30,508		21,673		5,628		1,408		-		-		251,603

Commercial real estate – investor
Pass		335,320		238,901		148,301		65,813		49,805		60,056		6,960		-		905,156
Special Mention		5,353		-		-		-		-		3,149		-		-		8,502
Substandard		-		2,018		-		23,140		-		3,094		-		-		28,252
Total commercial real estate – investor		340,673		240,919		148,301		88,953		49,805		66,299		6,960		-		941,910

Commercial real estate – owner occupied
Pass		164,067		241,671		103,552		48,982		51,399		100,087		33,753		-		743,511
Special Mention		8,429		8,600		53,299		19,102		244		1,068		-		-		90,742
Substandard		2,625		17,316		1,135		18,309		-		3,313		-		-		42,698
Total commercial real estate – owner occupied		175,121		267,587		157,986		86,393		51,643		104,468		33,753		-		876,951

Construction
Pass		27,377		77,625		44,138		2,460		2,886		1,435		2,560		-		158,481
Special Mention		-		1,465		5,181		10,226		-		-		-		-		16,872
Substandard		1,232		-		-		115		-		-		-		-		1,347
Total construction		28,609		79,090		49,319		12,801		2,886		1,435		2,560		-		176,700

Residential real estate – investor
Pass		13,481		10,482		7,079		9,508		5,246		11,285		1,214		-		58,295
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		175		-		-		499		189		422		-		-		1,285
Total residential real estate – investor		13,656		10,482		7,079		10,007		5,435		11,707		1,214		-		59,580

Residential real estate – owner occupied
Pass		36,688		45,430		29,163		16,407		12,421		74,772		1,565		-		216,446
Special Mention		-		594		-		-		-		-		-		-		594
Substandard		-		272		239		725		132		2,561		-		-		3,929
Total residential real estate – owner occupied		36,688		46,296		29,402		17,132		12,553		77,333		1,565		-		220,969
	��
Multifamily
Pass		71,830		108,581		53,862		15,559		56,411		7,538		101		155		314,037
Special Mention		-		-		-		6,837		-		-		-		-		6,837
Substandard		1,095		-		-		-		608		279		-		-		1,982
Total multifamily		72,925		108,581		53,862		22,396		57,019		7,817		101		155		322,856

HELOC
Pass		1,909		517		1,512		1,728		661		2,616		104,776		-		113,719
Special Mention		-		-		-		-		-		-		111		-		111
Substandard		63		-		-		-		70		210		1,935		-		2,278
Total HELOC		1,972		517		1,512		1,728		731		2,826		106,822		-		116,108

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Other
Pass		2,892		3,102		501		166		57		122		7,734		-		14,574
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		2		-		-		-		-		-		2
Total other		2,892		3,102		503		166		57		122		7,734		-		14,576

Total loans
Pass		946,621		873,420		442,402		196,825		193,016		264,572		686,455		628		3,603,939
Special Mention		16,812		13,796		59,754		38,693		244		4,217		18,149		-		151,665
Substandard		10,597		22,582		4,683		55,763		1,014		9,939		9,152		-		113,730
Total loans	$	974,030	$	909,798	$	506,839	$	291,281	$	194,274	$	278,728	$	713,756	$	628	$	3,869,334

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, 2021, were as follows:


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

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

Commercial real estate – investor
Pass		245,346		175,218		118,697		85,049		64,810		55,523		18,602		-		763,245
Special Mention		15,466		-		10,550		-		-		-		-		-		26,016
Substandard		2,238		2,378		451		181		3,612		1,807		-		-		10,667
Total commercial real estate – investor		263,050		177,596		129,698		85,230		68,422		57,330		18,602		-		799,928

Commercial real estate – owner occupied
Pass		290,225		155,353		90,325		60,915		54,236		59,887		2,522		-		713,463
Special Mention		-		-		2,953		-		-		-		-		-		2,953
Substandard		8,318		942		1,686		-		1,251		3,232		-		-		15,429
Total commercial real estate – owner occupied		298,543		156,295		94,964		60,915		55,487		63,119		2,522		-		731,845

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

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

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

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

HELOC
Pass		907		2,091		2,131		805		1,667		12,315		104,843			-		124,759
Special Mention		-		-		-		-		-		-		108			-		108
Substandard		-		-		-		17		12		376		1,018			-		1,423
Total HELOC		907		2,091		2,131		822		1,679		12,691		105,969			-		126,290

Other
Pass		8,659		1,099		437		254		1,414		4,214		7,206	-		-		23,283
Special Mention		-		-		-		-		-		-		-			-		-
Substandard		-		3		-		7		-		-		-			-		10
Total other		8,659		1,102		437		261		1,414		4,214		7,206			-		23,293

Total loans
Pass		1,079,972		607,575		392,999		267,763		177,970		224,824		546,694			30		3,297,827
Special Mention		16,169		2,222		26,029		-		-		-		3,816			-		48,236
Substandard		21,090		7,698		19,098		6,057		5,738		9,398		5,662			-		74,741
Total loans	$	1,117,231	$	617,495	$	438,126	$	273,820	$	183,708	$	234,222	$	556,172		$	30	$	3,420,804

The Company had ~~$1.2 million~~$659,000 and ~~$1.8 million~~$488,000 in residential real estate loans in the process of foreclosure as of September 30, ~~2017,~~2022, and December 31, ~~2016,~~2021, 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 were not considered TDRs, if modified prior to January 1, 2022, 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.

~~TDRs that~~There were ~~modified during~~no TDR loan modifications 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~~three months ended September 30, 2022 and two TDR loan modifications for an aggregate of ~~terms from bankruptcy court~~

$39,000 for the nine months ended September 30, 2022. There was no TDR activity for the three and nine months ended September 30, 2021. TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There was no TDR default activity for the ~~nine months~~periods ended September 30, ~~2017,~~2022, and September 30, ~~2016,~~2021, for loans that were restructured within the prior 12 month ~~period prior to default.~~period.

~~Tableof Contents~~22

~~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

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 65 – 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				Nine Months Ended
									September 30,				September 30,
Other real estate owned	2017		2016		2017		2016		2022		2021		2022		2021
Balance at beginning of period	$	11,724	$	16,252	$	11,916	$	19,141	$	1,624	$	1,877	$	2,356	$	2,474
Property additions		176		255		3,796		1,223
Property improvements		-		4		-		16
Property additions, net of acquisition adjustments										-		70		87		70
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		1,956		2,002		5,058		4,931		63		37		778		567
Period valuation adjustments		920		365		1,630		1,305
Period valuation (write-up)/write-down										-		(2)		104		65
Balance at end of period	$	9,024	$	14,144	$	9,024	$	14,144	$	1,561	$	1,912	$	1,561	$	1,912

Activity in the valuation allowance was as follows:


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

									Three Months Ended				Nine Months Ended
									September 30,				September 30,
									2022		2021		2022		2021
Balance at beginning of period	$	8,304	$	13,377	$	9,982	$	14,127	$	920	$	1,296	$	1,179	$	1,643
Provision for unrealized losses		920		365		1,630		1,305
(Release of) provision for unrealized losses										-		(2)		104		65
Reductions taken on sales		(421)		(488)		(2,809)		(2,178)		(64)		(129)		(427)		(543)
Balance at end of period	$	8,803	$	13,254	$	8,803	$	13,254	$	856	$	1,165	$	856	$	1,165

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				Nine Months Ended
									September 30,				September 30,
									2022		2021		2022		2021
Gain on sales, net	$	(276)	$	(249)	$	(454)	$	(316)	$	(33)	$	(5)	$	(163)	$	(40)
Provision for unrealized losses		920		365		1,630		1,305
(Release of) provision for unrealized losses										-		(2)		104		65
Operating expenses		221		361		1,037		1,217		58		32		159		117
Less:
Lease revenue		185		51		285		163		4		-		4		4
Net OREO expense	$	680	$	426	$	1,928	$	2,043	$	21	$	25	$	96	$	138

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 76 – Deposits

Major classifications of deposits were as follows:


	September 30, 2017		December 31, 2016

					September 30, 2022		December 31, 2021
Noninterest bearing demand	$	556,874	$	513,688	$	2,098,144	$	2,093,494
Savings		260,268		256,159		1,164,036		1,178,575
NOW accounts		417,054		419,417		630,747		587,381
Money market accounts		270,647		275,273		931,813		1,102,972
Certificates of deposit of less than $100,000		219,152		228,993		258,071		296,298
Certificates of deposit of $100,000 through $250,000		114,373		110,992		148,411		138,794
Certificates of deposit of more than $250,000		50,747		62,263		50,137		68,718
Total deposits	$	1,889,115	$	1,866,785	$	5,281,359	$	5,466,232

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Note 87 – Borrowings

The following table is a summary of borrowings as of September 30, ~~2017,~~2022, and December 31, ~~2016.~~2021. Junior subordinated debentures are discussed in more detail in Note 9:8:


	September 30, 2017		December 31, 2016

					September 30, 2022		December 31, 2021
Securities sold under repurchase agreements	$	26,853	$	25,715	$	35,497	$	50,337
FHLBC advances1		125,000		70,000
Other short-term borrowings						25,000		-
Junior subordinated debentures		57,627		57,591		25,773		25,773
Subordinated debentures						59,275		59,212
Senior notes		44,033		43,998		44,559		44,480
Notes payable and other borrowings						10,000		19,074
Total borrowings	$	253,513	$	197,304	$	200,104	$	198,876

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~~$35.5 million at September 30, ~~2017,~~2022, and ~~$25.7~~$50.3 million at December 31, ~~2016.~~2021. The fair value of the pledged collateral was ~~$41.5~~$72.4 million at September 30, ~~2017~~2022, and ~~$43.0~~$113.0 million at December 31, ~~2016.~~2021. At September 30, ~~2017,~~2022, there were no customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC. Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans. As of September 30, ~~2017,~~2022, the Bank had ~~$125.0~~$25.0 million in short-term advances outstanding under the ~~FHLBC as compared to $70.0 million outstanding~~FHLBC. There were no short-term advances as of December 31, ~~2016. As~~2021. The Bank assumed $23.4 million of long-term FHLBC advances with our ABC Bank acquisition in 2018. The remaining balance of $5.9 million was paid off in full during the second quarter of 2022. FHLB stock held at September 30, ~~2017, FHLBC stock held~~2022 was valued at ~~$5.6~~$4.5 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~~$861.1 million, which carried a ~~FHLBC calculated~~FHLBC-calculated combined collateral value of ~~$273.8~~$576.7 million. The Company had excess collateral of ~~$74.5~~$536.7 million available to secure borrowings at September 30, ~~2017.~~2022.

The Company ~~completed a debt retirement and simultaneous senior debt offering in the fourth quarter of 2016. Subordinated debt of $45.0~~also had $44.6 million and ~~$500,000~~$44.5 million of senior notes outstanding, ~~were paid off with the proceeds~~net of ~~a $45.0 million senior notes~~deferred issuance costs, as of September 30, 2022 and ~~cash on hand.~~December 31, 2021, respectively. 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 31, 2021, the senior debt ~~will~~began to pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points. The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. ~~Debt~~As

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

of September 30, 2022, and December 31, 2021, unamortized debt issuance costs ~~incurred for~~related to the senior notes ~~issuance totaled $1.0 million,~~were $441,000 and ~~are being deferred~~$520,000, 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.

On February 24, 2020, the Company originated a $20.0 million term note, of which $10.0 million is outstanding as of September 30, 2022, with a correspondent bank. The term note was issued for a three year term at one-month LIBOR plus 175 basis points, requires principal payments quarterly and interest payments monthly, and the balance of this note is included within Notes Payable and Other Borrowings on the Consolidated Balance Sheet. The Company also has an undrawn line of credit of $30.0 million with a correspondent bank to be used for short-term funding needs; advances under this line can be outstanding up to 360 days from the date of issuance. This line of credit has not been utilized since early 2019.

In the second quarter of 2021, we sold and issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). The Notes were offered and sold to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended and the provisions of Regulation D promulgated thereunder. The Company intends to use the net proceeds from the offering for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions. The Notes bear interest at a fixed annual rate of 3.50%, from and including the date of issuance to but excluding April 15, 2026, payable semi-annually in arrears. From and including April 15, 2026 to, but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to Three-Month Term SOFR (as defined in the Note) plus 273 basis points, payable quarterly in arrears. As of September 30, 2022, we had $59.3 million of subordinated debentures outstanding, net of deferred issuance costs.

Note 98 – Junior Subordinated Debentures

The Company completed the sale of $27.5 million of cumulative trust preferred securities by its unconsolidated subsidiary, Old Second Capital Trust I, in June 2003. An additional $4.1 million of cumulative trust preferred securities were sold in July 2003. The trust preferred securities may remain outstanding for a 30-year term but, subject to regulatory approval, can be called in whole or in part by the Company after June 30, 2008. When not in deferral, distributions on the securities are payable quarterly at an annual rate of 7.80%. 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,~~ unconsolidated subsidiary, Old Second Capital Trust II, in April 2007. These trust preferred securities ~~also~~ mature in 30 years, but subject to ~~the aforementioned~~ regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017. The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017, and ~~float at~~now have a floating rate of 150 basis points over three-month ~~LIBOR thereafter. The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017.~~LIBOR. Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of ~~4.30% as of~~4.39% and 4.40% for the quarters ended September 30, ~~2017, compared to the rate paid prior to June 15, 2017 of 6.77%.~~2022 and September 30, 2021, respectively. The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering. The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities. ~~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,~~2022, and December 31, ~~2016,~~2021, 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 109 – Equity Compensation Plans

Stock-based awards are outstanding under the Company’s ~~2008~~2019 Equity Incentive Plan, as amended and restated (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 originally approved at the ~~2014~~May 2019 annual stockholders’ meeting and authorized 600,000 shares, and at the May 2021 annual stockholders’ meeting, the Company obtained stockholder approval to increase the number of ~~stockholders; a maximum~~shares of ~~375,000~~common stock authorized for issuance under the plan by 1,200,000 shares, ~~were authorized~~from 600,000 shares to ~~be issued under this plan.~~1,800,000 shares. Following the approval of the ~~2014~~2019 Plan, no further awards will be granted under ~~the 2008 Plan or~~ any other ~~Company equity compensation~~prior 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, officers, employees or eligible service providers under

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Old Second Bancorp, Inc. and ~~officers or employees under~~ Subsidiaries

Notes to Consolidated Financial Statements

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

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~~2022, 1,176,903 shares remained available for issuance under the ~~2014~~2019 Plan.

There were no stock options granted or exercised in the third quarter 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 all stock options of the Company’s common stock have fully vested.

~~A summary of stock option activity 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

$
-

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~~2019 Plan, unless otherwise provided in an award agreement, upon the occurrence of a change in control, ofall stock options and SARs then held by the ~~Company,~~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 ~~2014~~2019 Plan is not an obligation of the successor entity following ~~the~~a change in control or (ii) the ~~2014~~2019 Plan is an obligation of the successor entity following ~~the~~a change in control and the participant incurs a termination of service without cause or for good reason following the change in control. Notwithstanding the immediately preceding sentence, if the vesting of an ~~involuntary termination,~~award is conditioned upon the achievement of performance measures, then such vesting will generally be subject to the ~~stock options, stock appreciation rights, stock awards and cash incentive awards under~~following: if, at the ~~2014 Plan will become fully exercisable and vested. Performance-based awards generally will vest~~time of the change in control, the performance measures are less than 50% attained (pro rata based upon the ~~level of achievement~~time of the ~~applicable performance measures~~period through the change in control), the award will become vested and exercisable on a fractional basis with the numerator being equal to the percentage of attainment and the denominator being 50%; and if, at the time of the change in control, the performance measures are at least 50% attained (pro rata based upon the time of the period through the change in control), the award will become fully earned and vested immediately upon the change in control.

~~The Company granted restricted stock under its equity compensation plans beginning in 2005 and it began granting~~Awards of restricted stock units ~~in February 2009. Restricted stock awards~~ under the ~~Plans~~2019 Plan generally entitle holders to voting and dividend rights upon grant and are subject to forfeiture until certain restrictions have lapsed including employment for a specific period. ~~Restricted~~Awards of restricted stock units under the ~~Plans~~2019 Plan are also subject to forfeiture until certain restrictions have lapsed including employment for a specific period, but do not entitle holders to voting rights until the restricted period ends and shares are transferred in connection with the ~~units.~~units Generally, restricted stock and restricted stock units granted under the Plan vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until the vest date.

There were ~~161,500~~268,160 and 222,464 restricted ~~awards~~stock units issued under the ~~2014~~2019 Plan during the nine months ended September 30, ~~2017. There were 130,000 restricted awards issuedduring the nine months ended~~2022 and September 30, ~~2016.~~2021, 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~~2019 Plan was ~~$925,100 and $485,000~~$2.2 million in the first nine months of ~~2017~~2022 and ~~2016, respectively.~~$1.2 million for the first nine months ended of 2021.

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A summary of changes in the Company’s unvested restricted awards for the nine months ended September 30, ~~2017,~~2022, 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

				September 30, 2022
					Weighted
				Restricted	Average
				Stock Shares	Grant Date
				and Units	Fair Value
Unvested at January 1				540,306	$	12.04
Granted	161,500		11.04	268,160		14.25
Vested	(91,500)		5.07	(143,437)		12.75
Forfeited	(14,000)		7.53	(17,144)		12.49
Nonvested at September 30	465,000	$	7.79
Unvested at September 30				647,885	$	12.79

Total unrecognized compensation cost of restricted awards was ~~$2.0~~$4.5 million as of September 30, ~~2017,~~2022, which is expected to be recognized over a weighted-average period of ~~2.11~~2.01 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 1110 – 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 September 30,				Nine Months Ended September 30,
											2022		2021		2022		2021
Basic earnings per share:
Weighted-average common shares outstanding			29,627,086		29,554,716		29,591,811		29,524,796			44,565,626		28,707,737		44,509,072		28,925,612
Net income		$	8,077	$	3,499	$	17,650	$	10,666		$	19,523	$	8,412	$	43,790	$	29,111
Basic earnings per share		$	0.27	$	0.12	$	0.60	$	0.36		$	0.43	$	0.30	$	0.98	$	1.01

Diluted earnings per share:
Weighted-average common shares outstanding			29,627,086		29,554,716		29,591,811		29,524,796			44,565,626		28,707,737		44,509,072		28,925,612
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												655,915		522,543		698,920		533,194
Diluted average common shares outstanding			30,103,609		29,838,182		30,019,365		29,828,430			45,221,541		29,230,280		45,207,992		29,458,806

Net Income		$	8,077	$	3,499	$	17,650	$	10,666		$	19,523	$	8,412	$	43,790	$	29,111
Diluted earnings per share		$	0.27	$	0.12	$	0.59	$	0.36		$	0.43	$	0.29	$	0.97	$	0.99

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.									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 11 – Regulatory & Capital Matters

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies. In connection with the current ~~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 percent (8%) and a total risk-based capital ratio at or above twelve percent (12%). At September 30, ~~2017,~~2022, the Bank exceeded those thresholds.

At September 30, ~~2017,~~2022, the Bank’s Tier 1 capital leverage ratio was ~~10.63%~~9.24%, ~~an increase~~a decrease of 3934 basis ~~point~~points from December 31, ~~2016, and~~2021, but is ~~well~~ above the 8.00% objective. The Bank’s total capital ratio was ~~13.52%~~12.64%, ~~an increase~~a decrease of 782 basis points from December 31, ~~2016, and~~2021, but also ~~modestly~~ 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,~~2022, and December 31, ~~2016.~~2021.

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015. The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies”, which are generally holding companies with consolidated assets of less than $3.0 billion. A detailed discussion of the Basel III Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, ~~2016,~~2021, under the heading “Supervision and Regulation.”

At September 30, ~~2017,~~2022 and December 31, ~~2016,~~2021, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

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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
September 30, 2022
Common equity tier 1 capital to risk weighted assets
Consolidated	$	170,622	8.88	%	$	110,482	5.750	%		N/A	N/A		$	434,155	9.16	%	$	331,778	7.00	%		N/A	N/A
Old Second Bank		243,109	12.67			110,330	5.750		$	124,720	6.50	%		550,635	11.60			332,280	7.00		$	308,545	6.50	%
Total capital to risk weighted assets
Consolidated		239,269	12.46			177,627	9.250			N/A	N/A			568,429	11.99			497,790	10.50			N/A	N/A
Old Second Bank		259,569	13.52			177,590	9.250			191,989	10.00			599,909	12.64			498,342	10.50			474,612	10.00
Tier 1 capital to risk weighted assets
Consolidated		221,579	11.54			139,207	7.250			N/A	N/A			459,155	9.68			403,184	8.50			N/A	N/A
Old Second Bank		243,109	12.67			139,111	7.250			153,502	8.00			550,635	11.60			403,483	8.50			379,748	8.00
Tier 1 capital to average assets
Consolidated		221,579	9.69			91,467	4.00			N/A	N/A			459,155	7.70			238,522	4.00			N/A	N/A
Old Second Bank		243,109	10.63			91,480	4.00			114,350	5.00			550,635	9.24			238,370	4.00			297,963	5.00

December 31, 2016

December 31, 2021
Common equity tier 1 capital to risk weighted assets
Consolidated	$	154,537	8.76	%	$	90,411	5.125	%		N/A	N/A		$	394,421	9.46	%	$	291,855	7.00	%		N/A	N/A
Old Second Bank		221,153	12.53			90,456	5.125		$	114,724	6.50	%		514,992	12.41			290,487	7.00		$	269,738	6.50	%
Total capital to risk weighted assets
Consolidated		216,769	12.29			152,126	8.625			N/A	N/A			522,932	12.55			437,513	10.50			N/A	N/A
Old Second Bank		237,306	13.45			152,176	8.625			176,436	10.00			558,503	13.46			435,682	10.50			414,935	10.00
Tier 1 capital to risk weighted assets
Consolidated		191,988	10.88			116,904	6.625			N/A	N/A			419,421	10.06			354,382	8.50			N/A	N/A
Old Second Bank		221,153	12.53			116,930	6.625			141,199	8.00			514,992	12.41			352,734	8.50			331,985	8.00
Tier 1 capital to average assets
Consolidated		191,988	8.90			86,287	4.00			N/A	N/A			419,421	7.81			214,812	4.00			N/A	N/A
Old Second Bank		221,153	10.24			86,388	4.00			107,985	5.00			514,992	9.58			215,028	4.00			268,785	5.00

¹~~As of September 30, 2017, amounts~~Amounts are shown inclusive of a capital conservation buffer of ~~1.25%; as compared to December 31, 2016, of 0.625%~~2.50%.

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. As of September 30, 2022, the capital measures of the Company exclude $2.9 million, which is the modified CECL transition adjustment.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Dividend Restrictions

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a bank without prior regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above. As of September 30, 2022, the Bank had capacity to pay dividends of $17.7 million to the Company without prior regulatory approval. Pursuant to the Basel III rules that came into effect January 1, 2015, and were fully phased in as of January 1, 2019, the Bank must keep a capital conservation buffer of ~~0.625% for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter of~~2.50% above the regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

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Note 13 12 – Fair Value Measurements

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

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

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

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

Transfers between levels are deemed to have occurred at the end of the reporting period. At September 30, 2022 and 2021, there were no transfers between levels.

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

●

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

●

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

●

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

●

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

●

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

●

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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

●

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

●

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

●

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

●

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

●

The fair value of impaired loans with specific allocations of the allowance for ~~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.

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,~~2022, and December 31, ~~2016,~~2021, respectively, measured by the Company at fair value on a recurring basis:


	September 30, 2017
	Level 1		Level 2		Level 3		Total

									September 30, 2022
									Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	3,990	$	-	$	-	$	3,990	$	211,097	$	-	$	-	$	211,097
U.S. government agencies		-		13,451		-		13,451		-		55,963		-		55,963
U.S. government agencies mortgage-backed		-		11,030		-		11,030		-		127,626		-		127,626
States and political subdivisions		-		216,672		12,360		229,032		-		210,950		13,309		224,259
Corporate bonds		-		10,577		-		10,577		-		9,544		-		9,544
Collateralized mortgage obligations		-		77,894		2,492		80,386		-		587,846		-		587,846
Asset-backed securities		-		131,759		-		131,759		-		219,587		-		219,587
Collateralized loan obligations		-		53,259		-		53,259		-		173,837		-		173,837
Loans held-for-sale		-		1,641		-		1,641		-		1,297		-		1,297
Mortgage servicing rights		-		-		6,684		6,684		-		-		11,461		11,461
Interest rate swap agreements		-		128		-		128
Interest rate swap agreements, including risk participation agreement										-		6,624		-		6,624
Mortgage banking derivatives		-		289		-		289		-		188		-		188
Total	$	3,990	$	516,700	$	21,536	$	542,226	$	211,097	$	1,393,462	$	24,770	$	1,629,329


Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	1,566	$	-	$	1,566	$	-	$	12,278	$	-	$	12,278
Total	$	-	$	1,566	$	-	$	1,566	$	-	$	12,278	$	-	$	12,278

December 31, 2016


Level 1

Level 2

Level 3

Total
Assets:

Securities available-for-sale

U.S. government agencies mortgage-backed

$
-

$
41,534

$
-

$
41,534
States and political subdivisions

-

46,477

22,226

68,703
Corporate bonds

-

10,630

-

10,630
Collateralized mortgage obligations

-

167,808

3,119

170,927
Asset-backed securities

-

138,407

-

138,407
Collateralized loan obligations

-

101,637

-

101,637
Loans held-for-sale

-

4,918

-

4,918
Mortgage servicing rights

-

-

6,489

6,489
Interest rate swap agreements

-

673

-

673
Mortgage banking derivatives

-

287

-

287
Total

$
-

$
512,371

$
31,834

$
544,205

Liabilities:

Interest rate swap agreements, including risk participation agreements

$
-

$
1,667

$
-

$
1,667
Total

$
-

$
1,667

$
-

$
1,667

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	December 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	202,339	$	-	$	-	$	202,339
U.S. government agencies		-		61,888		-		61,888
U.S. government agencies mortgage-backed		-		172,302		-		172,302
States and political subdivisions		-		242,373		15,236		257,609
Corporate bonds		-		9,887		-		9,887
Collateralized mortgage obligations		-		672,967		-		672,967
Asset-backed securities		-		236,877		-		236,877
Collateralized loan obligations		-		79,763		-		79,763
Loans held-for-sale		-		4,737		-		4,737
Mortgage servicing rights		-		-		7,097		7,097
Interest rate swap agreements		-		3,494		-		3,494
Mortgage banking derivatives		-		508		-		508
Total	$	202,339	$	1,484,796	$	22,333	$	1,709,468

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

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

							Nine Months Ended September 30, 2022
							Securities available-for-sale
							States and		Mortgage
							Political		Servicing
							Subdivisions		Rights
Beginning balance January 1, 2022							$	15,236	$	7,097
Total gains or losses
Included in earnings (or changes in net assets)		32		-		(354)
Included in other comprehensive income		7		(501)		-
Included in earnings								(98)		4,384
Included in other comprehensive loss								(1,333)		-
Purchases, issuances, sales, and settlements
Purchases		-		10,994		-		-		-
Issuances		-		-		951		519		756
Settlements		(666)		(20,359)		(402)		(1,015)		(776)
Ending balance September 30, 2017	$	2,492	$	12,360	$	6,684
Ending balance September 30, 2022							$	13,309	$	11,461

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)

-
Total gains or losses

Included in earnings (or changes in net assets)

-

(1,394)
Included in other comprehensive income

9

-
Purchases, issuances, sales, and settlements

Issuances

-

1,148
Settlements

(78)

(526)
Ending balance September 30, 2016

$
-

$
5,075

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	Nine Months Ended September 30, 2021
	Securities available-for-sale
	States and		Mortgage
	Political		Servicing
	Subdivisions		Rights
Beginning balance January 1, 2021	$	4,319	$	4,224
Total gains or losses
Included in earnings		(7)		840
Included in other comprehensive income		812		-
Purchases, issuances, sales, and settlements
Purchases		748		-
Issuances		-		1,298
Settlements		(312)		(1,042)
Ending balance September 30, 2021	$	5,560	$	5,320

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of September 30, ~~2017:~~2022:


						Weighted

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


States and political subdivisions								$	13,309	Discounted Cash Flow	Discount Rate	2.9 - 5.4%	4.8	%
											Liquidity Premium	0.4 - 1.3%	0.5	%

Mortgage servicing rights	$	6,684	Discounted Cash Flow	Discount Rate	10.0 - 1576.2%	10.2	%	$	11,461	Discounted Cash Flow	Discount Rate	9.0 - 11.0%	9.0	%
				Prepayment Speed	7.0 - 68.3%	10.0	%


											Prepayment Speed	0.0 - 12.8%	6.1	%

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, ~~2016:~~2021:


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


States and political subdivisions								$	15,236	Discounted Cash Flow	Discount Rate	0.6 - 3.5%	2.8	%
											Liquidity Premium	0.3 - 2.4%	0.6	%

Mortgage servicing rights	$	6,489	Discounted Cash Flow	Discount Rate	10.0 - 17.0%	10.2	%	$	7,097	Discounted Cash Flow	Discount Rate	11.0 - 15.0%	11.0	%
				Prepayment Speed	6.5 - 77.8%	9.6	%



											Prepayment Speed	0.0 - 36.6%	11.9	%

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

In addition to the above, Level 3 fair value measurement included $12.4 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 classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input. The state and political subdivisions securities balance in Level 3 fair value at September 30, 2016, was zero; the securities were transferred to Level 3 in the fourth quarter of 2016. Given the small dollar amount and size of the municipality involved, this is categorized as Level 3 based on the payment stream received by the Company from the municipality. That payment stream is otherwise 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,~~2022, and December 31, ~~2016,~~2021, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:


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

									September 30, 2022
									Level 1		Level 2		Level 3		Total
Individually evaluated loans¹									$	-	$	-	$	51,354	$	51,354
Other real estate owned, net2		-		-		9,024		9,024		-		-		1,561		1,561
Total	$	-	$	-	$	9,069	$	9,069	$	-	$	-	$	52,915	$	52,915

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;~~loans, which had a carrying amount of ~~$51,000~~$68.1 million and a valuation allowance of ~~$6,000~~$16.7million resulting in ~~a decrease~~an increase of specific allocations within the allowance for ~~loan~~credit losses on loans of ~~$92,000~~$11.3 million for the nine months ended September 30, ~~2017.~~2022.

²OREO is measured at ~~the lower of carrying or~~ fair value, less costs to sell, and had a net carrying amount of ~~$9.0~~$1.6 million at September 30, 2022, which is made up of the outstanding balance of ~~$18.7~~$2.5 million, net of a purchase accounting adjustment of $131,000 and a valuation allowance of ~~$8.8 million and participations of $900,000 at September 30, 2017.~~$856,000.


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

									December 31, 2021
									Level 1		Level 2		Level 3		Total
Individually evaluated loans¹									$	-	$	-	$	13,138	$	13,138
Other real estate owned, net2		-		-		11,916		11,916		-		-		2,356		2,356
Total	$	-	$	-	$	11,916	$	11,916	$	-	$	-	$	15,494	$	15,494

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;~~loans, which had a carrying amount of $18.5 million and a valuation allowance of ~~$1.0~~$5.4 million resulting in an increase of specific allocations within the allowance for ~~loan~~credit losses on loans of ~~$1.0~~$2.7 million for the year December 31, ~~2016.~~2021.

²OREO is measured at ~~the lower of carrying or~~ fair value, less costs to sell, and had a net carrying amount of ~~$11.9~~$2.4 million at December 31, 2021, which is made up of the outstanding balance of ~~$23.5~~$3.7 million, net of a purchase accounting adjustment of $131,000 and a valuation allowance of ~~$10.0 million and participations of $1.6 million, at December 31, 2016.~~$1.2 million.

The Company has estimated the fair values of these assets based primarily on Level 3 inputs. OREO and impaired loans are generally valued using the fair value of collateral provided by third party appraisals. These valuations include assumptions related to cash flow 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 1413 – 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 values~~The fair value of loans ~~were~~and leases at September 30, 2022 and December 31, 2021, was 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 iswas 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 iswas 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

											September 30, 2022
											Carrying		Fair
											Amount		Value		Level 1		Level 2		��	Level 3
Financial assets:
Cash and due from banks	$	32,772	$	32,772	$	32,772	$	-	$	-	$	64,903	$	64,903	$	64,903	$	-		$	-
Interest bearing deposits with financial institutions		14,730		14,730		14,730		-		-
Interest earning deposits with financial institutions												51,251		51,251		51,251		-			-
Securities available-for-sale		533,484		533,484		3,990		514,642		14,852		1,609,759		1,609,759		211,097		1,385,353			13,309
FHLBC and FRBC Stock		10,393		10,393		-		10,393		-
FHLBC and FRBC stock												19,413		19,413		-		19,413			-
Loans held-for-sale		1,641		1,641		-		1,641		-		1,297		1,297		-		1,297			-
Loans, net		1,577,726		1,568,457		-		-		1,568,457
Accrued interest receivable		8,669		8,669		-		8,669		-

Net loans												3,820,487		3,694,682		-		-			3,694,682
Mortgage servicing rights												11,461		11,461		-		-			11,461
Interest rate swap agreements												6,602		6,602		-		6,602			-
Interest rate lock commitments and forward contracts												188		188		-		188			-
Interest receivable on securities and loans												20,133		20,133		-		20,133			-

Financial liabilities:
Noninterest bearing deposits	$	556,874	$	556,874	$	556,874	$	-	$	-	$	2,098,144	$	2,098,144	$	2,098,144	$	-		$	-
Interest bearing deposits		1,332,241		1,329,668		-		1,329,668		-		3,183,215		3,166,428		-		3,166,428			-
Securities sold under repurchase agreements		26,853		26,853		-		26,853		-		35,497		35,497		-		35,497			-
Other short-term borrowings		125,000		125,000		-		125,000		-		25,000		25,000		-		25,000			-
Junior subordinated debentures		57,627		59,524		33,320		26,204		-		25,773		21,650		-		21,650			-
Subordinated debentures												59,275		51,985		-		51,985			-
Senior notes		44,033		46,958		-		46,958		-		44,559		44,469		44,469		-			-
Note payable and other borrowings												10,000		9,970		-		9,970			-
Interest rate swap agreements		1,439		1,439		-		1,439		-		12,277		12,277		-		12,277			-
Borrowing interest payable		773		773		-		773		-
Deposit interest payable		573		573		-		573		-
Interest payable on deposits and borrowings												2,067		2,067		-		2,067			-

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, 2021
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	38,565	$	38,565	$	38,565	$	-	$	-
Interest earning deposits with financial institutions		713,542		713,542		713,542		-		-
Securities available-for-sale		1,693,632		1,693,632		202,339		1,476,057		15,236
FHLBC and FRBC stock		13,257		13,257		-		13,257		-
Loans held-for-sale		4,737		4,737		-		4,737		-
Net loans		3,376,523		3,407,596		-		-		3,407,596
Mortgage servicing rights		7,097		7,097		-		-		7,097
Interest rate swap agreements		3,494		3,494		-		3,494		-
Interest rate lock commitments and forward contracts		508		508		-		508		-
Interest receivable on securities and loans		13,431		13,431		-		13,431		-

Financial liabilities:
Noninterest bearing deposits	$	2,093,494	$	2,093,494	$	2,093,494	$	-	$	-
Interest bearing deposits		3,372,738		3,375,930		-		3,375,930		-
Securities sold under repurchase agreements		50,377		50,377		-		50,377		-
Junior subordinated debentures		25,773		18,557		-		18,557		-
Subordinated debentures		59,212		60,111		-		60,111		-
Senior notes		44,480		44,480		44,480		-		-
Note payable and other borrowings		19,074		19,411		-		19,411		-
Interest rate swap agreements		6,788		6,788		-		6,788		-
Interest payable on deposits and borrowings		1,706		1,706		-		1,706		-

Note 1514 – 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~~

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 as an intermediary~~receipt of variable-rate amounts from a counterparty in exchange for the ~~client,~~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. In August of 2022, the Company also executed two loan pool hedges of $100 million each to convert variable rate loans to a fixed rate index for a three 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

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings. During the next twelve months, the Company estimates that an additional $3.5 million will be reclassified as a decrease to interest income and an additional $401,000 will be reclassified as a decrease to interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the ~~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 September 30, 2022, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other liabilities with changes in fair value recorded in other comprehensive income, net of tax. The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective. The Company expects the hedge to remain fully effective during the remaining term of the swap. The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR. The trust preferred 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. In August 2022, the Company also executed two loan pool hedges of $100.0 million each to convert variable rate loans to a fixed rate index for a three year term. This transaction falls under hedge accounting standards and is paired against a pool of the Bank’s SOFR-based loans. Overall, the new swap only bolsters income in down rate scenarios by a modest degree. We consider the current level of interest rate risk to be moderate but intend to continue looking for market opportunities to hedge further.

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments. These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. The Bank held $5.0 million of cash collateral and $180,000 of cash collateral related to one correspondent financial institution to cover the loan pool hedge mark to market valuation at September 30, 2022 and December 31, 2021, respectively. The Bank had $9.8 million of cash collateral at two correspondent financial institutions to support interest rate swap activity and $17.2 million of cash collateral held by one correspondent financial institution to support interest rate swap activity. No investment securities were required to be pledged to any correspondent financial institution at September 30, 2022 and December 31, 2021, respectively. At September 30, 2022, the notional amount of non-hedging interest rate swaps was $114.5 million with a weighted average maturity of 5.6 years. At December 31, 2021, the notional amount of non-hedging interest rate swaps was $165.0 million with a weighted average maturity of 3.9 years. The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of September 30, ~~2017,~~2022 and ~~periodic changes in the values~~December 31, 2021.

Fair Value of Derivative Instruments


			September 30, 2022
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	4	275,774	Other Assets	2,687	Other Liabilities	8,362
Total derivatives designated as hedging instruments				2,687		8,362

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	22	114,511	Other Assets	3,915	Other Liabilities	3,915
Interest rate lock commitments and forward contracts	58	15,552	Other Assets	188	Other Liabilities	-
Other contracts	3	28,526	Other Assets	22	Other Liabilities	1
Total derivatives not designated as hedging instruments				4,125		3,916


			December 31, 2021
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	2	75,774	Other Assets	808	Other Liabilities	4,102
Total derivatives designated as hedging instruments				808		4,102

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	26	165,005	Other Assets	2,686	Other Liabilities	2,686
Interest rate lock commitments and forward contracts	87	34,414	Other Assets	508	Other Liabilities	-
Other contracts	3	17,173	Other Assets	-	Other Liabilities	21
Total derivatives not designated as hedging instruments				3,194		2,707

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

The fair value and cash flow hedge accounting related to derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other Comprehensive Income (“AOCI”) and the Income Statement. The loss recognized in AOCI on derivatives totaled $4.1 million as of September 30, 2022, and $1.8 million as of September 30, 2021. The amount of the gain reclassified from AOCI to interest ~~rate swaps~~income on the income statement was $15,000 and $40,000 for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Credit-risk-related Contingent Features

For derivative transactions involving counterparties who are ~~reported~~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 ~~other noninterest income. Periodic changes~~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 ~~forward contracts related~~derivatives result in loss to ~~mortgage loan origination are reported~~the Company.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Other provisions of such agreements include the ~~net gain on sales~~definition 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 as~~certain events that may lead to the declaration of ~~December 31, 2016.~~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.

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

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,~~2022, and December 31, ~~2016.~~2021.

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


	September 30, 2022						December 31, 2021
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	3,424	$	15,000	$	18,424	$	384	$	17,474	$	17,858
Commercial standby		-		-		-		-		-		-
Performance standby		3,947		10,799		14,746		456		14,907		15,363
		7,371		25,799		33,170		840		32,381		33,221
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	7,371	$	25,866	$	33,237	$	840	$	32,448	$	33,288

Unused loan commitments:	$	197,499	$	779,515	$	977,014	$	84,225	$	895,665	$	979,890

As of September 30, 2022, the Company evaluated current market conditions, including any impacts related to COVID-19, market interest rate changes, and unused line of credit utilization trends during the third quarter of 2022, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments ~~(in thousands):~~totaled $4.4 million, excluding a $1.0 million purchase accounting adjustment on unfunded commitments recorded from our West Suburban acquisition, which is being accreted to interest income over the estimated life of the unused commitments. The resultant increase in the ACL for unfunded commitments of $749,000 for the third quarter of 2022, compared to the prior quarter end, is primarily related to a $973,000 increase in the commercial unfunded commitments funding rate assumptions based on our analysis of the last 12 months of utilization, decreased by accretion of $224,000 to interest income of the purchase accounting adjustment. The Company will continue to assess the credit risk at least quarterly, and adjust the allowance for unfunded commitments, which is carried within other liabilities on our Consolidated Balance Sheet, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

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 the holding company of Old Second National Bank (the “Bank”), a national banking organization headquartered in Aurora, Illinois, thatfollowing discussion provides commercial 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 presentsadditional information ~~concerning~~regarding our ~~financial condition as of September 30, 2017, as compared to December 31, 2016, and the results of~~ operations for the three and nine months ended September 30, ~~2017,~~2022, compared to the three and nine months ended September 30, ~~2016.~~2021, and our financial condition at September 30, 2022, compared to December 31, 2021. 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.~~2021. The results of operations for the ~~quarter~~three and nine months ended September 30, ~~2017,~~2022, are not necessarily indicative of future results.

~~Our community-focused banking franchise has experienced growth~~ Dollar amounts presented in the ~~past year,~~following tables are in thousands, except per share data, and ~~is positioned for further success as we~~September 30, 2022 and 2021 amounts are unaudited.

In this report, unless the context suggests otherwise, references to the “Company,” “we,” “us,” and “our” mean the combined business of Old Second Bancorp, Inc. and its subsidiary bank, Old Second National Bank (the “Bank”).

We have made, and will continue to ~~serve~~make, various forward-looking statements with respect to financial and business matters. Comments regarding our ~~customers’ needs~~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 ~~competitive economic environment. Industry~~bank holding company headquartered in Aurora, Illinois. Through our wholly-owned subsidiary bank, Old Second National Bank, a national banking organization also headquartered in Aurora, Illinois, we offer a wide range of financial services through our 51 banking centers located in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle and ~~regulatory developments~~Will counties in ~~the past few years have made it challenging~~Illinois. These banking centers offer access to ~~attain the levels~~a full range of ~~profitability~~traditional retail and ~~growth reflected~~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 ~~decade ago. As we look~~commitment to provide ~~value to our customers and~~for the financial services needs of the communities in which we ~~operate,~~operate. We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area. We also have extensive wealth management services, which includes a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts and employee benefit plan administration services.

Merger with West Suburban Bancorp, Inc.

On December 1, 2021, we completed our merger with West Suburban Bancorp, Inc. (“West Suburban”), the holding company for West Suburban Bank. Under the terms of the merger agreement, each share of West Suburban common stock was converted into 42.413 shares of our common stock and $271.15 in cash. Total cash and stock consideration paid was approximately $295.2 million. With the acquisition of West Suburban, we acquired 34 branches in DuPage, Kane, Kendall and Will counties in Illinois. The transaction is discussed in more detail in Note 2 to our Consolidated Financial Statements included in this report.

As we continue to consolidate operations, nine branches designated as held for sale with a net book value of $5.8 million are reported within fixed assets at September 30, 2022. During the nine months ended September 30, 2022, we sold nine branches, resulting in $977,000 of net gains on sale, after closing costs.

COVID-19 Update

Our historically careful underwriting practices and diverse loan portfolio has helped minimize the adverse impact of the pandemic on the Company. In addition, the combination of the vaccine rollout, government stimulus payments, and reduced spending during the pandemic are likely contributing factors mitigating the impact of the pandemic on our business, financial condition, results of operations, and our customers as of September 30, 2022. While the vaccine remains readily available, the longer term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including a resurgence of COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the vaccine or any boosters along with concerns related to new strains of the virus; supply chain issues remaining unresolved longer than anticipated; labor shortages and wage increases continuing to impact many industries; consumer confidence and spending falls; and rising geopolitical tensions. Given the ongoing and dynamic nature of the circumstances surrounding the pandemic, it is difficult to predict its future adverse financial impact to the Company.

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Results of Operation and Financial Condition

We continue to monitor the impact of the COVID-19 pandemic on our results of operations and financial condition. For the year ended December 31, 2020, we determined it prudent to increase our allowance for credit losses to $33.9 million, driven by both our adoption of the Current Expected Credit Losses (“CECL”) methodology and the expected impact of the COVID-19 pandemic and market interest rate reductions in anticipation of continued market risk and uncertainty. In 2021, due to the lack of significant net charge-offs projected with the 2020 forecast, and a more favorable forecast for the estimated life of loans, we reversed $9.5 million of our legacy allowance for credit losses, but recorded $12.1 million of Day One credit marks to the allowance for credit losses, as well as $12.2 million of Day Two adjustments on non-purchase credit deteriorated life of loan loss estimates, each stemming from the West Suburban acquisition. During the first nine months of 2022, we recorded $5.2 million of provision for credit losses on loans primarily due to loan growth ~~opportunities identified~~as well as our assessment of loan metrics and nonperforming loan trends. In addition, we also recorded a reduction of $126,000 in our ~~local~~allowance for credit losses on unfunded commitments, primarily due to a review of credit line utilization rates. These adjustments resulted in a net provision for credit losses expense of $5.1 million for the September 30, 2022 year to date period.

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

As of September 30, 2022 and December 31, 2021, we had $86.5 million and $86.3 million of goodwill, respectively. This reflected a $146,000 increase from the prior quarter and prior year-end as a deferred tax asset and current taxes receivable analysis was performed after the filing of West Suburban Bank related tax returns, with the resultant reclassifications impacting goodwill. At November 30, 2021, we performed our recurring annual review for any goodwill impairment. We determined no goodwill impairment existed, however, further deterioration in market conditions related to the general economy, financial markets, ~~are being developed into new banking relationships.~~and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our results of operations and financial condition.

Lending Operations and Accommodations to Borrowers

To more fully support our customers during the pandemic, we established client assistance programs, including offering commercial, consumer, and mortgage loan payment deferrals for certain clients. During 2020 and 2021, we executed 509 of these deferrals on loan balances of $242.7 million. As of September 30, 2022, all COVID-related loan deferrals had resumed payments or paid off.

During 2020 and 2021, as part of the SBA Paycheck Protection Program (“PPP”), we processed 1,320 PPP loan applications, representing a total of $199.0 million, and we acquired $20.8 million PPP loans from our acquisition of West Suburban. We ~~are encouraged~~started the application process for loan forgiveness for PPP loans in October 2020, and we continued to receive funds for forgiven loans from both the first and second round of PPP loans through September 2022. As of September 30, 2022, we had 19 loans, which totaled $2.4 million, still outstanding under the PPP program. We expect the application process for loan forgiveness to continue through the fourth quarter of 2022, with funds to be received from the SBA for the forgiven loans through the remainder of 2022.

Capital and Liquidity

As of September 30, 2022, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession, our reported and regulatory capital ratios could be adversely impacted by ~~sustained quality~~credit losses.

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

Financial Overview

Net income for the third quarter of 2022 was $19.5 million, or $0.43 per diluted share, compared to $8.4 million, or $0.29 per diluted share, for the third quarter of 2021. The increase was primarily due to our acquisition of West Suburban, which resulted in growth ~~and portfolio diversity. The Company generated increased~~in net interest income and noninterest income, partially offset by higher noninterest expense, which included $1.1 million in acquisition-related

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costs net of losses on sales of branches in the third quarter of 2022. Adjusted net income, a non-GAAP financial measure that excludes merger-related costs, net of gains/(losses) on branch sales, and gains on the sale of a Visa credit card portfolio and a land trust portfolio, was $19.6 million for the third quarter of 2022. See the discussion entitled “Non-GAAP Financial Measures” on page 42, as well as the table below, which provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalents.


	Quarters Ended
	September 30,		June 30,		September 30,
	2022		2022		2021
Net Income
Income before income taxes (GAAP)	$	26,577	$	16,676	$	11,329
Pre-tax income adjustments:
Merger-related costs, net of gains/losses on branch sales		1,061		2,131		-
Gains on the sale of Visa credit card and land trust portfolios		(923)		-		-
Adjusted net income before taxes		26,715		18,807		11,329
Taxes on adjusted net income		7,091		4,995		2,917
Adjusted net income (non-GAAP)	$	19,624	$	13,812	$	8,412

Basic earnings per share (GAAP)	$	0.43	$	0.28	$	0.30
Diluted earnings per share (GAAP)		0.43		0.27		0.29
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP)		0.44		0.31		0.30
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP)		0.43		0.31		0.29

The following provides an overview of some of the factors impacting our financial performance for the three month period ended September 30, ~~2017, as~~2022, compared to the like period ended September 30, ~~2016. The Company’s noninterest~~2021:

●

Net interest and dividend income was $55.6 million for the third quarter of 2022, compared to $22.6 million for the third quarter of 2021. Growth in interest and dividend income in the third quarter of 2022 was primarily due to our acquisition of West Suburban resulting in additional loan and securities income.

●

We recorded a net provision for credit losses of $4.5 million in the third quarter of 2022, driven by a $3.5 million increase in the allowance for credit losses on loans due to loan growth in the portfolio, coupled with an increase of $973,000 in our allowance for unfunded commitments. We recorded a $1.5 million release of provision expense in the third quarter of 2021.

●

Noninterest income was $11.5 million for the third quarter of 2022, compared to $9.3 million for the third quarter of 2021, an increase of $2.2 million, or 23.1%. Contributing to the increase was growth in service charges on deposits and card related income resulting primarily from the West Suburban acquisition and resultant additional fee income. These increases were partially offset by a decrease of $1.7 million of net gain on sale of mortgage loans from $2.2 million in the third quarter 2021 to $449,000 in the third quarter of 2022.

●

Noninterest expense was $36.0 million for the third quarter of 2022, compared to $22.1 million for the third quarter of 2021, an increase of $13.9 million, or 62.6%. Contributing to the increase was growth in salaries and employee benefits and occupancy, furniture and equipment expenses in the third quarter of 2022, primarily stemming from the additional employees and branches due to the West Suburban acquisition. In addition, we recorded $650,000 of acquisition-related costs in the third quarter of 2022, primarily from $188,000 of management consulting expense and $343,000 other expense related to the West Suburban acquisition. The $343,000 of other expenses was primarily due to the timing of a loan documentation storage project of $143,000 and debit card interchange fees of $150,000.

●

We had a provision for income tax expense of $7.1 million for the third quarter of 2022, compared to a provision for income tax expense of $2.9 million for the third quarter of 2021. The increase in tax expense for the third quarter of 2022 was due to an increase in pre-tax income, compared to the year over year quarter.

●

Our community-focused banking franchise experienced growth of $448.5 million in total loans at September 30, 2022, compared to the year ended December 31, 2021, and an increase of $2.0 billion in total loans compared to the third quarter of 2021, as we acquired $1.50 billion of loans in the West Suburban acquisition. We believe we are positioned for continued loan growth as we continue to serve our customers’ needs in a competitive economic environment. We are continuing to seek to provide value to our customers and the communities in which we operate, by executing on growth opportunities in our local markets and

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developing new banking relationships, while seeking to ensure the safety and soundness of our Bank, our customers, and our employees.

●

Nonaccrual loans decreased $9.4 million as of September 30, 2022, compared to December 31, 2021, due to the upgrade or payoff of various credits in the first nine months of 2022. Nonperforming loans as a percent of total loans was 1.4% as of September 30, 2022, compared to 1.3% as of December 31, 2021, and 1.5% at September 30, 2021. Classified assets increased to $115.3 million as of September 30, 2022, which is $38.2 million, or 49.5% more than December 31, 2021, and $78.5 million, or 213.0%, more than September 30, 2021, due to the West Suburban acquisition in late 2021.

Critical Accounting Estimates

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

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

Non-GAAP Financial Measures

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

Results of Operations

Overview

Three months ended September 30, ~~2017 as compared to like periods in the prior year. However, the positive earnings impact of the growth in net interest income~~2022 and noninterest income for the third quarter and nine months of 2017 was partially offset by an increase in noninterest expense. Noninterest expenses were negatively impacted primarily by an increase in employee costs in the year over year periods. Finally, an income tax benefit was recorded in the third quarter of 2017 due to a State of Illinois tax rate increase; this credit had a significantly favorable impact which contributed to the increase in net income in the year over year periods for the quarter and nine months.2021

~~Results of Operations~~

~~Net~~Our income before taxes ~~of $9.9~~was $26.6 million in the third quarter of ~~2017 compares~~2022 compared to ~~$5.4~~$11.3 million in the third quarter of ~~2016. When compared~~2021. This increase in pretax income was primarily due to ~~the third quarter of 2016, the third quarter of 2017 reflected higher levels of net~~a $33.0 million increase in interest and dividend income, and a ~~provision for loan loss of $300,000, and increased levels of~~$2.2 million increase in noninterest income, and noninterest expense. Noninterest income 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, as well as an increase in trust revenueprimarily due to ~~growth in our customer base. Noninterest expense increased~~the addition of West Suburban loans, securities and fee income in the third quarter of ~~2017 when compared to the third quarter of 2016~~2022. These increases were partially offset by a $13.9 million increase in noninterest expense, primarily due to an increase in salaries and employee benefits, occupancy, furniture and equipment expense, computer and data processing expense, other expense, and amortization of core deposit intangible. The majority of these increases were due to ~~higher insurance~~the inclusion of operating costs of the legacy West Suburban staff and branches, as well as ~~an increase in OREO related valuation costs. An income tax benefit~~$650,000 of ~~$1.6 million was recorded~~West Suburban acquisition-related costs in the third quarter of ~~2017~~2022, primarily within management and consulting and other expenses. Our net income was $19.5 million, or $0.43 per diluted share, for the third quarter of 2022, compared to net income of $8.4 million, or $0.29 per diluted share, for the third quarter of 2021.

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Net interest and dividend income was $55.6 million in the third quarter of 2022, compared to $22.6 million in the third quarter of 2021. The $33.0 million increase was primarily driven by growth in most interest and dividend income categories due to West Suburban related loan and securities income being reflected. In addition we experienced an increase in interest expense in the third quarter of 2022, compared to the third quarter of 2021, primarily due to a ~~State~~rise in deposit interest rates and increased balances from West Suburban, an increase in other short-term borrowings due to an FHLB advance, and an increase in the rate paid on our senior notes during the third quarter of ~~Illinois tax~~2022, as the interest rate ~~change; this nonrecurring item~~payable on these notes became floating as of January 1, 2022, at three month LIBOR plus 385 basis points, compared to the prior 5.75% fixed rate.

Average loans, including loans held for sale, increased $1.86 billion in the ~~Company’s deferred tax asset by a like amount.~~third quarter of 2022, compared to the third quarter of 2021, primarily from $1.50 billion of average loans acquired in our acquisition of West Suburban. Also contributing to the increase was $244.3 million in average loan growth during the third quarter of 2022, less PPP loans forgiven or repaid and loan paydowns.

~~Net~~

Nine months ended September 30, 2022 and 2021

Our income before taxes ~~of $23.7~~was $59.7 million for the nine months ended September 30, ~~2017 was favorable as~~2022 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. Earnings growth in the 2017 period, as compared to the like 2016 period, stems from the acquisition of the Chicago branch of Talmer Bank and Trust, which was completed on October 28, 2016. This acquisition resulted in a cash payment of $181.5 million for 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 the primary factors driving 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 average loans, including loans held-for-sale, increased by $44.3 million in the third quarter of 2017 as compared to the second quarter of 2017, and $361.9 million as compared to the third quarter of 2016. Average earning assets were $2.12 billion for the third quarter of 2017, which reflected an increase of $6.4 million compared to the second quarter of 2017, and an increase of $212.5 million as compared to the third 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, was driven by growth in the loan portfolio primarily due to the Talmer branch acquisition. In addition, the average yield on the securities portfolio increased by 103 basis points in the year over year period due to portfolio repositioning to higher yielding tax exempt securities; the average tax exempt securities portfolio increased by $185.5 million, and earned 138 basis points more in the third quarter of 2017 as compared to the third quarter of 2016.

Quarterly average interest bearing liabilities as of September 30, 2017, decreased $11.9 million, or 0.8%, compared to June 30, 2017, but increased $87.8 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 million of commercial deposits, as well as organic commercial deposit growth. As the deposit growth in the year over year period was driven by commercial demand accounts, the cost 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 used to fund loan growth. The cost of interest bearing liabilities in the third quarter of 2017 increased to 80 basis points from 67 basis points in the third quarter of 2016, primarily due 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 quarter of 2017 net 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.

The net interest margin (on a tax-equivalent basis), expressed as a percentage of average earning assets, was 3.77% in the third quarter of 2017, reflecting an increase of 6 basis points from the second quarter of 2017, and growth of 55 basis points from the third quarter of 2016. The average tax-equivalent yield on earning assets increased to 4.32% for the third quarter of 2017, as compared to 3.70% for the third quarter of 2016. Increases in net interest margin and yield on average earning assets for the third quarter of 2017 as compared to prior periods presented was attributable to growth in loan volumes and rates, as well as the securities portfolio repositioning to higher yielding tax exempt holdings, as discussed above. The cost of funds on interest bearing liabilities was 0.80% for the third quarter of 2017 and 0.67% for the third quarter of 2016.

~~Tax equivalent net interest and dividend income increased by $11.5 million from $46.3~~$39.4 million for the nine months ended September 30, ~~2016,~~2021. This increase in pretax income was primarily due to ~~$57.8~~a $74.0 million increase in interest and dividend income, and a $5.6 million increase in noninterest income, as West Suburban loan, security and fee income are included in the nine months ended September 30, 2022. These increases were partially offset by a $46.2 million increase in noninterest expense, primarily due to an increase in salaries and employee benefits, occupancy, furniture and equipment expense, computer and data processing expense, other expense, and amortization of core deposit intangible. The majority of these increases were due to the inclusion of operating costs of the legacy West Suburban staff and branches, as well as $9.5 million of West Suburban acquisition-related costs in the first nine months of 2022, primarily within computer and data processing. Our net income was $43.8 million, or $0.97 per diluted share, for the nine months ended September 30, 2022, compared to net income of $29.1 million, or $0.99 per diluted share, for the same period of 2021.

Net interest and dividend income was $142.1 million for the nine months ended September 30, ~~2017. Average earning assets~~2022, compared to $68.1 million for the same period of 2021. The $74.0 million increase was primarily driven by growth in most interest and dividend income categories due to West Suburban related loan and securities income being reflected. This increase was partially offset by a $402,000 increase in interest expense for the nine months ended September 30, ~~2017 increased $188.4 million as~~2022, compared to the ~~like~~same period of 2021, primarily due to three full periods of interest expense on the April 2021 issuance of subordinated debt in 2022, as well as higher average ~~period~~balances of deposits from the West Suburban acquisition, partially offset by a decrease in ~~2016,~~outstanding balances of notes payable and a decrease in the rate paid on our senior notes during 2022, as the interest rate payable on these notes became floating as of January 1, 2022, at three month LIBOR plus 385 basis points, compared to the prior 5.75% fixed rate.

Net Interest Income

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

Three months ended September 30, 2022 and 2021

Our net interest and dividend income increased by $33.0 million to $55.6 million, for the third quarter of 2022, from $22.6 million for the third quarter of 2021. This increase was primarily attributable to a $33.2 million increase in total interest and dividend income due to the acquisition of West Suburban in December 2021. In addition we experienced an increase in interest expense in the third quarter of 2022, compared to the third quarter of 2021, primarily due to increased balances from West Suburban, increased other short-term borrowings expense due to an FHLB advance, and an increase in the rate paid on our senior notes during 2022, as the interest rate payable on these notes became floating as of January 1, 2022, at three month LIBOR plus 385 basis points, compared to the prior 5.75% fixed rate.

Average earning assets for the third quarter of 2022 totaled $5.61 billion, a decrease of $141.5 million, or 2.5%, compared to the second quarter of 2022, and an increase of $2.52 billion, or 81.7%, compared to the third quarter of 2021. Average interest earning deposits with

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financial institutions totaled $131.3 million for the third quarter of 2022, a decrease of $295.6 million, compared to the second quarter of 2022, and a decrease of $392.3 million compared to the third quarter of 2021. The yield on average interest earning deposits was 200 basis points for the third quarter of 2022, an increase of 127 basis points from the second quarter of 2022, and an increase of 185 basis points from the third quarter of 2021. Interest income on securities increased year over year, primarily due to growth in volumes and higher interest rates. Total average securities for the third quarter of 2022 decreased $88.8 million from the second quarter of 2022, and increased $1.04 billion from the third quarter of 2021. The increase in our average securities year over year was primarily due to the $1.07 billion in securities acquired in our acquisition of West Suburban. The yield on average securities increased to 2.52% for the third quarter of 2022, compared to 1.89% for the second quarter of 2022 and increased from 2.07% for the third quarter of 2021. Total average loans, including loans held-for-sale, totaled $3.75 billion in the third quarter of 2022, an increase of $244.3 million from the second quarter of 2022, and an increase of $1.86 billion from the third quarter of 2021. The rise in average loan balances year over year was primarily due to the $1.50 billion loan portfolio acquired in our acquisition of West Suburban, as well as loan growth of $244.3 million in the third quarter of 2022. This rise in loan volumes resulted in an increase in loan interest and fee income of $25.3 million in the year over year period. For the third quarter of 2022, the yield on average ~~earning assets~~loans increased to 4.93%, compared to 4.37% for the ~~nine months~~second quarter of ~~2017 was 4.22% as~~2022, and 4.48% for the third quarter of 2021.

Average interest bearing liabilities decreased $113.1 million, or 3.2%, in the third quarter of 2022, compared to ~~3.69% for~~ the ~~like 2016 period. Average~~second quarter of 2022, and increased $1.54 billion compared to the third quarter of 2021. The year over year increase was primarily driven by a $1.55 billion increase in interest bearing deposits primarily due to our acquisition of West Suburban, as well as continued deposit activity of our legacy customers, offset by a $12.6 million decrease in securities sold under repurchase agreements and a $10.2 million decrease in notes payable and other borrowings. The linked quarter decrease was primarily the result of maturing higher cost time deposits and declines in money market accounts. The cost of interest bearing liabilities for the ~~nine months ended~~third quarter of 2022 increased four basis points from the linked period, and decreased 18 basis points from the third quarter of 2021. Growth in our average noninterest bearing demand deposits of $1.06 billion in the year over year period has assisted us in controlling our cost of funds stemming from average interest bearing deposits and borrowings, which totaled 0.18% for the third quarter of 2022, 0.15% for the second quarter of 2022, and 0.30% for the third quarter of 2021.

Due to the significant increase in interest earning deposits with financial institutions in 2020 and 2021 stemming from federal stimulus funds received and PPP loan forgiveness, we had no average other short-term borrowings in the first and second quarters of 2022 or the third quarter of 2021, which typically consist of FHLBC advances. In the third quarter of 2022, we had an average other short-term borrowing balance of $5.4 million due to a $25.0 million FHLB advance. As of September 30, ~~2017,~~2022, notes payable and other borrowings had an average balance of $11.0 million, which consists of $10.0 million outstanding on a term note with a correspondent bank originated in the first quarter of 2020.

Our net interest margin (GAAP) increased ~~$74.5 million, or 5.0%, when~~77 basis points to 3.93% for the third quarter of 2022, compared to ~~like prior year period. Net~~3.16% for the second quarter of 2022, and increased 102 basis points compared to 2.91% for the third quarter of 2021. Our net interest margin (TE) increased 78 basis points to 3.96% for the ~~nine months ended September 30, 2017, was 3.68%, as~~third quarter of 2022, compared to ~~3.23%~~3.18% for the ~~nine~~second quarter of 2022, and increased 101 basis points compared to 2.95% for the third quarter of 2021. The increase in the year over year was due primarily to the increasing market interest rates over the majority of the past twelve months, ~~ended September 30, 2016, for an increase of 45 basis points.~~the related rate resets on loans and securities during the past year, and the elevated liquidity on our balance sheet.

~~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.

Nine months ended September 30, 2022 and 2021

Our net interest and dividend income increased by $74.0 million, to $142.1 million for the nine months ended September 30, 2022, compared to $68.1 million for the nine months ended September 30, 2021. This increase was attributable to a $74.4 million increase in total interest income primarily from the acquisition of West Suburban as well as general loan growth, partially offset by a $402,000 increase in interest expense for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. Increased balances on interest earning assets related to the West Suburban acquisition drove the increase in net interest income, along with increased yields on earning assets and the reduction in the cost of interest bearing deposits, despite the increased average balance of subordinated debt.

Average earning assets for the nine months ended September 30, 2022 were $5.74 billion, an increase of $2.72 billion, or 90.0%, compared to the nine months ended September 30, 2021. The yield on average earning assets for the nine months ended September 30, 2022 was 3.49%, compared to 3.34% for the nine months ended September 30, 2021. Total average loans, including loans held-for-sale,

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totaled $3.56 billion for the nine months ended September 30, 2022, an increase of $1.61 billion, compared to the nine months ended September 30, 2021. The increase in average loan balances, coupled with increases in market interest rates, resulted in a $56.9 million increase in loan interest income for the nine months ended September 30, 2022, compared to the like period in 2021. For the nine months ended September 30, 2022, yields on average securities decreased by 28 basis points and yields on average loans increased by 13 basis points, each as compared to the nine months ended September 30, 2021, due primarily to the addition of the lower yielding legacy West Suburban securities and loan portfolios in late 2021, as well as the timing of rate resets on loans and securities as interest rates began to rise in 2022, compared to 2021. Average interest earning deposits with financial institutions decreased $65.6 million in the nine months ended September 30, 2022, compared to the prior year like period driven primarily by the acquisition of West Suburban, as well as the use of cash for loan growth and the decrease in customer deposits.

Average interest bearing liabilities increased $1.65 billion, or 88.8%, in the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021. The increase was primarily due to the acquisition of West Suburban in late 2021 resulting in an increase of $2.27 billion of interest earning deposits. In addition, average subordinated debt increased $20.6 million, due to the $60.0 million subordinated note issuance on April 6, 2021, as discussed below. Partially offsetting this increase was a $7.9 million decrease in average notes payable and other borrowings. Average noninterest bearing deposits increased $1.11 billion in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, due to the acquisition of West Suburban, as well as remaining federal stimulus funds received from our depositors. The cost of interest bearing liabilities decreased 20 basis points, to 25 basis points, for the nine months ended September 30, 2022, from 45 basis points for the nine months ended September 30, 2021.

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

Our net interest margin (GAAP) for the nine months ended September 30, 2022 was 3.31% compared to 3.02% for the nine months ended September 30, 2021, reflecting an increase of 29 basis points. Our net interest margin (TE) for the nine months ended September 30, 2022 was 3.33% compared to 3.06% for the nine months ended September 30, 2021, an increase of 27 basis points. The increase in net interest margin for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, was primarily due to the market interest rate increases in 2022, as well as full periods reflecting West Suburban loan and securities income. These increases to the net interest margin were partially offset by reductions in rates paid on deposits, and growth in noninterest bearing deposits, which drove down our overall cost of funds.

The following tables set forth certain information relating to ~~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”) basis using a marginal rate of 35% to more appropriately compare returns on tax-exempt loans and securities to other earning assets.~~

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~~ANALYSIS OF AVERAGE BALANCES,~~

~~TAX EQUIVALENT INTEREST AND RATES~~

~~(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
%

1Interest income from loans is shown on a TE basis as discussed below and includes fees of $722,000, $573,000 and $700,000 for the third quarter of 2017, the fourth quarter of 2016 and the third quarter of 2016, respectively. Nonaccrual loans are included in the above-stated average balances.

~~Tableof 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.

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~~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 income and net interest income to earning assets~~ have been adjusted to a non-GAAP TE basis using a marginal rate of ~~35%~~21% in 2022 and 2021 to compare returns more appropriately on tax-exempt loans and securities to other earning assets.

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

	Quarters Ended
	September 30, 2022						June 30, 2022						September 30, 2021
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	131,260		$	663	2.00	$	426,820		$	782	0.73	$	523,561		$	203	0.15
Securities:
Taxable		1,525,258			9,116	2.37		1,610,713			6,786	1.69		476,935			1,854	1.54
Non-taxable (TE)¹		178,090			1,686	3.76		181,386			1,642	3.63		186,515			1,603	3.42
Total securities (TE)¹		1,703,348			10,802	2.52		1,792,099			8,428	1.89		663,450			3,457	2.07
Dividends from FHLBC and FRBC		19,565			261	5.29		20,994			263	5.02		9,917			114	4.56
Loans and loans held-for-sale^{1, 2}		3,753,117			46,642	4.93		3,508,856			38,267	4.37		1,889,696			21,358	4.48
Total interest earning assets		5,607,290			58,368	4.13		5,748,769			47,740	3.33		3,086,624			25,132	3.23
Cash and due from banks		56,265			-	-		53,371			-	-		29,760			-	-
Allowance for credit losses on loans		(45,449)			-	-		(44,354)			-	-		(28,639)			-	-
Other noninterest bearing assets		377,850			-	-		374,309			-	-		185,415			-	-
Total assets	$	5,995,956					$	6,132,095					$	3,273,160

Liabilities and Stockholders' Equity
NOW accounts	$	612,174		$	148	0.10	$	604,176		$	102	0.07	$	534,056		$	96	0.07
Money market accounts		967,106			157	0.06		1,054,552			155	0.06		355,651			66	0.07
Savings accounts		1,186,001			75	0.03		1,213,133			90	0.03		451,829			47	0.04
Time deposits		459,925			335	0.29		469,009			265	0.23		331,482			330	0.39
Interest bearing deposits		3,225,206			715	0.09		3,340,870			612	0.07		1,673,018			539	0.13
Securities sold under repurchase agreements		33,733			10	0.12		34,496			9	0.10		46,339			15	0.13
Other short-term borrowings		5,435			44	3.21		-			-	-		-			-	-
Junior subordinated debentures		25,773			285	4.39		25,773			284	4.42		25,773			286	4.40
Subordinated debentures		59,265			546	3.66		59,244			547	3.70		59,180			547	3.67
Senior notes		44,546			728	6.48		44,520			578	5.21		44,441			673	6.01
Notes payable and other borrowings		10,989			111	4.01		13,103			95	2.91		21,171			113	2.12
Total interest bearing liabilities		3,404,947			2,439	0.28		3,518,006			2,125	0.24		1,869,922			2,173	0.46
Noninterest bearing deposits		2,092,301			-	-		2,120,428			-	-		1,029,705			-	-
Other liabilities		34,949			-	-		32,636			-	-		53,370			-	-
Stockholders' equity		463,759			-	-		461,025			-	-		320,163			-	-
Total liabilities and stockholders' equity	$	5,995,956					$	6,132,095					$	3,273,160
Net interest income (GAAP)				$	55,569					$	45,264					$	22,618
Net interest margin (GAAP)						3.93						3.16						2.91

Net interest income (TE)¹				$	55,929					$	45,615					$	22,964
Net interest margin (TE)¹						3.96						3.18						2.95
Interest bearing liabilities to earning assets		60.72	%					61.20	%					60.58	%

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

²Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 48, and includes fees of $750,000 for the third quarter of 2022, $588,000 second quarter of 2022, and $1.8 million for the third quarter of 2021. Nonaccrual loans are included in the above-stated average balances.

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

	Nine Months Ended September 30,
	2022						2021
	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	395,948		$	1,714	0.58	$	461,498		$	432	0.13
Securities:
Taxable		1,582,549			21,071	1.78		415,029			5,301	1.71
Non-taxable (TE)¹		184,842			4,995	3.61		188,700			4,851	3.44
Total securities (TE)¹		1,767,391			26,066	1.97		603,729			10,152	2.25
Dividends from FHLBC and FRBC		18,888			677	4.79		9,917			342	4.61
Loans and loans held-for-sale ^{1 , 2}		3,556,798			121,337	4.56		1,944,687			64,480	4.43
Total interest earning assets		5,739,025			149,794	3.49		3,019,831			75,406	3.34
Cash and due from banks		50,918			-	-		29,407			-	-
Allowance for credit losses on loans		(44,719)			-	-		(31,380)			-	-
Other noninterest bearing assets		374,388			-	-		186,083			-	-
Total assets	$	6,119,612					$	3,203,941

Liabilities and Stockholders' Equity
NOW accounts	$	603,345		$	339	0.08	$	520,556		$	295	0.08
Money market accounts		1,039,717			481	0.06		338,510			203	0.08
Savings accounts		1,200,018			304	0.03		434,702			169	0.05
Time deposits		474,665			877	0.25		363,227			1,239	0.46
Interest bearing deposits		3,317,745			2,001	0.08		1,656,995			1,906	0.15
Securities sold under repurchase agreements		35,791			30	0.11		65,385			67	0.14
Other short-term borrowings		1,832			44	3.21		-			-	-
Junior subordinated debentures		25,773			849	4.40		25,773			850	4.41
Subordinated debentures		59,244			1,639	3.70		38,637			1,064	3.68
Senior note		44,520			1,791	5.38		44,416			2,019	6.08
Notes payable and other borrowings		14,338			309	2.88		22,243			355	2.13
Total interest bearing liabilities		3,499,243			6,663	0.25		1,853,449			6,261	0.45
Noninterest bearing deposits		2,103,978			-	-		993,308			-	-
Other liabilities		42,706			-	-		42,632			-	-
Stockholders' equity		473,685			-	-		314,552			-	-
Total liabilities and stockholders' equity	$	6,119,612					$	3,203,941
Net interest income (GAAP)				$	142,065					$	68,115
Net interest margin (GAAP)						3.31						3.02

Net interest income (TE)¹				$	143,131					$	69,145
Net interest margin (TE)¹						3.33						3.06
Interest bearing liabilities to earning assets		60.97	%					61.38	%

²Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 48, and includes fees of $2.1 million and $4.4 million for the nine months ended September 30, 2022 and 2021, respectively. Nonaccrual loans are included in the above-stated average balances.

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Reconciliation of Tax-Equivalent Non-GAAP Financial Measures

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

																Three Months Ended									Nine Months Ended
																September 30,			June 30,			September 30,			September 30,
Net Interest Margin																2022			2022			2021			2022			2021


Interest income (GAAP)	$	22,425		$	21,800		$	17,825		$	64,841		$	53,183		$	58,008		$	47,389		$	24,791		$	148,728		$	74,376
Taxable-equivalent adjustment:
Loans		23			23			23			68			70			6			6			4			17			11
Securities		876			888			97			2,255			312			354			345			337			1,049			1,019
Interest income (TE)		23,324			22,711			17,945			67,164			53,565
Interest and dividend income (TE)																	58,368			47,740			25,132			149,794			75,406
Interest expense (GAAP)		3,142			3,139			2,478			9,348			7,252			2,439			2,125			2,173			6,663			6,261
Net interest income (TE)	$	20,182		$	19,572		$	15,467		$	57,816		$	46,313		$	55,929		$	45,615		$	22,959		$	143,131		$	69,145
Net interest income (GAAP)	$	19,283		$	18,661		$	15,347		$	55,493		$	45,931		$	55,569		$	45,264		$	22,618		$	142,065		$	68,115
Average interest earning assets	$	2,121,929		$	2,115,511		$	1,909,436		$	2,102,952		$	1,914,564		$	5,607,290		$	5,748,769		$	3,086,624		$	5,739,025		$	3,019,831
Net interest margin (GAAP)		3.61	%		3.54	%		3.20	%		3.53	%		3.20	%		3.93	%		3.16	%		2.91	%		3.31	%		3.02	%
Net interest margin (TE)		3.77	%		3.71	%		3.22	%		3.68	%		3.23	%		3.96	%		3.18	%		2.95	%		3.33	%		3.06	%

Noninterest Income

~~Asset Quality~~

Three months ended September 30, 2022 and 2021

The ~~Company recorded a provision~~following table details the major components of noninterest income for ~~loan losses expense of $300,000~~the periods presented:


							3rd Quarter 2022
Noninterest Income	Three Months Ended						Percent Change From
(Dollars in thousands)	September 30,		June 30,		September 30,		June 30,	September 30,
	2022		2022		2021		2022	2021
Wealth management	$	2,280	$	2,506	$	2,372	(9.0)	(3.9)
Service charges on deposits		2,661		2,328		1,368	14.3	94.5
Residential mortgage banking revenue
Secondary mortgage fees		81		50		240	62.0	(66.3)
MSRs mark to market gain (loss)		548		82		(282)	568.3	(294.3)
Mortgage servicing income		514		579		572	(11.2)	(10.1)
Net gain (loss) on sales of mortgage loans		449		(262)		2,186	(271.4)	(79.5)
Total residential mortgage banking revenue		1,592		449		2,716	254.6	(41.4)
Securities (losses) gains, net		(1)		(33)		244	N/M	N/M
Change in cash surrender value of BOLI		146		72		406	102.8	(64.0)
Card related income		2,653		2,965		1,624	(10.5)	63.4
Other income		2,165		924		610	134.3	254.9
Total noninterest income	$	11,496	$	9,211	$	9,340	24.8	23.1

N/M - Not meaningful

Noninterest income increased $2.3 million, or 24.8%, in the third quarter of ~~2017. On~~2022, compared to the second quarter of 2022, and increased $2.2 million, or 23.1%, compared to the third quarter of 2021. The increase from the second quarter was primarily driven by $1.1 million of growth in residential mortgage banking revenue that is attributable to an increase in mark to market gain on MSRs of $466,000, as

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well as a ~~quarterly~~$449,000 net gain on the sale of mortgage loans, compared to a net loss of $262,000 on the sale of mortgage loans in the second quarter of 2022. The variance in mortgage banking is derived from the changing rate environment experienced during the second and third quarters and the resultant negative impact on interest rate lock commitments during the second quarter, as well as further increases in the fair value of mortgage servicing rights during the third quarter. Increases were also noted in service charges on deposits of $333,000, and in other income of $1.2 million primarily due to a $743,000 gain on a Visa credit card portfolio sale and a $180,000 gain on the sale of a land trust portfolio, as compared to the linked quarter. These increases in noninterest income in the third quarter of 2022, compared to the second quarter of 2022, were partially offset by a $226,000 decrease in wealth management fees, and a $312,000 decrease in card related income.

The increase in noninterest income of $2.2 million in the third quarter of 2022, compared to the third quarter of 2021, is primarily due to an increase of $1.3 million in services charges of deposits, an increase of $1.0 million of card related income, and gains on the sale of the Visa credit card portfolio and the land trust portfolio reported in other income. These gains were partially offset by a $1.1 million decline in residential mortgage banking revenue due to increases in interest rates effecting the mortgage banking volumes and related derivative, offset by an increase in the fair value of mortgage servicing rights, and a $260,000 decline in the cash surrender value of BOLI.

Nine months ended September 30, 2022 and 2021


Noninterest Income	Nine Months Ended				YTD through September 30, 2022
(Dollars in thousands)	September 30,		September 30,		Percent
	2022		2021		Change
Wealth management	$	7,484	$	6,912	8.3
Service charges on deposits		7,063		3,784	86.7
Residential mortgage banking revenue
Secondary mortgage fees		270		834	(67.6)
MSRs mark to market gain (loss)		3,608		(202)	N/M
Mortgage servicing income		1,612		1,646	(2.1)
Net gain on sales of mortgage loans		1,682		7,802	(78.4)
Total residential mortgage banking revenue		7,172		10,080	(28.8)
Securities (losses) gains, net		(34)		246	(113.8)
Change in cash surrender value of BOLI		342		1,163	(70.6)
Card related income		8,194		4,737	73.0
Other income		3,949		1,637	141.2
Total noninterest income	$	34,170	$	28,559	19.6

N/M - Not meaningful

Noninterest income increased $5.6 million, or 19.6%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. This increase was primarily driven by a $3.5 million increase in card related income, a $3.3 million increase in service charges on deposits, a $572,000 increase in wealth management fees, and a $2.3 million increase in other income, each stemming from the inclusion of West Suburban related activity in our results for the nine months ended September 30, 2022. Partially offsetting these increases was a $2.9 million decline in mortgage banking revenue year over year, comprised primarily of a $6.1 million decrease in net gain on sales of mortgage loans, partially offset by a $3.8 million mark to market gain on MSRs, both due to the increasing interest rate environment, and a $821,000 decline in the cash surrender value of BOLI.

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Noninterest Expense

Three months ended September 30, 2022 and 2021

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


										3rd Quarter 2022
Noninterest Expense	Three Months Ended									Percent Change From
(Dollars in thousands)	September 30,			June 30,			September 30,			June 30,	September 30,
	2022			2022			2021			2022	2021
Salaries	$	14,711		$	15,995		$	9,630		(8.0)	52.8
Officers incentive		2,787			1,662			1,212		67.7	130.0
Benefits and other		3,513			3,675			2,122		(4.4)	65.6
Total salaries and employee benefits		21,011			21,332			12,964		(1.5)	62.1
Occupancy, furniture and equipment expense		4,119			3,046			2,418		35.2	70.3
Computer and data processing		2,543			4,006			1,477		(36.5)	72.2
FDIC insurance		659			702			211		(6.1)	212.3
General bank insurance		257			351			301		(26.8)	(14.6)
Amortization of core deposit intangible asset		657			659			113		(0.3)	481.4
Advertising expense		83			194			107		(57.2)	(22.4)
Card related expense		1,453			1,057			662		37.5	119.5
Legal fees		212			179			455		18.4	(53.4)
Consulting & management fees		607			523			248		16.1	144.8
Other real estate owned expense, net		22			87			25		(74.7)	(12.0)
Other expense		4,365			5,113			3,148		(14.6)	38.7
Total noninterest expense	$	35,988		$	37,249		$	22,129		(3.4)	62.6
Efficiency ratio (GAAP)¹		53.08	%		67.07	%		68.73	%
Adjusted efficiency ratio (non-GAAP)²		51.90	%		62.73	%		66.47	%

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

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses and merger-related costs, net of gain on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, mark to market gains or losses on MSRs, and nonrecurring gains on the sale of Visa credit card and land trust portfolios, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” starting on page 52 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the third quarter of 2022 decreased $1.3 million, or 3.4%, compared to the second quarter of 2022, and increased $13.9 million, or 62.6%, compared to the third quarter of 2021. The decrease in the third quarter of 2022 compared to the second quarter was primarily attributable to $650,000 of West Suburban acquisition-related costs for the third quarter of 2022 compared to $3.3 million for the second quarter of 2022. Acquisition-related costs in the third quarter of 2022 included $90,000 in data processing expense, compared to $1.7 million in the second quarter of 2022, primarily due to acquisition-related core system conversion costs. Partially offsetting the decrease in noninterest expense was an increase in occupancy, furniture and equipment costs of $1.1 million in the third quarter of 2022, compared to the prior quarter, due to net losses on branch sales during the quarter. Finally, our card related expense increased in the third quarter of 2022, compared to the second quarter, due to growth in customer transactions and related volume charges.

The year over year increase of $13.9 million in noninterest expense is primarily attributable to an $8.0 million increase in salaries and employee benefits, a $1.7 million increase in occupancy, furniture and equipment, a $1.1 million increase in computer and data processing expense, and a $1.2 million increase in other expense. Officers incentive compensation increased $1.6 million in the third quarter of 2022, compared to the third quarter of 2021, as incentive accruals increased in the current year due to the acquisition of West Suburban, as well as growth in our commercial lending team. Employee benefits expense increased $1.4 million in the third quarter of 2022, compared to the third quarter of 2021, due to increases stemming from additional employees from our acquisition of West Suburban. The increase in occupancy, furniture and equipment expense year over year was due to the addition of 34 West Suburban branches in late 2021. The $1.1

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million increase in computer and data processing expense was primarily due to core system conversion costs relating to the West Suburban acquisition. Finally, the increase in other expense was due primarily to growth in bill payment services, consulting fees and commercial loan related costs, primarily due to acquisition-related costs in the third quarter of 2022.

Nine months ended September 30, 2022 and 2021


Noninterest Expense	Nine Months Ended						YTD through September 30, 2022
(Dollars in thousands)	September 30,			September 30,			Percent
	2022			2021			Change
Salaries	$	46,304		$	28,280		63.7
Officers incentive		5,443			4,060		34.1
Benefits and other		10,563			7,026		50.3
Total salaries and employee benefits		62,310			39,366		58.3
Occupancy, furniture and equipment expense		10,864			7,188		51.1
Computer and data processing		12,817			4,079		214.2
FDIC insurance		1,771			604		193.2
General bank insurance		923			854		8.1
Amortization of core deposit intangible asset		1,981			348		469.3
Advertising expense		459			262		75.2
Card related expense		3,044			1,881		61.8
Legal fees		648			645		0.5
Consulting & management fees		1,746			914		91.0
Other real estate owned expense, net		97			138		(29.7)
Other expense		14,829			8,989		65.0
Total noninterest expense	$	111,489		$	65,268		70.8
Efficiency ratio (GAAP)¹		63.37	%		67.04	%
Adjusted efficiency ratio (non-GAAP)²		58.76	%		65.69	%

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses and merger-related costs, net of gain on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, mark to market gains or losses on MSRs, and nonrecurring gains on the sale of Visa credit card and land trust portfolios, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” starting on page 52 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent

Noninterest expense for the nine months ended September 30, 2022, increased $46.2 million, or 70.8%, compared to the nine months ended September 30, 2021, primarily due to an increase in salaries and employee benefits, occupancy, furniture and equipment, computer and data processing, and other expenses, which increases primarily resulted from our acquisition of West Suburban in December 2021. Salaries and employee benefits increased $22.9 million largely from the additional employees from West Suburban. Occupancy, furniture and equipment increased $3.7 million, or 51.1%, due to additional facilities acquired with our acquisition of West Suburban, net of gains from the sale of overlapping branches. Computer and data processing increased $8.7 million, or 214.2%, primarily related to costs of operating multiple systems prior to conversion as well as data conversion costs. Other expense increased $5.8 million, or 65.0%, primarily from a $2.9 million increase to special services expense and a $1.3 million increase in miscellaneous expenses, due to acquisition-related costs. In addition, FDIC insurance increased $1.2 million due to our increased asset size, as well as the absence of assessment credits fully utilized in the 2021 year to date period. Amortization of core deposit intangible increased $1.6 million for the nine months ended September 30, 2022, compared to the prior year like period, due to the West Suburban acquisition. Finally, consulting and management ~~estimates~~fees increased $832,000 due to $760,000 of acquisition-related costs and general ledger reclassifications in the ~~amount~~first nine months of 2022.

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Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures


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

Noninterest expense	$	35,988		$	37,249		$	22,129		$	35,988		$	37,249		$	22,129
Less amortization of core deposit		657			659			113			657			659			113
Less other real estate expense, net		22			87			25			22			87			25
Less acquisition related costs, net of gain on branch sales		N/A			N/A			N/A			1,061			2,132			425
Noninterest expense less adjustments	$	35,309		$	36,503		$	21,991		$	34,248		$	34,371		$	21,566

Net interest income	$	55,569		$	45,264		$	22,618		$	55,569		$	45,264		$	22,618
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			6			6			4
Securities		N/A			N/A			N/A			354			345			337
Net interest income including adjustments		55,569			45,264			22,618			55,929			45,615			22,959
Noninterest income		11,496			9,211			9,340			11,496			9,211			9,340
Less securities (losses) gains		(1)			(33)			244			(1)			(33)			244
Less MSRs mark to market gain (loss)		548			82			(282)			548			82			(282)
Less gain on Visa credit card portfolio sale		N/A			N/A			N/A			743			-			-
Less gain on sale of land trust portfolio		N/A			N/A			N/A			180			-			-
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			N/A			39			19			108
Noninterest income (less) / including adjustments		10,949			9,162			9,378			10,065			9,181			9,486

Net interest income including adjustments plus noninterest income (less) / including adjustments	$	66,518		$	54,426		$	31,996		$	65,994		$	54,796		$	32,445
Efficiency ratio / Adjusted efficiency ratio		53.08	%		67.07	%		68.73	%		51.90	%		62.73	%		66.47	%

Income Taxes

We recorded income tax expense of $7.1 million for the third quarter of 2022 on $26.6 million of pretax income, compared to income tax expense of $4.4 million on $16.7 million of pretax income in the second quarter of 2022, and income tax expense of $2.9 million on $11.3 million of pretax income in the third quarter of 2021. Our effective tax rate was 26.5% in the third quarter of 2022, 26.6% for the second quarter of 2022, and 25.8% for the third quarter of 2021.

We recorded income tax expense of $15.9 million on $59.7 million of pretax income for the nine months ended September 30, 2022, compared to income tax expense of $10.3 million on $39.4 million of pretax income in the like 2021 period. The effective tax rate was 26.7% and 26.1% for the third quarter of 2022 and the third quarter of 2021, respectively.

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

Financial Condition

Total assets decreased $244.5 million to $5.97 billion at September 30, 2022, from $6.21 billion at December 31, 2021, due primarily to a net decrease in cash and cash equivalents of $636.0 million, offset by increases of $444.0 million in net loans and $43.5 million in deferred tax assets. The decrease in cash and cash equivalents was primarily due to the use of cash for loan growth, as well as the decrease in customer deposits of $184.9 million. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were $5.28 billion at September 30, 2022, a decrease of $184.9 million from December 31, 2021, primarily due to seasonal decreases of municipal deposits, and to a lesser extent declines in interest bearing demand accounts, savings, money market, NOW, and time deposits in 2022.

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								September 30, 2022
Securities	As of							Percent Change From
(Dollars in thousands)	September 30,		December 31,			September 30,		December 31,	September 30,
	2022		2021			2021		2021	2021
Securities available-for-sale, at fair value
U.S. Treasuries	$	211,097	$	202,339		$	4,070	4.3	N/M
U.S. government agencies		55,963		61,888	��		33,575	(9.6)	66.7
U.S. government agencies mortgage-backed		127,626		172,302			17,818	(25.9)	616.3
States and political subdivisions		224,259		257,609			238,952	(12.9)	(6.1)
Corporate bonds		9,544		9,887			4,992	(3.5)	91.2
Collateralized mortgage obligations		587,846		672,967			165,414	(12.6)	255.4
Asset-backed securities		219,587		236,877			189,338	(7.3)	16.0
Collateralized loan obligations		173,837		79,763			61,029	117.9	184.8
Total securities	$	1,609,759	$	1,693,632		$	715,188	(5.0)	125.1

N/M - Not meaningful

Securities available-for-sale decreased $83.9 million as of September 30, 2022, compared to December 31, 2021, and increased $894.6 million compared to September 30, 2021. The decrease in the portfolio during 2022 was driven by $234.8 million in principal reductions from calls, maturities and mortgage related prepayments, as well as an unrealized mark to market loss adjustment of $146.4 million, which were partially offset by the purchase of $301.6 million across a variety of sectors. We continue to seek to position the portfolio in higher credit quality, shorter duration securities with an appropriate mix of fixed- and floating-rate exposures. The increase in the securities portfolio in the year over year period was primarily due to the securities acquired in the acquisition of West Suburban. There were no securities sales during the third quarter of 2022.


							September 30, 2022
Loans	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2022		2021		2021		2021	2021
Commercial	$	888,081	$	771,474	$	321,548	15.1	176.2
Leases		251,603		176,031		162,444	42.9	54.9
Commercial real estate – investor		941,910		799,928		420,853	17.7	123.8
Commercial real estate – owner occupied		876,951		731,845		445,301	19.8	96.9
Construction		176,700		206,132		108,690	(14.3)	62.6
Residential real estate – investor		59,580		63,399		45,497	(6.0)	31.0
Residential real estate – owner occupied		220,969		213,248		108,343	3.6	104.0
Multifamily		322,856		309,164		160,798	4.4	100.8
HELOC		116,108		126,290		82,021	(8.1)	41.6
Other ¹		14,576		23,293		12,447	(37.4)	17.1
Total loans	$	3,869,334	$	3,420,804	$	1,867,942	13.1	107.1

¹The “Other” segment includes consumer and overdrafts.

Total loans were $3.87 billion as of September 30, 2022, an increase of $448.5 million from December 31, 2021. The increase in total loans in the first nine months of 2022, compared to December 31, 2021, was due primarily to growth in loan originations within commercial real estate – investor, which increased by $142.0 million, commercial real estate – owner occupied, which increased by $145.1 million, commercial, which increased by $116.6 million, and leases, which increased by $75.6 million from December 31, 2021. Total loans increased $2.00 billion from September 30, 2021 to September 30, 2022, primarily due to the loan portfolio acquired from West Suburban. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) is carried on a gross basis (rather than net of the associated credit loss estimate), and ~~records~~ the ~~appropriate provision~~expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses, or ~~release~~ACL.

The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate. Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to ~~maintain an adequate reserve for~~be a sizeable portion of our portfolio. These categories comprised 70.2% of the portfolio as of September 30, 2022, compared to 71.6% of the portfolio as of

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December 31, 2021. We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

Asset Quality

Nonperforming loans consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or greater past due. Remediation work continues in all ~~potential and estimated loan losses.~~

segments. Nonperforming loans increased by ~~$270,000~~$8.2 million to $52.9 million at September 30, ~~2017,~~2022 from ~~$16.0~~$44.7 million at December 31, ~~2016. Credit metrics continue to be relatively stable regarding~~2021. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced a more-than-insignificant deterioration in credit quality since origination. PCD loans and their related deferred loan costs are included in our nonperforming loan ~~levels, and management is~~disclosures, if such loans otherwise meet the definition of a nonperforming loan. Management continues to carefully ~~monitoring~~monitor 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 1.1% as of December 31, 2016, and~~were 1.4% as of September 30, ~~2016.~~2022, 1.3% as of December 31, 2021, and 1.5% as of September 30, 2021. 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)


							September 30, 2022
Nonperforming Loans	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2022		2021		2021		2021	2021
Commercial	$	8,821	$	13,291	$	220	(33.6)	N/M
Leases		235		3,754		3,959	(93.7)	(94.1)
Commercial real estate – investor		17,945		5,694		6,100	215.2	194.2
Commercial real estate – owner occupied		9,581		13,231		6,896	(27.6)	38.9
Construction		7,525		160		2,958	N/M	154.4
Residential real estate – investor		1,380		899		998	53.5	38.3
Residential real estate – owner occupied		3,787		5,019		4,885	(24.5)	(22.5)
Multifamily		1,559		1,573		2,055	(0.9)	(24.1)
HELOC		2,065		1,042		881	98.2	134.4
Other ¹		2		3		-	-	N/M
Total nonperforming loans	$	52,900	$	44,666	$	28,952	18.4	82.7

N/M - Not meaningful

¹ The “Other” segment includes consumer and overdrafts.

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


										September 30, 2022
Nonperforming Assets	As of									Percent Change From
(Dollars in Thousands)	September 30,			December 31,			September 30,			December 31,	September 30,
	2022			2021			2021			2021	2021
Nonaccrual loans	$	32,126		$	41,531		$	27,520		(22.6)	16.7
Performing troubled debt restructured loans accruing interest		22			25			199		(12.0)	(88.9)
Loans past due 90 days or more and still accruing interest		20,752			3,110			1,233		567.3	N/M
Total nonperforming loans		52,900			44,666			28,952		18.4	82.7
Other real estate owned		1,561			2,356			1,912		(33.7)	(18.4)
Total nonperforming assets	$	54,461		$	47,022		$	30,864		15.8	76.5


30-89 days past due loans and still accruing interest	$	8,197		$	10,745		$	2,829
Nonaccrual loans to total loans		0.8	%		1.2	%		1.5	%
Nonperforming loans to total loans		1.4	%		1.3	%		1.5	%
Nonperforming assets to total loans plus OREO		1.4	%		1.4	%		1.7	%

Allowance for credit losses	$	48,847		$	44,281		$	26,949
Allowance for credit losses to total loans		1.3	%		1.3	%		1.4	%
Allowance for credit losses to nonaccrual loans		152.1	%		106.6	%		97.9	%

N/M - Not ~~Meaningful~~meaningful

~~Nonperforming loans consist~~Loan charge-offs, net of ~~nonaccrual loans, nonperforming restructured accruing loans~~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.

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


Loan Charge–offs, Net of Recoveries	Three Months Ended
(Dollars in thousands)	September 30,		% of	June 30,		% of	September 30,		% of
	2022		Total¹	2022		Total¹	2021		Total¹
Commercial	$	20	29.4	$	44	17.6	$	(2)	(0.8)
Leases		178	261.80		-	-		4	1.7
Commercial real estate – investor		105	154.4		225	90.0		83	35.0
Commercial real estate – owner occupied		(75)	(110.3)		(7)	(2.8)		(2)	(0.8)
Residential real estate – investor		(8)	(11.8)		(5)	(2.0)		(7)	(3.0)
Residential real estate – owner occupied		(113)	(166.2)		(22)	(8.8)		(18)	(7.6)
Multifamily		(63)	(92.6)		-	-		183	77.2
HELOC		(35)	(51.5)		(31)	(12.4)		(28)	(11.8)
Other ²		59	86.8		46	18.4		24	10.1
Net charge–offs	$	68	100.0	$	250	100.0	$	237	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~~charge-offs of $68,000 were recorded for the third quarter of ~~2017 reflected~~2022, compared to net charge-offs of $250,000 for the second quarter of 2022, and net charge-offs of $237,000 for the third quarter of 2021, reflecting continuing management attention to credit ~~quality. Gross~~quality and remediation efforts. The net 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 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 quarter of ~~2017~~2022 were primarily due to one lease charge off for $178,000 and one commercial real estate – investor charge off for $94,000. 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~~

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


							September 30, 2022
Classified Assets	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2022		2021		2021		2021	2021
Commercial	$	31,722	$	32,712	$	467	(3.0)	N/M
Leases		235		3,754		4,423	(93.7)	(94.7)
Commercial real estate – investor		28,252		10,667		8,718	164.9	224.1
Commercial real estate – owner occupied		42,698		15,429		7,211	176.7	492.1
Construction		1,347		2,104		4,898	(36.0)	(72.5)
Residential real estate – investor		1,285		1,265		1,154	1.6	11.4
Residential real estate – owner occupied		3,929		5,099		4,508	(22.9)	(12.8)
Multifamily		1,982		2,278		2,327	(13.0)	(14.8)
HELOC		2,278		1,423		1,215	60.1	87.5
Other ¹		2		10		2	(80.0)	-
Total classified loans		113,730		74,741		34,923	52.2	225.7
Other real estate owned		1,561		2,356		1,912	(33.7)	(18.4)
Total classified assets	$	115,291	$	77,097	$	36,835	49.5	213.0

N/M - Not meaningful

¹ The “Other” segment includes consumer and overdrafts.

Total classified loans and ~~OREO.~~classified assets increased $38.2 million as of September 30, 2022, from the levels at December 31, 2021. The increase is due to the addition of commercial real estate – investor loans totaling $19.7 million and two commercial real estate – owner occupied loans totaling $32.0 million in the second quarter. The increase from September 30, 2021 is primarily due to the $15.4 million addition of the West Suburban loan portfolio in late 2021. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ~~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 19.23% for the period ended September 30, ~~2017.~~2022, compared to 13.79% as of December 31, 2021, and 9.73% as of September 30, 2021. The increase in the classified assets ratio for the period ended September 30, 2022, compared to September 30, 2021, is also due to the acquisition of West Suburban.

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.

At September 30, 2022, our allowance for credit losses, or ACL, on loans totaled $48.8 million, and our ACL on unfunded commitments, included in other liabilities, totaled $4.4 million. In the third quarter of 2022, we recorded provision expense on loans of $3.5 million, based on our assessment of nonperforming loan metrics and trends and estimated future credit losses, and a $973,000 increase in our reserve on unfunded commitments, primarily due to an updated analysis of line utilization rates over the past twelve months, as well as the roll off of prior historical periods with lower losses within the CECL model. These two entries resulted in a $4.5 million net impact to the provision for credit losses for the third quarter of 2022.

The ACL on loans totaled $45.4 million as of June 30, 2022, $44.3 as of December 31, 2021, and $26.9 million as of September 30, 2021. The ACL on loans increased in late 2021 due to the impact of the West Suburban acquisition Day One credit mark of $12.1 million, the Day Two non-PCD loan adjustment to ACL of $12.2 million, less a reversal of $2.3 million related to our legacy loan portfolio and net charge-offs of $4.7 million for the fourth quarter. The ACL for loans was reduced in the third quarter of 2021 due to a $1.5 million release of the provision for credit losses.

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

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Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

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


		Three Months Ended								Nine Months Ended
	September 30,			June 30,			September 30,			September 30,			September 30,
	2022			2022			2021			2022			2021
Allowance at beginning of period	$	45,388		$	44,308		$	28,639		$	44,281		$	33,855
Charge–offs:
Commercial		67			52			23			149			232
Leases		178			-			4			178			32
Commercial real estate – investor		124			243			101			604			101
Commercial real estate – owner occupied		12			-			5			133			39
Construction		-			-			-			-			-
Residential real estate – investor		-			-			-			-			-
Residential real estate – owner occupied		-			-			-			-			-
Multifamily		-			-			183			-			183
HELOC		-			-			-			-			17
Other ¹		103			91			53			320			108
Total charge–offs		484			386			369			1,384			712
Recoveries:
Commercial		47			8			25			85			62
Leases		-			-			-			-			-
Commercial real estate – investor		19			18			18			60			58
Commercial real estate – owner occupied		87			7			7			102			225
Construction		-			-			-			-			-
Residential real estate – investor		8			5			7			23			283
Residential real estate – owner occupied		113			22			18			218			128
Multifamily		63			-			-			63			-
HELOC		35			31			28			102			129
Other ¹		44			45			29			120			107
Total recoveries		416			136			132			773			992
Net charge-offs (recoveries)		68			250			237			611			(280)
Provision for (release of) credit losses on loans		3,527			1,330			(1,453)			5,177			(7,186)
Allowance at end of period	$	48,847		$	45,388		$	26,949		$	48,847		$	26,949

Average total loans (exclusive of loans held–for–sale)	$	3,751,097		$	3,505,806		$	1,884,788		$	3,552,871		$	1,938,573
Net charge–offs / (recoveries) to average loans		0.01	%		0.03	%		0.05	%		0.02	%		(0.02)	%
Allowance at period end to average loans		1.30	%		1.29	%		1.43	%		1.37	%		1.39	%

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%~~92.3% as of September 30, ~~2017,~~2022, which was a ~~minimal reduction~~decrease from the coverage ratio of ~~101.4%~~107.8% as of June 30, ~~2017, but greater than the 86.2% coverage ratio~~2022 and a decrease from 93.1% as of September 30, ~~2016.~~2021. When measured as a percentage of average loans, asour total ACL on loans was 1.37% for the nine months ended 2022 and 1.39% for the like period of September 30, 2017, 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 end loans was 1.15% as 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. 2021

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,~~2022, 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~~Continued volatility in the ~~quarter ended September 30, 2017, increased $300,000~~economic environment stemming from the impacts of and response to inflation and the war in Ukraine, and the associated effects on our customers, or other factors, such as ~~compared to like quarter~~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,~~2022, OREO ~~ended at $9.0 million. This compares to $11.7~~totaled $1.6 million, reflecting a $795,000 decrease from the $2.4 million at ~~June 30, 2017,~~December 31, 2021, and ~~$14.1~~a $351,000 decrease from the $1.9 million at September 30, ~~2016. New additions~~2021. In the third quarter of 2022, we disposed of one property totaling $62,000 in net book value, which resulted in a gain on sale of OREO of $33,000 and had no transfers to OREO. In the fourth quarter of 2021, we acquired three OREO ~~portfolio~~properties in our acquisition of ~~$176,000~~West Suburban, with a total fair value of $5.6 million, and we sold two of these properties in December, which had a net book value of $5.2 million. In the third quarter of 2022, we recorded no OREO valuation reserve adjustments, compared to $14,000 of valuation reserve adjustments recorded in the fourth quarter of 2021, and $2,000 of valuation reserve adjustments recorded 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 net book value decreased in the first nine months of 2017 due 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 were recorded in the first nine months of 2017; both of these reductions were partially offset by 13 property transfers into OREO from nonaccrual or fixed asset status totaling $3.8 million.2021.

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)


							September 30, 2022
OREO	Three Months Ended						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2022		2021		2021		2021	2021
Balance at beginning of period	$	1,623	$	1,912	$	1,877	(15.1)	(13.5)
Property additions, net of acquisition adjustments		-		5,678		70	(100.0)	(100.0)
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		62		5,220		37	(98.8)	67.6
Period valuation write-down		-		14		(2)	(100.0)	(100.0)
Balance at end of period	$	1,561	$	2,356	$	1,912	(33.7)	(18.4)

~~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 million,~~$928,000, or approximately ~~57.5%~~59.5% of total OREO at September 30, ~~2017,~~2022, have been in OREO for five years or more. The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.





OREO Properties by Type
(in thousands)	September 30, 2017				December 31, 2016				September 30, 2016
		Amount	% of Total			Amount	% of Total			Amount	% of Total
(Dollars in thousands)													September 30, 2022				December 31, 2021				September 30, 2021
														Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	937	11	%	$	225	2	%	$	1,218	9	%	$	-	0	%	$	645	27	%	$	519	27	%
Lots (single family and commercial)		5,536	61	%		7,322	61	%		8,795	62	%		1,261	81	%		1,411	60	%		1,078	56	%
Vacant land		628	7	%		636	5	%		636	4	%		300	19	%		300	13	%		315	17	%
Multi-family		-	0	%		264	2	%		264	2	%
Commercial property		1,923	21	%		3,469	30	%		3,231	23	%
Total OREO properties	$	9,024	100	%	$	11,916	100	%	$	14,144	100	%

Total other real estate owned													$	1,561	100	%	$	2,356	100	%	$	1,912	100	%

Deposits and Borrowings


							September 30, 2022
Deposits	As of						Percent Change From
(Dollars in thousands)	September 30,		December 31,		September 30,		December 31,	September 30,
	2022		2021		2021		2021	2021
Noninterest bearing demand	$	2,098,144	$	2,093,494	$	1,037,638	0.2	102.2
Savings		1,164,036		1,178,575		457,900	(1.2)	154.2
NOW accounts		630,747		587,381		537,547	7.4	17.3
Money market accounts		931,813		1,102,972		370,691	(15.5)	151.4
Certificates of deposit of less than $100,000		258,071		296,298		173,595	(12.9)	48.7
Certificates of deposit of $100,000 through $250,000		148,411		138,794		98,496	6.9	50.7
Certificates of deposit of more than $250,000		50,137		68,718		38,462	(27.0)	30.4
Total deposits	$	5,281,359	$	5,466,232	$	2,714,329	(3.4)	94.6

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 $5.28 billion at September 30, ~~2017, due primarily to organic loan growth. Total loans increased $115.4~~2022, which reflects a $184.9 million ~~or 7.8%, when~~decrease from total deposits of $5.47 billion at December 31, 2021, and an increase of $2.57 billion from total deposits of $2.71 billion at September 30, 2021. The decrease in deposits at September 30, 2022, compared to December 31, ~~2016, which~~2021, was ~~funded~~primarily due to decreases in savings of $14.5 million, money market

Tableof Contents

accounts of $171.2 million and time deposits of $47.2 million partially offset by ~~significant deposit growth~~increases in demand and ~~FHLBC advances. Securities increased a modest $1.6 million~~NOW accounts of $48.0 million. The increase in ~~total, but the securities portfolio experienced select significant shifts in type of investments held year~~deposits at September 30, 2022, compared 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,~~September 30, 2021 was primarily due to an increase of ~~$1.6 million from $531.8 million at December 31, 2016, and an increase~~$2.69 billion of $2.4 million from September 30, 2016. Available-for-sale purchases during the third quarter of 2017 and year over year periods were primarily tax exempt state and political subdivisions securities; treasuries and government agencies also increased in the period ending September 30, 2017. This portfolio repositioning was performed to enhance overall asset yield 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.

~~Loans~~

~~Total loans were $1.59 billion as of September 30, 2017, an increase of $115.4 million~~deposits 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.West Suburban acquisition.

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~~$35.5 million at September 30, ~~2017, an increase~~2022, a $14.8 million, or 29.5%, decrease from ~~$25.7~~$50.3 million at December 31, ~~2016. The Bank also recorded an advance~~2021. Our notes payable and other borrowings is comprised of ~~$125.0~~$10.0 million outstanding on a $20.0 million term note originated with a correspondent bank in the first quarter of 2020, to facilitate the redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures, completed on March 2, 2020. Notes payable and other borrowings of $10.0 million as of September 30, 2022, decreased $9.1 million from ~~Federal Home Loan Bank of Chicago at~~December 31, 2021, and decreased $10.2 million from September 30, ~~2017, as compared~~2021.

In the second quarter of 2021, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers pursuant to ~~$70.0~~which we sold and issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). We sold the Notes to eligible purchasers in a private offering, and the proceeds of this issuance are intended to be used for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions. The Notes bear interest at ~~December 31, 2016.~~a fixed annual rate of 3.50% through April 14, 2026, payable semi-annually in arrears. As of April 15, 2026 forward, the interest rate on the Notes will generally reset quarterly to a rate equal to Three-Month Term SOFR (as defined by the Note) plus 273 basis points, payable quarterly in arrears. The Notes have a stated maturity of April 15, 2031, and are redeemable, in whole are in part, on April 15, 2026, or any interest payment date thereafter, and at any time upon the occurrence of certain events.

~~The Company is~~We are indebted on senior notes originated in December 2016, totaling ~~$44.0~~$44.6 million, net of deferred issuance costs, ~~which were issued in the fourth quarter~~as of ~~2016.~~September 30, 2022. These notes mature in December 2026, and ~~include~~included interest payable ~~semiannually~~semi-annually at 5.75% for five years. Beginning December 31, 2021, the interest ~~becomes~~became payable quarterly at three month LIBOR plus 385 basis points. ~~The Company is~~We are 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%~~4.39% as of September 30, ~~2017,~~2022, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017 rate reset.

Capital

As of September 30, ~~2017,~~2022, total stockholders’ equity was ~~$200.8~~$433.7 million, which was ~~an increase~~a decrease of ~~$25.6~~$68.3 million from ~~$175.2~~$502.0 million as of December 31, ~~2016.~~2021. This ~~increase~~decrease is ~~directly~~primarily attributable to a decrease in accumulated other comprehensive income of $107.2 million in the first nine months of 2022 due to a net decrease in unrealized gains on available-for-sale securities, net of unrealized losses on swaps, due to the increase in market interest rates, as well as a reduction to retained earnings of $6.7 million for payment of dividends to our common stockholders in the first nine months of 2022. Partially offsetting this decrease was $43.8 million of net income ~~in 2017 and a reduction in~~for the ~~accumulated other comprehensive net loss, offset slightly by $888,000 of dividends paid to common shareholders in 2017.~~

~~In 2015, the Company redeemed all outstanding shares of the Company’s Series B preferred stock;~~nine months ended September 30, 2022. Total stockholders’ equity as of September 30, ~~2015, no shares~~2022, increased $112.5 million compared to September 30, 2021, primarily due to the West Suburban acquisition in late 2021 and the resultant additional common stock issued, as well as net income year over year, less the reduction in accumulated other comprehensive income of $110.6 million year over year.

Tableof Contents

The following table shows the regulatory capital ratios and the current well capitalized regulatory requirements for the Company and the Bank as of the ~~Series B Stock remained outstanding~~. ~~After this redemption, the Company’s total stockholders’ equity continues to include $4.8 million to reflect the value~~dates indicated:


	Minimum Capital		Well Capitalized
	Adequacy with		Under Prompt
	Capital Conservation		Corrective Action		September 30,		December 31,		September 30,
	Buffer, if applicable¹		Provisions²		2022		2021		2021
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		9.16	%	9.46	%	12.99	%
Total risk-based capital ratio	10.50	%	N/A		11.99	%	12.55	%	17.80	%
Tier 1 risk-based capital ratio	8.50	%	N/A		9.68	%	10.06	%	14.10	%
Tier 1 leverage ratio	4.00	%	N/A		7.70	%	7.81	%	9.81	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	11.60	%	12.41	%	15.65	%
Total risk-based capital ratio	10.50	%	10.00	%	12.64	%	13.46	%	16.69	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	11.60	%	12.41	%	15.65	%
Tier 1 leverage ratio	4.00	%	5.00	%	9.24	%	9.58	%	10.83	%

¹Amounts are shown inclusive of a ~~ten year warrant to purchase shares~~capital conservation buffer of 2.50%.

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

As part of its ~~common stock, with an exercise price of $13.43 per share, issued in January 2009 as part~~response to the impact of the ~~original Series B issuance. A discussion~~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 ~~2009 issuance, including this warrant, is included~~capital benefit provided during the initial two-year delay (i.e., a five-year transition in ~~Item 7, “Management’s Discussion and Analysis~~total). In connection with our adoption of ~~Financial Condition and Results~~CECL on January 1, 2020, we elected to utilize the five-year CECL transition. As of ~~Operations”~~September 30, 2022, the capital measures of the ~~Company’s Form 10-K~~Company exclude $2.9 million, which is the modified CECL transition adjustment.

As of September 30, 2022, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the now fully phased-in capital conservation buffer requirements. In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for ~~the year ended~~capital analysis and peer comparisons, decreased from 8.08% at December 31, ~~2016, under~~2021, to 7.27% at September 30, 2022. Our GAAP tangible common equity to tangible assets ratio was 5.67% at September 30, 2022, compared to 6.54% as of December 31, 2021. Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, decreased from 6.59% at December 31, 2021, to 5.72% at September 30, 2022, primarily due to a decline in tangible common equity in the ~~heading “Capital”.~~

~~Table~~nine months ended September 30, 2022. The decline in tangible common equity was due to a decrease in accumulated other comprehensive income of ~~Contents~~

$107.2 million primarily related to unrealized losses on available-for-sale securities stemming from the increase in market interest rates. The ~~Company’s~~ non-GAAP tangible common equity to tangible assets ratio was ~~8.16% at September 30, 2017, compared~~also negatively impacted by growth in total tangible assets in the third quarter of 2022.

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Reconciliation of Tangible Common Equity to ~~7.41% as of December 31, 2016,~~Tangible Assets Ratio Non-GAAP Measure


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

Total Equity	$	433,714		$	433,714		$	502,027		$	502,027
Less: Goodwill and intangible assets		100,801			100,801			102,636			102,636
Add: Limitation of exclusion of core deposit intangible (80%)		N/A			2,865			N/A			3,261
Adjusted goodwill and intangible assets		100,801			97,936			102,636			99,375
Tangible common equity	$	332,913		$	335,778		$	399,391		$	402,652
Tangible assets
Total assets	$	5,967,705		$	5,967,705		$	6,212,189		$	6,212,189
Less: Adjusted goodwill and intangible assets		100,801			97,936			102,636			99,375
Tangible assets	$	5,866,904		$	5,869,769		$	6,109,553		$	6,112,814

Common equity to total assets		7.27	%		7.27	%		8.08	%		8.08	%
Tangible common equity to tangible assets		5.67	%		5.72	%		6.54	%		6.59	%

The non-GAAP intangible asset exclusion reflects the 80% core deposit limitation per Basel III guidelines within risk based capital calculations, and ~~8.12% at September 30, 2016.~~

(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

is useful for us when reviewing risk based capital ratios and equity performance metrics.

Liquidity

~~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 September 30, 2022, our cash on hand liquidity totaled $116.2 million, a decrease of $636.0 million over cash balances held as of December 31, 2021.

Net cash inflows from operating activities were ~~$28.5~~$60.1 million during the first nine months of ~~2017,~~2022, compared with net cash inflows of ~~$17.2~~$50.8 million in the same period ~~in 2016.~~of 2021. Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of inflows for the first nine months of ~~2017 and 2016.~~2022 though to a lesser extent than the like period of 2021. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of ~~outflows~~inflows for the ~~first~~ nine months ended September 30, 2022 and also for the like period of ~~2017 and 2016.~~2021. The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash outflows from investing activities were ~~$105.7~~$506.4 million in the ~~first~~ nine months ~~of 2017,~~ended September 30, 2022, compared to net cash ~~inflows~~outflows of ~~$117.4~~$57.0 million in the same period in ~~2016.~~2021. In the first nine months of ~~2017,~~2022, securities transactions accounted for net ~~inflows~~outflows of ~~$10.8~~$66.9 million, and ~~net~~the principal ~~disbursed~~change on loans accounted for net outflows of ~~$118.7~~$443.6 million. In the first nine months of ~~2016,~~2021, securities transactions accounted for net ~~inflows~~outflows of ~~$184.4~~$225.2 million, and net principal ~~disbursed~~ on loans funded accounted for net ~~outflows~~inflows of ~~$71.6~~$168.6 million. Proceeds from sales of OREO accounted for ~~$5.5 million~~$941,000 and ~~$5.2 million~~$607,000 in investing cash inflows for the ~~first~~ nine months ~~of 2017~~ended September 30, 2022 and ~~2016,~~2021, respectively.

Net cash ~~inflows~~outflows from financing activities in the ~~first~~ nine months ~~of 2017~~ended September 30, 2022, were ~~$77.3~~$189.7 million, compared with net cash inflows of ~~$15.0~~$195.6 million in the nine months ended September 30, 2021. Net deposit outflows in the first nine months of 2022 were $183.7 million compared to net deposit inflows of $177.3 million in the first nine months of ~~2016. Net deposit~~2021. Other short-term borrowings had $25.0 million of net cash inflows in the first nine months of ~~2017 were $22.3 million~~2022, compared to ~~net deposit~~no cash inflows ~~of $18.3 million~~or outflows in the first nine months of ~~2016. Other short-term borrowings had net cash inflows related to FHLBC advances of $55.0 million in the first nine months of 2017 and outflows of $15.0 million in the first nine months of 2016.~~2021. Changes in securities sold under repurchase agreements accounted for ~~$1.1~~outflows of $14.8 million and ~~$12.5~~outflows of $24.0 million for the nine months ended September 30, 2022 and 2021, respectively. Dividends paid on our common stock totaled $6.7 million in ~~net inflows~~the nine months ended September 30, 2022, compared to dividends paid of $3.2 million for the like 2021 period, as the per common share dividend was increased to five cents per share in the second quarter of 2021. The purchase of treasury stock in the first nine months of ~~2017 and 2016, respectively.~~2022 due

Tableof Contents

to shares acquired with restricted stock award vestings resulted in outflows of $447,000, compared to cash outflows of $10.4 million in the first nine months of 2021.

Cash and cash equivalents for the nine months ended September 30, ~~2017,~~2022, totaled ~~$47.5~~$116.2 million, as compared to ~~$189.9~~$519.3 million as of September 30, ~~2016. The significantly higher balance at~~2021. In addition to cash and cash equivalents on hand or held as deposits with other financial institutions, we rely on funding sources from customer deposits, cash flows from securities available-for-sale and loans, and a line of credit with the ~~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 $30.0 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~~The Federal Reserve has continued its pace of rate hikes and raised ~~short-term interest rates~~the federal funds target rate by ~~0.25%. There~~another 0.75% in September 2022. The current market expectation is a ~~general market expectation that~~federal funds target rate of 4.50% by the end of the year, however the outlook on rates have been constantly changing as new economic measures are published. The Federal Reserve ~~will move short-term rates higher~~has been slow in ~~December of 2017. Generally, Federal Reserve actions have not had a significant impact on long-term rates, although Federal Reserve officials have announced a schedule~~shrinking its balance sheet, which decreased from $9.0 trillion in March 2022 to ~~end reinvestment~~$8.8 trillion in ~~their securities portfolio starting October 2017, which could result in increases in long-term rates. The Company manages~~September 2022. 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 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,~~2022 and December 31, ~~2016,~~2021 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 balance~~our on-balance sheet and off-balance sheet positions, which ~~include~~includes interest rate swap derivatives as discussed in Note 1519 of ~~the~~our consolidated financial statements ~~included~~found in ~~this quarterly report. The~~in our Annual Report on Form 10-K for the year ended December 31, 2021. 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~~2022, our net interest income profile remained sensitive to earnings gains (in both dollars and percentage) should interest rates ~~rise,~~rise. However, we have a lower sensitivity profile relative to December 31, 2021 from interest rate swaps and ~~earnings reductions should interest rates fall. The~~mix changes in income across the various interest rate scenarios as of September 30, 2017 were similar to those increases in Federal Home Loan Bank borrowings. Overall, management considers the current level 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.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%~~, 1.0%, and ~~an increase of 2% assuming~~2.0%, with no change in the slope of the yield curve. Due to relatively low market interest rates, it was not possible to calculate any down rate scenarios for December 31, 2021 results because many of the market interest rates would fall below zero in that scenario.

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
%

Tableof Contents

	Analysis of Net Interest Income Sensitivity
	Immediate Changes in Rates
(Dollars in thousands)		(2.0)	%		(1.0)	%		(0.5)	%		0.5	%		1.0	%		2.0	%
September 30, 2022
Dollar change	$	(46,160)		$	(22,306)		$	(10,791)		$	10,567		$	21,073		$	40,937
Percent change		(19.5)	%		(9.4)	%		(4.5)	%		4.5	%		8.9	%		17.3	%

December 31, 2021
Dollar change		N/M			N/M			N/M		$	13,404		$	27,689		$	54,007
Percent change		N/M			N/M			N/M			9.4	%		19.5	%		38.0	%

N/M - Not meaningful

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

44Effects of Inflation

~~Table~~In management’s opinion, changes in interest rates affect our financial condition to a far greater degree than changes in the inflation rate; however, we monitor both. The annual US inflation rate was 8.2% in September 2022, a slight reduction from its peak of ~~Contents~~

9.1% in June 2022. Management believes the inflation rate will be elevated in the near term, which is expected to be favorable for the Bank. In general, we anticipate that higher inflation will increase borrowers’ needs for credit as a result of GDP growth. In addition, as interest rates are expected to rise to combat inflation, we also expect our net interest margin to be favorably impacted. The downside risks of high inflation puts upwards pressure to our expenses, which could impact profits. Furthermore, higher costs of living weaken the financial condition of our borrowers which could affect our credit profile. A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today’s volatile economic environment. We seek to mitigate the impact of interest rate volatility on the Bank by seeking to ensure that rate sensitive assets and rate sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree. Overall, we expect the effects of higher inflation to be beneficial to us in the near term.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of September 30, ~~2017.~~2022. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, ~~2017,~~2022, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended September 30, ~~2017,~~2022, 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

Tableof Contents

that the ultimate liabilities, if any, resulting from these actions will not have a material adverse effect on the financial position of the Bank or on the consolidated financial position of the Company.

Item 1.A. Risk Factors

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as well as cautionary statements contained in this Quarterly Report, on Form 10-Q, including those under the caption “Cautionary Note Regarding Forward-Looking Statements.”

There have been no material changes ~~from~~to the risk factors ~~set forth~~previously disclosed in ~~Part I, Item 1.A. “Risk Factors,” of~~ the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016 and~~2021 filed with the risk factors set forth under the heading “Risk Factors” in the Company’s Registration Statement of 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 StatementSEC on ~~Form S-3 for disclosures regarding the risks and uncertainties related to the Company’s business.~~March 10, 2022.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

~~N/A~~

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibits:


~~10.1~~	First Amendment of Old Second Bancorp, Inc. Employment Agreement with James Eccher, dated as of September 1, 2017 (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on September 1, 2017).

~~10.2~~	~~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 ~~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,~~2022 and December 31, ~~2016;~~2021; (ii) Consolidated Statements of Income for the three and nine months ended September 30, ~~2017~~2022 and ~~2016;~~2021; (iii) Consolidated Statements of ~~Stockholders’ Equity~~Comprehensive (Loss) Income for the three and nine months ended September 30, ~~2017~~2022 and ~~2016;~~2021; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2022 and ~~2016;~~2021; (v) Consolidated Statements of Stockholder’s Equity for the three and ~~(v)~~nine months ended September 30, 2022 and 2021; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

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


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

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SIGNATURES

~~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 ~~7, 2017~~8, 2022


	PART I
	~~PART I~~
		Page Number
Item 1.	Financial Statements	3 4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32 39
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
~~Item 4.~~	~~Controls and Procedures~~	45
	~~PART II~~
		62
Item 1.4.	~~Legal Proceedings~~Controls and Procedures	45 63
	PART II

Item ~~1.A.~~1.	~~Risk Factors~~Legal Proceedings	45 63
Item 2.1.A.	Risk Factors	64
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45 64
Item 3.	Defaults Upon Senior Securities	45 64
Item 4.	Mine Safety Disclosure	45 64
Item 5.	Other Information	45 64
Item 6.	Exhibits	46
		65

	Signatures	47 66


	(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


			Gross			Gross
	Amortized		Unrealized			Unrealized			Fair
September 30, 2017	Cost			Gains			Losses			Value
Securities available-for-sale
U.S. Treasuries	$	4,001		$	-		$	(11)		$	3,990
U.S. government agencies		13,475			15			(39)			13,451
U.S. government agencies mortgage-backed		11,131			18			(119)			11,030
States and political subdivisions		224,648			5,173			(789)			229,032
Corporate bonds		10,823			20			(266)			10,577
Collateralized mortgage obligations		81,693			228			(1,535)			80,386
Asset-backed securities		134,542			865			(3,648)			131,759
Collateralized loan obligations		52,803			505			(49)			53,259
Total securities available-for-sale	$	533,116		$	6,824		$	(6,456)		$	533,484



		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	%