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 ~~June 30, 2022~~March 31, 2023


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

For transition period from to

Commission File Number 000-10537

(Exact name of Registrant as specified in its charter)


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

37 South River Street, Aurora, Illinois 60507

(Address of principal executive offices) (Zip Code)

(630) 892-0202

(Registrant’s telephone number, including area code)

Not applicable

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

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


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

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

Yes ☒ No ☐

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

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

Large accelerated filer☐Accelerated filer☒

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

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

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

Yes ☐ No ☒


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

As of ~~August 4, 2022,~~May 5, 2023, the Registrant has ~~44,563,376~~44,665,127 shares of common stock outstanding at $1.00 par value per share.

Table of Contents

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

Cautionary Note Regarding Forward-Looking Statements

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other publicly available documents of the Company contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, including, but not limited to, management’s expectations regarding future plans, strategies and financial performance, including regulatory developments, industry and economic trends and estimates and assumptions underlying accounting policies. Forward-looking statements are based on our current beliefs, expectations and assumptions and on information currently available and, can be identified by the use of words such as ~~“expects,~~“should,” ~~“seeks to,~~“anticipate,” ~~“intends,~~“expect,” ~~“believes,~~“estimate,” “intend,” “believe,” “may,” “likely,” “will,” ~~“would,~~“forecast,” ~~“could,~~“project,” ~~“should,~~“looking forward,” ~~“plan,~~“optimistic,” ~~“anticipate,~~“hopeful,” ~~“estimate,~~“potential,” ~~“possible,~~“progress,” ~~“likely”~~“prospect,” “remain,” “continue,” “trend,” “momentum” or the negative thereof as well as other similar words and expressions of the future. Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict as to timing, extent, likelihood and degree of occurrence, which could cause our actual results to differ materially from those anticipated in or by such statements. Potential risks and uncertainties include, but are not limited to, the following:

●

our ability to execute our growth strategy;

●

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

●

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

●

risks with respect to our ability to successfully expand and integrate businesses and operations that we acquire, ~~such as the recent 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;statements;

●

our ability to receive dividends from our subsidiaries;

●

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

●

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

●

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

●

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

●

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

●

any increases in FDIC assessment which will increase our cost of doing business;

●

the adverse effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics, ~~(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~~2022 Annual Report on Form 10-K and in subsequent filings we make with the SEC.

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

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)

(unaudited)

June 30,

December 31,

2022

2021
Assets

Cash and due from banks

$
53,295

$
38,565
Interest earning deposits with financial institutions

228,040

713,542
Cash and cash equivalents

281,335

752,107
Securities available-for-sale, at fair value

1,734,416

1,693,632
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock

20,413

13,257
Loans held-for-sale

1,707

4,737
Loans

3,625,070

3,420,804
Less: allowance for credit losses on loans

45,388

44,281
Net loans

3,579,682

3,376,523
Premises and equipment, net

81,901

88,005
Other real estate owned

1,624

2,356
Mortgage servicing rights, at fair value

10,722

7,097
Goodwill

86,332

86,332
Core deposit intangible

14,980

16,304
Bank-owned life insurance ("BOLI")

105,496

105,300
Deferred tax assets, net

32,481

6,100
Other assets

54,454

60,439
Total assets

$
6,005,543

$
6,212,189

Liabilities

Deposits:

Noninterest bearing demand

$
2,078,272

$
2,093,494
Interest bearing:

Savings, NOW, and money market

2,803,201

2,868,928
Time

461,382

503,810
Total deposits

5,342,855

5,466,232
Securities sold under repurchase agreements

37,599

50,337
Junior subordinated debentures

25,773

25,773
Subordinated debentures

59,254

59,212
Senior notes

44,533

44,480
Notes payable and other borrowings

11,000

19,074
Other liabilities

35,625

45,054
Total liabilities

5,556,639

5,710,162

Stockholders’ Equity

Common stock

44,705

44,705
Additional paid-in capital

201,282

202,443
Retained earnings

271,831

252,011
Accumulated other comprehensive (loss) income

(65,244)

8,768
Treasury stock

(3,670)

(5,900)
Total stockholders’ equity

448,904

502,027
Total liabilities and stockholders’ equity

$
6,005,543

$
6,212,189


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

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

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


	June 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
	Common		Common		Common		Common
	Stock		Stock		Stock		Stock
Par value	$	1.00	$	1.00	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000		60,000,000		60,000,000
Shares issued		44,705,150		44,705,150		44,705,150		44,705,150
Shares outstanding		44,562,068		44,461,045		44,665,127		44,582,311
Treasury shares		143,082		244,105		40,023		122,839

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)


	(unaudited)					(unaudited)				(unaudited)
	Three Months Ended June 30,					Six Months Ended June 30,				Three Months Ended March 31,
	2022			2021		2022		2021		2023		2022
Interest and dividend income
Loans, including fees	$	38,229		$	20,815	$	74,595	$	43,022	$	57,210	$	36,366
Loans held-for-sale		32			38		89		93		12		57
Securities:
Taxable		6,670			1,832		11,723		3,447		10,735		5,169
Tax exempt		1,413			1,259		2,846		2,566		1,337		1,317
Dividends from FHLBC and FRBC stock		263			113		416		228		280		153
Interest bearing deposits with financial institutions		782			137		1,051		229		585		269
Total interest and dividend income		47,389			24,194		90,720		49,585		70,159		43,331
Interest expense
Savings, NOW, and money market deposits		347			217		744		458		1,149		397
Time deposits		265			409		542		909		664		277
Securities sold under repurchase agreements		9			21		20		52		9		11
Other short-term borrowings											2,345		-
Junior subordinated debentures		284			284		564		564		279		280
Subordinated debentures		547			517		1,093		517		546		546
Senior notes		578			673		1,063		1,346		994		485
Notes payable and other borrowings		95			119		198		242		87		103
Total interest expense		2,125			2,240		4,224		4,088		6,073		2,099
Net interest and dividend income		45,264			21,954		86,496		45,497		64,086		41,232
Provision for (release of) credit losses		550			(3,500)		550		(6,500)
Net interest and dividend income after provision for (release of) credit losses		44,714			25,454		85,946		51,997
Provision for credit losses											3,501		-
Net interest and dividend income after provision for credit losses											60,585		41,232
Noninterest income
Wealth management		2,506			2,389		5,204		4,540		2,270		2,698
Service charges on deposits		2,328			1,221		4,402		2,416		2,424		2,074
Secondary mortgage fees		50			272		189		594		59		139
Mortgage servicing rights mark to market gain (loss)		82			(1,033)		3,060		80
Mortgage servicing rights mark to market (loss) gain											(525)		2,978
Mortgage servicing income		579			507		1,098		1,074		516		519
Net (loss) gain on sales of mortgage loans		(262)	��		1,895		1,233		5,616
Securities (losses) gains, net		(33)			2		(33)		2
Net gain on sales of mortgage loans											306		1,495
Securities losses, net											(1,675)		-
Change in cash surrender value of BOLI		72			423		196		757		242		124
Card related income		2,965			1,666		5,532		3,113		2,244		2,574
Other income		924			577		1,793		1,027		1,489		862
Total noninterest income		9,211			7,919		22,674		19,219		7,350		13,463
Noninterest expense
Salaries and employee benefits		21,332			12,896		41,299		26,402		22,248		19,967
Occupancy, furniture and equipment		3,046			2,303		6,745		4,770		3,475		3,699
Computer and data processing		4,006			1,304		10,274		2,602		1,774		6,268
FDIC insurance		702			192		1,112		393		584		410
Net teller & bill paying											502		1,907
General bank insurance		351			277		666		553		305		315
Amortization of core deposit intangible		659			115		1,324		235		624		665
Advertising expense		194			95		376		155		142		182
Card related expense		1,057			626		1,591		1,219		1,216		534
Legal fees		179			135		436		190		319		257
Consulting & management fees		523			250		1,139		667		790		616
Other real estate expense, net		87			77		75		113		306		(12)
Other expense		5,113			3,131		10,464		5,840		3,637		3,444
Total noninterest expense		37,249			21,401		75,501		43,139		35,922		38,252
Income before income taxes		16,676			11,972		33,119		28,077		32,013		16,443
Provision for income taxes		4,429			3,152		8,852		7,378		8,406		4,423
Net income	$	12,247		$	8,820	$	24,267	$	20,699	$	23,607	$	12,020

Basic earnings per share	$	0.28		$	0.30	$	0.55	$	0.71	$	0.53	$	0.27
Diluted earnings per share		0.27			0.30		0.54		0.70		0.52		0.27
Dividends declared per share		0.05			0.05		0.10		0.06		0.05		0.05

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss) ~~Income~~

(In thousands)


	(unaudited)				(unaudited)				(unaudited)
	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Net Income	$	12,247	$	8,820	$	24,267	$	20,699	$	23,607	$	12,020

Unrealized holding (losses) gains on available-for-sale securities arising during the period		(40,485)		3,337		(105,314)		(1,476)
Related tax benefit (expense)		11,335		(935)		29,488		436
Holding (losses) gains, after tax, on available-for-sale securities		(29,150)		2,402		(75,826)		(1,040)
Unrealized holding gains (losses) on available-for-sale securities arising during the period										16,210		(64,829)
Related tax (expense) benefit										(4,536)		18,153
Holding gains (losses), after tax, on available-for-sale securities										11,674		(46,676)

Less: Reclassification adjustment for the net (losses) gains realized during the period
Net realized (losses) gains		(33)		2		(33)		2
Related tax benefit (expense)		9		(1)		9		(1)
Net realized (losses) gains after tax		(24)		1		(24)		1
Other comprehensive (loss) income on available-for-sale securities		(29,126)		2,401		(75,802)		(1,041)
Less: Reclassification adjustment for the net losses realized during the period
Net realized losses										(1,675)		-
Related tax benefit										471		-
Net realized losses after tax										(1,204)		-
Other comprehensive income (loss) on available-for-sale securities										12,878		(46,676)

Changes in fair value of derivatives used for cash flow hedges		1,898		(1,714)		2,487		989		1,602		589
Related tax (expense) benefit		(532)		480		(697)		(277)
Other comprehensive income (loss) on cash flow hedges		1,366		(1,234)		1,790		712
Related tax expense										(456)		(165)
Other comprehensive income on cash flow hedges										1,146		424

Total other comprehensive (loss) income		(27,760)		1,167		(74,012)		(329)
Total comprehensive (loss) income	$	(15,513)	$	9,987	$	(49,745)	$	20,370
Total other comprehensive income (loss)										14,024		(46,252)
Total comprehensive income (loss)									$	37,631	$	(34,232)



	Accumulated		Accumulated		Total		Accumulated		Accumulated		Total
	Unrealized Gain		Unrealized Gain		Accumulated Other		Unrealized Gain		Unrealized Gain		Accumulated Other
	(Loss) on Securities		(Loss) on Derivative		Comprehensive		(Loss) on Securities		(Loss) on Derivative		Comprehensive
(unaudited)	Available-for -Sale		Instruments		Income/(Loss)		Available-for -Sale		Instruments		Income/(Loss)
For the Three Months Ended
Balance, March 31, 2021	$	13,971	$	(705)	$	13,266
Other comprehensive income (loss), net of tax		2,401		(1,234)		1,167
Balance, June 30, 2021	$	16,372	$	(1,939)	$	14,433
Balance, January 1, 2022							$	11,139	$	(2,371)	$	8,768
Other comprehensive (loss) income, net of tax								(46,676)		424		(46,252)
Balance, March 31, 2022							$	(35,537)	$	(1,947)	$	(37,484)

Balance, March 31, 2022	$	(35,537)	$	(1,947)	$	(37,484)
Other comprehensive (loss) income, net of tax		(29,126)		1,366		(27,760)
Balance, June 30, 2022	$	(64,663)	$	(581)	$	(65,244)

For the Six Months Ended
Balance, December 31, 2020	$	17,413	$	(2,651)	$	14,762
Other comprehensive (loss) income, net of tax		(1,041)		712		(329)
Balance, June 30, 2021	$	16,372	$	(1,939)	$	14,433

Balance, December 31, 2021	$	11,139	$	(2,371)	$	8,768
Other comprehensive (loss) income, net of tax		(75,802)		1,790		(74,012)
Balance, June 30, 2022	$	(64,663)	$	(581)	$	(65,244)

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

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Six Months Ended June 30,

2022

2021

Cash flows from operating activities

Net income

$
24,267

$
20,699

Adjustments to reconcile net income to net cash provided by operating activities:

Net premium / discount amortization on securities

3,300

1,095

Securities losses (gains), net

33

(2)

Release of provision for credit losses

550

(6,500)

Originations of loans held-for-sale

(49,648)

(140,402)

Proceeds from sales of loans held-for-sale

53,204

150,571

Net gains on sales of mortgage loans

(1,233)

(5,616)

Mortgage servicing rights mark to market loss

(3,060)

(80)

Net accretion of discount on loans

(3,841)

(588)

Net change in cash surrender value of BOLI

(196)

(757)

Net gains on sale of other real estate owned

(130)

(35)

Provision for other real estate owned valuation losses

104

67

Depreciation of fixed assets and amortization of leasehold improvements

2,101

1,528

Net gains on disposal and transfer of fixed assets

(1,961)

-

Amortization of core deposit intangibles

1,324

235

Change in current income taxes receivable

(729)

(1,487)

Deferred tax expense (benefit)

2,400

1,585

Change in accrued interest receivable and other assets

7,000

4,186

Accretion of purchase accounting adjustment on time deposits

(821)

-

Change in accrued interest payable and other liabilities

(7,033)

(615)

Stock based compensation

1,469

611

Net cash provided by operating activities

27,100

24,495

Cash flows from investing activities

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

148,429

68,122

Proceeds from sales of securities available-for-sale

3,303

8,202

Purchases of securities available-for-sale

(301,129)

(162,663)

Proceeds from sales of FHLBC/FRBC stock

1,561

-

Purchases of FHLBC/FRBC stock

(8,717)

-

Net change in loans

(199,955)

133,357

Proceeds from sales of other real estate owned, net of participations and improvements

845

565

Proceeds from disposition of fixed assets

7,490

-

Net purchases of premises and equipment

(1,526)

(595)

Net cash used in investing activities

(349,699)

46,988

Cash flows from financing activities

Net change in deposits

(122,556)

144,928

Net change in securities sold under repurchase agreements

(12,738)

1,586

Issuance of subordinated debentures, net of issuance costs

-

59,147

Repayment of term note

(2,000)

(2,000)

Net change in notes payable and other borrowings, excluding term note

(6,056)

(157)

Dividends paid on common stock

(4,423)

(1,742)

Purchase of treasury stock

(400)

(10,388)

Net cash provided by financing activities

(148,173)

191,374

Net change in cash and cash equivalents

(470,772)

262,857

Cash and cash equivalents at beginning of period

752,107

329,903

Cash and cash equivalents at end of period

$
281,335

$
592,760


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

See accompanying notes to consolidated financial statements.

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Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)


								Accumulated													Accumulated
				Additional				Other				Total					Additional				Other				Total
(unaudited)	(unaudited)	Common		Paid-In		Retained		Comprehensive		Treasury		Stockholders’		(unaudited)	Common		Paid-In		Retained		Comprehensive		Treasury		Stockholders’
		Stock		Capital		Earnings		Income (Loss)		Stock		Equity			Stock		Capital		Earnings		Income (Loss)		Stock		Equity
For the Three Months Ended
Balance, March 31, 2021		$	34,957	$	120,075	$	248,165	$	13,266	$	(105,350)	$	311,113

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

Balance, January 1, 2023															$	44,705	$	202,276	$	310,512	$	(93,124)	$	(3,228)	$	461,141
Net income							8,820						8,820							23,607						23,607
Other comprehensive income, net of tax									1,167				1,167									14,024				14,024
Dividends declared and paid, ($0.05 per share)							(1,449)						(1,449)
Stock based compensation					497								497
Purchase of treasury stock from stock repurchase program											(4,210)		(4,210)
Balance, June 30, 2021		$	34,957	$	120,572	$	255,536	$	14,433	$	(109,560)	$	315,938

Balance, March 31, 2022		$	44,705	$	203,190	$	261,807	$	(37,484)	$	(5,900)	$	466,318
Net income							12,247						12,247
Other comprehensive loss, net of tax									(27,760)				(27,760)
Dividends declared and paid, ($0.05 per share)							(2,223)						(2,223)
Dividends declared on common stock, ($0.05 per share)																				(2,229)						(2,229)
Vesting of restricted stock					(2,630)						2,630		-					(3,087)						3,087		-
Stock based compensation					722								722					932								932
Purchase of treasury stock from taxes withheld on stock awards											(400)		(400)											(605)		(605)
Balance, June 30, 2022		$	44,705	$	201,282	$	271,831	$	(65,244)	$	(3,670)	$	448,904
Balance, March 31, 2023															$	44,705	$	200,121	$	331,890	$	(79,100)	$	(746)	$	496,870

For the Six Months Ended

Balance, December 31, 2020

$
34,957

$
122,212

$
236,579

$
14,762

$
(101,423)

$
307,087
Net income

20,699

20,699
Other comprehensive loss, net of tax

(329)

(329)
Dividends declared and paid, ($0.06 per share)

(1,742)

(1,742)
Vesting of restricted stock

(2,251)

2,251

-
Stock based compensation

611

611
Purchase of treasury stock from taxes withheld on stock awards

(577)

(577)
Purchase of treasury stock from stock repurchase program

(9,811)

(9,811)
Balance, June 30, 2021

$
34,957

$
120,572

$
255,536

$
14,433

$
(109,560)

$
315,938

Balance, December 31, 2021

$
44,705

$
202,443

$
252,011

$
8,768

$
(5,900)

$
502,027
Net income

24,267

24,267
Other comprehensive loss, net of tax

(74,012)

(74,012)
Dividends declared and paid, ($0.10 per share)

(4,447)

(4,447)
Vesting of restricted stock

(2,630)

2,630

-
Stock based compensation

1,469

1,469
Purchase of treasury stock from taxes withheld on stock awards

(400)

(400)
Balance, June 30, 2022

$
44,705

$
201,282

$
271,831

$
(65,244)

$
(3,670)

$
448,904

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information. The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented. Results for the period ended ~~June 30, 2022,~~March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023. These interim consolidated financial statements and accompanying notes are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, ~~2021.~~2022. Unless otherwise indicated, dollar amounts in the tables contained in the notes to the consolidated financial statements are in thousands. Certain items in prior periods have been reclassified to conform to the current presentation.

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

~~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, ASU 2021-01, and ASU ~~2021-01 -~~2022-06 – In October 2018, the Financial Standards Board, or FASB, issued ASU No. 2018-16 “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting.” ASU 2018-16 adds the SOFR overnight index swap rate to the list of United States (U.S.) benchmark rates eligible for hedge accounting purposes, which is the fourth rate permissible to be used as a U.S. benchmark rate. This guidance iswas effective for annual and interim periods beginning after December 15, 2018, and ~~we do~~did 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.

~~Table~~ ASU 2022-06 further defers the sunset date of ~~Contents~~Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

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

~~Notes to Consolidated Financial Statements~~

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

The Company formed a LIBOR transition team in 2019 and ~~has~~ developed a project plan to assess the use of alternative indexes and to seek to ensure all financial instruments that reference LIBOR are identified, quantified, and researched for the LIBOR fallback language available or needed. The Company ~~has~~ completed the ISDA protocol adherence for LIBOR fallback language for all commercial swaps, ~~has~~ met with ~~our~~its commercial loan clients to also guide their swap fallback language adherence, and worked to revise all credit documents being issued by ~~our~~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~~were updated to handle multiple SOFR-based indexes and we continue to meet regularly to plan for the transition of existing LIBOR exposures prior to the final LIBOR cessation date of June 30, 2023.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

ASU 2022-01 – On March 28, 2022, the FASB issued ASU ~~2022-01”~~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 is effective for public business entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, and was adopted by the ~~impact to derivative measurement and disclosures, and will assess any revisions needed for reporting purposes in the next few quarters. We anticipate adopting ASU 2022-01 no later than~~Company as of January 1, 2023. There was no material impact of the pronouncement to the financial statements of the Company.

ASU 2022-02 – On March 31, 2022, the FASB issued ASU 2022-02 “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” ~~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 was effective for fiscal years beginning after December 15, 2022, including interim periods within those years, and was adopted prospectively by the ~~impact to TDR recognition, measurement and disclosures, and will assess any revisions needed for reporting purposes in the next few quarters. We anticipate adopting ASU 2022-02~~Company as of January 1, 2023. There was no material impact of the pronouncement to the financial statements of the Company. As of March 31, 2023, the Company has not modified the terms of any loans that are experiencing financial difficulty.

Change in Significant Accounting Policies

Significant accounting policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. During the ~~second~~first quarter of ~~2022,~~2023, the Company had no changes to significant accounting policies or estimates.

Subsequent Events

On ~~July 19, 2022,~~April 18, 2023, our Board of Directors declared a cash dividend of $0.05 per share payable on ~~August~~May 8, ~~2022,~~2023, to stockholders of record as of ~~July 29, 2022;~~April 28, 2023; dividends of $2.2 million are scheduled to be paid to stockholders on ~~August~~May 8, ~~2022.~~

2023.

Note 2 – Acquisition

On December 1, 2021, the Company completed its acquisition of West Suburban Bancorp, Inc. (“West Suburban”), a bank holding company, and its wholly owned subsidiary, West Suburban Bank, based in Lombard, Illinois, with operations throughout our existing market footprint. ~~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

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

consideration of $295.2 million, based on the closing price of the Company’s common stock on the date of acquisition, which consisted of 15.7 million shares of the Company’s common stock and $100.7 million of cash. Goodwill of ~~$67.7~~$67.9 million associated with the acquisition was recorded by the Company, which was the result of expected synergies, operational efficiencies and other factors.

The acquisition of West Suburban was accounted for as a business combination. 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 conditionscombination, and other future events that are often subjective in nature and may require adjustments. Accordingly, these estimated fair values are considered preliminary as of June 30, 2022, and are subject to adjustment for up to one year after December 1, 2021. These adjustments may include: (i) changes in deferred tax assets or liabilities related to fair value estimates and changes in the expected realization of items considered to be net operating loss carryforwards due to tax calculations still in process, and (ii) changes in goodwill as a resultnone of the ~~net effect of any adjustments. No adjustments were identified during the quarter ended June 30, 2022. None of the $67.7~~$67.9 million of goodwill recorded 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 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

2,093
Other assets

52,710
Total assets

$
2,944,088

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

$
67,727

Expenses related to the West Suburban acquisition totaled $3.3 million and $8.9 million for the three month and six month periods ended June 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 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 June 30, 2022 and December 21, 2021, including loans that, as of the acquisition date, had not experienced a more-than-insignificant deterioration in credit quality since origination (“non-PCD loans”):

Acquired Loan Detail

As of June 30, 2022

As of December 31, 2021

PCD

Non-PCD

Total

PCD

Non-PCD

Total
West Suburban acquired loans

$
80,224

$
1,220,474

$
1,300,698

$
102,409

$
1,418,752

$
1,521,161
ABC Bank acquired loans

2,125

47,518

49,643

4,547

64,236

68,783
Talmer Bank acquired loans

-

44,034

44,034

-

45,858

45,858
Total acquired loans net book value

$
82,349

$
1,312,026

$
1,394,375

$
106,956

$
1,528,846

$
1,635,802
Accretion recorded on acquired loans year to date

$
566

$
3,342

$
3,908

$
401

$
565

$
966

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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments. FHLBC stock was recorded at ~~$5.5~~$15.3 million at ~~June 30, 2022,~~March 31, 2023, and ~~$7.1~~$5.6 million at December 31, ~~2021.~~2022. FRBC stock was recorded at $14.9 million at ~~June 30, 2022,~~March 31, 2023 and ~~$6.2 million at~~ December 31, ~~2021.~~2022.

The following tables summarize the amortized cost and fair value of the securities portfolio at ~~June 30, 2022,~~March 31, 2023, and December 31, ~~2021,~~2022, and the corresponding amounts of gross unrealized gains and losses:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2023	Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	224,195	$	-	$	(9,461)	$	214,734
U.S. government agencies		60,952		-		(4,249)		56,703
U.S. government agencies mortgage-backed		135,504		-		(13,566)		121,938
States and political subdivisions		243,131		1,329		(10,954)		233,506
Corporate bonds		10,000		-		(238)		9,762
Collateralized mortgage obligations		510,992		-		(56,886)		454,106
Asset-backed securities		196,966		4		(7,217)		189,753
Collateralized loan obligations		178,903		-		(4,337)		174,566
Total securities available-for-sale	$	1,560,643	$	1,333	$	(106,908)	$	1,455,068


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2022	Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	224,054	$	-	$	(11,925)	$	212,129
U.S. government agencies		61,178		-		(5,130)		56,048
U.S. government agencies mortgage-backed		140,588		-		(15,598)		124,990
States and political subdivisions		239,999		363		(14,234)		226,128
Corporate bonds		10,000		-		(378)		9,622
Collateralized mortgage obligations		596,336		1		(62,569)		533,768
Asset-backed securities		210,388		6		(8,466)		201,928
Collateralized loan obligations		180,276		-		(5,530)		174,746
Total securities available-for-sale	$	1,662,819	$	370	$	(123,830)	$	1,539,359

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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2023, by contractual maturity, are listed in the table below. Securities not due at a single maturity date are shown separately.


			Weighted
	Amortized		Average		Fair
Securities available-for-sale	Cost		Yield		Value
Due in one year or less	$	64,076	0.72	%	$	62,639
Due after one year through five years		245,837	1.14			233,060
Due after five years through ten years		48,750	3.02			45,537
Due after ten years		179,615	3.06			173,469
		538,278	1.90			514,705
Mortgage-backed and collateralized mortgage obligations		646,496	2.41			576,044
Asset-backed securities		196,966	5.12			189,753
Collateralized loan obligations		178,903	6.45			174,566
Total securities available-for-sale	$	1,560,643	3.04	%	$	1,455,068

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

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

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


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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


			Gross		Gross				Less than 12 months					12 months or more
December 31, 2022									in an unrealized loss position					in an unrealized loss position					Total
	Amortized		Unrealized		Unrealized		Fair		Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
June 30, 2022	Cost¹		Gains		Losses		Value
Securities available-for-sale									Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. Treasury	$	223,768	$	-	$	(8,948)	$	214,820
U.S. Treasuries									1	$	1,025	$	24,121	4	$	10,900	$	188,008	5	$	11,925	$	212,129
U.S. government agencies		61,673		-		(3,777)		57,896	-		-		-	9		5,130		56,048	9		5,130		56,048
U.S. government agencies mortgage-backed		152,583		-		(10,747)		141,836	15		975		11,369	117		14,623		113,621	132		15,598		124,990
States and political subdivisions		244,864		912		(12,124)		233,652	45		5,800		128,770	15		8,434		48,877	60		14,234		177,647
Corporate bonds		10,000		-		(457)		9,543	-		-		-	2		378		9,622	2		378		9,622
Collateralized mortgage obligations		681,539		31		(40,072)		641,498	80		12,895		180,624	120		49,674		348,880	200		62,569		529,504
Asset-backed securities		268,682		87		(9,147)		259,622	30		3,030		121,915	21		5,436		79,659	51		8,466		201,574
Collateralized loan obligations		181,116		-		(5,567)		175,549	23		3,579		112,772	11		1,951		61,974	34		5,530		174,746
Total securities available-for-sale	$	1,824,225	$	1,030	$	(90,839)	$	1,734,416	194	$	27,304	$	579,571	299	$	96,526	$	906,689	493	$	123,830	$	1,486,260

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

¹~~Excludes accrued interest receivable of~~ ~~$5.5~~ ~~million and~~ ~~$4.3~~ ~~million at June 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 June 30, 2022, by contractual maturity, are listed in the table below. Securities not due at a single maturity date are shown separately.

Weighted

Amortized

Average

Fair

Securities available-for-sale

Cost

Yield


Value

Due in one year or less

$
8,229

1.15
%

$
8,017

Due after one year through five years

304,142

1.05

291,151

Due after five years through ten years

44,642

2.52

41,310

Due after ten years

183,292

3.00

175,433

540,305

1.83

515,911

Mortgage-backed and collateralized mortgage obligations

834,122

1.81

783,334

Asset-backed securities

268,682

2.17

259,622

Collateralized loan obligations

181,116

3.10

175,549

Total securities available-for-sale

$
1,824,225

2.00
%

$
1,734,416

At June 30, 2022, the Company’s investments included $216.4 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

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

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

~~At June 30, 2022,~~ ~~the Company had 0 securities issued from any one originator, other than the U.S. Government and its agencies, which individually amounted to over 10% of the Company’s stockholders’ equity.~~

Securities with unrealized losses with no corresponding allowance for credit losses at June 30, 2022 and December 31, 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

June 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
U.S. Treasuries

5

$
8,948

$
214,820

-

$
-

$
-

5

$
8,948

$
214,820
U.S. government agencies

5

3,691

53,781

4

86

4,116

9

3,777

57,897
U.S. government agencies mortgage-backed

127

9,681

136,686

6

1,066

5,149

133

10,747

141,835
States and political subdivisions

36

10,463

119,482

1

1,661

2,941

37

12,124

122,423
Corporate bonds

2

457

9,543

-

-

-

2

457

9,543
Collateralized mortgage obligations

221

38,780

617,153

2

1,292

12,739

223

40,072

629,892
Asset-backed securities

48

8,853

236,143

5

294

6,956

53

9,147

243,099
Collateralized loan obligations

32

5,378

165,068

2

189

10,481

34

5,567

175,549
Total securities available-for-sale

476

$
86,251

$
1,552,676

20

$
4,588

$
42,382

496

$
90,839

$
1,595,058

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
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

63

505

78,711

1

65

1,663

64

570

80,374
States and political subdivisions

7

55

8,430

1

617

4,051

8

672

12,481
Corporate bonds

2

113

9,887

-

-

-

2

113

9,887
Collateralized mortgage obligations

133

2,285

381,658

-

-

-

133

2,285

381,658
Asset-backed securities

20

608

103,819

3

53

3,276

23

661

107,095
Collateralized loan obligations

10

35

45,132

2

43

10,628

12

78

55,760
Total securities available-for-sale

241

$
4,230

$
734,235

11

$
885

$
24,626

252

$
5,115

$
758,861

Each quarter, we perform an analysis to determine if any of the unrealized losses on securities available-for-sale are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. Our assessment includes a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and our ability and intent to hold the security for a period of time sufficient for a recovery in value. We also consider the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. ~~NaN~~The portfolio continues to consist of a mix of fixed- and floating-rate, high quality securities, largely rated AA (or better), displaying an overall effective duration of approximately 3.2 years. No credit losses were determined to be present as of ~~June 30, 2022,~~March 31, 2023, as there was no credit quality deterioration noted. Therefore, 0no provision for credit losses on securities was recognized for the ~~second~~first quarter of ~~2022.~~2023.


		Three Months Ended				Six Months Ended				Three Months Ended
		June 30,				June 30,				March 31,
Securities available-for-sale	2022		2021		2022		2021		2023			2022
Proceeds from sales of securities	$	3,303	$	8,202	$	3,303	$	8,202	$	66,170		$	-
Gross realized gains on securities	$	-	$	5	$	-	$	5
Gross realized losses on securities		(33)		(3)		(33)		(3)		(1,675)			-
Net realized (losses) gains	$	(33)	$	2	$	(33)	$	2
Income tax benefit (expense) on net realized (losses) gains	$	9	$	(1)	$	9	$	(1)
Net realized losses									$	(1,675)		$	-
Income tax benefit on net realized losses									$	471		$	-
Effective tax rate applied										28.1	%		N/M

N/M -Not meaningful

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

1413

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

~~Effective tax rate applied~~

~~27.3~~

~~N/M~~

~~27.3~~

~~N/M~~

As of June 30, 2022, securities valued at $511.4 million were pledged to secure deposits and borrowings, and for other purposes, an increase from $501.3 million of securities pledged at year-end 2021.

Note 4 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:


	June 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Commercial ¹	$	806,725	$	771,474	$	851,737	$	840,964
Leases		230,677		176,031		285,831		277,385
Commercial real estate – Investor		1,076,678		957,389
Commercial real estate – Owner occupied		627,898		574,384
Commercial real estate – investor						1,056,787		987,635
Commercial real estate – owner occupied						870,115		854,879
Construction		170,037		206,132		174,683		180,535
Residential real estate – Investor		61,220		63,399
Residential real estate – Owner occupied		207,836		213,248
Residential real estate – investor						56,720		57,353
Residential real estate – owner occupied						217,855		219,718
Multifamily		310,706		309,164		358,991		323,691
HELOC		111,072		115,664		104,941		109,202
HELOC – Purchased		9,066		10,626
Other ²		13,155		23,293		25,694		18,247
Total loans		3,625,070		3,420,804		4,003,354		3,869,609
Allowance for credit losses on loans		(45,388)		(44,281)		(53,392)		(49,480)
Net loans³	$	3,579,682	$	3,376,523	$	3,949,962	$	3,820,129

¹ Includes $~~3.5~~1.3 million and $~~38.4~~1.6 million of Paycheck Protection Program (“PPP”) loans at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

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

³ Excludes accrued interest receivable of $~~11.0~~17.0 million and $~~9.2~~15.9 million at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, that is recorded in other assets on the consolidated balance ~~sheet.~~sheets.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to assure access to collateral, in the event of borrower default, through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. Although the Bank makes loans primarily within its market area, there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector. The real estate related categories listed above represent ~~71.0%~~70.9% and ~~71.6%~~70.6% of the portfolio at ~~June 30, 2022,~~March 31, 2023, and December 31, ~~2021,~~2022, respectively, and include a mix of owner occupied and non-owner occupied commercial real estate, residential, construction and multifamily loans.

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

The following tables represent the activity in the allowance for credit losses for loans, or the ACL, for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~2021:~~2022:

Provision for

Beginning

(Release of)

Ending
Allowance for credit losses

Balance

Credit Losses

Charge-offs

Recoveries

Balance
Three months ended June 30, 2022

Commercial

$
12,576

$
1,582

$
52

$
8

$
14,114
Leases

2,573

(837)

-

-

1,736
Commercial real estate – Investor

15,559

(1,400)

243

18

13,934
Commercial real estate – Owner occupied

3,270

3,703

-

7

6,980
Construction

2,858

(1,323)

-

-

1,535
Residential real estate – Investor

703

(47)

-

5

661
Residential real estate – Owner occupied

1,950

(103)

-

22

1,869
Multifamily

2,977

(543)

-

-

2,434
HELOC

1,594

(158)

-

31

1,467
HELOC – Purchased

81

(6)

-

-

75
Other

167

462

91

45

583

$
44,308

$
1,330

$
386

$
136

$
45,388

Provision for

Beginning

(Release of)

Ending
Allowance for credit losses

Balance

Credit Losses

Charge-offs

Recoveries

Balance
Six months ended June 30, 2022

Commercial

$
11,751

$
2,407

$
82

$
38

$
14,114
Leases

3,480

(1,744)

-

-

1,736
Commercial real estate - Investor

13,093

1,280

480

41

13,934
Commercial real estate - Owner occupied

2,615

4,471

121

15

6,980
Construction

3,373

(1,838)

-

-

1,535
Residential real estate - Investor

760

(114)

-

15

661
Residential real estate - Owner occupied

2,832

(1,068)

-

105

1,869
Multifamily

3,675

(1,241)

-

-

2,434
HELOC

2,379

(979)

-

67

1,467
HELOC - Purchased

131

(56)

-

-

75
Other

192

532

217

76

583

$
44,281

$
1,650

$
900

$
357

$
45,388

(Release of)

Beginning

Provision for

Ending
Allowance for credit losses

Balance

Credit Losses

Charge-offs

Recoveries

Balance
Three months ended June 30, 2021

Commercial

$
3,276

$
(485)

$
207

$
17

$
2,601
Leases

3,382

34

28

-

3,388
Commercial real estate – Investor

7,908

2,509

-

20

10,437
Commercial real estate – Owner occupied

1,722

(615)

31

10

1,086
Construction

3,719

(671)

-

-

3,048
Residential real estate – Investor

1,803

(838)

-

10

975
Residential real estate – Owner occupied

2,528

(723)

-

61

1,866
Multifamily

4,265

(999)

-

-

3,266
HELOC

1,713

(181)

5

77

1,604
HELOC – Purchased

295

(66)

-

-

229
Other

356

(228)

30

41

139

$
30,967

$
(2,263)

$
301

$
236

$
28,639



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

1614

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

(Release of)

Allowance for credit losses

Beginning

Provision for

Ending
Six months ended June 30, 2021

Balance

Credit Losses

Charge-offs

Recoveries

Balance
Commercial

$
2,812

$
(39)

$
209

$
37

$
2,601
Leases

3,888

(472)

28

-

3,388
Commercial real estate – Investor

9,205

1,192

-

40

10,437
Commercial real estate – Owner occupied
��

2,251

(1,349)

34

218

1,086
Construction

4,054

(1,006)

-

-

3,048
Residential real estate – Investor

1,740

(1,041)

-

276

975
Residential real estate – Owner occupied

2,714

(958)

-

110

1,866
Multifamily

3,625

(359)

-

-

3,266
HELOC

1,749

(229)

17

101

1,604
HELOC – Purchased

199

30

-

-

229
Other

1,618

(1,502)

55

78

139

$
33,855

$
(5,733)

$
343

$
860

$
28,639



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

At March 31, 2023, our allowance for credit losses (“ACL”) on loans totaled $53.4 million, and our ACL on unfunded commitments, included in other liabilities, totaled $3.8 million including related purchase accounting adjustments. In the first quarter of 2023, we recorded net provision expense of $3.5 million based on historical loss rate updates, loan growth, our assessment of nonperforming loan metrics and trends, and estimated future credit losses. The ACL on loans excludes ~~$3.4~~$3.2 million, ~~$4.5~~$4.3 million and ~~$2.2~~$4.2 million of allowance for unfunded commitments as of ~~June 30, 2022,~~March 31, 2023, December 31, ~~2021~~2022 and ~~June 30, 2021,~~March 31, 2022, respectively, recorded within Other Liabilities. The total ACL on unfunded commitments listed as of ~~June 30,~~March 31, 2023, December 31, 2022, and ~~December~~March 31, ~~2021~~2022 excludes the purchase accounting adjustment of ~~$1.3 million~~$596,000, $819,000 and ~~$1.7~~$1.5 million, respectively, recorded due to our acquisition of West Suburban, which is also recorded within Other Liabilities, and is being accreted in interest income over the estimated life of the unused commitments.

The following tables presents the collateral dependent loans and the related ACL allocated by segment of loans as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:

Accounts

ACL
June 30, 2022

Real Estate

Receivable

Equipment

Other

Total

Allocation
Commercial

$
907

$
9,067

$
-

$
1,091

$
11,065

$
2,610
Leases

-

-

2,002

-

2,002

323
Commercial real estate – Investor

5,293

-

-

-

5,293

-
Commercial real estate – Owner occupied

22,597

-

-

2,450

25,047

4,228
Construction

150

-

-

-

150

-
Residential real estate – Investor

965

-

-

-

965

-
Residential real estate – Owner occupied

3,112

-

-

-

3,112

254
Multifamily

1,010

-

-

-

1,010

-
HELOC

1,967

-

-

-

1,967

-
HELOC – Purchased

171

-

-

-

171

-
Other

-

-

-

-

-

-
Total

$
36,172

$
9,067

$
2,002

$
3,541

$
50,782

$
7,415

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

826

-

-

-

826

190
HELOC – Purchased

180

-

-

-

180

-
Other

-

-

-

7

7

4
Total

$
26,977

$
9,901

$
3,249

$
3,002

$
43,129

$
5,387


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


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

1715

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


													90 days or														90 days or
					90 Days or								Greater Past						90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and		30-59 Days		60-89 Days		Greater Past		Total Past						Due and
June 30, 2022	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
March 31, 2023															Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	1,093	$	1,628	$	2,134	$	4,855	$	801,870	$	806,725	$	979	$	2,640	$	-	$	1,422	$	4,062	$	847,675	$	851,737	$	460
Leases		-		-		1,508		1,508		229,169		230,677		-		789		51		-		840		284,991		285,831		-
Commercial real estate - Investor		17,732		3,489		3,143		24,364		1,052,314		1,076,678		3,150
Commercial real estate - Owner occupied		116		3,127		3,055		6,298		621,600		627,898		1,107
Commercial real estate – investor																5,395		22,966		2,018		30,379		1,026,408		1,056,787		-
Commercial real estate – owner occupied																2,914		9,162		1,833		13,909		856,206		870,115		-
Construction		-		-		-		-		170,037		170,037		-		873		-		116		989		173,694		174,683		-
Residential real estate - Investor		-		69		1,011		1,080		60,140		61,220		38
Residential real estate - Owner occupied		2,365		717		2,149		5,231		202,605		207,836		-
Residential real estate – investor																322		-		1,233		1,555		55,165		56,720		-
Residential real estate – owner occupied																3,044		177		2,622		5,843		212,012		217,855		420
Multifamily		985		-		-		985		309,721		310,706		-		217		-		1,662		1,879		357,112		358,991		-
HELOC		322		51		392		765		110,307		111,072		-		303		182		409		894		104,047		104,941		86
HELOC - Purchased		-		-		171		171		8,895		9,066		-
Other		607		-		-		607		12,548		13,155		-		558		1		-		559		25,135		25,694		-
Total	$	23,220	$	9,081	$	13,563	$	45,864	$	3,579,206	$	3,625,070	$	5,274	$	17,055	$	32,539	$	11,315	$	60,909	$	3,942,445	$	4,003,354	$	966

90 days or

90 Days or

Greater Past

30-59 Days

60-89 Days

Greater Past

Total Past

Due and
December 31, 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

956,015

957,389

-
Commercial real estate – Owner occupied

2,324

500

4,848

7,672

566,712

574,384

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

218

434

115,230

115,664

-
HELOC – Purchased

-

-

180

180

10,446

10,626

-
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 are considered current if they are in compliance with the modified terms.~~


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

The table presents all nonaccrual loans as of ~~June 30, 2022,~~March 31, 2023, and December 31, ~~2021:~~2022:


Nonaccrual loan detail	June 30, 2022		With no ACL		December 31, 2021		With no ACL		March 31, 2023		With no ACL		December 31, 2022		With no ACL
Commercial	$	10,621	$	2,354	$	11,894	$	9,217	$	2,351	$	1,892	$	7,189	$	6,598
Leases		2,005		235		3,754		2,943		856		173		1,876		-
Commercial real estate - Investor		5,174		5,174		5,694		5,694
Commercial real estate - Owner occupied		9,563		6,975		11,637		11,205
Commercial real estate – investor										30,397		11,210		4,346		4,244
Commercial real estate – owner occupied										19,691		4,560		8,050		3,813
Construction		150		150		160		160		241		241		251		-
Residential real estate - Investor		1,054		1,054		876		876
Residential real estate - Owner occupied		3,642		3,388		4,898		4,622
Residential real estate – investor										1,555		1,379		1,528		675
Residential real estate – owner occupied										3,618		3,618		3,713		1,572
Multifamily		907		907		1,573		1,573		2,495		2,495		2,538		1,322
HELOC		2,422		2,422		862		672		2,355		2,177		2,109		180
HELOC - Purchased		171		171		180		180
Other		3		3		3		3		2		2		2		-
Total	$	35,712	$	22,833	$	41,531	$	37,145	$	63,561	$	27,747	$	31,602	$	18,404

The Company recognized ~~$35,000~~$86,000 of interest on nonaccrual loans during the ~~six~~three months ended ~~June 30, 2022.~~March 31, 2023.

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

Credit Quality Indicators

The Company categorizes loans into credit risk categories based on current financial information, overall debt service coverage, comparison to industry averages, historical payment experience, and current economic trends. This analysis includes loans with outstanding balances or commitments greater than $50,000 and excludes homogeneous loans such as home equity lines of credit and

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

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

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

Credit quality indicators by loan segment and loan origination date at ~~June 30, 2022~~March 31, 2023 were as follows:


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

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

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

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

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

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

Revolving

Loans

Converted

Revolving

To Term


2022

2021

2020

2019

2018

Prior

Loans

Loans

Total
Commercial

Pass

$
101,846

$
84,311

$
34,286

$
16,069

$
13,178

$
32,438

$
468,212

$
-

$
750,340
Special Mention

88

15,326

1,394

3,160

-

-

4,840

-

24,808
Substandard

8,825

3,594

3,309

13,395

22

60

2,372

-

31,577
Total commercial

110,759

103,231

38,989

32,624

13,200

32,498

475,424

-

806,725

Leases

Pass

85,782

74,574

$
34,929

24,334

7,054

1,713

-

-

228,386
Special Mention

-

-

-

286

-

-

-

-

286
Substandard

-

-

-

1,770

-

235

-

-

2,005
Total leases

85,782

74,574

34,929

26,390

7,054

1,948

-

-

230,677

Commercial real estate – investor

Pass

245,689

310,869

185,655

83,699

52,267

85,785

19,968

-

983,932
Special Mention

-

4,955

28,904

28,480

-

-

-

-

62,339
Substandard

-

3,979

-

23,240

-

3,188

-

-

30,407
Total commercial real estate – investor

245,689

319,803

214,559

135,419

52,267

88,973

19,968

-

1,076,678

Commercial real estate – owner occupied

Pass

71,396

178,903

97,521

63,526

53,156

107,040

1,640

-

573,182
Special Mention

8,405

-

8,766

8,830

-

-

-

-

26,001
Substandard

207

22,345

1,196

1,679

-

3,288

-

-

28,715
Total commercial real estate – owner occupied

80,008

201,248

107,483

74,035

53,156

110,328

1,640

-

627,898

Construction

Pass

21,503

70,850

49,606

2,596

2,828

1,678

2,806

-

151,867
Special Mention

-

1,497

5,224

10,211

-

-

-

-

16,932
Substandard

1,238

-

-

-

-

-

-

-

1,238
Total construction

22,741

72,347

54,830

12,807

2,828

1,678

2,806

-

170,037

Residential real estate – investor

Pass

12,597

11,037

7,308

9,722

5,623

12,613

1,074

-

59,974
Special Mention

-

-

-

-

-

-

-

-

-
Substandard

-

-

-

506

191

549

-

-

1,246
Total residential real estate – investor

12,597

11,037

7,308

10,228

5,814

13,162

1,074

-

61,220

Residential real estate – owner occupied

Pass

2,524

45,874

29,768

16,812

13,000

94,011

1,446

-

203,435
Special Mention

-

616

-

-

-

-

-

-

616
Substandard

-

254

241

712

132

2,446

-

-

3,785
Total residential real estate – owner occupied

2,524

46,744

30,009

17,524

13,132

96,457

1,446

-

207,836

Multifamily

Pass

56,793

109,808

43,793

28,315

54,875

8,868

54

-

302,506
Special Mention

-

-

-

6,864

-

-

-

-

6,864
Substandard

429

-

-

-

621

286

-

-

1,336
Total multifamily

57,222

109,808

43,793

35,179

55,496

9,154

54

-

310,706

HELOC

Pass

225

365

537

1,617

679

2,822

102,036

-

108,281
Special Mention

-

-

-

110

-

-

-

-

110
Substandard

-

378

1,010

31

71

873

318

-

2,681
Total HELOC

225

743

1,547

1,758

750

3,695

102,354

-

111,072

HELOC – purchased

2017

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Pass

-

-

-

-

-

-

8,894

-

8,894
Special Mention

-

-

-

-

-

-

-

-

-
Substandard

-

-

-

-

-

172

-

-

172
Total HELOC – purchased

-

-

-

-

-

172

8,894

-

9,066

Other

Pass

1,467

3,900

608

281

88

1,263

5,546

-

13,153
Special Mention

-

-

-

-

-

-

-

-

-
Substandard

-

-

2

-

-

-

-

-

2
Total other

1,467

3,900

610

281

88

1,263

5,546

-

13,155

Total loans

Pass

599,822

890,491

484,011

246,971

202,748

348,231

611,676

-

3,383,950
Special Mention

8,493

22,394

44,288

57,941

-

-

4,840

-

137,956
Substandard

10,699

30,550

5,758

41,333

1,037

11,097

2,690

-

103,164
Total loans

$
619,014

$
943,435

$
534,057

$
346,245

$
203,785

$
359,328

$
619,206

$
-

$
3,625,070


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

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

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

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

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

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

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


															Revolving
															Loans
															Converted
													Revolving		To Term
	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total		2022		2021		2020		2019		2018		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	$	225,056	$	70,608	$	21,597	$	12,742	$	6,957	$	2,651	$	447,821	$	-	$	787,432
Special Mention		44		84		694		-		-		-		3,708		-		4,530		1,875		272		1,182		2,432		-		-		21,286		-		27,047
Substandard		9,498		4,048		14,121		326		-		75		4,644		-		32,712		4,958		2,447		2,981		12,176		7		-		3,916		-		26,485
Total commercial		201,800		54,770		53,429		28,503		5,176		11,020		416,746		30		771,474		231,889		73,327		25,760		27,350		6,964		2,651		473,023		-		840,964

Leases
Pass		83,402		44,129	$	32,259		8,950		1,170		2,367		-		-		172,277		161,379		64,203	$	26,995		17,653		4,449		830		-		-		275,509
Special Mention		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Substandard		-		-		2,834		623		-		297		-		-		3,754		1,606		-		-		270		-		-		-		-		1,876
Total leases		83,402		44,129		35,093		9,573		1,170		2,664		-		-		176,031		162,985		64,203		26,995		17,923		4,449		830		-		-		277,385

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

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

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

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

2118

Table of 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

1,869

104,843

-

114,313
Special Mention

-

-

-

-

-

-

108

-

108
Substandard

-

-

-

17

12

196

1,018

-

1,243
Total HELOC

907

2,091

2,131

822

1,679

2,065

105,969

-

115,664

HELOC – Purchased

Pass

-

-

-

-

-

10,446

-

-

10,446
Special Mention

-

-

-

-

-

-

-

-

-
Substandard

-

-

-

-

-

180

-

-

180
Total HELOC – purchased

-

-

-

-

-

10,626

-

-

10,626

Other

Pass

8,659

1,099

437

254

1,414

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


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

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

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

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

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

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

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

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

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

The Company had ~~$659,000~~$547,000 and ~~$488,000~~$600,000 in residential real estate loans in the process of foreclosure as of ~~June 30, 2022,~~March 31, 2023, and December 31, ~~2021,~~2022, respectively.

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

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

2219

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

As of January 1, 2023, the Company adopted ASU 2022-02, Topic 326 “Troubled Debt Restructuring (“TDRs”) and Vintage Disclosures”, see Note 1. No loans were modified that were in financial difficulty during the three-month period ending March 31, 2023. There ~~were 2~~was no TDR ~~loan modifications for an aggregate of $41,000~~activity for the three months ended ~~June 30, 2022 and 3 TDR loan modifications for an aggregate of $1.1 million for the six months ended June 30,~~March 31, 2022. ~~There was 0 TDR activity for the three and six months ended June 30, 2021.~~ TDRs ~~are~~were classified as being in default on a case-by-case basis when they ~~fail~~failed to be in compliance with the modified terms. There was 0no TDR default activity for the ~~periods~~period ended ~~June 30,~~March 31, 2022, ~~and June 30, 2021,~~ for loans that were restructured within the prior ~~12 month~~12-month period.

Note 5 – Other Real Estate Owned

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


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
Other real estate owned	2022		2021		2022		2021		2023		2022
Balance at beginning of period	$	2,374	$	2,163	$	2,356	$	2,474	$	1,561	$	2,356
Property additions, net of acquisition adjustments		-		-		87		-		291		87
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		646		225		715		530
Proceeds from property disposals, net of participation purchase and gains/losses										328		69
Period valuation write-down		104		61		104		67		269		-
Balance at end of period	$	1,624	$	1,877	$	1,624	$	1,877	$	1,255	$	2,374

Activity in the valuation allowance was as follows:


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2022		2021		2022		2021		2023		2022
Balance at beginning of period	$	1,179	$	1,649	$	1,179	$	1,643	$	856	$	1,179
(Release of) provision for unrealized losses		104		61		104		67
Provision for unrealized losses										269		-
Reductions taken on sales		(363)		(414)		(363)		(414)		(272)		-
Balance at end of period	$	920	$	1,296	$	920	$	1,296	$	853	$	1,179

Expenses related to OREO, net of lease revenue includes:


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
	2022		2021		2022		2021		2023		2022
Gain on sales, net	$	(81)	$	(15)	$	(130)	$	(35)
(Release of) provision for unrealized losses		104		61		104		67
Loss (Gain) on sales, net									$	28	$	(49)
Provision for unrealized losses										269		-
Operating expenses		64		31		101		85		9		37
Less:
Lease revenue		-		-		-		4		-		-
Net OREO expense	$	87	$	77	$	75	$	113	$	306	$	(12)

2320

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 6 – Deposits

Major classifications of deposits were as follows:


	June 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Noninterest bearing demand	$	2,078,272	$	2,093,494	$	1,950,144	$	2,051,702
Savings		1,199,027		1,178,575		1,108,610		1,145,592
NOW accounts		609,558		587,381		608,260		609,338
Money market accounts		994,616		1,102,972		799,300		862,170
Certificates of deposit of less than $100,000		268,723		296,298		238,257		244,017
Certificates of deposit of $100,000 through $250,000		140,266		138,794		147,887		157,438
Certificates of deposit of more than $250,000		52,393		68,718		44,762		40,466
Total deposits	$	5,342,855	$	5,466,232	$	4,897,220	$	5,110,723

Note 7 – Borrowings

The following table is a summary of borrowings as of ~~June 30, 2022,~~March 31, 2023, and December 31, ~~2021.~~2022. Junior subordinated debentures are discussed in more detail in Note 8:8.


	June 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Securities sold under repurchase agreements	$	37,599	$	50,337	$	27,897	$	32,156
Other short-term borrowings						315,000		90,000
Junior subordinated debentures		25,773		25,773		25,773		25,773
Subordinated debentures		59,254		59,212		59,318		59,297
Senior notes		44,533		44,480		44,611		44,585
Notes payable and other borrowings		11,000		19,074		-		9,000
Total borrowings	$	178,159	$	198,876	$	472,599	$	260,811

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities. These transactions consistently mature overnight from the transaction date and are governed by sweep repurchase agreements. All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities, and had a carrying amount of ~~$37.6~~$27.9 million at ~~June 30, 2022,~~March 31, 2023, and ~~$50.3~~$32.2 million at December 31, ~~2021.~~2022. The fair value of the pledged collateral was ~~$102.6~~$65.9 million at ~~June 30, 2022,~~March 31, 2023, and ~~$113.0~~$71.4 million at December 31, ~~2021.~~2022. At ~~June 30, 2022,~~March 31, 2023, there were 0no 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 ~~June 30, 2022, and December~~March 31, ~~2021,~~2023, the Bank had 0$315.0 million in short-term advances outstanding under the FHLBC. There were $90.0 million in short-term advances as of December 31, 2022. The Bank assumed $23.4 million of long-term FHLBC advances with our ABC Bank acquisition in ~~2018.~~2018, which were recorded in notes payable and other borrowings. The remaining balance of $5.9 million was paid off in full during the second quarter of 2022. ~~FHLB~~FHLBC stock held ~~as of June 30, 2022~~at March 31, 2023 was valued at ~~$5.5~~$15.3 million, and any potential FHLBC advances were collateralized by loans with a principal balance of ~~$820.3 million,~~$1.50 billion, which carried a FHLBC-calculated combined collateral value of ~~$559.3 million.~~$1.06 billion. The Company had excess collateral of ~~$479.3~~$743.6 million available to secure borrowings at ~~June 30, 2022.~~

~~The Company also had $44.5 million of senior notes outstanding, net of deferred issuance costs, as of June 30, 2022 and December~~March 31, 2021. The senior notes were issued in December 2016 with a ten year maturity, and terms include interest payable semiannually at 5.75% for five years. Beginning December 31, 2021, the senior debt began to pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points. ��The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. As of June 30, 2022, and December 31, 2021, unamortized debt issuance costs related to the senior notes were $467,000 and $520,000, respectively, and are included as a reduction of the balance of the senior notes on the Consolidated Balance Sheet. These deferred issuance costs will be amortized to interest expense over the ten year term of the notes and are included in the Consolidated Statements of Income.

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

On February 24, 2020, the Company originated a $20.0 million term note, of which $11.0 million is outstanding as of June 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 and interest payments quarterly, and the balance of this note is included within Notes Payable and Other Borrowings on the Consolidated Balance Sheet. The Company also has an undrawn line of credit of $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 2019.2023.

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~~used 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.~~purposes. The Notes bear interest at a fixed annual rate of 3.50%, from and including the date of issuance to but excluding April 15, 2026, payable semi-annually in arrears. From and including April 15, 2026 to, but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to Three-Month Term SOFR (as defined inby the Note) plus 273 basis points, payable

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

quarterly in arrears. As of ~~June 30,~~March 31, 2023 and December 31, 2022, we had $59.3 million of subordinated debentures outstanding, net of deferred issuance costs.

The Company also had $44.6 million of senior notes outstanding, net of deferred issuance costs, as of March 31, 2023 and December 31, 2022. The senior notes were issued in December 2016 with a ten-year maturity, and terms include interest payable semiannually at 5.75% for five years. Beginning December 31, 2021, the senior debt began to pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points. The interest rate at March 31, 2023 and December 31, 2022 was 9.01% and 8.62%, respectively. The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. As of March 31, 2023, and December 31, 2022, unamortized debt issuance costs related to the senior notes were $389,000 and $415,000, respectively, and are included as a reduction of the balance of the senior notes on the Consolidated Balance Sheets. These deferred issuance costs will be amortized to interest expense over the ten-year term of the notes and are included in the Consolidated Statements of Income.

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

Note 8 – Junior Subordinated Debentures

The Company issued $25.0 million of cumulative trust preferred securities through a private placement completed by an unconsolidated subsidiary, Old Second Capital Trust II, in April 2007. These trust preferred securities mature in 30 years, but subject to regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017. The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017, and now have a floating rate of 150 basis points over three-month LIBOR. Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of ~~4.42%~~4.39% and 4.41% for the quarters ended ~~June 30,~~March 31, 2023 and March 31, 2022, ~~and June 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.

The junior subordinated debentures issued by the Company are disclosed on the Consolidated Balance ~~Sheet,~~Sheets, and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of ~~June 30, 2022,~~March 31, 2023 and December 31, ~~2021,~~2022, the remaining unamortized debt issuance costs related to the junior subordinated debentures were $1,000 and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance ~~Sheet.~~Sheets. The remaining deferred issuance costs on the junior subordinated debentures related to the issuance of Old Second Capital Trust II will be amortized to interest expense over the remainder of the 30-year term of the notes and are included in the Consolidated Statements of Income.

Note 9 – Equity Compensation Plans

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

The 2019 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”). Awards may be granted to selected directors, officers, employees or eligible service providers under the 2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors. As of ~~June 30, 2022, 1,176,029~~March 31, 2023, 970,271 shares remained available for issuance under the 2019 ~~Plan~~Plan. The Company has granted only restricted stock units under the 2019 Equity Plan.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

There were ~~264,589~~230,399 and ~~222,964~~251,055 restricted stock units issued under the 2019 Plan during the ~~six~~three months ended ~~June 30,~~March 31, 2023 and March 31, 2022, ~~and June 30, 2021,~~ respectively. Compensation expense is recognized over the vesting period of the restricted stock units based on the market value of the award on the issue date. Total compensation cost that has been recorded for the 2019 Plan was ~~$1.5 million~~$948,000 in the first ~~six~~three months of ~~2022~~2023 and ~~$644,000~~$795,000 for the first ~~six~~three months of ~~2021.~~2022.

A summary of changes in the Company’s unvested restricted awards for the ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023, is as follows:


	June 30, 2022			March 31, 2023
		Weighted			Weighted
	Restricted	Average		Restricted	Average
	Stock Shares	Grant Date		Stock Shares	Grant Date
	and Units	Fair Value		and Units	Fair Value
Unvested at January 1	540,306	$	12.04	649,210	$	12.84
Granted	264,589		14.25	230,399		17.21
Vested	(128,516)		12.81	(117,674)		12.26
Forfeited	(17,144)		12.49
Unvested at June 30	659,235	$	12.77
Unvested at March 31				761,935	$	14.25

Total unrecognized compensation cost of restricted awards was ~~$5.2~~$6.8 million as of ~~June 30, 2022,~~March 31, 2023, which is expected to be recognized over a weighted-average period of ~~2.20~~2.25 years.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 10 – Earnings Per Share

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


		Three Months Ended June 30,				Six Months Ended June 30,					Three Months Ended March 31,
		2022		2021		2022		2021			2023		2022
Basic earnings per share:
Weighted-average common shares outstanding			44,499,395		28,849,015		44,480,326		29,036,354			44,619,118		44,461,045
Net income		$	12,247	$	8,820	$	24,267	$	20,699		$	23,607	$	12,020
Basic earnings per share		$	0.28	$	0.30	$	0.55	$	0.71		$	0.53	$	0.27

Diluted earnings per share:
Weighted-average common shares outstanding			44,499,395		28,849,015		44,480,326		29,036,354			44,619,118		44,461,045
Dilutive effect of unvested restricted awards ¹			747,341		518,457		724,134		538,608			697,480		700,670
Diluted average common shares outstanding			45,246,736		29,367,472		45,204,460		29,574,962			45,316,598		45,161,715

Net Income		$	12,247	$	8,820	$	24,267	$	20,699		$	23,607	$	12,020
Diluted earnings per share		$	0.27	$	0.30	$	0.54	$	0.70		$	0.52	$	0.27


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

Note 11 – Regulatory & Capital Matters

The Bank is subject to the risk-based capital regulatory guidelines, which include the methodology for calculating the risk-weighted Bank assets, developed by the Office of the Comptroller of the Currency (the “OCC”) and the other bank regulatory agencies. In connection with the current risk-based capital regulatory guidelines, the Bank’s Board of Directors has established an internal guideline requiring the Bank to maintain a Tier 1 leverage capital ratio at or above 8eight percent (8%) and a total risk-based capital ratio at or above 12twelve percent (12%). At ~~June 30, 2022,~~March 31, 2023, the Bank exceeded those thresholds.

At ~~June 30, 2022,~~March 31, 2023, the Bank’s Tier 1 capital leverage ratio was ~~8.94%~~9.83%, ~~a decrease~~an increase of 6451 basis points from December 31, ~~2021, but~~2022, and is above the 8.00% objective. The Bank’s total capital ratio was ~~13.25%~~13.10%, ~~a decrease~~an increase of 2135 basis points from December 31, ~~2021, but~~2022, and also above the objective of 12.00%.

Bank holding companies are generally required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System. The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of ~~June 30, 2022,~~March 31, 2023, and December 31, ~~2021.~~2022.

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015. The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies”, which are generally holding companies with consolidated assets of less than $3.0 billion. A detailed discussion of the Basel III Rules is included in Part I, Item 1 of the Company’s Form 10-K for the year ended December 31, ~~2021,~~2022, under the heading “Supervision and Regulation.”

At ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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				Well Capitalized								Minimum Capital				Well Capitalized
					Adequacy with Capital				Under Prompt Corrective								Adequacy with Capital				Under Prompt Corrective
	Actual				Conservation Buffer, if applicable¹				Action Provisions²				Actual				Conservation Buffer, if applicable¹				Action Provisions²
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2022
March 31, 2023
Common equity tier 1 capital to risk weighted assets
Consolidated	$	415,443	9.35	%	$	311,027	7.00	%		N/A	N/A		$	478,610	9.91	%	$	338,070	7.00	%		N/A	N/A
Old Second Bank		543,518	12.24			310,835	7.00		$	288,633	6.50	%		577,986	11.98			337,721	7.00		$	313,598	6.50	%
Total capital to risk weighted assets
Consolidated		545,284	12.27			466,624	10.50			N/A	N/A			617,527	12.79			506,961	10.50			N/A	N/A
Old Second Bank		588,359	13.25			466,247	10.50			444,045	10.00			631,903	13.10			506,487	10.50			482,369	10.00
Tier 1 capital to risk weighted assets
Consolidated		440,443	9.91			377,777	8.50			N/A	N/A			503,610	10.43			410,420	8.50			N/A	N/A
Old Second Bank		543,518	12.24			377,443	8.50			355,241	8.00			577,986	11.98			410,090	8.50			385,967	8.00
Tier 1 capital to average assets
Consolidated		440,443	7.24			243,339	4.00			N/A	N/A			503,610	8.56			235,332	4.00			N/A	N/A
Old Second Bank		543,518	8.94			243,185	4.00			303,981	5.00			577,986	9.83			235,193	4.00			293,991	5.00

December 31, 2021
December 31, 2022
Common equity tier 1 capital to risk weighted assets
Consolidated	$	394,421	9.46	%	$	291,855	7.00	%		N/A	N/A		$	457,206	9.67	%	$	330,966	7.00	%		N/A	N/A
Old Second Bank		514,992	12.41			290,487	7.00		$	269,738	6.50	%		552,404	11.70			330,498	7.00		$	306,891	6.50	%
Total capital to risk weighted assets
Consolidated		522,932	12.55			437,513	10.50			N/A	N/A			592,039	12.52			496,518	10.50			N/A	N/A
Old Second Bank		558,503	13.46			435,682	10.50			414,935	10.00			602,237	12.75			495,960	10.50			472,343	10.00
Tier 1 capital to risk weighted assets
Consolidated		419,421	10.06			354,382	8.50			N/A	N/A			482,206	10.20			401,838	8.50			N/A	N/A
Old Second Bank		514,992	12.41			352,734	8.50			331,985	8.00			552,404	11.70			401,319	8.50			377,712	8.00
Tier 1 capital to average assets
Consolidated		419,421	7.81			214,812	4.00			N/A	N/A			482,206	8.14			236,956	4.00			N/A	N/A
Old Second Bank		514,992	9.58			215,028	4.00			268,785	5.00			552,404	9.32			237,083	4.00			296,354	5.00

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

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

As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition. As of ~~June 30, 2022,~~March 31, 2023, the capital measures of the Company exclude ~~$2.9~~$1.9 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 ~~June 30, 2022,~~March 31, 2023, the Bank had capacity to pay dividends of ~~$11.1~~$51.2 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 2.50% above the ~~new~~ regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

Note 12 – Fair Value Measurements

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

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

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

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

~~Transfers~~At March 31, 2023, $14.9 million of asset-backed securities and $6.8 million of collateralized mortgage obligations were transferred to Level 2 from Level 3. There were no transfers between levels ~~are deemed to have occurred~~ at ~~the end of the reporting period. At June 30, 2022 and 2021, there were 0 transfers between levels.~~March 31, 2022.

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

●

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

●

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

●

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

●

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

●

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

●

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

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

●

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

●

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

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

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


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

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

3027

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


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

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

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


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

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

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


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

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

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

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


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

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

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

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

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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

The ~~tables below present the balance of~~Company may be required, from time to time, to measure certain other assets ~~and liabilities at June 30, 2022, and December 31, 2021, respectively, measured by the Company~~ at fair value on a ~~recurring basis:~~nonrecurring basis in accordance with GAAP. These assets consist of individually evaluated loans and OREO. For assets measured at fair value on a nonrecurring basis at March 31, 2023, and December 31, 2022, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

June 30, 2022


Level 1

Level 2

Level 3

Total
Assets:

Securities available-for-sale

U.S. Treasury

$
214,820

$
-

$
-

$
214,820
U.S. government agencies

-

57,896

-

57,896
U.S. government agencies mortgage-backed

-

141,836

-

141,836
States and political subdivisions

-

220,564

13,088

233,652
Corporate bonds

-

9,543

-

9,543
Collateralized mortgage obligations

-

641,498

-

641,498
Asset-backed securities

-

259,622

-

259,622
Collateralized loan obligations

-

175,549

-

175,549
Loans held-for-sale

-

1,707

-

1,707
Credit card portfolio, reported in other assets

-

4,956

-

4,956
Mortgage servicing rights

-

-

10,722

10,722
Interest rate swap agreements

-

2,770

-

2,770
Mortgage banking derivatives

-

153

-

153
Total

$
214,820

$
1,516,094

$
23,810

$
1,754,724

Liabilities:

Interest rate swap agreements, including risk participation agreements

$
-

$
3,580

$
-

$
3,580
Total

$
-

$
3,580

$
-

$
3,580


	March 31, 2023
	Level 1		Level 2		Level 3		Total
Individually evaluated loans¹	$	-	$	-	$	48,285	$	48,285
Other real estate owned, net²		-		-		1,255		1,255
Total	$	-	$	-	$	49,540	$	49,540

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

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

December 31, 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


	December 31, 2022
	Level 1		Level 2		Level 3		Total
Individually evaluated loans¹	$	-	$	-	$	47,700	$	47,700
Other real estate owned, net²		-		-		1,561		1,561
Total	$	-	$	-	$	49,261	$	49,261

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

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

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

Note 13 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table. Securities available-for-sale fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security. The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC or another member institution at par. FHLBC stock is carried at cost and considered a Level 2 fair value. For March 31, 2023 and December 31, 2022, the fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The fair value of time deposits was estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities. The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities. The fair value of off balance sheet volume was not considered material.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


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

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

Six Months Ended June 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

(65)

3,630
Included in other comprehensive loss

(1,562)

-
Purchases, issuances, sales, and settlements

Purchases

-

-
Issuances

-

565
Settlements

(521)

(570)
Ending balance June 30, 2022

$
13,088

$
10,722

Six Months Ended June 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

(6)

734
Included in other comprehensive income

735

-
Purchases, issuances, sales, and settlements

Purchases

220

-
Issuances

-

963
Settlements

(277)

(654)
Ending balance June 30, 2021

$
4,991

$
5,267

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

Weighted
Measured at fair value

Significant Unobservable

Average
on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Mortgage servicing rights

$
10,722

Discounted Cash Flow

Discount Rate

9.0 - 11.0%

9.0
%

Prepayment Speed

4.9 - 14.7%

6.3
%

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

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

Weighted
Measured at fair value

Significant Unobservable

Average
on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Mortgage servicing rights

$
7,097

Discounted Cash Flow

Discount Rate

11.0 - 15.0%

11.0
%

Prepayment Speed

0.0 - 36.6%

11.9
%

In addition to the above, Level 3 fair value measurement included $13.1 million for state and political subdivisions representing various local municipality securities at June 30, 2022. These securities were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input. The state and political subdivisions securities balance in Level 3 fair value at June 30, 2021, was $5.0 million. These securities were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.

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

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of individually evaluated (formerly, impaired) loans and OREO. For assets measured at fair value on a nonrecurring basis at June 30, 2022, and December 31, 2021, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:

June 30, 2022


Level 1

Level 2

Level 3

Total
Individually evaluated loans¹

$
-

$
-

$
28,200

$
28,200
Other real estate owned, net²

-

-

1,624

1,624
Total

$
-

$
-

$
29,824

$
29,824

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, which had a carrying amount of ~~$42.4~~ ~~million and a valuation allowance of~~ ~~$14.2~~~~million resulting in an increase of specific allocations within the allowance for credit losses on loans of~~ ~~$8.8~~ ~~million for the six months ended June 30, 2022.~~

²~~OREO is measured at fair value, less costs to sell, and had a net carrying amount of~~ ~~$1.6~~ ~~million at June 30, 2022, which is made up of the outstanding balance of~~ ~~$2.7~~ ~~million, net of a purchase accounting adjustment of~~ ~~$131,000~~ ~~and a valuation allowance of~~ ~~$920,000~~.

December 31, 2021


Level 1

Level 2

Level 3

Total
Individually evaluated loans¹

$
-

$
-

$
13,138

$
13,138
Other real estate owned, net²

-

-

2,356

2,356
Total

$
-

$
-

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

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

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

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.

~~Note 13 – Fair Values of Financial Instruments~~

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

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

June 30, 2022

Carrying

Fair


Amount

Value

Level 1

Level 2

Level 3
Financial assets:

Cash and due from banks

$
53,295

$
53,295

$
53,295

$
-

$
-
Interest earning deposits with financial institutions

228,040

228,040

228,040

-

-
Securities available-for-sale

1,734,416

1,734,416

214,820

1,506,508

13,088
FHLBC and FRBC stock

20,413

20,413

-

20,413

-
Loans held-for-sale

1,707

1,707

-

1,707

-
Credit card portfolio, reported in other assets

4,956

4,956

-

4,956

-
Net loans

3,579,682

3,491,324

-

-

3,491,324
Mortgage servicing rights

10,722

10,722

-

-

10,722
Interest rate swap agreements

2,770

2,770

-

2,770

-
Interest rate lock commitments and forward contracts

153

153

-

153

-
Interest receivable on securities and loans

16,495

16,495

-

16,495

-

Financial liabilities:

Noninterest bearing deposits

$
2,078,272

$
2,078,272

$
2,078,272

$
-

$
-
Interest bearing deposits

3,264,583

3,254,995

-

3,254,995

-
Securities sold under repurchase agreements

37,599

37,599

-

37,599

-
Junior subordinated debentures

25,773

22,938

-

22,938

-
Subordinated debentures

59,254

55,054

-

55,054

-
Senior notes

44,533

44,465

44,465

-

-
Note payable and other borrowings

11,000

10,950

-

10,950

-
Interest rate swap agreements

3,576

3,576

-

3,576

-
Interest payable on deposits and borrowings

1,359

1,359

-

1,359

-

~~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										December 31, 2022
	Carrying		Fair								Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	38,565	$	38,565	$	38,565	$	-	$	-	$	56,632	$	56,632	$	56,632	$	-	$	-
Interest earning deposits with financial institutions		713,542		713,542		713,542		-		-		58,545		58,545		58,545		-		-
Securities available-for-sale		1,693,632		1,693,632		202,339		1,476,057		15,236		1,539,359		1,539,359		212,129		1,291,219		36,011
FHLBC and FRBC stock		13,257		13,257		-		13,257		-		20,530		20,530		-		20,530		-
Loans held-for-sale		4,737		4,737		-		4,737		-		491		491		-		491		-
Net loans		3,376,523		3,407,596		-		-		3,407,596		3,820,129		3,681,387		-		-		3,681,387
Mortgage servicing rights		7,097		7,097		-		-		7,097		11,189		11,189		-		-		11,189
Interest rate swap agreements		3,494		3,494		-		3,494		-		6,391		6,391		-		6,391		-
Interest rate lock commitments and forward contracts		508		508		-		508		-		76		76		-		76		-
Interest receivable on securities and loans		13,431		13,431		-		13,431		-		22,661		22,661		-		22,661		-

Financial liabilities:
Noninterest bearing deposits	$	2,093,494	$	2,093,494	$	2,093,494	$	-	$	-	$	2,051,702	$	2,051,702	$	2,051,702	$	-	$	-
Interest bearing deposits		3,372,738		3,375,930		-		3,375,930		-		3,059,021		3,042,740		-		3,042,740		-
Securities sold under repurchase agreements		50,377		50,377		-		50,377		-		32,156		32,156		-		32,156		-
Other short-term borrowings												90,000		90,000		-		90,000		-
Junior subordinated debentures		25,773		18,557		-		18,557		-		25,773		21,907		-		21,907		-
Subordinated debentures		59,212		60,111		-		60,111		-		59,297		52,322		-		52,322		-
Senior notes		44,480		44,480		44,480		-		-		44,585		44,248		44,248		-		-
Note payable and other borrowings		19,074		19,411		-		19,411		-		9,000		8,984		-		8,984		-
Interest rate swap agreements		6,788		6,788		-		6,788		-		12,264		12,264		-		12,264		-
Interest payable on deposits and borrowings		1,706		1,706		-		1,706		-		1,657		1,657		-		1,657		-

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

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish ~~these objectives,~~this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. ~~Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life~~The aggregate fair value of the ~~agreements without exchange~~swaps are recorded in other assets or other liabilities with changes in fair value recorded in other comprehensive income, net of tax. The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the ~~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.~~

no longer be considered effective. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in ~~Accumulated Other Comprehensive Income~~accumulated other comprehensive income and subsequently reclassified into interest ~~income/~~income or interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts ~~reported in accumulated other comprehensive income related to derivatives will~~

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

During the next twelve months, the Company estimates that an additional ~~$101,000~~$5.0 million will be reclassified as an increase to interest income and an additional ~~$117,000~~$511,000 will be reclassified as an increase to interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of interest rate swaps with its loan customers as of March 31, 2023 and December 31, 2022 were $108.2 million and $110.6 million, respectively. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives ~~with financial counterparties~~ are recognized directly in earnings.

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

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

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

The Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017. This transaction had a notional amount totaling $25.8 million as of June 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, 0 amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other liabilities with changes in fair value recorded in other comprehensive income, net of tax. The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective. The Company expects the hedge to remain fully effective during the remaining term of the swap. The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR. The trust preferred securities~~changed from fixed rate to floating rate on June 15, 2017. The cash flow hedge has a maturity date of June 15, 2037.~~

In December 2019, the Company also executed a loan pool hedge of $50.0 million to convert variable rate loans to a fixed rate index for a five year term. This transaction falls under hedge accounting standards and is paired against a pool of the Bank’s LIBOR-based loans. Overall, the new swap only bolsters income in down rate scenarios by a modest degree. We consider the current level of interest rate risk to be moderate but intend to continue looking for market opportunities to hedge further.

The Bank 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 $3.0 million of cash collateral and $180,000 of cash collateral related to 1 correspondent financial institution to cover the loan pool hedge mark to market valuation at June 30, 2022 and December 31, 2021, respectively. The Bank had $1.8 million and $17.2 million of cash collateral held by 1 correspondent financial institution to support interest rate swap activity and 0 investment securities were required to be pledged to any correspondent financial institution at June 30, 2022 and December 31, 2021, respectively. At June 30, 2022, the notional amount of non-hedging interest rate swaps was $147.8 million with a weighted average maturity of 3.6 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~~Sheets as of ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

Fair Value of Derivative Instruments


			June 30, 2022						March 31, 2023
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	2	75,774	Other Assets	952	Other Liabilities	1,759	5	325,774	Other Assets	1,824	Other Liabilities	6,095
Total derivatives designated as hedging instruments				952		1,759				1,824		6,095

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	24	147,754	Other Assets	1,817	Other Liabilities	1,817	19	108,150	Other Assets	3,911	Other Liabilities	3,911
Interest rate lock commitments and forward contracts	42	11,088	Other Assets	153	Other Liabilities	-	41	10,930	Other Assets	28	Other Liabilities	-
Other contracts	3	16,927	Other Assets	-	Other Liabilities	4	4	44,097	Other Assets	150	Other Liabilities	1
Total derivatives not designated as hedging instruments				1,970		1,821				4,089		3,912


			December 31, 2021						December 31, 2022
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	2	75,774	Other Assets	808	Other Liabilities	4,102	4	275,774	Other Assets	2,737	Other Liabilities	8,610
Total derivatives designated as hedging instruments				808		4,102				2,737		8,610

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	26	165,005	Other Assets	2,686	Other Liabilities	2,686	21	110,647	Other Assets	3,654	Other Liabilities	3,654
Interest rate lock commitments and forward contracts	87	34,414	Other Assets	508	Other Liabilities	-	28	5,298	Other Assets	76	Other Liabilities	-
Other contracts	3	17,173	Other Assets	-	Other Liabilities	21	4	43,699	Other Assets	125	Other Liabilities	1
Total derivatives not designated as hedging instruments				3,194		2,707				3,855		3,655

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

The fair value and cash flow hedge accounting related to derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other Comprehensive Income (“AOCI”) and the Income Statement. The loss recognized in AOCI on derivatives totaled ~~$581,000~~$3.1 million as of ~~June 30, 2022,~~March 31, 2023, and $1.9 million as of ~~June 30, 2021.~~March 31, 2022. The amount of the loss reclassified from AOCI to interest ~~expense~~income on the income statement was ~~$16,000 and $26,000~~$1.0 million for the ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023 and ~~June 30, 2021, respectively.~~$16,000 of gain for three months ended March 31, 2022.

Credit-risk-related Contingent Features

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

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

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

●

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

●

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

●

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

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers. In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO. The following table represents the Company’s contractual commitments due to letters of credit as of ~~June 30, 2022,~~March 31, 2023, and December 31, ~~2021.~~2022.

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


	June 30, 2022						December 31, 2021						March 31, 2023						December 31, 2022
	Fixed		Variable		Total		Fixed		Variable		Total		Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	5,504	$	14,145	$	19,649	$	384	$	17,474	$	17,858	$	3,456	$	15,390	$	18,846	$	3,514	$	15,365	$	18,879
Commercial standby		-		-		-		-		-		-
Performance standby		8,085		7,613		15,698		456		14,907		15,363		1,913		11,799		13,712		3,161		13,989		17,150
		13,589		21,758		35,347		840		32,381		33,221		5,369		27,189		32,558		6,675		29,354		36,029
Non-borrower:
Performance standby		-		67		67		-		67		67		-		67		67		-		67		67
Total letters of credit	$	13,589	$	21,825	$	35,414	$	840	$	32,448	$	33,288	$	5,369	$	27,256	$	32,625	$	6,675	$	29,421	$	36,096

Unused loan commitments:	$	148,591	$	701,707	$	850,298	$	84,225	$	895,665	$	979,890	$	138,829	$	800,693	$	939,522	$	139,070	$	860,255	$	999,325

As of ~~June 30, 2022,~~March 31, 2023, 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 ~~second~~first quarter of ~~2022,~~2023, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments totaled ~~$3.4~~$3.2 million, excluding a ~~$1.3 million~~$596,000 purchase accounting adjustment on unfunded commitments recorded from our West Suburban acquisition, which is being accreted to interest income over the estimated life of the unused commitments. The resultant decrease in the ACL for unfunded commitments of ~~$1.0~~$1.4 million for the ~~second~~first quarter of ~~2022,~~2023, compared to the prior quarter end, is primarily related to a ~~$780,000~~$1.2 million decrease in ~~the commercial~~construction unfunded ~~commitments funding rate assumptions based on our analysis of the last 12 months of utilization,~~commitment levels as well as the loss rate associated with those commitments, a commercial substandard portfolio reduction primarily due to two upgraded credits, and a $224,000 decrease by accretion ~~of $223,000~~ 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,~~Sheets, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

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

Overview

The following discussion provides additional information regarding our operations for the three ~~and six~~ months ended ~~June 30, 2022,~~March 31, 2023, compared to the three ~~and six~~ months ended ~~June 30, 2021,~~March 31, 2022, and our financial condition at ~~June 30, 2022,~~March 31, 2023, compared to December 31, ~~2021.~~2022. This discussion should be read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our Form 10-K for the year ended December 31, ~~2021.~~2022. The results of operations for the three ~~and six~~ months ended ~~June 30, 2022,~~March 31, 2023, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and ~~June 30,~~March 31, 2023 and 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 make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” on page 3 of this report.

Business Overview

The Company is a bank holding company headquartered in Aurora, Illinois. Through our wholly-owned subsidiary bank, Old Second National Bank, a national banking organization also headquartered in Aurora, Illinois, we offer a wide range of financial services through our 5148 banking centers located in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle and Will counties in Illinois. These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services. We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to provide for the financial services needs of the communities in which we operate. We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area. We also have extensive wealth management services, which includes a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts and employee benefit plan administration services.

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

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

As of March 31, 2023, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession, our reported and regulatory capital ratios could be adversely impacted by credit losses.

Merger with West Suburban Bancorp, Inc.

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

As we continue to consolidate operations, five branches designated as held for sale with a net book value of $9.6 million are reported within fixed assets at June 30, 2022. During the six months ended June 30, 2022, we sold five branches, resulting in $1.4 million 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 June 30, 2022. While vaccine availability and uptake has increased, the longer term macro-economic effects on global supply chains, inflation, labor shortages and wage increases continue to impact many industries. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including new COVID-19 cases, hospitalizations and deaths leading to additional government imposed restrictions; refusals to receive the vaccine 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, although we expect to continue to be impacted by the pandemic throughout the remainder of 2022.

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~~Results of Operation and Financial Condition~~Recent Banking Events

~~We continue to monitor~~There were three significant bank failures in the ~~impact~~first five months 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 2021,2023, primarily due to the failed banks’ lack of ~~significant net charge-offs projected with~~liquidity as depositors sought to withdraw their deposits. Due to rising interest rates, 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~~failed banks were unable 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 six months of 2022, we recorded $1.3 million of provision for credit losses on loans primarily due to loan growth as well as our assessment of loan metrics and nonperforming loan trends. In addition, we also recorded a reduction of $780,000 in our 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 $550,000 in the second quarter of 2022.

~~We also adjust our~~sell investment securities ~~portfolio~~held to ~~fair value each period end and review for any impairment that would require a provision for credit~~meet liquidity needs without realizing substantial 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 June 30, 2022 and December 31, 2021, we had $86.3 million of 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, 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 June 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 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 June 2022. As of June 30, 2022, we had 31 loans, which totaled $3.5 million, still outstanding under the PPP program. We expect the application process for loan forgiveness to continue through the third 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 June 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 brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by credit losses.

~~We believe there could be potential stresses on liquidity management as~~ a result of the ~~COVID-19 pandemic. For instance, as customers manage their own liquidity stress, we could experience~~March 2023 bank closures and in an ~~increase~~effort to strengthen public confidence in the ~~utilization~~banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of ~~existing lines~~our FDIC insurance assessment. Additionally, the Federal Reserve announced the creation of ~~credit. However,~~a new Bank Term Funding Program in an effort to ~~date, due~~minimize the need for banks to sell securities at a loss in ~~part to federal government stimulus funds received by our customers,~~times of stress. The future impact of these failures on the economy, financial institutions and their depositors, as well as ~~a higher volume of loan paydowns than periods prior~~any governmental regulatory responses or actions resulting from the same, is difficult to ~~COVID-19, our liquidity has increased.~~predict at this time.

Financial Overview

Net income for the ~~second~~first quarter of ~~2022~~2023 was ~~$12.2~~$23.6 million, or $0.52 per diluted share, compared to $12.0 million, or $0.27 per diluted share, ~~compared to $8.8 million, or $0.30 per diluted share,~~ for the ~~second~~first quarter of ~~2021.~~2022. The increase was primarily due to growth in our ~~acquisition of West Suburban,~~loan portfolio and higher loan and security yields, which resulted in growth in net interest income, ~~and noninterest income,~~ partially offset by lower noninterest income from reductions in mortgage banking revenues primarily due to higher ~~noninterest expense, which included $2.1 million~~market interest rates, and losses recognized on securities sold. Also contributing to the increase in ~~acquisition-related~~net income in the first quarter of 2023 compared to the first quarter of 2022, were acquisition costs, net of ~~gain~~gains on ~~sale~~branch sales, of ~~branches~~$5.3 million incurred in the ~~second~~prior year like quarter, compared to $306,000 of net gains on branch sales in the first quarter of ~~2022.~~2023. Adjusted net income, a non-GAAP financial measure that

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excludes merger-related costs, net of ~~gains~~(gains)/losses on branch sales, was ~~$13.8~~$23.4 million for the ~~second~~first quarter of 2023, compared to $24.1 million for the fourth quarter of 2022, and $15.9 million for the first quarter of 2022. See the discussion entitled “Non-GAAP Financial Measures” on page ~~42,~~38, as well as the table below, which provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalents.


	Quarters Ended						Quarters Ended
	June 30,		March 31,		June 30,		March 31,		December 31,		March 31,
	2022		2022		2021		2023		2022		2022
Net Income
Income before income taxes (GAAP)	$	16,676	$	16,443	$	11,972	$	32,013	$	31,853	$	16,443
Pre-tax income adjustments:
Merger-related costs, net of gains on branch sales		2,131		5,335		-
Merger-related costs, net of gains/losses on branch sales								(306)		617		5,335
Adjusted net income before taxes		18,807		21,778		11,972		31,707		32,470		21,778
Taxes on adjusted net income		4,995		5,858		3,152		8,326		8,398		5,858
Adjusted net income (non-GAAP)	$	13,812	$	15,920	$	8,820	$	23,381	$	24,072	$	15,920

Basic earnings per share (GAAP)	$	0.28	$	0.27	$	0.30	$	0.53	$	0.53	$	0.27
Diluted earnings per share (GAAP)		0.27		0.27		0.30		0.52		0.52		0.27
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP)		0.31		0.36		0.30		0.52		0.54		0.36
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP)		0.31		0.35		0.30		0.52		0.53		0.36

The following provides an overview of some of the factors impacting our financial performance for the three month period ended ~~June 30, 2022,~~March 31, 2023, compared to the like period ended ~~June 30, 2021:~~March 31, 2022:

●

Net interest and dividend income was ~~$45.3~~$64.1 million for the ~~second~~first quarter of ~~2022,~~2023, compared to ~~$22.0~~$41.2 million for the ~~second~~first quarter of ~~2021.~~2022. Growth in interest and dividend income in the ~~second~~first quarter of ~~2022~~2023 was primarily due to ~~our acquisition of West Suburban resulting in additional~~ loan growth and higher yields on loans and securities, ~~income.~~partially offset by higher funding costs.

●

We recorded a net provision for credit losses of ~~$550,000~~$3.5 million in the ~~second~~first quarter of ~~2022,~~2023, driven by a ~~$1.3~~$4.7 million increase in the allowance for credit losses on loans ~~due to~~based on historical loss rate updates, loan growth, ~~in the portfolio, partially offset by~~our assessment of nonperforming loan metrics and trends, and estimated future credit losses, net of a ~~$780,000 reduction~~reversal of $1.2 million in our allowance for unfunded ~~commitments.~~commitments based on a slight reduction in construction unfunded commitments combined with changes in the construction loss rate. We recorded ~~a $3.5 million release of~~no net provision for credit loss expense in the ~~second~~first quarter of ~~2021.~~ 2022.

●

Noninterest income was ~~$9.2~~$7.4 million for the ~~second~~first quarter of ~~2022,~~2023, compared to ~~$7.9~~$13.5 million for the ~~second~~first quarter of ~~2021,~~2022. Contributing to the decrease was a $3.5 million decline in mortgage servicing rights mark to market gains, a $1.2 million decrease

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of net gain on sales of mortgage loans, and security losses of $1.7 million due to strategic sales in 2023. These decreases were partially offset by an increase of ~~$1.3 million, or 16.3%. Contributing to the increase was growth in~~$350,000 of service charges on deposits and ~~card related income resulting primarily from the West Suburban acquisition and resultant additional fee~~a $627,000 increase in other income. ~~These increases were partially offset by a $262,000 net loss on sales of mortgage loans in the second quarter of 2022, compared to a $1.9 million net gain in the second quarter of 2021.~~

●

Noninterest expense was ~~$37.2~~$36.0 million for the ~~second~~first quarter of 2023, compared to $38.3 million for the first quarter of 2022, ~~compared to $21.4 million for the second quarter~~a decrease of ~~2021, an increase of $15.8~~$2.3 million, or ~~74.0%~~6.09%. Contributing to the ~~increase~~decrease was ~~growth~~a reduction in ~~salaries~~computer and ~~employee benefits~~data processing and ~~occupancy, furniture and equipment~~net teller & bill paying expenses in the first quarter of 2023, primarily stemming from acquisition costs incurred in the first quarter of 2022 from our West Suburban acquisition in the fourth quarter of 2021. In addition, we recorded net gains on branch sales of $306,000 in the first quarter of 2023, compared to $5.3 million of acquisition-related cost, net of gains on branch sales, in the first quarter of 2022, primarily ~~stemming~~ from ~~the additional employees and branches due to the West Suburban acquisition. In addition, we recorded $3.3~~$4.9 million of ~~acquisition-related costs in the second quarter of 2022, primarily within~~ computer and data processing ~~salaries~~ and ~~employee benefits, and other expense~~net teller & bill paying expenses related to the West Suburban acquisition.

●

We had a provision for income tax expense of ~~$4.4~~$8.4 million for the ~~second~~first quarter of ~~2022,~~2023, compared to a provision for income tax expense of ~~$3.2~~$4.4 million for the ~~second~~first quarter of ~~2021.~~2022. The increase in tax expense for the ~~second~~first quarter of ~~2022~~2023 was due to anthe increase in pre-tax income, compared to the year over year quarter.

●

Our community-focused banking franchise experienced growth of ~~$204.3~~$133.7 million in total loans ~~at June 30, 2022,~~in the first quarter of 2023, compared to the year ended December 31, ~~2021,~~2022, and an increase of ~~$1.72 billion~~$601.0 million in total loans compared to the ~~second~~first quarter of ~~2021, as we acquired $1.50 billion of loans in the West Suburban acquisition.~~2022. We believe we are positioned for continued loan growth, though likely at a slower pace, as we continue to serve our customers’ needs in a competitive economic environment. We ~~are continuing~~continue to seek to provide value to our customers and the communities in which we operate, by executing on growth opportunities in our local markets and developing new banking relationships, while seeking to ensure the safety and soundness of our Bank, our customers, and our ~~employees during the COVID-19 pandemic.~~employees.

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●

Nonaccrual loans ~~decreased $5.8~~increased $32.0 million as of ~~June 30, 2022,~~March 31, 2023, compared to December 31, ~~2021,~~2022, primarily due to ~~the upgrade or payoff of various~~a few larger credits moved from substandard accrual to substandard nonaccrual in the first ~~and second~~ quarter of ~~2022.~~2023, which include two office buildings and one health care facility. Nonperforming loans as a percent of total loans was ~~1.2%~~1.6% as of ~~June 30, 2022,~~March 31, 2023, compared to ~~1.3%~~0.9% as of December 31, ~~2021,~~2022, and ~~1.2% at June 30, 2021.~~1.1% as of March 31, 2022. Classified assets increased to ~~$103.2~~$126.5 million as of ~~June 30, 2022,~~March 31, 2023, which is ~~$28.4~~$16.0 million, or ~~38.0%~~14.5% more than December 31, ~~2021,~~2022, and ~~$61.1~~$57.5 million, or 83.4%, more than ~~June 30, 2021, due to the West Suburban acquisition in late 2021.~~ March 31, 2022.

Critical Accounting Estimates

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

Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. There have been no material changes to our critical accounting policies or the estimates made pursuant to those policies during the most recent quarter from those disclosed in our ~~2021~~2022 Annual Report in Form 10-K.

Non-GAAP Financial Measures

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

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Results of Operations

Overview

Three months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~

Our income before taxes was ~~$16.7~~$32.0 million in the ~~second~~first quarter of ~~2022~~2023 compared to ~~$12.0~~$16.4 million in the ~~second~~first quarter of ~~2021.~~2022. This increase in pretax income was primarily due to a ~~$23.2~~$26.8 million increase in interest and dividend income and a ~~$1.3~~$2.3 million decrease in noninterest expenses. The increase in ~~noninterest~~pretax income ~~primarily due to the addition of West Suburban loan, securities and fee income in the second quarter of 2022. These increases were~~was partially offset by a ~~$15.8~~$4.0 million increase in interest expense, a $3.5 million increase in provision for credit losses, and a $6.1 million decrease in noninterest ~~expense, primarily~~income, mainly 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 $3.3$1.7 million of ~~West Suburban acquisition-related costs~~security losses in the ~~second~~first quarter of ~~2022, primarily within computer~~2023 and ~~data processing.~~a $4.8 million decrease in mortgage banking revenues. Our net income was ~~$12.2~~$23.6 million, or $0.52 per diluted share, for the first quarter of 2023, compared to net income of $12.0 million, or $0.27 per diluted share, for the ~~second~~first quarter of ~~2022, compared~~2022. The Bank remains well positioned to ~~net income of $8.8 million, or $0.30 per diluted share,~~navigate uncertain macroeconomics; we have mitigated interest rate risk, tightened expenses in a recessionary environment, and actively managed daily liquidity. Furthermore, we continue to possess strong liquidity metrics and an outsized securities portfolio for ~~the second quarter of 2021.~~funding needs.

Net interest and dividend income was ~~$45.3~~$64.1 million in the ~~second~~first quarter of ~~2022,~~2023, compared to ~~$22.0~~$41.2 million in the ~~second~~first quarter of ~~2021.~~2022. The ~~$23.3~~$22.9 million increase was primarily driven by significant growth in ~~all~~our loan portfolio as well as the effect of higher market interest rates on our loan and securities portfolios. Higher interest and dividend income ~~categories due to West Suburban~~

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~~related loan and securities income being reflected. In addition we experienced a decrease~~was partially offset by an increase in interest expense in the ~~second~~first quarter of ~~2022,~~2023, compared to the ~~second~~first quarter of ~~2021,~~2022, primarily due to a ~~reduction~~rise in deposit interest rates, ~~offset by increased balances from West Suburban, decreased outstanding balances of notes payable~~an increase in other short-term borrowing expense due to additional FHLB advances, and ~~other borrowings, and a decrease~~an increase in the rate paid on our senior notes during ~~2022,~~the first quarter of 2023, as the ~~interest rate payable on these notes became floating as of January 1, 2022,~~senior debt issuance is at ~~three month~~ LIBOR plus 385 basis points, ~~compared to~~and the ~~prior 5.75% fixed rate.~~

Average loans, including loans held for sale, increased $1.58 billion in the second quarter of 2022, compared to the second quarter of 2021, primarily from $1.50 billion of average loans acquired in our acquisition of West Suburban. Also contributing to the increase was $104.3 million in average loan growth during the second quarter of 2022, less PPP loans forgiven or repaid and loan paydowns.

~~Six months ended June 30, 2022 and 2021~~

Our income before taxes was $33.1 million for the six months ended June 30, 2022 compared to $28.1 million for the six months ended June 30, 2021. This increase in pretax income was primarily due to a $41.1 million increase in interest and dividend income, and a $3.5 million increase in noninterest income, as West Suburban loan, securities and fee income are included in the six months ended June 30, 2022. These increases were partially offset by a $32.4 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 $8.8 million of West Suburban acquisition-related costs in the first six months of 2022, primarily within computer and data processing. Our net income was $24.3 million, or $0.54 per diluted share, for the six months ended June 30, 2022, compared to net income of $20.7 million, or $0.70 per diluted share, for the same period of 2021.

Net interest and dividend income was $86.5 million for the six months ended June 30, 2022, compared to $45.5 million for the same period of 2021. The $41.0 million increase was primarily driven by growth in all interest and dividend income categories due to West Suburban related loan and securities income being reflected. This increase was partially offset by a $136,000 increase in interest expense for the six months ended June 30, 2022, compared to the same period of 2021, primarily due to a full period of interest expense on the April 2021 issuance of subordinated debt, as well as higher average balances of deposits from the West Suburban acquisition, partially offset by a decrease in outstanding balances of notes payable and a decrease in the rate paid on our senior notes during 2022, as thefloating interest rate ~~payable on these notes became floating as~~ of ~~January 1, 2022, at~~the three month LIBOR ~~plus 385~~increased 462 basis points ~~compared to~~since the ~~prior 5.75% fixed rate.~~first quarter of 2022.

Net Interest Income

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

Three months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~

~~Our net~~The increased yield of 30 basis points on interest and dividend income increased by $23.3 million to $45.3 million, for the second quarter of 2022, from $22.0 million for the second quarter of 2021. This increase was primarily attributable to a $23.2 million increase in total interest and dividend income due to the acquisition of West Suburban in December 2021. In addition we experienced a decrease in interest expense in the second quarter of 2022,earning assets compared to the ~~second quarter of 2021, primarily due to a reduction~~linked period was driven by new higher yield originations than those in ~~deposit interest rates offset by increased balances from West Suburban, decreased outstanding~~previous periods as well as repricing within the existing variable rate portfolio. Average balances of ~~notes payable and other borrowings, and a decrease~~interest earning assets totaled $5.51 billion for the quarter ended March 31, 2023, compared to $5.86 billion for the quarter ended March 31, 2022. The increase in interest income for the ~~rate paid on our senior notes during 2022,~~current quarter, 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.~~year like quarter, was the result of replacing older, lower yielding securities with higher rate securities through a mix of maturities, and strategic purchases and sales, as well as loan growth year over year. Changes in the market interest rate environment impact the portfolio at varying intervals depending on the repricing timeline of loans, as well as the securities maturity and purchase activity.

~~Average~~The year over year increase of 217 basis points on interest earning assets ~~for~~was driven by significant increases to benchmark interest rates as well as strong loan growth throughout the ~~second~~period specifically within the commercial and commercial real estate portfolios. The increases in benchmark interest rates impacted yields on the securities portfolio through the inverse relationship between interest rates and market value coupled with maturities and strategic sales of lower yielding assets and timely purchase of higher yielding securities as we work to increase the weighted average yield in the portfolio. Average securities available-for-sale decreased $304.3 million in the first quarter of ~~2022 totaled $5.75 billion, a decrease of $115.0 million, or 2.0%,~~2023, compared to the first quarter of 2022, due to paydowns and ~~an increase~~strategic sales. Due to market interest rate increases year over year, securities available-for-sale interest income was $12.4 million in the first quarter of ~~$2.69 billion, or 88.2%,~~2023, compared to ~~the second quarter of 2021. Average interest earning deposits with financial institutions totaled $426.8~~$6.8 million for the ~~second~~like 2022 quarter. Average loans, including loans held for sale, increased $528.0 million in the first quarter of ~~2022, a decrease of $208.5 million,~~2023, compared to the first quarter of 2022, primarily driven by the growth in commercial, commercial real estate-investor, and ~~a decrease~~multifamily portfolios. Growth in the loan portfolio, as well as the rising interest rate environment, resulted in $57.2 million of ~~$72.7 million~~loan interest income in the first quarter of 2023, compared to $36.4 million in the ~~second~~first quarter of ~~2021. The yield on average interest earning deposits was 73~~2022.

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~~basis points for the second quarter~~

Average balances of ~~2022, an increase of 56 basis points from~~interest bearing deposit accounts have decreased steadily since the first quarter of 2022 and an increase of 62 basis points from the second 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 second quarter of 2022 decreased $15.8 million fromthrough the first quarter of 2023 from $3.40 billion to $3.00 billion, with these decreases reflected in all categories aside from NOW accounts which increased nominally. We have continued to control the cost of funds over the periods reflected, with the rate of overall interest bearing deposits increasing by 17 basis points to 25 basis points from eight basis points as of March 31, 2022. A 19 basis point increase in the cost of money market funds as of March 31, 2023 compared to December 31, 2022, and ~~increased $1.28 billion from~~34 basis points increase compared to March 31, 2022 were both due to select exception pricing and drove a significant portion of the ~~second~~overall increase. Time deposits saw the next largest increase of 12 basis points and 39 basis points in the quarter ~~of 2021. The increase in our average securities~~to date and year over year ~~was~~periods ending March 31, 2023, respectively, primarily due to the $1.07 billion in securities acquired in our acquisition of West Suburban. The yield on average securities increased to 1.89% for the second quarter of 2022, compared to 1.54% for the first quarter of 2022 and decreased from 2.24% for the second quarter of 2021. Total average loans, including loans held-for-sale, totaled $3.51 billion in the second quarter of 2022, an increase of $104.3 million from the first quarter of 2022, and an increase of $1.58 billion from the second 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 $108.0 million in the second quarter of 2022. This rise in loan volumes resulted in an increase in loan interest and fee income of $17.4 million in the year over year period. For the second quarter of 2022, the yield on average loans increased to 4.37%, compared to 4.34% for the first quarter of 2022, and 4.33% for the second quarter of 2021. CD rate specials we offered.

~~Average interest bearing liabilities decreased $58.7 million, or 1.6%, in the second quarter of 2022, compared to the first quarter of 2022, and~~Borrowing costs increased $1.64 billion compared to the second quarter of 2021. The year over year increase was primarily driven by a $1.68 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 $33.2 million decrease in securities sold under repurchase agreements and a $9.1 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 second quarter of 2022 remained consistent with the linked period, and decreased 24 basis points from the second quarter of 2021. Growth in our average noninterest bearing demand deposits of $1.11 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 0.15% for both the second and first quarters of 2022, and 0.31% for the second quarter of 2021.

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

Due to the significant increase in 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, which typically consist of FHLBC advances, in the first and second quarters of 2022 or the second quarter of 2021. As of June 30, 2022, we paid off our long-term FHLBC advance of $5.9 million and notes payable and other borrowings now consists of $11.0 million outstanding on a term note with a correspondent bank originated in the first quarter of ~~2020.~~ 2023 primarily due to the increase in average short term borrowings stemming from average FHLB advance growth of $156.5 million since year end 2022, and average growth of $201.0 million year over year based on daily liquidity needs. Subordinated and junior subordinated debt interest expense remained flat over each of the periods presented. Senior notes interest expense had the most significant interest expense increase, as this issuance references three month LIBOR, and rising market interest rates resulted in a 111 basis point increase to 9.04%, from 7.93% as of December 31, 2022, and a 462 basis point increase from 4.42% as of March 31, 2022. In the first quarter of 2023, we paid off the remaining balance of $9.0 million on the original $20.0 term note issued in 2020, recorded within notes payable and other borrowings.

Our net interest margin (GAAP) increased 3112 basis points to ~~3.16%~~4.72% for the ~~second~~first quarter of 2023, compared to 4.60% for the fourth quarter of 2022, and increased 187 basis points compared to 2.85% for the first quarter of ~~2022, and increased 28 basis points compared to 2.88% for the second quarter of 2021.~~2022. Our net interest margin (TE) increased 3011 basis points to ~~3.18%~~4.74% for the ~~second~~first quarter of 2023, compared to 4.63% for the fourth quarter of 2022 and increased 186 basis points compared to 2.88% for the first quarter of ~~2022, and~~2022. The increase ~~25 basis points~~in the current quarter, compared to ~~2.93% for the second quarter of 2021. The~~both prior quarters, is primarily due to an increase ~~year over year was due primarily to the increasing~~in market interest rates, ~~over the majority of the past twelve months,~~and the related rate resets on loans and securities during the past year, ~~and~~as well as continuing loan growth relative to a more modest increase in the ~~elevated liquidity on our balance sheet.~~ cost of interest bearing liabilities.

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

~~Six months ended June 30, 2022 and 2021~~

Our net interest and dividend income increased by $41.0 million, to $86.5 million for the six months ended June 30, 2022, compared to $45.5 million for the six months ended June 30, 2021. This increase was attributable to a $41.1 million increase in total interest income primarily from the acquisition of West Suburban as well as general loan growth, partially offset by a $136,000 increase in interest expense for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. Increased balances on interest earning assets related to the West Suburban acquisition drove the increase in net interest income, along with the reduction in the cost of interest bearing deposits, despite lower yields on interest earning assets and the increased average balance of subordinated debt.

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Average earning assets for the six months ended June 30, 2022 were $5.81 billion, an increase of $2.82 billion, or 94.4%, compared to the six months ended June 30, 2021. The yield on average earning assets for the six months ended June 30, 2022 was 3.18%, compared to 3.40% for the six months ended June 30, 2021. Total average loans, including loans held-for-sale, totaled $3.46 billion for the six months ended June 30, 2022, an increase of $1.48 billion, compared to the six months ended June 30, 2021. The increase in average loan balances, partially offset by market interest rate reductions, resulted in a $31.6 million increase in loan interest income for the six months ended June 30, 2022, compared to the like period in 2021. For the six months ended June 30, 2022, yields on average securities decreased by 63 basis points and yields on average loans decreased by five basis points, each as compared to the six months ended June 30, 2021, due primarily to the addition of the lower yielding legacy West Suburban security 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 increased $100.5 million in the six months ended June 30, 2022, compared to the prior year like period driven primarily by the acquisition of West Suburban, as well as remaining federal stimulus funds received by our depositors.

Average interest bearing liabilities increased $1.70 billion, or 92.3%, in the six months ended June 30, 2022, compared to the six months ended June 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 $31.0 million, due to the $60.0 million subordinated note issuance on April 6, 2021, as discussed above. Partially offsetting this increase was a $6.7 million decrease in average notes payable and other borrowings. Average noninterest bearing deposits increased $1.13 billion in the six months ended June 30, 2022 compared to the six months ended June 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 21 basis points, to 24 basis points, for the six months ended June 30, 2022, from 45 basis points for the six months ended June 30, 2021.

Our net interest margin (GAAP) for the six months ended June 30, 2021 was 3.00% compared to 3.07% for the six months ended June 30, 2022, reflecting a decrease of seven basis points. Our net interest margin (TE) for the six months ended June 30, 2022 was 3.03% compared to 3.12% for the six months ended June 30, 2021, a decrease of nine basis points. The decrease in net interest margin for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was primarily due to the addition of the lower yielding legacy West Suburban security and loan portfolios in late 2021. These reductions 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 our average consolidated balance ~~sheet~~sheets and reflect the yield on average earning assets and cost of average interest bearing liabilities for the periods indicated. These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period. Average balances are derived from daily balances. For purposes of discussion, net interest income and net interest income to total earning assets in the following tables have been adjusted to a non-GAAP TE basis using a marginal rate of 21% in ~~2022~~2023 and ~~2021~~2022 to compare returns more appropriately on tax-exempt loans and securities to other earning assets.

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

	Quarters Ended																			Quarters Ended
	June 30, 2022						March 31, 2022						June 30, 2021							March 31, 2023						December 31, 2022						March 31, 2022
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate		Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%		Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	426,820		$	782	0.73	$	635,302		$	269	0.17	$	499,555		$	137	0.11		$	49,310		$	585	4.81	$	50,377		$	461	3.63	$	635,302		$	269	0.17
Securities:
Taxable		1,610,713			6,670	1.66		1,612,635			5,053	1.27		425,785			1,832	1.73			1,330,295			10,735	3.27		1,404,437			10,495	2.96		1,612,635			5,169	1.30
Non-taxable (TE)¹		181,386			1,789	3.96		195,240			1,814	3.77		188,281			1,593	3.40			173,324			1,693	3.96		171,567			1,697	3.92		195,240			1,667	3.47
Total securities (TE)¹		1,792,099			8,459	1.89		1,807,875			6,867	1.54		614,066			3,425	2.24			1,503,619			12,428	3.35		1,576,004			12,192	3.07		1,807,875			6,836	1.53
Dividends from FHLBC and FRBC		20,994			263	5.02		16,066			153	3.86		9,917			113	4.57
FHLBC and FRBC Stock																					24,905			280	4.56		19,534			259	5.26		16,066			153	3.86
Loans and loans held-for-sale^{1, 2}		3,508,856			38,267	4.37		3,404,534			36,428	4.34		1,930,965			20,856	4.33			3,932,492			57,228	5.90		3,878,228			55,195	5.65		3,404,534			36,428	4.34
Total interest earning assets		5,748,769			47,771	3.33		5,863,777			43,717	3.02		3,054,503			24,531	3.22			5,510,326			70,521	5.19		5,524,143			68,107	4.89		5,863,777			43,686	3.02
Cash and due from banks		53,371			-	-		42,972			-	-		29,985			-	-			55,140			-	-		56,531			-	-		42,972			-	-
Allowance for credit losses on loans		(44,354)			-	-		(44,341)			-	-		(31,024)			-	-			(49,398)			-	-		(48,778)			-	-		(44,341)			-	-
Other noninterest bearing assets		374,309			-	-		370,987			-	-		185,368			-	-			382,579			-	-		395,726			-	-		370,987			-	-
Total assets	$	6,132,095					$	6,233,395					$	3,238,832						$	5,898,647					$	5,927,622					$	6,233,395

Liabilities and Stockholders' Equity
NOW accounts	$	604,176		$	102	0.07	$	593,481		$	89	0.06	$	531,804		$	105	0.08		$	601,030		$	242	0.16	$	623,408		$	225	0.14	$	599,481		$	89	0.06
Money market accounts		1,054,552			155	0.06		1,098,941			170	0.06		330,536			59	0.07			833,823			828	0.40		901,950			477	0.21		1,098,941			170	0.06
Savings accounts		1,213,133			90	0.03		1,201,086			138	0.05		439,104			53	0.05			1,126,040			79	0.03		1,155,409			74	0.03		1,201,075			138	0.05
Time deposits		469,009			265	0.23		495,452			277	0.23		359,635			409	0.46			434,655			664	0.62		450,111			571	0.50		495,452			277	0.23
Interest bearing deposits		3,340,870			612	0.07		3,388,960			674	0.08		1,661,079			626	0.15			2,995,548			1,813	0.25		3,130,878			1,347	0.17		3,394,949			674	0.08
Securities sold under repurchase agreements		34,496			9	0.10		39,204			11	0.11		67,737			21	0.12			31,080			9	0.12		33,275			10	0.12		39,204			11	0.11
Other short-term borrowings		-			-	-		-			-	-		1			-	-			200,833			2,345	4.74		44,293			436	3.91		-			-	-
Junior subordinated debentures		25,773			284	4.42		25,773			280	4.41		25,773			284	4.42			25,773			279	4.39		25,773			287	4.42		25,773			280	4.41
Subordinated debentures		59,244			547	3.70		59,222			546	3.74		56,081			517	3.70			59,308			546	3.73		59,286			546	3.65		59,222			546	3.74
Senior notes		44,520			578	5.21		44,494			485	4.42		44,415			673	6.08			44,599			994	9.04		44,572			891	7.93		44,494			485	4.42
Notes payable and other borrowings		13,103			95	2.91		19,009			103	2.20		22,250			119	2.15			5,400			87	6.53		9,978			137	5.45		19,009			103	2.20
Total interest bearing liabilities		3,518,006			2,125	0.24		3,576,662			2,099	0.24		1,877,336			2,240	0.48			3,362,541			6,073	0.73		3,348,055			3,654	0.43		3,582,651			2,099	0.24
Noninterest bearing deposits		2,120,428			-	-		2,099,283			-	-		1,012,163			-	-			2,002,801			-	-		2,083,503			-	-		2,093,293			-	-
Other liabilities		32,636			-	-		60,818			-	-		36,553			-	-			51,279			-	-		51,753			-	-		60,819			-	-
Stockholders' equity		461,025			-	-		496,632			-	-		312,780			-	-			482,026			-	-		444,311			-	-		496,632			-	-
Total liabilities and stockholders' equity	$	6,132,095					$	6,233,395					$	3,238,832						$	5,898,647					$	5,927,622					$	6,233,395
Net interest income (GAAP)				$	45,264					$	41,232					$	21,954						$	64,086					$	64,091					$	41,232
Net interest margin (GAAP)						3.16						2.85						2.88							4.72						4.60						2.85

Net interest income (TE)¹				$	45,646					$	41,618					$	22,291						$	64,448					$	64,453					$	41,587
Net interest margin (TE)¹						3.18						2.88						2.93							4.74						4.63						2.88
Interest bearing liabilities to earning assets		61.20	%					61.00	%					61.46	%						61.02	%					60.61	%					61.10	%

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~~2023 and ~~2021.~~2022.

² Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page ~~48,~~42, and includes ~~fees~~fee expense of ~~$588,000~~$730,000 for the ~~second~~first quarter of ~~2022, $724,000 first~~2023, and loan fee income of $917,000 for the fourth quarter of 2022, and ~~$1.3~~$1.6 million for the ~~second~~first quarter of ~~2021. Nonaccrual loans are included in the above-stated average balances.~~

~~Tableof Contents~~

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

Six Months Ended June 30,

2022

2021

Average

Income /

Rate

Average

Income /

Rate

Balance

Expense

%

Balance

Expense

%
Assets

��

Interest earning deposits with financial institutions
$
530,485

$
1,051

0.40

$
429,953

$
229

0.11
Securities:

Taxable

1,611,669

11,723

1.47

383,563

3,447

1.81
Non-taxable (TE)¹

188,275

3,603

3.86

189,811

3,248

3.45
Total securities (TE)¹

1,799,944

15,326

1.72

573,374

6,695

2.35
Dividends from FHLBC and FRBC

18,543

416

4.52

9,917

228

4.64
Loans and loans held-for-sale ^{1 , 2}

3,456,984

74,695

4.36

1,972,638

43,122

4.41
Total interest earning assets

5,805,956

91,488

3.18

2,985,882

50,274

3.40
Cash and due from banks

48,200

-

-

29,227

-

-
Allowance for credit losses on loans

(44,348)

-

-

(32,773)

-

-
Other noninterest bearing assets

372,657

-

-

186,422

-

-
Total assets
$
6,182,465

$
3,168,758

Liabilities and Stockholders' Equity

NOW accounts
$
598,858

$
191

0.06

$
513,694

$
199

0.08
Money market accounts

1,076,624

325

0.06

329,797

137

0.08
Savings accounts

1,207,143

228

0.04

425,996

122

0.06
Time deposits

482,157

542

0.23

379,363

909

0.48
Interest bearing deposits

3,364,782

1,286

0.08

1,648,850

1,367

0.17
Securities sold under repurchase agreements

36,837

20

0.11

75,066

52

0.14
Other short-term borrowings

-

-

-

-

-

-
Junior subordinated debentures

25,773

564

4.41

25,773

564

4.41
Subordinated debentures

59,233

1,093

3.72

28,197

517

3.70
Senior note

44,507

1,063

4.82

44,402

1,346

6.11
Notes payable and other borrowings

16,040

198

2.49

22,787

242

2.14
Total interest bearing liabilities

3,547,172

4,224

0.24

1,845,075

4,088

0.45
Noninterest bearing deposits

2,109,914

-

-

974,809

-

-
Other liabilities

46,648

-

-

37,173

-

-
Stockholders' equity

478,731

-

-

311,701

-

-
Total liabilities and stockholders' equity
$
6,182,465

$
3,168,758

Net interest income (GAAP)

$
86,496

$
45,497

Net interest margin (GAAP)

3.00

3.07

Net interest income (TE)¹

$
87,264

$
46,186

Net interest margin (TE)¹

3.03

3.12
Interest bearing liabilities to earning assets

61.10
%

61.79
%

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 $1.3 million and $2.6 million for the six months ended June 30, 2022 and 2021, respectively. Nonaccrual loans are included in the above-stated average balances.

4741

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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~~2023 and ~~2021~~2022 to compare returns more appropriately on tax-exempt loans and securities to other earning assets. The table below provides a reconciliation of each non-GAAP (TE) measure to the GAAP equivalent for the periods indicated:


	Three Months Ended									Six Months Ended						Three Months Ended
	June 30,			March 31,			June 30,			June 30,						March 31,			December 31,			March 31,
Net Interest Margin	2022			2022			2021			2022			2021			2023			2022			2022


Interest income (GAAP)	$	47,389		$	43,331		$	24,194		$	90,720		$	49,585		$	70,159		$	67,745		$	43,331
Taxable-equivalent adjustment:
Loans		6			5			3			11			7			6			6			5
Securities		376			381			334			757			682			356			356			350
Interest and dividend income (TE)		47,771			43,717			24,531			91,488			50,274			70,521			68,107			43,686
Interest expense (GAAP)		2,125			2,099			2,240			4,224			4,088			6,073			3,654			2,099
Net interest income (TE)	$	45,646		$	41,618		$	22,291		$	87,264		$	46,186		$	64,448		$	64,453		$	41,587
Net interest income (GAAP)	$	45,264		$	41,232		$	21,954		$	86,496		$	45,497		$	64,086		$	64,091		$	41,232
Average interest earning assets	$	5,748,769		$	5,863,777		$	3,054,503		$	5,805,956		$	2,985,882		$	5,510,326		$	5,524,143		$	5,863,777
Net interest margin (GAAP)		3.16	%		2.85	%		2.88	%		3.00	%		3.07	%		4.72	%		4.60	%		2.85	%
Net interest margin (TE)		3.18	%		2.88	%		2.93	%		3.03	%		3.12	%		4.74	%		4.63	%		2.88	%

Noninterest Income

Three months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~

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


							2nd Quarter 2022								First Quarter 2023
Noninterest Income	Three Months Ended						Percent Change From		Three Months Ended						Percent Change From
(Dollars in thousands)	June 30,		March 31,		June 30,		March 31,	June 30,	March 31,		December 31,		March 31,		December 31,	March 31,
	2022		2022		2021		2022	2021	2023		2022		2022		2022	2022
Wealth management	$	2,506	$	2,698	$	2,389	(7.1)	4.9	$	2,270	$	2,403	$	2,698	(5.5)	(15.9)
Service charges on deposits		2,328		2,074		1,221	12.2	90.7		2,424		2,499		2,074	(3.0)	16.9
Residential mortgage banking revenue
Secondary mortgage fees		50		139		272	(64.0)	(81.6)		59		62		139	(4.8)	(57.6)
MSRs mark to market gain (loss)		82		2,978		(1,033)	(97.2)	(107.9)
MSRs mark to market (loss) gain										(525)		(431)		2,978	21.8	(117.6)
Mortgage servicing income		579		519		507	11.6	14.2		516		518		519	(0.4)	(0.6)
Net (loss) gain on sales of mortgage loans		(262)		1,495		1,895	(117.5)	(113.8)
Net gain on sales of mortgage loans										306		340		1,495	(10.0)	(79.5)
Total residential mortgage banking revenue		449		5,131		1,641	(91.2)	(72.6)		356		489		5,131	(27.2)	(93.1)
Securities (losses) gains, net		(33)		-		2	N/M	N/M
Securities losses, net										(1,675)		(910)		-	84.1	N/M
Change in cash surrender value of BOLI		72		124		423	(41.9)	(83.0)		242		376		124	(35.6)	95.2
Card related income		2,965		2,567		1,666	15.5	78.0		2,244		2,795		2,574	(19.7)	(12.8)
Other income		924		869		577	6.3	60.1		1,489		1,294		862	15.1	72.7
Total noninterest income	$	9,211	$	13,463	$	7,919	(31.6)	16.3	$	7,350	$	8,946	$	13,463	(17.8)	(45.4)

N/M - Not meaningful

Noninterest income decreased ~~$4.3~~$1.6 million, or ~~31.6%~~17.8%, in the ~~second~~first quarter of 2023, compared to the fourth quarter of 2022, and decreased $6.1 million, or 45.4%, compared to the first quarter of ~~2022, and increased $1.3 million, or 16.3%, compared to the second quarter of 2021.~~2022. The decrease from the ~~linked~~fourth quarter of 2022 was primarily driven by a ~~$4.7 million decline in residential mortgage banking revenue, attributable to a $2.9 million decline in mark to market gain on mortgage~~

4842

Table of Contents

~~servicing rights (MSRs)~~$765,000 increase in securities losses, net, based on strategic sales and a $551,000 decline in card related income primarily due to ~~market interest rate changes~~decreased activity. These decreases in ~~the first six months of 2022, and a $262,000 net loss on the sale of mortgage loans in the second quarter of 2022, compared to a $1.5 million net gain~~noninterest income in the first quarter of ~~2022, due~~2023, compared to the ~~impact~~fourth quarter of interest rate locks in the rising interest rate environment during the period. In addition, wealth management income decreased $192,000 from the linked quarter due to a decline in assets under management as a result of global stock market losses. These decreases2022, were partially offset by ~~increases~~a $195,000 increase in ~~card~~other income driven by credits received from a few vendors related to prior year service discounts.

The decrease in noninterest income of ~~$398,000 and service charges on deposits of $254,000~~$6.1 million in the ~~second~~first quarter of ~~2022,~~2023, compared to the first quarter of ~~2022.~~

~~The increase in noninterest income in the second quarter of~~ 2022, ~~compared to the second quarter of 2021,~~ is primarily due to a ~~$1.3~~decrease of $4.8 million increase in card related income, a $1.1 million increase in service charges on deposits, a $117,000 increase in wealth management fees, and a $347,000 increase in other income, each stemming from the inclusion of West Suburban activity in 2022. Partially offsetting these increases was a $1.2 million decline in residential mortgage banking revenue due to ~~a decrease~~increases in market interest rates in the year over year period, reducing mortgage banking origination volume ~~in the second quarter of 2022,~~and related derivative revenue, as well as ~~changes~~an increase in ~~interest rates effecting the mortgage banking derivative, and a $351,000 decrease~~security losses of $1.7 million based on strategic sales in the ~~cash surrender value of BOLI, due to market interest rate fluctuations.~~

~~Six months~~quarter ended ~~June 30, 2022 and 2021~~

Noninterest Income

Six Months Ended

YTD
(Dollars in thousands)

June 30,

June 30,

Percent


2022

2021

Change
Wealth management

$
5,204

$
4,540

14.6
Service charges on deposits

4,402

2,416

82.2
Residential mortgage banking revenue

Secondary mortgage fees

189

594

(68.2)
MSRs mark to market gain (loss)

3,060

80

N/M
Mortgage servicing income

1,098

1,074

2.2
Net gain on sales of mortgage loans

1,233

5,616

(78.0)
Total residential mortgage banking revenue

5,580

7,364

(24.2)
Securities gains (losses) , net

(33)

2

N/M
Change in cash surrender value of BOLI

196

757

(74.1)
Card related income

5,532

3,113

77.7
Other income

1,793

1,027

74.6
Total noninterest income

$
22,674

$
19,219

18.0

~~Noninterest income increased $3.5 million, or 18.0%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. This increase was primarily driven~~March 31, 2023. These decreases were partially offset by a ~~$2.4 million increase in card related income, a $2.0 million~~$350,000 increase in service charges on deposits, ~~a $664,000 increase in wealth management fees,~~ and a ~~$766,000~~$627,000 increase in other income each stemming from the inclusion of West Suburban related activity in our results for the six months ended June 30, 2022. Partially offsetting these increases was a $1.8 million decline in mortgage banking revenue year over year, comprised primarily of a $4.4 million decrease in net gain on sales of mortgage loans, partially offsetdriven by a ~~$3.0 million mark~~few vendor credits related to ~~market gain on MSRs, both due to the increasing interest rate environment,~~prior year billings and ~~a $561,000 decline in the cash surrender value~~volumes of ~~BOLI.~~activity.

~~Tableof Contents~~

Noninterest Expense

Three months ended ~~June 30,~~March 31, 2023 and 2022 ~~and 2021~~

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


										2nd Quarter 2022											First Quarter 2023
Noninterest Expense	Three Months Ended									Percent Change From		Three Months Ended									Percent Change From
(Dollars in thousands)	June 30,			March 31,			June 30,			March 31,	June 30,	March 31,			December 31,			March 31,			December 31,	March 31,
	2022			2022			2021			2022	2021	2023			2022			2022			2022	2022
Salaries	$	15,995		$	15,598		$	9,435		2.5	69.5	$	16,087		$	17,487		$	15,598		(8.0)	3.1
Officers incentive		1,662			994			1,194		67.2	39.2		1,827			3,876			994		(52.9)	83.8
Benefits and other		3,675			3,375			2,267		8.9	62.1		4,334			2,900			3,375		49.4	28.4
Total salaries and employee benefits		21,332			19,967			12,896		6.8	65.4		22,248			24,263			19,967		(8.3)	11.4
Occupancy, furniture and equipment expense		3,046			3,699			2,303		(17.7)	32.3		3,475			4,128			3,699		(15.8)	(6.1)
Computer and data processing		4,006			6,268			1,304		(36.1)	207.2		1,774			2,978			6,268		(40.4)	(71.7)
FDIC insurance		702			410			192		71.2	265.6		584			630			410		(7.3)	42.4
Net teller & bill paying													502			485			1,907		3.5	(73.7)
General bank insurance		351			315			277		11.4	26.7		305			298			315		2.3	(3.2)
Amortization of core deposit intangible asset		659			665			115		(0.9)	473.0		624			645			665		(3.3)	(6.2)
Advertising expense		194			182			95		6.6	104.2		142			130			182		9.2	(22.0)
Card related expense		1,057			534			626		97.9	68.8		1,216			1,304			534		(6.7)	127.7
Legal fees		179			257			135		(30.4)	32.6		319			225			257		41.8	24.1
Consulting & management fees		523			616			250		(15.1)	109.2		790			679			616		16.3	28.2
Other real estate owned expense (gain), net		87			(12)			77		(825.0)	13.0
Other real estate owned expense, net													306			34			(12)		N/M	N/M
Other expense		5,113			5,351			3,131		(4.4)	63.3		3,637			3,885			3,444		(6.4)	5.6
Total noninterest expense	$	37,249		$	38,252		$	21,401		(2.6)	74.1	$	35,922		$	39,684		$	38,252		(9.5)	(6.1)
Efficiency ratio (GAAP)¹		67.07	%		72.70	%		68.63	%				47.52	%		52.44	%		72.70	%
Adjusted efficiency ratio (non-GAAP)²		62.69	%		61.89	%		67.65	%				47.66	%		51.29	%		61.92	%

N/M - Not meaningful

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

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, 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, ~~and~~ mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” starting on page 5244 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.
Noninterest expense for the ~~second~~first quarter of 2023 decreased $3.8 million, or 9.5%, compared to the fourth quarter of 2022, and decreased ~~$1.0~~$2.3 million, or ~~2.6%~~6.1%, compared to the first quarter of ~~2022, and increased $15.8 million, or 74.1%, compared to the second quarter of 2021.~~2022. The ~~linked quarter~~ decrease was primarily attributable to $3.3 million of West Suburban acquisition-related costs for the second quarter of 2022, compared to $5.6 million for the first quarter of 2022. These acquisition-related costs included a $3.2 million decrease in computer and data processing expense in the second quarter of 2022, primarily due to acquisition-related core system conversion costs, and a $489,000 decrease in other expense due to ancillary teller and mobile banking systems conversion costs occurring in the first quarter of ~~2022. Occupancy, furniture and equipment costs also decreased $850,000 in the second quarter of 2022,~~2023 compared to the prior quarter, due to net gains on branch sales during the quarter. These decreases were partially offset by a $1.4 million increase in salaries and employee benefits, largely the result of bonuses paid to non-officer employees for efforts during the acquisition and conversion period, and a $523,000 increase in card related expense, due to the growth in customer transactions and related volume charges, as well as certain credits recorded in the first quarter of 2022.
The year over year increase in noninterest expense is primarily attributable to an $8.4 million increase in salaries and employee benefits, a $2.7 million increase in computer and data processing expense, a $2.0 million increase in other expense, and a $743,000 increase in occupancy, furniture and equipment expense. Salaries and officer incentive increased $6.6 million and $468,000, respectively, in the second quarter of 2022, compared to the like quarter of 2021, primarily due to additional employees from our acquisition of West Suburban, as well as growth in our commercial lending team. Employee benefits expense increased $1.4 million in the secondfourth quarter of

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2022 ~~compared~~was attributable to a $2.0 million decrease in salaries and employee benefits, primarily due to reductions in the ~~second~~officer incentive accrual, partially offset by an increase in employee benefits and other stemming from payroll taxes and 401k matching expense related to annual bonus payments made in the first quarter of 2021, due to increases stemming from additional employees from our acquisition of West Suburban, and increases in employee insurance costs as more employees returned to more routine medical appointments, many of which were on hold during the COVID-19 pandemic in 2020 and part of 2021. The increase in occupancy, furniture and equipment expense year over year was due to the2023. In addition, ~~of 34 West Suburban branches in late 2021. The increase~~a $1.2 million decrease in computer and data processing ~~expense~~costs was recorded in the first quarter of 2023, compared to the linked quarter, primarily due to ~~core system conversion~~the timing of software contracts and incentives. Noninterest expense was further increased by a $269,000 OREO valuation reserve recorded on two properties in the first quarter of 2023; no OREO valuation reserve was recorded in the fourth quarter of 2022.

The year over year decrease in noninterest expense is primarily attributable to a $4.5 million decrease in computer and data processing expenses and a $1.4 million decrease in net teller & bill paying expense, both stemming from acquisition related costs ~~relating to~~in the first quarter of 2022 from our West Suburban acquisition. ~~Finally,~~Partially offsetting the ~~increase~~decrease in ~~other~~noninterest expense ~~was due primarily to growth in net teller banking and bill paying fees of $623,000, which was due to acquisition-related costs~~ in the ~~second~~first quarter of 2023, compared to the first quarter of 2022, ~~as well as the impact of~~was a ~~quarter of other expense from the inclusion of West Suburban activity.~~

~~Six months ended June 30, 2022 and 2021~~

Noninterest Expense

Six Months Ended

YTD
(Dollars in thousands)

June 30,

June 30,

Percent


2022

2021

Change
Salaries

$
31,593

$
18,651

69.4
Officers incentive

2,656

2,847

(6.7)
Benefits and other

7,050

4,904

43.8
Total salaries and employee benefits

41,299

26,402

56.4
Occupancy, furniture and equipment expense

6,745

4,770

41.4
Computer and data processing

10,274

2,602

294.9
FDIC insurance

1,112

393

183.0
General bank insurance

666

553

20.4
Amortization of core deposit intangible asset

1,324

235

463.4
Advertising expense

376

155

142.6
Card related expense

1,591

1,219

30.5
Legal fees

436

190

129.5
Consulting & management fees

1,139

667

70.8
Other real estate owned expense, net

75

113

(33.6)
Other expense

10,464

5,840

79.2
Total noninterest expense

$
75,501

$
43,139

75.0
Efficiency ratio (GAAP)¹

69.81
%

66.21
%

Adjusted efficiency ratio (non-GAAP)²

62.30
%

65.31
%

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 and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” starting on page 52 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent

~~Noninterest expense for the six months ended June 30, 2022, increased $32.4~~$2.3 million ~~or 75.0%, compared to the six months ended June 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~~a $682,000 increase in ~~December 2021. Salaries and employee benefits~~card related expenses. Officer incentive compensation increased ~~$14.9 million largely from the additional employees from West Suburban, as well as incentives and merit increases effective~~$833,000 in the ~~second~~first quarter of 2022. Occupancy, furniture and equipment increased $2.0 million or 41.4% 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 $7.7 million, or 294.9%, primarily related to costs of operating multiple systems prior to conversion as well as data conversion costs. Other expense increased $4.6 million or 79.2% primarily from a $2.4 million increase to net teller and bill paying expense, and $931,000 of other acquisition-related costs. In addition, FDIC insurance increased $719,000 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 $1.1 million for the six months ended June 30, 2022,2023, compared to the ~~prior~~first quarter of 2022, as incentive accruals increased in the current year ~~like period,~~ due to ~~the West Suburban acquisition. Finally, consulting~~growth in our commercial and ~~management fees increased $472,000 due to $572,000 of acquisition-related costs and general ledger reclasses in the first six months of 2022.~~sponsored finance lending teams year over year.

~~Tableof Contents~~

Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures


	GAAP									Non-GAAP									GAAP									Non-GAAP
		Three Months Ended									Three Months Ended									Three Months Ended									Three Months Ended
	June 30,			March 31,			June 30,			June 30,			March 31,			June 30,			March 31,			December 31,			March 31,			March 31,			December 31,			March 31,
	2022			2022			2021			2022			2022			2021			2023			2022			2022			2023			2022			2022
Efficiency Ratio / Adjusted Efficiency Ratio

Noninterest expense	$	37,249		$	38,252		$	21,401		$	37,249		$	38,252		$	21,401		$	35,922		$	39,684		$	38,252		$	35,922		$	39,684		$	38,252
Less amortization of core deposit		659			665			115			659			665			115			624			645			665			624			645			665
Less other real estate expense, net		87			(12)			77			87			(12)			77			306			34			(12)			306			34			(12)
Less merger related costs, net of gain on branch sales		N/A			N/A			N/A			2,132			5,334			-
Less acquisition related costs, net of gain on branch sales																				N/A			N/A			N/A			(306)			617			5,335
Noninterest expense less adjustments	$	36,503		$	37,599		$	21,209		$	34,371		$	32,265		$	21,209		$	34,992		$	39,005		$	37,599		$	35,298		$	38,388		$	32,264

Net interest income	$	45,264		$	41,232		$	21,954		$	45,264		$	41,232		$	21,954		$	64,086		$	64,091		$	41,232		$	64,086		$	64,091		$	41,232
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			6			5			3			N/A			N/A			N/A			6			6			5
Securities		N/A			N/A			N/A			376			381			334			N/A			N/A			N/A			356			356			350
Net interest income including adjustments		45,264			41,232			21,954			45,646			41,618			22,291			64,086			64,091			41,232			64,448			64,453			41,587
Noninterest income		9,211			13,463			7,919			9,211			13,463			7,919			7,350			8,946			13,463			7,350			8,946			13,463
Less securities (losses) gains		(33)			-			2			(33)			-			2
Less MSRs mark to market gain (loss)		82			2,978			(1,033)			82			2,978			(1,033)
Less securities losses																				(1,675)			(910)			-			(1,675)			(910)			-
Less MSRs mark to market (loss) gain																				(525)			(431)			2,978			(525)			(431)			2,978
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			N/A			19			33			112			N/A			N/A			N/A			64			100			33
Noninterest income (less) / including adjustments		9,162			10,485			8,950			9,181			10,518			9,062
Noninterest income (excluding) / including adjustments																				9,550			10,287			10,485			9,614			10,387			10,518

Net interest income including adjustments plus noninterest income (less) / including adjustments	$	54,426		$	51,717		$	30,904		$	54,827		$	52,136		$	31,353
Net interest income including adjustments plus noninterest income (excluding) / including adjustments																			$	73,636		$	74,378		$	51,717		$	74,062		$	74,840		$	52,105
Efficiency ratio / Adjusted efficiency ratio		67.07	%		72.70	%		68.63	%		62.69	%		61.89	%		67.65	%		47.52	%		52.44	%		72.70	%		47.66	%		51.29	%		61.92	%

N/A - not applicable

Income Taxes

We recorded income tax expense of ~~$4.4~~$8.4 million for the ~~second~~first quarter of ~~2022~~2023 on ~~$16.7~~$32.0 million of pretax income, compared to income tax expense of $8.2 million on $31.9 million of pretax income in the fourth quarter of 2022, and income tax expense of $4.4 million on $16.4 million of pretax income in the first quarter of ~~2022, and income tax expense of $3.2 million on $12.0 million of pretax income in the second quarter of 2021.~~2022. Our effective tax rate was ~~26.6%~~26.3% in the ~~second~~first quarter of 2023, 25.9% for the fourth quarter of 2022, and 26.9% for the first quarter of ~~2022, and 26.3% for the second quarter of 2021.~~
We recorded income tax expense of $8.9 million on $33.1 million of pretax income for the six months ended June 30, 2022, compared to income tax expense of $7.4 million on $28.1 million of pretax income in the like 2021 period. The effective tax rate was 26.7% and 26.3% for the second quarter of 2022 and the second quarter of 2021, respectively.2022.
Income tax expense reflected all relevant statutory tax rates and GAAP accounting. There were no significant changes in our ability to utilize our deferred tax assets during the quarter ~~or six months~~ ended ~~June 30, 2022.~~March 31, 2023. We had no valuation reserve on the deferred tax assets as of ~~June 30, 2022.~~March 31, 2023.

Tableof Contents

Financial Condition

Total assets ~~decreased $206.6~~increased $32.0 million to ~~$6.01~~$5.92 billion at ~~June 30, 2022,~~March 31, 2023, from ~~$6.21~~$5.89 billion at December 31, ~~2021,~~2022, due primarily to aan increase in net ~~decrease~~loans of $129.8 million and FHLB and FRB stock held of $9.7 million, partially offset by decreases of $12.2 million in cash and cash equivalents, ~~of $470.7 million, offset by increases of $203.2 million in net loans, $40.8~~$84.3 million in securities available-for-sale, and ~~$26.4~~$6.9 million in deferred tax assets. The decrease in cash and cash equivalents was primarily due to the use of cash ~~in the abovementioned asset increases,~~for loan growth, as well as the decrease in customer ~~deposits of $123.4 million and loan growth.~~deposits. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were ~~$5.3~~$4.90 billion at ~~June 30, 2022,~~March 31, 2023, a decrease of ~~$123.4~~$213.5 million from December 31, ~~2021,~~2022, primarily due to seasonal decreases of municipal deposits, and to a lesser extent declines in interest bearing demand accounts, savings, money market, NOW, and time deposits in ~~2022.~~

~~Table~~the first quarter of ~~Contents~~2023.

June 30, 2022
Securities

As of

Percent Change From
(Dollars in thousands)

June 30,

December 31,

June 30,

December 31,

June 30,


2022

2021

2021

2021

2021
Securities available-for-sale, at fair value

U.S. Treasuries

$
214,820

$
202,339

$
4,086

6.2

N/M
U.S. government agencies

57,896

61,888

6,038

(6.5)

858.9
U.S. government agencies mortgage-backed

141,836

172,302

18,939

(17.7)

648.9
States and political subdivisions

233,652

257,609

242,748

(9.3)

(3.7)
Corporate bonds

9,543

9,887

31,715

(3.5)

(69.9)
Collateralized mortgage obligations

641,498

672,967

101,912

(4.7)

529.5
Asset-backed securities

259,622

236,877

145,356

9.6

78.6
Collateralized loan obligations

175,549

79,763

29,154

120.1

502.1
Total securities

$
1,734,416

$
1,693,632

$
579,948

2.4

199.1

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

March 31, 2023
Securities

As of

Percent Change From
(Dollars in thousands)

March 31,

December 31,

March 31,

December 31,

March 31,


2023

2022

2022

2022

2022
Securities available-for-sale, at fair value

U.S. Treasuries

$
214,734

$
212,129

$
220,563

1.2

(2.6)
U.S. government agencies

56,703

56,048

59,036

1.2

(4.0)
U.S. government agencies mortgage-backed

121,938

124,990

153,148

(2.4)

(20.4)
States and political subdivisions

233,506

226,128

236,408

3.3

(1.2)
Corporate bonds

9,762

9,622

9,683

1.5

0.8
Collateralized mortgage obligations

454,106

533,768

696,513

(14.9)

(34.8)
Asset-backed securities

189,753

201,928

274,941

(6.0)

(31.0)
Collateralized loan obligations

174,566

174,746

166,158

(0.1)

5.1
Total securities

$
1,455,068

$
1,539,359

$
1,816,450

(5.5)

(19.9)

Securities available-for-sale ~~increased $40.8~~decreased $84.3 million as of ~~June 30, 2022,~~March 31, 2023, compared to December 31, ~~2021,~~2022, and ~~increased $1.15 billion~~decreased $361.4 million compared to ~~June 30, 2021.~~March 31, 2022. The ~~increase~~decrease in the portfolio during ~~the second quarter of 2022~~2023 was driven by ~~the purchase of $9.7~~securities sales totaling $66.2 million ~~of states~~ and ~~political subdivisions, $8.5~~paydowns totaling $37.4 million, ~~of collateralized mortgage obligations, $3.7 million of asset-backed securities, and $14.0 million of collateralized loan obligations. These purchases were~~ partially offset by ~~$76.1~~$4.0 million ~~of calls, maturities, sales~~in purchases and ~~paydowns during the second quarter of 2022, and an unrealized mark to~~a $17.9 million increase in market ~~loss adjustment of $40.5 million and net premium amortization of $1.5 million.~~value. We continue to seek to position ~~our~~the portfolio ~~into~~in higher credit quality, shorter duration ~~issuances. The increase in the~~ securities ~~portfolio in the year over year period was primarily due to $1.07 billion~~with an appropriate mix of securities acquired in our acquisition of West Suburban, as well as $1.03 billion of purchases in the last twelve months, less $601.0 million of sales in that same period, to utilize our excess cash on hand. There was one security sale during the second quarter of 2022fixed- and ~~one during the second quarter of 2021, resulting in a loss of $33,000 and gain of $2,000 respectively.~~ floating-rate exposures.

June 30, 2022

March 31, 2023
Loans
As of

Percent Change From
As of

Percent Change From
(Dollars in thousands)
June 30,

December 31,

June 30,

December 31,

June 30,
March 31,

December 31,

March 31,

December 31,

March 31,

2022

2021

2021

2021

2021
2023

2022

2022

2022

2022
Commercial
$
806,725

$
771,474

$
344,084

4.6

134.5
Commercial ¹
$
851,737

$
840,964

$
695,545

1.3

22.5
Leases

230,677

176,031

154,512

31.0

49.3

285,831

277,385

211,132

3.0

35.4
Commercial real estate – investor

1,076,678

957,389

569,745

12.5

89.0

1,056,787

987,635

748,267

7.0

41.2
Commercial real estate – owner occupied

627,898

574,384

318,259

9.3

97.3

870,115

854,879

873,292

1.8

(0.4)
Construction

170,037

206,132

100,544

(17.5)

69.1

174,683

180,535

165,558

(3.2)

5.5
Residential real estate – investor

61,220

63,399

50,127

(3.4)

22.1

56,720

57,353

62,846

(1.1)

(9.7)
Residential real estate – owner occupied

207,836

213,248

105,419

(2.5)

97.2

217,855

219,718

203,118

(0.8)

7.3
Multifamily

310,706

309,164

161,628

0.5

92.2

358,991

323,691

298,686

10.9

20.2
HELOC

111,072

115,664

72,475

(4.0)

53.3

104,941

109,202

120,241

(3.9)

(12.7)
HELOC – purchased

9,066

10,626

14,436

(14.7)

(37.2)
Other ⁽¹⁾

13,155

23,293

12,137

(43.5)

8.4
Other ²

25,694

18,247

23,685

40.8

8.5
Total loans
$
3,625,070

$
3,420,804

$
1,903,366

6.0

90.5
$
4,003,354

$
3,869,609

$
3,402,370

3.5

17.7

¹ Includes $1.3 million, $1.6 million, and $11.2 million of Paycheck Protection Program (“PPP”) loans at March 31, 2023, December 31, 2022, and March 31, 2022, respectively.
²The “Other” segment includes consumer loans and ~~overdrafts.~~overdrafts

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Total loans were ~~$3.63~~$4.0 billion as of ~~June 30, 2022,~~March 31, 2023, an increase of ~~$204.3~~$133.7 million from December 31, ~~2021.~~2022. The increase in total loans in the first ~~six~~three months of ~~2022,~~2023, compared to December 31, ~~2021,~~2022, was due primarily to growth in loan originations within commercial real estate – investor ~~which increased by $119.3~~of $69.2 million, multifamily of $35.3 million, and ~~leases, which increased by $54.6~~commercial real estate – owner occupied of $15.2 million from December 31, ~~2021.~~2022. Total loans increased ~~$1.72 billion~~$601.0 million from ~~June 30, 2021~~March 31, 2022 to ~~June 30, 2022,~~March 31, 2023, primarily due to ~~the~~growth in loan ~~portfolio acquired from West Suburban.~~originations within commercial real estate – investor of $308.5 million, commercial of $156.2 million, leases of $74.7 million, and multifamily of $60.3 million. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) is carried on a gross basis (rather than net of the associated credit loss estimate), and the expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses, or ACL.

The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate. Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio. These categories comprised ~~71.0%~~70.9% of the portfolio as of ~~June 30, 2022,~~March 31, 2023, compared to ~~71.6%~~70.6% of the portfolio as of December 31, ~~2021.~~2022. We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

Asset Quality
Nonperforming loans consist of nonaccrual loans, ~~performing restructured accruing loans~~ and loans 90 days or greater past due. ~~Remediation work continues in all segments.~~Prior to January 1, 2023, nonperforming loans also included performing troubled debt restructured loans accruing interest. Nonperforming loans ~~decreased~~increased by ~~$2.6~~$31.6 million to ~~$42.1~~$64.5 million at ~~June 30, 2022~~March 31, 2023 from ~~$44.7~~$32.9 million at December 31, ~~2021.~~2022, and increased $26.6 million from $38.0 million at March 31, 2022. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced a more-than-insignificant deterioration in credit quality since origination. PCD loans and their related deferred loan costs are included in our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan. Management continues to carefully monitor loans considered to be in a classified status. Nonperforming loans as a percent of total loans were ~~1.2%~~1.6% as of ~~June 30, 2022, 1.3%~~March 31, 2023, 0.9% as of December 31, ~~2021,~~2022, and ~~1.2%~~1.1% as of ~~June 30, 2021.~~March 31, 2022. The distribution of our nonperforming loans is shown in the following table.

June 30, 2022

Nonperforming Loans
As of

Percent Change From

(Dollars in thousands)
June 30,

December 31,

June 30,

December 31,

June 30,

2022

2021

2021

2021

2021

Commercial
$
11,600

$
13,291

$
-

(12.7)

N/M

Leases

2,005

3,754

2,526

(46.6)

(20.6)

Commercial real estate – Investor

8,324

5,694

1,915

46.2

334.7

Commercial real estate – Owner occupied

10,670

13,231

7,078

(19.4)

50.7

Construction

1,238

160

3,470

673.8

(64.3)

Residential real estate – Investor

1,092

899

840

21.5

30.0

Residential real estate – Owner occupied

3,642

5,019

3,564

(27.4)

2.2

Multifamily

907

1,573

2,723

(42.3)

(66.7)

HELOC

2,442

862

810

183.3

201.5

HELOC – Purchased

171

180

-

(5.0)

N/M

Other ¹

3

3

195

-

(98.5)

Total nonperforming loans
$
42,094

$
44,666

$
23,121

(5.8)

82.1

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

March 31, 2023

Nonperforming Loans
As of

Percent Change From

(Dollars in thousands)
March 31,

December 31,

March 31,

December 31,

March 31,

2023

2022

2022

2022

2022

Commercial
$
2,811

$
7,649

$
9,029

(63.3)

(68.9)

Leases

856

1,876

2,641

(54.4)

(67.6)

Commercial real estate – investor

30,397

4,346

6,335

599.4

379.8

Commercial real estate – owner occupied

19,691

8,223

9,871

139.5

99.5

Construction

241

251

1,250

(4.0)

(80.7)

Residential real estate – investor

1,555

1,672

1,393

(7.0)

11.6

Residential real estate – owner occupied

4,038

4,198

4,470

(3.8)

(9.7)

Multifamily

2,495

2,538

1,629

(1.7)

53.2

HELOC

2,441

2,158

1,337

13.1

82.6

Other ¹

2

2

3

-

(33.3)

Total nonperforming loans
$
64,527

$
32,913

$
37,958

96.1

70.0

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

5446

Table of Contents

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


										June 30, 2022											March 31, 2023
Nonperforming Assets	As of									Percent Change From		As of									Percent Change From
(Dollars in Thousands)	June 30,			December 31,			June 30,			December 31,	June 30,	March 31,			December 31,			March 31,			December 31,	March 31,
	2022			2021			2021			2021	2021	2023			2022			2022			2022	2022
Nonaccrual loans	$	35,712		$	41,531		$	22,784		(14.0)	56.7	$	63,561		$	31,602		$	35,973		101.1	76.7
Performing troubled debt restructured loans accruing interest		1,108			25			201		N/M	451.2
Performing troubled debt restructured loans accruing interest ¹													N/A			49			1,242		N/A	N/A
Loans past due 90 days or more and still accruing interest		5,274			3,110			136		69.6	N/M		966			1,262			743		(23.5)	30.0
Total nonperforming loans		42,094			44,666			23,121		(5.8)	82.1		64,527			32,913			37,958		96.1	70.0
Other real estate owned		1,624			2,356			1,877		(31.1)	(13.5)		1,255			1,561			2,374		(19.6)	(47.1)
Total nonperforming assets	$	43,718		$	47,022		$	24,998		(7.0)	74.9	$	65,782		$	34,474		$	40,332		90.8	63.1


30-89 days past due loans and still accruing interest	$	24,681		$	10,745		$	8,654				$	24,770		$	7,508		$	20,835
Nonaccrual loans to total loans		1.0	%		1.2	%		1.2	%				1.6	%		0.8	%		1.1	%
Nonperforming loans to total loans		1.2	%		1.3	%		1.2	%				1.6	%		0.9	%		1.1	%
Nonperforming assets to total loans plus OREO		1.2	%		1.4	%		1.3	%				1.6	%		0.9	%		1.2	%

Allowance for credit losses	$	45,388		$	44,281		$	28,639				$	53,392		$	49,480		$	44,308
Allowance for credit losses to total loans		1.3	%		1.3	%		1.5	%				1.3	%		1.3	%		1.3	%
Allowance for credit losses to nonaccrual loans		127.1	%		106.6	%		125.7	%				84.0	%		156.6	%		123.2	%

N/~~M -~~ A – Not ~~meaningful~~applicable

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

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


Loan Charge–offs, Net of Recoveries	Three Months Ended									Three Months Ended
(Dollars in thousands)	June 30,		% of	March 31,		% of	June 30,		% of	March 31,		% of	December 31,		% of	March 31,		% of
	2022		Total¹	2022		Total¹	2021		Total¹	2023		Total¹	2022		Total¹	2022		Total¹
Commercial	$	44	17.6	$	-	-	$	190	292.3	$	(124)	(16.8)	$	(8)	(0.9)	$	-	-
Leases		-	-		-	-		28	43.1		873	118.00		191	20.3		-	-
Commercial real estate – investor		225	90.0		213	72.7		(20)	(30.8)		(17)	(2.3)		776	82.6		213	72.7
Commercial real estate – owner occupied		(7)	(2.8)		113	38.6		21	32.3		(2)	(0.3)		(2)	(0.2)		113	38.6
Residential real estate – investor		(5)	(2.0)		(10)	(3.4)		(10)	(15.4)		(19)	(2.6)		(7)	(0.7)		(10)	(3.4)
Residential real estate – owner occupied		(22)	(8.8)		(83)	(28.3)		(61)	(93.8)		(10)	(1.4)		-	-		(83)	(28.3)
Multifamily											-	-		(6)	(0.6)		-	-
HELOC		(31)	(12.4)		(35)	(11.9)		(72)	(110.8)		(29)	(3.9)		(38)	(4.0)		(35)	(11.9)
Other ²		46	18.4		95	32.3		(11)	(16.9)		68	9.3		34	3.5		95	32.3
Net charge–offs	$	250	100.0	$	293	100.0	$	65	100.0	$	740	100.0	$	940	100.0	$	293	100.0

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

² The “Other” segment includes consumer and overdrafts.

Net charge-offs of ~~$250,000~~$740,000 were recorded for the ~~second~~first quarter of 2023, compared to net charge-offs of $940,000 for the fourth quarter of 2022, ~~compared to~~and net charge-offs of $293,000 for the first quarter of 2022, ~~and net charge-offs of $65,000 for the second quarter of 2021,~~ reflecting continuing management attention to credit quality and remediation efforts. The net charge-offs for the ~~second~~first quarter of ~~2022~~2023 were primarily due to ~~one commercial real estate - investor~~six lease charge ~~off for 243,000.~~offs of $882,000 in aggregate. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

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

Tableof Contents

of the obligor, or by the collateral pledged to secure the loan, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and carry the distinct possibility that we will sustain some loss if deficiencies remain uncorrected.

~~Tableof Contents~~

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


							June 30, 2022								March 31, 2023
Classified Assets	As of						Percent Change From		As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,	March 31,		December 31,		March 31,		December 31,	March 31,
	2022		2021		2021		2021	2021	2023		2022		2022		2022	2022
Commercial	$	31,577	$	32,712	$	482	(3.5)	N/M	$	22,662	$	26,485	$	29,267	(14.4)	(22.6)
Leases		2,005		3,754		3,007	(46.6)	(33.3)		906		1,876		2,641	(51.7)	(65.7)
Commercial real estate – investor		30,407		10,667		5,063	185.1	500.6		52,615		27,410		8,809	92.0	497.3
Commercial real estate – owner occupied		28,715		15,429		8,702	86.1	230.0		37,545		40,890		13,259	(8.2)	183.2
Construction		1,238		2,104		5,393	(41.2)	(77.0)		241		1,333		3,185	(81.9)	(92.4)
Residential real estate – investor		1,246		1,265		1,082	(1.5)	15.2		1,702		1,714		1,544	(0.7)	10.2
Residential real estate – owner occupied		3,785		5,099		4,578	(25.8)	(17.3)		3,618		3,854		4,862	(6.1)	(25.6)
Multifamily		1,336		2,278		8,477	(41.4)	(84.2)		3,348		2,954		1,369	13.3	144.6
HELOC		2,681		1,243		1,090	115.7	146.0		2,635		2,411		1,669	9.3	57.9
HELOC – purchased		172		180		-	(4.4)	N/M
Other ¹		2		10		2	(80.0)	-		2		2		3	-	(33.3)
Total classified loans		103,164		74,741		37,876	38.0	172.4		125,274		108,929		66,608	15.0	88.1
Other real estate owned		1,624		2,356		1,877	(31.1)	(13.5)		1,255		1,561		2,374	(19.6)	(47.1)
Total classified assets	$	104,788	$	77,097	$	39,753	35.9	163.6	$	126,529	$	110,490	$	68,982	14.5	83.4

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

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

Total classified loans and classified assets increased ~~$27.7~~$16.0 million as of ~~June 30, 2022,~~March 31, 2023, from the levels at December 31, ~~2021.~~2022. The increase is due to the addition of ~~four~~$25.2 million classified loans in commercial real estate – investor, ~~loans totaling $19.7 million~~primarily due to three large credits, two of which are office buildings and one is an assisted living facility in the first quarter of 2023. The increase from March 31, 2022 is primarily due to additions to commercial real estate – investor and commercial real estate – owner occupied, ~~loan for $15.4~~increases of $43.8 million indriven by six larger credits and $24.3 million primarily from the ~~second quarter. The increase from June 30, 2021 is primarily due to the $15.4 million~~ addition of ~~the West Suburban loan portfolio in late 2021.~~two large credits, respectively. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ACL on loans as another measure of overall change in loan related asset quality, which is referred to as the “classified assets ratio.” The classified assets ratio was ~~17.79%~~20.04% for the period ended ~~June 30, 2022,~~March 31, 2023, compared to ~~13.79%~~18.36% as of December 31, ~~2021,~~2022, and ~~10.75%~~12.04% as of ~~June 30, 2021. The increase in the classified assets ratio for the period ended June 30, 2022, compared to June 30, 2021, is also due to the acquisition of West Suburban Bank.~~March 31, 2022.

Allowance for Credit Losses on Loans

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

At ~~June 30, 2022,~~March 31, 2023, our ~~allowance for credit losses (“ACL”)~~ACL on loans totaled ~~$45.4~~$53.4 million, and our ACL on unfunded commitments, included in other liabilities, totaled ~~$4.7~~$3.8 million. In the ~~second~~first quarter of ~~2022,~~2023, we recorded provision expense on loans of ~~$1.3~~$4.7 million, based on our assessment of nonperforming loan metrics and trends and estimated future credit losses, ~~which was offset by~~and a ~~$780,000 reduction~~$1.2 million decrease in our reserve on unfunded commitments, primarily due to ~~an updated analysis of line utilization~~a reduction in construction unfunded commitments and the construction historical loss rates, ~~over the past twelve months,~~ as well as a reduction in the ~~roll off of prior historical periods with lower losses within the CECL model.~~commercial substandard portfolio due to two large upgraded credits. These two entries resulted in a ~~$550,000~~$3.5 million net impact to the provision for credit losses for the ~~second~~first quarter of ~~2022.~~

The ACL on loans totaled $44.3 million as of both March 31, 2022 and December 31, 2021, and $28.6 million as of June 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 second quarter of 2021 due to a $2.3 million release of the provision for credit losses.2023.

Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loans, leases and unfunded commitments. The ACL on loans totaled $53.4 million as of March 31, 2023, $49.5 million as of December 31, 2022, and $44.3 million as of March 31, 2022. Our ACL on loans to total loans was 1.3% as of ~~June 30,~~March 31, 2023, December 31, 2022 and ~~December~~March 31, ~~2021.~~2022. See Item 7 – Critical Accounting Estimates in the Management Discussion and Analysis in our ~~2021~~2022 Annual Report in Form 10-K for discussion of our ACL methodology on loans.

~~Tableof Contents~~

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

Tableof Contents

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


		Three Months Ended								Six Months Ended							Three Months Ended
	June 30,			March 31,			June 30,			June 30,			June 30,			March 31,			December 31,			March 31,
	2022			2022			2021			2022			2021			2023			2022			2022
Allowance at beginning of period	$	44,308		$	44,281		$	30,967		$	44,281		$	33,855		$	49,480		$	48,847		$	44,281
Charge–offs:
Commercial		52			30			207			82			209			27			2			30
Leases		-			-			28			-			28			882			193			-
Commercial real estate – investor		243			236			-			480			-			-			797			236
Commercial real estate – owner occupied		-			121			31			121			34			-			-			121
Construction		-			-			-			-			-			-			-			-
Residential real estate – investor		-			-			-			-			-			-			-			-
Residential real estate – owner occupied		-			-			-			-			-			-			-			-
Multifamily		-			-			-			-			-			-			2			-
HELOC		-			-			5			-			17			-			-			-
HELOC – purchased		-			-			-			-			-
Other ¹		91			127			30			217			55			113			82			127
Total charge–offs		386			514			301			900			343			1,022			1,076			514
Recoveries:
Commercial		8			30			17			38			37			151			10			30
Leases		-			-			-			-			-			9			2			-
Commercial real estate – investor		18			23			20			41			40			17			21			23
Commercial real estate – owner occupied		7			8			10			15			218			2			2			8
Construction		-			-			-			-			-			-			-			-
Residential real estate – investor		5			10			10			15			276			19			7			10
Residential real estate – owner occupied		22			83			61			105			110			10			-			83
Multifamily		-			-			-			-			-			-			8			-
HELOC		31			35			77			67			101			29			38			35
HELOC – purchased		-			-			-			-			-
Other ¹		45			32			41			76			78			45			48			32
Total recoveries		136			221			236			357			860			282			136			221
Net charge-offs (recoveries)		250			293			65			543			(517)
Provision for (release of) credit losses on loans		1,330			320			(2,263)			1,650			(5,733)
Net charge-offs																	740			940			293
Provision for credit losses on loans																	4,652			1,573			320
Allowance at end of period	$	45,388		$	44,308		$	28,639		$	45,388		$	28,639		$	53,392		$	49,480		$	44,308

Average total loans (exclusive of loans held–for–sale)	$	3,505,806		$	3,397,827		$	1,926,105		$	3,452,115		$	1,965,911		$	3,931,679		$	3,877,004		$	3,397,827
Net charge–offs / (recoveries) to average loans		0.01	%		0.01	%		0.00	%		0.02	%		(0.03)	%
Net charge–offs to average loans																	0.08	%		0.10	%		0.04	%
Allowance at period end to average loans		1.29	%		1.30	%		1.49	%		1.31	%		1.46	%		1.36	%		1.28	%		1.30	%

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

The coverage ratio of the ACL on loans to nonperforming loans was ~~107.8% as of June 30, 2022,~~82.7% March 31, 2023, which was a decrease from the coverage ratio of 150.3% as of December 31, 2022 and a decrease from 116.7% as of March 31, ~~2021 and a decrease from 123.9% as of June 30, 2021.~~2022. When measured as a percentage of average loans, our total ACL on loans was ~~1.31%~~1.36% for the ~~six~~three months ended ~~June 30, 2022~~2023 and ~~1.46%~~1.30% for the like period of ~~June 30, 2021~~March 31, 2022.

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at ~~June 30, 2022,~~March 31, 2023, and general changes in lending policy, procedures and staffing, as well as other external ~~factors, such as the impacts of the COVID-19 pandemic.~~factors. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. ~~Further delayed recovery or further deterioration~~Continued volatility in ~~market conditions related~~the economic environment stemming from the impacts of and response to ~~COVID-19 or other factors, such as~~inflation, potential recession, and the war in Ukraine, and the associated ~~impacts~~effects on our customers, or other factors, such as changes in business climates and the condition of collateral at the time of default or repossession, may revise our current expectations of future credit losses in future reporting periods.

5749

Table of Contents

Other Real Estate Owned

As of ~~June 30, 2022,~~March 31, 2023, OREO totaled ~~$1.6~~$1.3 million, reflecting a ~~$732,000~~$306,000 decrease from the $1.6 million at December 31, 2022, and a $1.1 million decrease from the $2.4 million at ~~December~~March 31, ~~2021, and a $254,000 decrease from the $1.9 million at June 30, 2021.~~2022. In the ~~second~~first quarter of ~~2022,~~2023, we disposed of ~~three properties~~one property totaling ~~$646,191~~$328,000 in net book value, which resulted in a ~~gain~~loss on sale of OREO of ~~$81,000 and no transfers to OREO. In the fourth quarter of 2021, we acquired three~~$28,000. We transferred in two properties which increased total OREO ~~properties in our acquisition of West Suburban, with a total fair value of $5.6 million, and we sold two of these properties in December, which had a~~ net book value ~~of $5.2 million.~~by $291,000. In the ~~second~~first quarter of ~~2022,~~2023, we recorded ~~$104,000 of OREO~~two write-downs totaling $273,000 as well as a write-up for $4,000, totaling a $269,000 increase in valuation reserve, ~~adjustments,~~ compared to ~~$14,000 of~~no valuation reserve adjustments recorded in the fourth quarter of ~~2021,~~2022 and ~~$61,000 of valuation reserve adjustments recorded in~~ the ~~second~~first quarter of ~~2021.~~2022.

June 30, 2022

March 31, 2023
OREO
Three Months Ended

Percent Change From
Three Months Ended

Percent Change From
(Dollars in thousands)
June 30,

December 31,

June 30,

December 31,

June 30,
March 31,

December 31,

March 31,

December 31,

March 31,

2022

2021

2021

2021

2021
2023

2022

2022

2022

2022
Balance at beginning of period
$
2,374

$
1,912

$
2,163

24.2

9.8

$
1,561

$
1,561

$
2,356

-

(33.7)

Property additions, net of acquisition adjustments

-

5,678

-

(100.0)

-

291

-

87

N/M

234.5

Less:

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

646

5,220

225

(87.6)

187.1

328

-

69

N/M

375.4

Period valuation write-down

104

14

61

642.9

70.5

269

-

-

N/M

N/M

Balance at end of period
$
1,624

$
2,356

$
1,877

(31.1)

(13.5)

$
1,255

$
1,561

$
2,374

(19.6)

(47.1)

N/M - Not meaningful

In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future. Of note, properties valued in total at ~~$930,000,~~$431,000, or approximately ~~57.2%~~34.3% of total OREO at ~~June 30, 2022,~~March 31, 2023, have been in OREO for five years or more. The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.

OREO Properties by Type

(Dollars in thousands)
June 30, 2022

December 31, 2021

June 30, 2021
March 31, 2023

December 31, 2022

March 31, 2022

Amount

% of Total

Amount

% of Total

Amount

% of Total

Amount

% of Total

Amount

% of Total

Amount

% of Total
Single family residence
$
63

4
%

$
645

27
%

$
450

24
%
$
291

23
%

$
-

-
%

$
576

24
%
Lots (single family and commercial)

1,261

78
%

1,411

56
%

1,075

57
%

767

61
%

1,261

81
%

1,411

59
%
Vacant land

300

18
%

300

17
%

352

19
%

197

16
%

300

19
%

387

17
%
Total other real estate owned
$
1,624

100
%

$
2,356

100
%

$
1,877

100
%
$
1,255

100
%

$
1,561

100
%

$
2,374

100
%

Deposits and Borrowings

88

June 30, 2022

March 31, 2023
Deposits
As of

Percent Change From
As of

Percent Change From
(Dollars in thousands)
June 30,

December 31,

June 30,

December 31,

June 30,
March 31,

December 31,

March 31,

December 31,

March 31,

2022

2021

2021

2021

2021
2023

2022

2022

2022

2022
Noninterest bearing demand
$
2,078,272

$
2,093,494

$
1,028,558

(0.7)

102.1
$
1,950,144

$
2,051,702

$
2,132,606

(4.9)

(8.6)
Savings

1,199,027

1,178,575

442,805

1.7

170.8

1,108,610

1,145,592

1,228,783

(3.2)

(9.8)
NOW accounts

609,558

587,381

531,231

3.8

14.7

608,260

609,338

607,019

(0.2)

0.2
Money market accounts

994,616

1,102,972

331,144

(9.8)

200.4

799,300

862,170

1,098,581

(7.3)

(27.2)
Certificates of deposit of less than $100,000

268,723

296,298

183,444

(9.3)

46.5

238,257

244,017

286,116

(2.4)

(16.7)
Certificates of deposit of $100,000 through $250,000

140,266

138,794

109,500

1.1

28.1

147,887

157,438

135,682

(6.1)

9.0
Certificates of deposit of more than $250,000

52,393

68,718

55,319

(23.8)

(5.3)

44,762

40,466

55,758

10.6

(19.7)
Total deposits
$
5,342,855

$
5,466,232

$
2,682,001

(2.3)

99.2
$
4,897,220

$
5,110,723

$
5,544,545

(4.2)

(11.7)

Total deposits were $5.34 billion at June 30, 2022, which reflects a $123.4 million decrease from total deposits of $5.47 billion at December 31, 2021, and an increase of $2.66 billion from total deposits of $2.68 billion at June 30, 2021. The decrease in deposits at June 30, 2022, compared to December 31, 2021, was primarily due to decreases in demand deposits of $15.2 million, money market

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~~accounts of $108.3~~Total deposits were $4.90 billion at March 31, 2023, which reflects a $213.5 million ~~and time~~decrease from total deposits of ~~$42.4~~$5.11 billion at December 31, 2022, and a decrease of $647.3 million ~~partially offset by increases in savings and NOW accounts~~from total deposits of ~~$42.6 million.~~$5.54 billion at March 31, 2022. The ~~increase~~decrease in deposits at ~~June 30, 2022,~~March 31, 2023, compared to ~~June 30, 2021~~December 31, 2022, was primarily due to ~~an increase~~decreases in non-interest bearing deposits of ~~$2.69 billion~~$101.6 million, savings accounts of $37.0 million and money market accounts of $62.9 million. The decrease in deposits ~~from~~at March 31, 2023, compared to March 31, 2022 was primarily due to decreases in non-interest bearing deposits of $182.5 million, savings accounts of $120.2 million, and money market accounts of $299.3 million. The bulk of the linked quarter decline in deposit balances occurred in January 2023 and is consistent with seasonal historical trends. Deposit trends in February and March were essentially unchanged and net account growth improved significantly in the first quarter relative to trends throughout 2022 following the close of the West Suburban acquisition. Total average deposits decreased $489.9 million, or 8.9%, in the year over year period, driven by declines in our average demand deposits of $90.5 million, and savings, NOW and money markets combined of $338.6 million. In general, the bulk of the decline in deposits year over year can be characterized as rate sensitive account attrition with significant flows and transfers into investing activities following significant expansion in those same accounts in the immediate aftermath of the pandemic.

In addition to deposits, we ~~obtained~~used other liquidity sources for our funding ~~from other sources~~needs in all periods ~~presented.~~presented, such as repurchase agreements and other short-term borrowings with the FHLBC. Securities sold under repurchase agreements totaled ~~$37.6~~$27.9 million at ~~June 30, 2022,~~March 31, 2023, a ~~$12.7~~$4.3 million, or ~~25.3%~~13.2%, decrease from ~~$50.3~~$32.2 million at December 31, ~~2021.~~2022. Our ~~notes payable and other borrowings is comprised~~excess liquidity on hand during much of ~~$11.0 million outstanding~~2022 allowed us to fund our short-term liquidity needs with cash on ~~a $20.0 million term note originated with a correspondent bank in~~hand. During the ~~first~~third quarter of ~~2020,~~2022, we began utilizing short-term borrowings from the FHLBC again. The outstanding balance of our short-term FHLBC borrowings was $315.0 million as of March 31, 2023 and $90.0 million as of December 31, 2022; there were no short-term borrowings outstanding as of March 31, 2022.

We are also indebted on $25.8 million, net of deferred issuance costs, of junior subordinated debentures, which are related to ~~facilitate~~ the ~~redemption of our~~trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust ~~I trust preferred securities and related junior subordinated debentures, completed~~II (“Trust II”). The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on ~~March 2, 2020. Notes payable and other borrowings~~June 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of ~~$11.0 million~~4.39% as of March 31, 2023, as compared to 6.77%, which was the rate paid during the period prior to the June ~~30, 2022, decreased $8.1 million from December 31, 2021, and decreased $10.2 million from June 30, 2021.~~15, 2017 rate reset.

In the second quarter of 2021, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers pursuant to which we ~~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~~were used for general corporate ~~purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions.~~purposes. The Notes bear interest at a fixed annual rate of 3.50% through April 14, 2026, payable semi-annually in arrears. As of April 15, 2026 forward, the interest rate on the Notes will generally reset quarterly to a rate equal to Three-Month Term SOFR (as defined by the Note) plus 273 basis points, payable quarterly in arrears. The Notes have a stated maturity of April 15, 2031, and are redeemable, in whole are in part, on April 15, 2026, or any interest payment date thereafter, and at any time upon the occurrence of certain events.

~~The Company is indebted on senior notes originated in December 2016, totaling $44.5~~ As of March 31, 2023, we had $59.3 million of subordinated debentures outstanding, net of deferred issuance ~~costs, as of June 30, 2022. These~~costs.

In December 2016, we completed a $45.0 million senior note issuance. The notes ~~mature in December 2026,~~have a ten-year term, and ~~included~~include interest payable ~~semi-annually~~semiannually at 5.75% for five years. Beginning December 31, 2021, the interest became payable quarterly at three month LIBOR plus 385 basis points. ~~The Company is also indebted on $25.8~~As of March 31, 2023, we had $44.6 million of senior debt outstanding, net of deferred issuance ~~costs,~~costs. At March 31, 2023, we were in compliance with all of ~~junior subordinated debentures, which are~~the financial covenants outlined within the senior debt agreement.

On February 24, 2023, we paid off the $9.0 million balance in notes payable and other borrowings, resulting in no balance in this line item as of March 31, 2023, compared to $9.0 million as of December 31, 2022, and $18.0 million as of March 31, 2022. The balance in notes payable was related to a $20.0 million dollar term note originated with a correspondent bank in the ~~trust preferred securities issued by its statutory trust subsidiary,~~first quarter of 2020, to facilitate the redemption of our 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~~I trust preferred securities and related junior subordinated debentures, completed on June 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of 4.41% as of June 30, 2022, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017, rate reset. March 2, 2020.

Capital

As of ~~June 30, 2022,~~March 31, 2023, total stockholders’ equity was ~~$448.9~~$496.9 million, which was ~~a decrease~~an increase of ~~$53.1~~$35.7 million from ~~$502.0~~$461.1 million as of December 31, ~~2021.~~2022. This ~~decrease~~increase is primarily attributable to an increase in retained earnings of $21.4 million due to net income of $23.6 million in the first quarter of 2023, partially offset by $2.2 million of dividends paid to our common stockholders. In addition, total stockholders’ equity as of March 31, 2023 increased over December 31, 2022, due to a ~~decrease~~reduction in unrealized net losses on available-for-sale securities, which increased accumulated other comprehensive income ~~of $74.0~~by $14.0 million in the first ~~six~~three months of ~~2022~~2023, due to ~~a net decrease in unrealized gains on available-for-sale securities, net of unrealized losses on swaps, due to the increase~~changes in market interest rates, as well as a reduction to retained earnings of $4.4 million for payment of dividends to our common stockholders in the first six months of 2022. Partially offsetting this decrease was $24.3 million of net income for the six months ended June 30, 2022.rates. Total stockholders’ equity as of ~~June 30, 2022,~~March 31, 2023 increased ~~$133.0~~$30.6 million compared to ~~June 30, 2021, primarily due to the West Suburban acquisition in late 2021 and the resultant additional common stock issued, as well as~~March 31, 2022 net income year over year, less the reduction in accumulated other comprehensive income of ~~$79.7~~$41.6 million year over year.

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


	Minimum Capital		Well Capitalized								Minimum Capital		Well Capitalized
	Adequacy with		Under Prompt								Adequacy with		Under Prompt
	Capital Conservation		Corrective Action		June 30,		December 31,		June 30,		Capital Conservation		Corrective Action		March 31,		December 31,		March 31,
	Buffer, if applicable¹		Provisions²		2022		2021		2021		Buffer, if applicable¹		Provisions²		2023		2022		2022
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		9.35	%	9.46	%	12.72	%	7.00	%	N/A		9.91	%	9.67	%	9.73	%
Total risk-based capital ratio	10.50	%	N/A		12.27	%	12.55	%	17.60	%	10.50	%	N/A		12.79	%	12.52	%	12.85	%
Tier 1 risk-based capital ratio	8.50	%	N/A		9.91	%	10.06	%	13.83	%	8.50	%	N/A		10.43	%	10.20	%	10.33	%
Tier 1 leverage ratio	4.00	%	N/A		7.24	%	7.81	%	9.68	%	4.00	%	N/A		8.56	%	8.14	%	7.00	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	12.24	%	12.41	%	15.23	%	7.00	%	6.50	%	11.98	%	11.70	%	12.74	%
Total risk-based capital ratio	10.50	%	10.00	%	13.25	%	13.46	%	16.33	%	10.50	%	10.00	%	13.10	%	12.75	%	13.83	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	12.24	%	12.41	%	15.23	%	8.50	%	8.00	%	11.98	%	11.70	%	12.74	%
Tier 1 leverage ratio	4.00	%	5.00	%	8.94	%	9.58	%	10.63	%	4.00	%	5.00	%	9.83	%	9.32	%	8.61	%

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

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

As of ~~June 30, 2022,~~March 31, 2023, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the now fully phased-in capital conservation buffer requirements. In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, ~~decreased~~increased from ~~8.08%~~7.83% at December 31, ~~2021,~~2022, to ~~7.47%~~8.39% at ~~June 30, 2022.~~March 31, 2023. Our GAAP tangible common equity to tangible assets ratio was ~~5.89%~~6.83% at ~~June 30, 2022,~~March 31, 2023, compared to ~~6.54%~~6.24% as of December 31, ~~2021.~~2022. Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, ~~decreased~~increased from ~~6.59%~~6.28% at December 31, ~~2021,~~2022, to ~~5.93%~~6.87% at ~~June 30, 2022,~~March 31, 2023, primarily due to ~~a decline~~an increase in tangible common equity in the ~~second~~first quarter of ~~2022.~~2023. The ~~decline~~increase in tangible common equity was due to ~~a decrease~~an increase in retained earnings of $21.4 million and an increase in accumulated other comprehensive income of ~~$74.0~~$14.0 million primarily related to a decline in unrealized losses on available-for-sale securities stemming from the ~~increase~~changes in market interest rates. ~~The non-GAAP tangible common equity to tangible assets ratio was also negatively impacted by growth in total tangible assets in the second quarter of 2022.~~

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

June 30, 2022

December 31, 2021

March 31, 2023

December 31, 2022

Tangible common equity
GAAP

Non-GAAP

GAAP

Non-GAAP

GAAP

Non-GAAP

GAAP

Non-GAAP

(Dollars in thousands)

Total Equity
$
448,904

$
448,904

$
502,027

$
502,027

$
496,870

$
496,870

$
461,141

$
461,141

Less: Goodwill and intangible assets

101,312

101,312

102,636

102,636

99,532

99,532

100,156

100,156

Add: Limitation of exclusion of core deposit intangible (80%)

N/A

2,996

N/A

3,261

N/A

2,611

N/A

2,736

Adjusted goodwill and intangible assets

101,312

98,316

102,636

99,375

99,532

96,921

100,156

97,420

Tangible common equity
$
347,592

$
350,588

$
399,391

$
402,652

$
397,338

$
399,949

$
360,985

$
363,721

Tangible assets

Total assets
$
6,005,543

$
6,005,543

$
6,212,189

$
6,212,189

$
5,920,283

$
5,920,283

$
5,888,317

$
5,888,317

Less: Adjusted goodwill and intangible assets

101,312

98,316

102,636

99,375

99,532

96,921

100,156

97,420

Tangible assets
$
5,904,231

$
5,907,227

$
6,109,553

$
6,112,814

$
5,820,751

$
5,823,362

$
5,788,161

$
5,790,897

Common equity to total assets

7.47
%

7.47
%

8.08
%

8.08
%

8.39
%

8.39
%

7.83
%

7.83
%
Tangible common equity to tangible assets

5.89
%

5.93
%

6.54
%

6.59
%

6.83
%

6.87
%

6.24
%

6.28
%

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

Liquidity

Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. In the first quarter of 2023, we experienced strong loan growth, while deposits have trended down as clients moved balances to pursue higher yields as well as due to seasonal declines. We managed the change in our funding through borrowing from the Federal Home Loan Bank of Chicago (“FHLBC”) and sale of securities, which resulted in minimal losses and mitigated our interest rate risk profile. The bank failures in the first five months of 2023 exemplify the potentially serious results of the unexpected inability of insured depository institutions to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institution’s ability to satisfy its obligations to depositors. We seek to ensure our funding needs are met by maintaining a level of liquidity through asset and liability management. We monitor our borrowing capacity at the FHLBC as part of our liquidity management process as supervised by our Asset and Liability Committee (“ALCO”) and reviewed by our Board of Directors. In addition, ~~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 ~~June 30, 2022,~~March 31, 2023, our cash on hand liquidity totaled ~~$281.3~~$103.0 million, a decrease of ~~$470.8~~$12.2 million over cash balances held as of December 31, ~~2021.~~2022.

Net cash inflows from operating activities were ~~$27.1~~$35.0 million during the first ~~six~~three months of ~~2022,~~2023, compared with net cash inflows of ~~$24.5 million~~$494,000 in the same period of ~~2021.~~2022. Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of ~~inflows~~outflows for the first ~~six~~three months of ~~2022, and for~~2023 though to a lesser extent than the like period of ~~2021.~~2022. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the ~~six~~three months ended ~~June 30, 2022, but were a source of inflows~~March 31, 2023 and for the like period of ~~2021.~~2022. The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash outflows from investing activities were ~~$349.7~~$42.9 million in the ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023, compared to net cash ~~inflows~~outflows of ~~$47.0~~$176.5 million in the same period in ~~2021.~~2022. In the first ~~six~~three months of ~~2022,~~2023, securities transactions accounted for net ~~outflows~~inflows of ~~$149.4~~$90.0 million, and the principal change on loans accounted for net outflows of ~~$200.0~~$132.4 million. In the first ~~six~~three months of ~~2021,~~2022, securities transactions accounted for net outflows of ~~$86.3~~$199.3 million, and ~~net~~ principal on loans funded, net of paydowns, accounted for net inflows of ~~$133.4~~$21.9 million. Proceeds from sales of OREO accounted for ~~$845,000~~$300,000 and ~~$565,000~~$118,000 in investing cash inflows for the ~~six~~three months ended ~~June 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively.

Net cash outflows from financing activities in the ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023, were ~~$148.2~~$4.2 million, compared with net cash inflows of ~~$191.4~~$58.6 million in the ~~six~~three months ended ~~June 30, 2021.~~March 31, 2022. Net deposit outflows in the first ~~six~~three months of ~~2022~~2023 were ~~$122.6~~$213.1 million compared to net deposit inflows of $144.9 million in the first six months of 2021. Other short-term borrowings had no net cash inflows or outflows in the first six months of 2022 or 2021. Changes in securities sold under repurchase agreements accounted for outflows of $12.7 million and inflows of $1.6 million for the six months ended June 30, 2022 and 2021, respectively. Dividends paid on our common stock totaled $4.4 million in the six months ended June 30, 2022, compared to dividends paid of $1.7 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 repurchase of treasury stock in the first six months of 2022 resulted in outflows of $400,000, compared to cash outflows of $10.4 million in the first six months of 2021.

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

Cash and cash equivalents for the ~~six~~three months ended ~~June 30, 2022,~~March 31, 2023, totaled ~~$281.3~~$103.0 million, as compared to ~~$592.8~~$115.2 million as of ~~June 30, 2021.~~December 31, 2022 and $634.7 million as of March 31, 2022. The decrease in cash and cash equivalents for the three months ended March 31, 2023 was mainly attributable to loan growth and the payoff of the remaining balance of the term note, as well as seasonal deposit outflows, partially offset by security sales during the first quarter of 2023. The year over year decrease is again driven by loan growth, as well as increased customer use of deposits. In addition to cash and cash equivalents on hand or held as deposits with other financial institutions, we rely on funding sources from customer deposits, cash flows from securities available-for-sale and loans, and a line of credit with the FHLBC to meet potential liquidity needs. These sources of liquidity are immediately available to satisfy any funding requirements due to depositor or borrower demands through the ordinary course of our business. Additional sources of funding include a $30.0 million undrawn line of credit held by the Company with a third party financial institution, as well as unpledged securities available-for-sale.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

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

The Federal Reserve ~~raised~~has slowed its pace of rate hikes to 0.25% at the March meeting – resulting in a federal funds rate target from 4.75% to 5.00%. We believe the current market expectation is one 25 basis points rate hike at the May meeting and the federal funds target rate ~~by 0.75%~~to level off at 5.25%. The market has priced in ~~June 2022 and by another 0.75% in July 2022. The current market expectation is a federal funds target~~ rate ~~of 3.50% by~~cuts near the end of ~~the year, however the market sentiment~~2023. The Federal Reserve’s objective of shrinking its balance sheet has been ~~evolving week by week.~~ slower than planned due to slower prepayments on mortgage-backed securities from the lack of refinancing activity. The Federal Reserve also provided additional liquidity facilities to financial institutions in March 2023, as a result its balance sheet remains at $8.6 trillion.

We manage interest rate risk within guidelines established by policy ~~that~~which are intended to limit the amount of rate exposure. In practice, we seek to manage our interest rate risk exposure within our guidelines so that such exposure does not pose a material risk to our future ~~earnings.~~

Weearnings.We manage various market risks in the normal course of our operations, including credit, liquidity risk, and interest-rate risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of our business activities and operations. In addition, since we do not hold a trading portfolio, we are not exposed to significant market risk from trading activities. Our interest rate risk exposures at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are outlined in the table below.

Tableof Contents

Our net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as LIBOR and prime), and balance sheet growth or contraction. Our asset-liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our on-balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 19 of our consolidated financial statements found in in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. We seek to monitor and manage interest rate risk within approved policy guidelines and limits.

We use simulation analysis to quantify the impact of various rate scenarios on our net interest income. Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by us are incorporated into the simulation model. Earnings at risk are calculated by comparing the net interest income of a stable interest rate environment to the net interest income of a different interest rate environment in order to determine the percentage change. As of ~~June 30, 2022,~~March 31, 2023, our net interest income profile remained sensitive to earnings gains (in both dollars and percentage) should interest rates rise. WeHowever, we continue to have a ~~moderately~~ lower sensitivity profile ~~quarter-over-quarter due~~relative to ~~mild mix change~~December 31, 2022 from interest rate swaps and increase in ~~repricing characteristics of new acquired loans.~~variable rate funding.

~~Tableof Contents~~

The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 0.5%, 1.0%, and 2.0% ~~and~~, with no change in the slope of the yield curve. ~~Down rate scenarios remained not meaningful below -1.0% as certain rates would still fall below zero in those scenarios.~~

Analysis of Net Interest Income Sensitivity

Immediate Changes in Rates
(Dollars in thousands)


(2.0)
%


(1.0)
%


(0.5)
%


0.5
%


1.0
%


2.0
%
March 31, 2023

Dollar change

$
(42,566)

$
(21,044)

$
(10,322)

$
10,476

$
21,117

$
41,629

Percent change

(16.3)
%

(8.1)
%

(4.0)
%

4.0
%

8.1
%

15.9
%

December 31, 2022

Dollar change

$
(46,800)

$
(22,963)

$
(11,327)

$
11,278

$
22,593

$
44,482

Percent change

(18.2)
%

(8.9)
%

(4.4)
%

4.4
%

8.8
%

17.3
%

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
%
June 30, 2022

Dollar change

N/M

$
26,377

$
12,906

$
12,416

$
24,720

$
48,081

Percent change

N/M

(13.3)
%

(6.5)
%

6.3
%

12.5
%

24.2
%

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.

Effects of Inflation

In management’s opinion, changes in interest rates affect our financial condition to a far greater degree than changes in the inflation rate; however, we monitor both. The annual US inflation rate ~~in the U.S. accelerated~~continues to slow to 5.0% from its peak of 9.1% in June ~~2022, the highest since December 1981.~~2022. Management believes the inflation rate will ~~remain elevated~~continue to trend down in ~~the near term, which is expected~~response to ~~be favorable for the Bank.~~monetary policy. In general, we ~~anticipate that~~expect higher inflation ~~will~~to increase borrowers’ needs for credit ~~as a result of~~which drives GDP growth. ~~In addition, as~~As interest rates are expected to ~~rise~~continue to ~~combat inflation,~~move up modestly, we ~~also~~ expect our net interest margin to ~~be favorably impacted.~~correlate in this direction. The downside risks of high inflation ~~puts~~put upwards pressure to our expenses, which could impact our profits. Furthermore, higher costs of living weaken the financial condition of our borrowers which could affect our credit profile. A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in ~~today’s~~a volatile economic environment. We seek to mitigate the impact of interest rate volatility on the Bank by seeking to ensure that rate sensitive assets and rate sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree. Overall, we expect the effects of higher inflation to be beneficial to us in the near term.

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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 ~~June 30, 2022.~~March 31, 2023. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of ~~June 30, 2022,~~March 31, 2023, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended ~~June 30, 2022,~~March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

~~Tableof Contents~~

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1.A. Risk Factors

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021,~~2022, as well as cautionary statements contained in this Quarterly Report, on Form 10-Q, including those under the caption “Cautionary Note Regarding Forward-Looking Statements.”

~~There have been no material changes~~We are providing these additional risk factors to supplement the risk factors ~~previously disclosed~~contained in Item 1A. of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021~~2022 filed with the SEC on March ~~10, 2022.~~9, 2023.

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

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

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

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

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

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

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

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

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

•

an increase in our deposit and funding costs;

•

a decrease in the demand for loans, mortgage banking products and services and other products and services we offer;

•

a decrease in our deposit account balances as customers move funds to seek to obtain maximum federal deposit insurance coverage or to seek higher interest rates;

•

a decrease in the value of the collateral securing our residential or commercial real estate loans;

•

a permanent impairment of our assets; or

•

an increase in the number of customers or other counterparties who default on their loans or other obligations to us, which could result in a higher level of NPAs, net charge-offs and provision for loan losses.

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

~~Stock Repurchases~~

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable

Item 5.  Other Information

None.

6457

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Item 6. Exhibits

Exhibits:

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

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

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

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

101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021;~~2022; (ii) Consolidated Statements of Income for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~2021;~~2022; (iii) Consolidated Statements of Comprehensive (Loss) Income for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~2021;~~2022; (iv) Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~2021;~~2022; (v) Consolidated Statements of Stockholder’s Equity for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~2021;~~2022; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.

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

6558

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SIGNATURES

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

OLD SECOND BANCORP, INC.

BY:
/s/ James L. Eccher

James L. Eccher

~~President~~Chairman and Chief Executive Officer

(principal executive officer)

BY:
/s/ Bradley S. Adams

Bradley S. Adams

Executive Vice President and Chief Financial Officer

(principal financial and accounting officer)

DATE: ~~August 8, 2022~~May 9, 2023

6659


	PART I
		Page Number
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3936
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6254
Item 4.	Controls and Procedures	6356
	PART II

Item 1.	Legal Proceedings	6456
Item 1.A.	Risk Factors	6456
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6457
Item 3.	Defaults Upon Senior Securities	6457
Item 4.	Mine Safety Disclosure	6457
Item 5.	Other Information	6457
Item 6.	Exhibits	6558

	Signatures	6659


For the Six Months Ended
Balance, December 31, 2020	$	34,957	$	122,212	$	236,579	$	14,762	$	(101,423)	$	307,087
Net income						20,699						20,699
Other comprehensive loss, net of tax								(329)				(329)
Dividends declared and paid, ($0.06 per share)						(1,742)						(1,742)
Vesting of restricted stock				(2,251)						2,251		-
Stock based compensation				611								611
Purchase of treasury stock from taxes withheld on stock awards										(577)		(577)
Purchase of treasury stock from stock repurchase program										(9,811)		(9,811)
Balance, June 30, 2021	$	34,957	$	120,572	$	255,536	$	14,433	$	(109,560)	$	315,938


Balance, December 31, 2021	$	44,705	$	202,443	$	252,011	$	8,768	$	(5,900)	$	502,027
Net income						24,267						24,267
Other comprehensive loss, net of tax								(74,012)				(74,012)
Dividends declared and paid, ($0.10 per share)						(4,447)						(4,447)
Vesting of restricted stock				(2,630)						2,630		-
Stock based compensation				1,469								1,469
Purchase of treasury stock from taxes withheld on stock awards										(400)		(400)
Balance, June 30, 2022	$	44,705	$	201,282	$	271,831	$	(65,244)	$	(3,670)	$	448,904


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		2,093
Other assets		52,710
Total assets	$	2,944,088

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	$	67,727


	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


Acquired Loan Detail	As of June 30, 2022						As of December 31, 2021
	PCD		Non-PCD		Total		PCD		Non-PCD		Total
West Suburban acquired loans	$	80,224	$	1,220,474	$	1,300,698	$	102,409	$	1,418,752	$	1,521,161
ABC Bank acquired loans		2,125		47,518		49,643		4,547		64,236		68,783
Talmer Bank acquired loans		-		44,034		44,034		-		45,858		45,858
Total acquired loans net book value	$	82,349	$	1,312,026	$	1,394,375	$	106,956	$	1,528,846	$	1,635,802
Accretion recorded on acquired loans year to date	$	566	$	3,342	$	3,908	$	401	$	565	$	966

Pass		-		-		-		-		-		-		8,894		-		8,894
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		172		-		-		172
Total HELOC – purchased		-		-		-		-		-		172		8,894		-		9,066

Other
Pass		1,467		3,900		608		281		88		1,263		5,546		-		13,153
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		2		-		-		-		-		-		2
Total other		1,467		3,900		610		281		88		1,263		5,546		-		13,155

Total loans
Pass		599,822		890,491		484,011		246,971		202,748		348,231		611,676		-		3,383,950
Special Mention		8,493		22,394		44,288		57,941		-		-		4,840		-		137,956
Substandard		10,699		30,550		5,758		41,333		1,037		11,097		2,690		-		103,164
Total loans	$	619,014	$	943,435	$	534,057	$	346,245	$	203,785	$	359,328	$	619,206	$	-	$	3,625,070

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

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

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

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

Other
Pass		8,659		1,099		437		254		1,414		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


	Six Months Ended June 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		(65)		3,630
Included in other comprehensive loss		(1,562)		-
Purchases, issuances, sales, and settlements
Purchases		-		-
Issuances		-		565
Settlements		(521)		(570)
Ending balance June 30, 2022	$	13,088	$	10,722


	Six Months Ended June 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		(6)		734
Included in other comprehensive income		735		-
Purchases, issuances, sales, and settlements
Purchases		220		-
Issuances		-		963
Settlements		(277)		(654)
Ending balance June 30, 2021	$	4,991	$	5,267


Noninterest Income	Six Months Ended				YTD
(Dollars in thousands)	June 30,		June 30,		Percent
	2022		2021		Change
Wealth management	$	5,204	$	4,540	14.6
Service charges on deposits		4,402		2,416	82.2
Residential mortgage banking revenue
Secondary mortgage fees		189		594	(68.2)
MSRs mark to market gain (loss)		3,060		80	N/M
Mortgage servicing income		1,098		1,074	2.2
Net gain on sales of mortgage loans		1,233		5,616	(78.0)
Total residential mortgage banking revenue		5,580		7,364	(24.2)
Securities gains (losses) , net		(33)		2	N/M
Change in cash surrender value of BOLI		196		757	(74.1)
Card related income		5,532		3,113	77.7
Other income		1,793		1,027	74.6
Total noninterest income	$	22,674	$	19,219	18.0


							June 30, 2022
Nonperforming Loans	As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,
	2022		2021		2021		2021	2021
Commercial	$	11,600	$	13,291	$	-	(12.7)	N/M
Leases		2,005		3,754		2,526	(46.6)	(20.6)
Commercial real estate – Investor		8,324		5,694		1,915	46.2	334.7
Commercial real estate – Owner occupied		10,670		13,231		7,078	(19.4)	50.7
Construction		1,238		160		3,470	673.8	(64.3)
Residential real estate – Investor		1,092		899		840	21.5	30.0
Residential real estate – Owner occupied		3,642		5,019		3,564	(27.4)	2.2
Multifamily		907		1,573		2,723	(42.3)	(66.7)
HELOC		2,442		862		810	183.3	201.5
HELOC – Purchased		171		180		-	(5.0)	N/M
Other ¹		3		3		195	-	(98.5)
Total nonperforming loans	$	42,094	$	44,666	$	23,121	(5.8)	82.1


							June 30, 2022								March 31, 2023
OREO	Three Months Ended						Percent Change From		Three Months Ended						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,	March 31,		December 31,		March 31,		December 31,	March 31,
	2022		2021		2021		2021	2021	2023		2022		2022		2022	2022
Balance at beginning of period	$	2,374	$	1,912	$	2,163	24.2	9.8	$	1,561	$	1,561	$	2,356	-	(33.7)
Property additions, net of acquisition adjustments		-		5,678		-	(100.0)	-		291		-		87	N/M	234.5
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		646		5,220		225	(87.6)	187.1		328		-		69	N/M	375.4
Period valuation write-down		104		14		61	642.9	70.5		269		-		-	N/M	N/M
Balance at end of period	$	1,624	$	2,356	$	1,877	(31.1)	(13.5)	$	1,255	$	1,561	$	2,374	(19.6)	(47.1)



OREO Properties by Type
(Dollars in thousands)	June 30, 2022				December 31, 2021				June 30, 2021				March 31, 2023				December 31, 2022				March 31, 2022
		Amount	% of Total			Amount	% of Total			Amount	% of Total			Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	63	4	%	$	645	27	%	$	450	24	%	$	291	23	%	$	-	-	%	$	576	24	%
Lots (single family and commercial)		1,261	78	%		1,411	56	%		1,075	57	%		767	61	%		1,261	81	%		1,411	59	%
Vacant land		300	18	%		300	17	%		352	19	%		197	16	%		300	19	%		387	17	%
Total other real estate owned	$	1,624	100	%	$	2,356	100	%	$	1,877	100	%	$	1,255	100	%	$	1,561	100	%	$	2,374	100	%


88
							June 30, 2022								March 31, 2023
Deposits	As of						Percent Change From		As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,	March 31,		December 31,		March 31,		December 31,	March 31,
	2022		2021		2021		2021	2021	2023		2022		2022		2022	2022
Noninterest bearing demand	$	2,078,272	$	2,093,494	$	1,028,558	(0.7)	102.1	$	1,950,144	$	2,051,702	$	2,132,606	(4.9)	(8.6)
Savings		1,199,027		1,178,575		442,805	1.7	170.8		1,108,610		1,145,592		1,228,783	(3.2)	(9.8)
NOW accounts		609,558		587,381		531,231	3.8	14.7		608,260		609,338		607,019	(0.2)	0.2
Money market accounts		994,616		1,102,972		331,144	(9.8)	200.4		799,300		862,170		1,098,581	(7.3)	(27.2)
Certificates of deposit of less than $100,000		268,723		296,298		183,444	(9.3)	46.5		238,257		244,017		286,116	(2.4)	(16.7)
Certificates of deposit of $100,000 through $250,000		140,266		138,794		109,500	1.1	28.1		147,887		157,438		135,682	(6.1)	9.0
Certificates of deposit of more than $250,000		52,393		68,718		55,319	(23.8)	(5.3)		44,762		40,466		55,758	10.6	(19.7)
Total deposits	$	5,342,855	$	5,466,232	$	2,682,001	(2.3)	99.2	$	4,897,220	$	5,110,723	$	5,544,545	(4.2)	(11.7)


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

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



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

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

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

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

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at ~~June 30, 2022~~March 31, 2023 and December 31, ~~2021;~~2022; (ii) Consolidated Statements of Income for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~2021;~~2022; (iii) Consolidated Statements of Comprehensive (Loss) Income for the three ~~and six~~ months ended ~~June 30, 2022~~March 31, 2023 and ~~2021;~~2022; (iv) Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~2021;~~2022; (v) Consolidated Statements of Stockholder’s Equity for the ~~six~~three months ended ~~June 30, 2022~~March 31, 2023 and ~~2021;~~2022; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.

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


	OLD SECOND BANCORP, INC.


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


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


DATE: ~~August 8, 2022~~May 9, 2023