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 ~~March 31,~~September 30, 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 ☒

As of ~~May 5,~~November 3, 2023, the Registrant has ~~44,665,127~~44,697,917 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 “should,” “anticipate,” “expect,” “estimate,” “intend,” “believe,” “may,” “likely,” “will,” “forecast,” “project,” “looking forward,” “optimistic,” “hopeful,” “potential,” “progress,” “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;

●

negative economic conditions, including inflation, ~~that~~which 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;

●

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

●

risks with respect to our ability to successfully expand and integrate businesses and operations that we acquire, 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;

●

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~~continued increases in FDIC assessment which will continue to increase our cost of doing business;

●

risks associated with complex and changing regulatory environments, including, among others, with respect to data privacy, artificial intelligence, information security, climate change or other environmental, social and governance matters, and labor matters, relating to the Company’s operations;

●

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, war or terrorist activities, such as the war in Ukraine and the Middle East conflict, 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 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)

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


	(unaudited)
	September 30,		December 31,
	2023		2022
Assets
Cash and due from banks	$	55,548	$	56,632
Interest earning deposits with financial institutions		53,485		58,545
Cash and cash equivalents		109,033		115,177
Securities available-for-sale, at fair value		1,229,618		1,539,359
Federal Home Loan Bank Chicago (“FHLBC”) and Federal Reserve Bank Chicago (“FRBC”) stock		35,830		20,530
Loans held-for-sale		2,297		491
Loans		4,029,543		3,869,609
Less: allowance for credit losses on loans		51,729		49,480
Net loans		3,977,814		3,820,129
Premises and equipment, net		76,472		72,355
Other real estate owned		407		1,561
Mortgage servicing rights, at fair value		11,461		11,189
Goodwill		86,478		86,478
Core deposit intangible		11,820		13,678
Bank-owned life insurance (“BOLI”)		108,187		106,608
Deferred tax assets, net		44,051		44,750
Other assets		64,688		56,012
Total assets	$	5,758,156	$	5,888,317

Liabilities
Deposits:
Noninterest bearing demand	$	1,862,659	$	2,051,702
Interest bearing:
Savings, NOW, and money market		2,273,671		2,617,100
Time		477,990		441,921
Total deposits		4,614,320		5,110,723
Securities sold under repurchase agreements		25,894		32,156
Other short-term borrowings		435,000		90,000
Junior subordinated debentures		25,773		25,773
Subordinated debentures		59,361		59,297
Senior notes		-		44,585
Notes payable and other borrowings		-		9,000
Other liabilities		65,250		55,642
Total liabilities		5,225,598		5,427,176

Stockholders’ Equity
Common stock		44,705		44,705
Additional paid-in capital		201,553		202,276
Retained earnings		377,320		310,512
Accumulated other comprehensive loss		(90,619)		(93,124)
Treasury stock		(401)		(3,228)
Total stockholders’ equity		532,558		461,141
Total liabilities and stockholders’ equity	$	5,758,156	$	5,888,317


	March 31, 2023		December 31, 2022		September 30, 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		44,665,127		44,582,311		44,684,987		44,582,311
Treasury shares		40,023		122,839		20,163		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)

Three Months Ended March 31,


2023

2022

Interest and dividend income

Loans, including fees

$
57,210

$
36,366

Loans held-for-sale

12

57

Securities:

Taxable

10,735

5,169

Tax exempt

1,337

1,317

Dividends from FHLBC and FRBC stock

280

153

Interest bearing deposits with financial institutions

585

269

Total interest and dividend income

70,159

43,331

Interest expense

Savings, NOW, and money market deposits

1,149

397

Time deposits

664

277

Securities sold under repurchase agreements

9

11

Other short-term borrowings

2,345

-

Junior subordinated debentures

279

280

Subordinated debentures

546

546

Senior notes

994

485

Notes payable and other borrowings

87

103

Total interest expense

6,073

2,099

Net interest and dividend income

64,086

41,232

Provision for credit losses

3,501

-

Net interest and dividend income after provision for credit losses

60,585

41,232

Noninterest income

Wealth management

2,270

2,698

Service charges on deposits

2,424

2,074

Secondary mortgage fees

59

139

Mortgage servicing rights mark to market (loss) gain

(525)

2,978

Mortgage servicing income

516

519

Net gain on sales of mortgage loans

306

1,495

Securities losses, net

(1,675)

-

Change in cash surrender value of BOLI

242

124

Card related income

2,244

2,574

Other income

1,489

862

Total noninterest income

7,350

13,463

Noninterest expense

Salaries and employee benefits

22,248

19,967

Occupancy, furniture and equipment

3,475

3,699

Computer and data processing

1,774

6,268

FDIC insurance

584

410

Net teller & bill paying

502

1,907

General bank insurance

305

315

Amortization of core deposit intangible

624

665

Advertising expense

142

182

Card related expense

1,216

534

Legal fees

319

257

Consulting & management fees

790

616

Other real estate expense, net

306

(12)

Other expense

3,637

3,444

Total noninterest expense

35,922

38,252

Income before income taxes

32,013

16,443

Provision for income taxes

8,406

4,423

Net income

$
23,607

$
12,020

Basic earnings per share

$
0.53

$
0.27

Diluted earnings per share

0.52

0.27

Dividends declared per share

0.05

0.05


	(unaudited)				(unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Interest and dividend income
Loans, including fees	$	62,665	$	46,614	$	181,436	$	121,209
Loans held-for-sale		29		22		60		111
Securities:
Taxable		8,946		9,116		29,611		21,071
Tax exempt		1,333		1,332		4,007		3,946
Dividends from FHLBC and FRBC stock		597		261		1,273		677
Interest bearing deposits with financial institutions		659		663		1,887		1,714
Total interest and dividend income		74,229		58,008		218,274		148,728
Interest expense
Savings, NOW, and money market deposits		2,558		380		5,449		1,124
Time deposits		1,982		335		3,802		877
Securities sold under repurchase agreements		27		10		43		30
Other short-term borrowings		5,840		44		13,345		44
Junior subordinated debentures		245		285		805		849
Subordinated debentures		547		546		1,639		1,639
Senior notes		-		728		2,408		1,791
Notes payable and other borrowings		-		111		87		309
Total interest expense		11,199		2,439		27,578		6,663
Net interest and dividend income		63,030		55,569		190,696		142,065
Provision for credit losses		3,000		4,500		8,501		5,050
Net interest and dividend income after provision for credit losses		60,030		51,069		182,195		137,015
Noninterest income
Wealth management		2,475		2,280		7,203		7,484
Service charges on deposits		2,504		2,661		7,290		7,063
Secondary mortgage fees		66		81		201		270
Mortgage servicing rights mark to market gain (loss)		281		548		(148)		3,608
Mortgage servicing income		519		514		1,534		1,612
Net gain on sales of mortgage loans		407		449		1,111		1,682
Securities losses, net		(924)		(1)		(4,146)		(34)
Change in cash surrender value of BOLI		919		146		1,579		342
Card related income		2,606		2,653		7,540		8,194
Other income		1,024		2,165		3,286		3,949
Total noninterest income		9,877		11,496		25,450		34,170
Noninterest expense
Salaries and employee benefits		23,115		21,011		67,161		62,310
Occupancy, furniture and equipment		3,506		4,119		10,620		10,864
Computer and data processing		1,922		2,543		4,986		12,817
FDIC insurance		744		659		2,122		1,771
Net teller & bill paying		534		504		1,551		3,245
General bank insurance		300		257		911		923
Amortization of core deposit intangible		616		657		1,858		1,981
Advertising expense		93		83		338		459
Card related expense		1,347		1,453		3,785		3,044
Legal fees		97		212		699		648
Consulting & management fees		549		607		1,859		1,746
Other real estate (income) expense, net		(27)		21		181		96
Other expense		4,627		3,862		12,104		11,585
Total noninterest expense		37,423		35,988		108,175		111,489
Income before income taxes		32,484		26,577		99,470		59,696
Provision for income taxes		8,149		7,054		25,966		15,906
Net income	$	24,335	$	19,523	$	73,504	$	43,790

Basic earnings per share	$	0.55	$	0.43	$	1.65	$	0.98
Diluted earnings per share		0.54		0.43		1.62		0.97
Dividends declared per share		0.05		0.05		0.15		0.15

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(unaudited)

Three Months Ended March 31,


2023

2022

Net Income

$
23,607

$
12,020

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 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

1,602

589

Related tax expense

(456)

(165)

Other comprehensive income on cash flow hedges

1,146

424

Total other comprehensive income (loss)

14,024

(46,252)

Total comprehensive income (loss)

$
37,631

$
(34,232)


	(unaudited)				(unaudited)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net Income	$	24,335	$	19,523	$	73,504	$	43,790

Unrealized holding losses on available-for-sale securities arising during the period		(9,062)		(41,163)		(1,212)		(146,477)
Related tax benefit		2,538		11,526		344		41,014
Holding losses, after tax, on available-for-sale securities		(6,524)		(29,637)		(868)		(105,463)

Less: Reclassification adjustment for the net losses realized during the period
Net realized losses		(924)		(1)		(4,146)		(34)
Related tax benefit		260		1		1,165		10
Net realized losses after tax		(664)		-		(2,981)		(24)
Other comprehensive (loss) income on available-for-sale securities		(5,860)		(29,637)		2,113		(105,439)

Changes in fair value of derivatives used for cash flow hedges		1,975		(4,868)		560		(2,381)
Related tax (expense) benefit		(548)		1,360		(168)		663
Other comprehensive income (loss) on cash flow hedges		1,427		(3,508)		392		(1,718)

Total other comprehensive (loss) income		(4,433)		(33,145)		2,505		(107,157)
Total comprehensive income (loss)	$	19,902	$	(13,622)	$	76,009	$	(63,367)

Accumulated

Accumulated

Total

Unrealized Gain

Unrealized Gain

Accumulated Other

(Loss) on Securities

(Loss) on Derivative

Comprehensive
(unaudited)

Available-for -Sale

Instruments

Income/(Loss)
For the Three Months Ended

Balance, 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, 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)



	Accumulated		Accumulated		Total
	Unrealized Gain		Unrealized Gain		Accumulated Other
	(Loss) on Securities		(Loss) on Derivative		Comprehensive
(unaudited)	Available-for -Sale		Instruments		Income/(Loss)
For the Three Months Ended
Balance, July 1, 2022	$	(64,663)	$	(581)	$	(65,244)
Other comprehensive loss, net of tax		(29,637)		(3,508)		(33,145)
Balance, September 30, 2022	$	(94,300)	$	(4,089)	$	(98,389)

Balance, July 1, 2023	$	(80,919)	$	(5,267)	$	(86,186)
Other comprehensive (loss) income, net of tax		(5,860)		1,427		(4,433)
Balance, September 30, 2023	$	(86,779)	$	(3,840)	$	(90,619)

For the Nine Months Ended
Balance, January 1, 2022	$	11,139	$	(2,371)	$	8,768
Other comprehensive loss, net of tax		(105,439)		(1,718)		(107,157)
Balance, September 30, 2022	$	(94,300)	$	(4,089)	$	(98,389)

Balance, January 1, 2023	$	(88,892)	$	(4,232)	$	(93,124)
Other comprehensive income, net of tax		2,113		392		2,505
Balance, September 30, 2023	$	(86,779)	$	(3,840)	$	(90,619)

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


	(Unaudited)				(unaudited)
	Three Months Ended March 31,				Nine Months Ended September 30,
	2023		2022		2023		2022
Cash flows from operating activities
Net income	$	23,607	$	12,020	$	73,504	$	43,790
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount amortization on securities		799		1,809		2,506		4,259
Securities losses, net		1,675		-		4,146		34
Provision for credit losses		3,501		-		8,501		5,050
Originations of loans held-for-sale		(10,206)		(32,739)		(39,068)		(65,103)
Proceeds from sales of loans held-for-sale		9,957		30,791		37,962		69,263
Net gains on sales of mortgage loans		(306)		(1,495)		(1,111)		(1,682)
Mortgage servicing rights mark to market loss (gain)		525		(2,978)		148		(3,608)
Net accretion of discount on loans and unfunded commitments		(1,180)		(2,382)		(2,620)		(5,473)
Net change in cash surrender value of BOLI		(242)		(124)		(1,579)		(342)
Net losses (gains) on sale of other real estate owned		28		(49)
Net gains on sale of other real estate owned						(229)		(163)
Provision for other real estate owned valuation losses		269		-		269		104
Depreciation of fixed assets and amortization of leasehold improvements		1,046		1,086		3,246		3,079
Net gains on disposal and transfer of fixed assets		(434)		-		(636)		(1,872)
Amortization of core deposit intangibles		624		665		1,858		1,981
Change in current income taxes receivable		7,043		2,955		1,070		7,279
Deferred tax expense		1,442		1,458		(289)		(1,854)
Change in accrued interest receivable and other assets		2,635		893		(10,053)		1,036
Accretion of purchase accounting adjustment on time deposits		(367)		(424)		(1,004)		(1,207)
Change in accrued interest payable and other liabilities		(6,344)		(11,739)		7,991		3,314
Stock based compensation		932		747		2,709		2,176
Net cash provided by operating activities		35,004		494		87,321		60,061
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		37,718		75,650		104,471		231,483
Proceeds from sales of securities available-for-sale		66,170		-		205,738		3,303
Purchases of securities available-for-sale		(4,186)		(266,250)		(4,186)		(301,649)
Purchases of FHLBC/FRBC stock		(9,675)		(8,717)
Net purchases of FHLBC/FRBC stock						(15,300)		(6,156)
Net change in loans		(132,445)		21,900		(164,252)		(443,628)
Proceeds from sales of other real estate owned, net of participations and improvements		300		118		1,800		941
Proceeds from disposition of premises and equipment		756		1,250		4,460		12,167
Net purchases of premises and equipment		(1,560)		(487)		(8,217)		(2,670)
Net cash used in investing activities		(42,922)		(176,536)
Cash paid for acquisition, net of cash and cash equivalents acquired						-		(146)
Net cash provided by (used in) investing activities						124,514		(506,355)
Cash flows from financing activities
Net change in deposits		(213,136)		78,737		(495,399)		(183,666)
Net change in securities sold under repurchase agreements		(4,259)		(16,816)		(6,262)		(14,840)
Net change in other short-term borrowings		225,000		-		345,000		25,000
Repayment of term note		(9,000)		(1,000)		(9,000)		(3,000)
Net change in notes payable and other borrowings, excluding term note		-		(81)		-		(6,056)
Repayment of senior notes						(45,000)		-
Dividends paid on common stock		(2,237)		(2,192)		(6,713)		(6,650)
Purchase of treasury stock		(605)		-		(605)		(447)
Net cash (used in) provided by financing activities		(4,237)		58,648
Net cash used in financing activities						(217,979)		(189,659)
Net change in cash and cash equivalents		(12,155)		(117,394)		(6,144)		(635,953)
Cash and cash equivalents at beginning of period		115,177		752,107		115,177		752,107
Cash and cash equivalents at end of period	$	103,022	$	634,713	$	109,033	$	116,154

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)

Accumulated

Additional

Other

Total
(unaudited)
Common

Paid-In

Retained

Comprehensive

Treasury

Stockholders’


Stock

Capital

Earnings

Income (Loss)

Stock

Equity
For the Three Months Ended

Balance, 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

23,607

23,607
Other comprehensive income, net of tax

14,024

14,024
Dividends declared on common stock, ($0.05 per share)

(2,229)

(2,229)
Vesting of restricted stock

(3,087)

3,087

-
Stock based compensation

932

932
Purchase of treasury stock from taxes withheld on stock awards

(605)

(605)
Balance, March 31, 2023

$
44,705

$
200,121

$
331,890

$
(79,100)

$
(746)

$
496,870


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

Balance, July 1, 2022	$	44,705	$	201,282	$	271,831	$	(65,244)	$	(3,670)	$	448,904
Net income						19,523						19,523
Other comprehensive loss, net of tax								(33,145)				(33,145)
Dividends declared on common stock, ($0.05 per share)						(2,228)						(2,228)
Vesting of restricted stock				(304)						304		-
Stock based compensation				722								722
Purchase of treasury stock from taxes withheld on stock awards										(62)		(62)
Balance, September 30, 2022	$	44,705	$	201,700	$	289,126	$	(98,389)	$	(3,428)	$	433,714

Balance, July 1, 2023	$	44,705	$	200,963	$	355,219	$	(86,186)	$	(746)	$	513,955
Net income						24,335						24,335
Other comprehensive loss, net of tax								(4,433)				(4,433)
Dividends declared on common stock, ($0.05 per share)						(2,234)						(2,234)
Vesting of restricted stock				(345)						345		-
Stock based compensation				935								935
Balance, September 30, 2023	$	44,705	$	201,553	$	377,320	$	(90,619)	$	(401)	$	532,558


For the Nine Months Ended

Balance, January 1, 2022	$	44,705	$	202,443	$	252,011	$	8,768	$	(5,900)	$	502,027
Net income						43,790						43,790
Other comprehensive loss, net of tax								(107,157)				(107,157)
Dividends declared on common stock, ($0.15 per share)						(6,675)						(6,675)
Vesting of restricted stock				(2,919)						2,919		-
Stock based compensation				2,176								2,176
Purchase of treasury stock from taxes withheld on stock awards										(447)		(447)
Balance, September 30, 2022	$	44,705	$	201,700	$	289,126	$	(98,389)	$	(3,428)	$	433,714


Balance, January 1, 2023	$	44,705	$	202,276	$	310,512	$	(93,124)	$	(3,228)	$	461,141
Net income						73,504						73,504
Other comprehensive income, net of tax								2,505				2,505
Dividends declared on common stock, ($0.15 per share)						(6,696)						(6,696)
Vesting of restricted stock				(3,432)						3,432		-
Stock based compensation				2,709								2,709
Purchase of treasury stock from taxes withheld on stock awards										(605)		(605)
Balance, September 30, 2023	$	44,705	$	201,553	$	377,320	$	(90,619)	$	(401)	$	532,558

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 ~~March 31,~~September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 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, 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.

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 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 was effective for annual and interim periods beginning after December 15, 2018, and did not 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. ASU 2022-06 further defers the sunset date of 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.

The Company formed a LIBOR transition team in 2019 and 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 completed the ISDA protocol adherence for LIBOR fallback language for all commercial swaps, met with its commercial loan clients to also guide their swap fallback language adherence, and worked to revise all credit documents being issued by Old Second National Bank (the “Bank”) for new loans to ensure appropriate fallback language iswas included. We 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 were updated to handle multiple SOFR-based indexes and we ~~continue to meet regularly to plan~~planned accordingly for the transition of existing LIBOR exposures ~~prior to~~as the final LIBOR cessation date ofwas June 30, 2023. As of September 30, 2023, the Company’s LIBOR transition processes were determined to be completed and alternative index rates are in place.

Table of 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 “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method.” 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. 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 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.” 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. 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 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, 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 ~~first~~third quarter of 2023, the Company had no changes to significant accounting policies or estimates.

Subsequent Events

On ~~April 18,~~October 17, 2023, our Board of Directors declared a cash dividend of $0.05 per share payable on ~~May 8,~~November 6, 2023, to stockholders of record as of ~~April 28,~~October 27, 2023; dividends of $2.2 million are scheduled to be paid to stockholders on ~~May 8,~~November 6, 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. At closing, the Company acquired $2.94 billion of assets, $1.50 billion of loans, $1.07 billion of securities, and $2.69 billion of deposits, net of fair value adjustments. Under the terms of the merger agreement, each outstanding share of West Suburban common stock was exchanged for 42.413 shares of Company common stock, plus $271.15 of cash. This resulted in merger consideration of $295.2 million, based on the closing price of the Company’s common stock on the date of acquisition, which consisted of 15.7 million shares of the Company’s common stock and $100.7 million of cash. Goodwill of $67.9 million associated with the acquisition was recorded by the Company, which was the result of expected synergies, operational efficiencies and other factors. The acquisition of West Suburban was accounted for as a business combination, and none of the $67.9 million of goodwill recorded is expected to be deductible for income tax purposes.

Note 3 – Securities

Investment Portfolio Management

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

Table of 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 ~~$15.3~~$20.9 million at ~~March 31,~~September 30, 2023, and $5.6 million at December 31, 2022. FRBC stock was recorded at $14.9 million at ~~March 31,~~September 30, 2023 and December 31, 2022.

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


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
March 31, 2023	Cost¹		Gains		Losses		Value
September 30, 2023									Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	224,195	$	-	$	(9,461)	$	214,734	$	224,481	$	-	$	(7,704)	$	216,777
U.S. government agencies		60,952		-		(4,249)		56,703		60,197		-		(4,376)		55,821
U.S. government agencies mortgage-backed		135,504		-		(13,566)		121,938		122,653		-		(18,084)		104,569
States and political subdivisions		243,131		1,329		(10,954)		233,506		240,107		142		(20,149)		220,100
Corporate bonds		10,000		-		(238)		9,762		5,000		-		(39)		4,961
Collateralized mortgage obligations		510,992		-		(56,886)		454,106		450,470		54		(63,845)		386,679
Asset-backed securities		196,966		4		(7,217)		189,753		71,241		-		(4,325)		66,916
Collateralized loan obligations		178,903		-		(4,337)		174,566		175,995		10		(2,210)		173,795
Total securities available-for-sale	$	1,560,643	$	1,333	$	(106,908)	$	1,455,068	$	1,350,144	$	206	$	(120,732)	$	1,229,618


			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

¹ Excludes accrued interest receivable of $6.7~~7.2~~ million and $6.8~~6.8~~ million at ~~March 31,~~September 30, 2023 and December 31, 2022, respectively, that is recorded in other assets on the consolidated balance sheets.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The fair value, amortized cost and weighted average yield of debt securities at March 31, 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

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

The fair value, amortized cost and weighted average yield of debt securities at September 30, 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	$	49,989	0.64	%	$	49,804
Due after one year through five years		253,955	1.17			241,430
Due after five years through ten years		60,975	2.92			53,882
Due after ten years		164,866	3.11			152,543
		529,785	1.92			497,659
Mortgage-backed and collateralized mortgage obligations		573,123	2.29			491,248
Asset-backed securities		71,241	4.24			66,916
Collateralized loan obligations		175,995	7.21			173,795
Total securities available-for-sale	$	1,350,144	3.00	%	$	1,229,618

At September 30, 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 September 30, 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
September 30, 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	$	7,704	$	216,777	5	$	7,704	$	216,777
U.S. government agencies	-		-		-	9		4,376		55,821	9		4,376		55,821
U.S. government agencies mortgage-backed	-		-		-	128		18,084		104,569	128		18,084		104,569
States and political subdivisions	44		3,232		110,511	30		16,917		104,582	74		20,149		215,093
Corporate bonds	-		-		-	1		39		4,961	1		39		4,961
Collateralized mortgage obligations	2		14		756	146		63,831		379,159	148		63,845		379,915
Asset-backed securities	-		-		-	19		4,325		66,916	19		4,325		66,916
Collateralized loan obligations	-		-		-	33		2,210		170,803	33		2,210		170,803
Total securities available-for-sale	46	$	3,246	$	111,267	371	$	117,486	$	1,103,588	417	$	120,732	$	1,214,855


	Less than 12 months					12 months or more
December 31, 2022	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized			Fair	Number of	Unrealized			Fair	Number of	Unrealized			Fair
Securities available-for-sale	Securities	Losses			Value	Securities	Losses			Value	Securities	Losses			Value
U.S. Treasuries	1	$	1,025	$	24,121	4	$	10,900	$	188,008	5	$	11,925	$	212,129
U.S. government agencies	-		-		-	9		5,130		56,048	9		5,130		56,048
U.S. government agencies mortgage-backed	15		975		11,369	117		14,623		113,621	132		15,598		124,990
States and political subdivisions	45		5,800		128,770	15		8,434		48,877	60		14,234		177,647
Corporate bonds	-		-		-	2		378		9,622	2		378		9,622
Collateralized mortgage obligations	80		12,895		180,624	120		49,674		348,880	200		62,569		529,504
Asset-backed securities	30		3,030		121,915	21		5,436		79,659	51		8,466		201,574
Collateralized loan obligations	23		3,579		112,772	11		1,951		61,974	34		5,530		174,746
Total securities available-for-sale	194	$	27,304	$	579,571	299	$	96,526	$	906,689	493	$	123,830	$	1,486,260

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. The portfolio continues to consist of a mix of ~~fixed-~~fixed and floating-rate, high quality securities, largely rated AA (or better), displaying an overall effective duration of approximately ~~3.2~~3.0 years. No credit losses were determined to be present as of ~~March 31,~~September 30, 2023, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the ~~first~~third quarter of 2023.

Three Months Ended

March 31,

Securities available-for-sale

2023

2022


Proceeds from sales of securities

$
66,170

$
-

Gross realized losses on securities

(1,675)

-

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.~~

1312

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following table presents net realized losses on securities available-for-sale for three and nine months ended:


		Three Months Ended					Nine Months Ended
		September 30,					September 30,
Securities available-for-sale	2023			2022		2023			2022
Proceeds from sales of securities	$	65,572		$	-	$	205,738		$	3,303
Gross realized losses on securities		(924)			(1)		(4,146)			(34)
Net realized losses	$	(924)		$	(1)	$	(4,146)		$	(34)
Income tax benefit on net realized losses	$	260		$	1	$	1,165		$	10
Effective tax rate applied		28.1	%		N/M		28.1	%		29.4	%

N/M - Not meaningful

As of September 30, 2023, securities valued at $808.7 million were pledged for borrowings, and for other purposes, an increase from $547.8 million of securities pledged at year-end 2022.

Note 4 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:


	March 31, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Commercial ¹	$	851,737	$	840,964
Commercial					$	834,877	$	840,964
Leases		285,831		277,385		354,827		277,385
Commercial real estate – investor		1,056,787		987,635		1,047,122		987,635
Commercial real estate – owner occupied		870,115		854,879		809,050		854,879
Construction		174,683		180,535		202,546		180,535
Residential real estate – investor		56,720		57,353		53,762		57,353
Residential real estate – owner occupied		217,855		219,718		227,446		219,718
Multifamily		358,991		323,691		372,020		323,691
HELOC		104,941		109,202		102,055		109,202
Other ²		25,694		18,247
Other ¹						25,838		18,247
Total loans		4,003,354		3,869,609		4,029,543		3,869,609
Allowance for credit losses on loans		(53,392)		(49,480)		(51,729)		(49,480)
Net loans ³	$	3,949,962	$	3,820,129
Net loans ²					$	3,977,814	$	3,820,129

¹ ~~Includes~~ ~~$1.3~~ ~~million and~~ ~~$1.6~~ ~~million of Paycheck Protection Program (“PPP”) loans at March 31, 2023 and December 31, 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.

³² Excludes accrued interest receivable of $~~17.0~~19.2 million and $15.9 million at ~~March 31,~~September 30, 2023 and December 31, 2022, respectively, that is recorded in other assets on the consolidated balance 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 ~~70.9%~~69.8% and 70.6% of the portfolio at ~~March 31,~~September 30, 2023, and December 31, 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 nine months ended ~~March 31,~~September 30, 2023 and 2022:



			Provision for										Provision for
	Beginning		(Release of)						Ending		Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance		Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three months ended March 31, 2023
Three months ended September 30, 2023
Commercial	$	11,968	$	(581)	$	27	$	151	$	11,511	$	11,532	$	(1,025)	$	20	$	12	$	10,499
Leases		2,865		774		882		9		2,766		2,690		(193)		-		95		2,592
Commercial real estate – investor		10,674		4,569		-		17		15,260		20,031		4,726		6,774		20		18,003
Commercial real estate – owner occupied		15,001		573		-		2		15,576		12,562		(154)		35		12		12,385
Construction		1,546		(501)		-		-		1,045		1,179		(39)		-		100		1,240
Residential real estate – investor		768		(41)		-		19		746		743		(55)		-		3		691
Residential real estate – owner occupied		2,046		(334)		-		10		1,722		1,868		(36)		-		25		1,857
Multifamily		2,453		212		-		-		2,665		2,737		(165)		-		-		2,572
HELOC		1,806		(47)		-		29		1,788		1,694		(77)		-		35		1,652
Other		353		28		113		45		313		278		30		107		37		238
Total											$	55,314	$	3,012	$	6,936	$	339	$	51,729
	$	49,480	$	4,652	$	1,022	$	282	$	53,392



			Provision for
	Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Nine months ended September 30, 2023
Commercial	$	11,968	$	(1,287)	$	427	$	245	$	10,499
Leases		2,865		498		882		111		2,592
Commercial real estate – investor		10,674		14,117		6,845		57		18,003
Commercial real estate – owner occupied		15,001		(2,397)		236		17		12,385
Construction		1,546		(406)		-		100		1,240
Residential real estate – investor		768		(104)		-		27		691
Residential real estate – owner occupied		2,046		(260)		-		71		1,857
Multifamily		2,453		119		-		-		2,572
HELOC		1,806		(242)		-		88		1,652
Other		353		53		301		133		238
Total	$	49,480	$	10,091	$	8,691	$	849	$	51,729



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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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



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

At September 30, 2023, our allowance for credit losses (“ACL”) on loans totaled $51.7 million, and our ACL on unfunded commitments, included in other liabilities, totaled $2.9 million including related purchase accounting adjustments. During the first nine months of 2023, we recorded net provision expense of $8.5 million based on historical loss rate updates driven by higher charge offs in commercial real estate-investor, loan growth of approximately $160.0 million, downward risk rating migration including an increased reserve on loans individually analyzed, and our assessment of estimated future credit losses. The ACL on loans excludes $2.7 million, $4.3 million and $4.4 million of allowance for unfunded commitments as of September 30, 2023, December 31, 2022 and September 30, 2022, respectively, recorded within Other Liabilities. The total ACL on unfunded commitments listed as of September 30, 2023, December 31, 2022, and September 30, 2022 excludes the purchase accounting adjustment of $149,000, $819,000, and $1.0 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.

Generally, the Bank considers a loan to be collateral dependent when, based on current information and events, it is probable that foreclosure will be initiated. Additionally, the Bank will review all loans meeting the criteria for individual analysis, to determine if repayment or satisfaction of the loan is expected through the sale of collateral. This will generally be the case for credits with high loan-to-values. Exceptions to this policy would include loans with guarantors that have the means and willingness to support the obligation. Non-accruing loans with an outstanding balance of $500,000 or more are assessed on an individual loan level basis. When a financial asset is deemed collateral-dependent, the level of credit loss is measured by the difference between amortized cost of the financial asset and the fair value of collateral adjusted for estimated cost to sell. The Company had $55.8 million and $50.5 million of collateral dependent loans secured by real estate or business assets as of September 30, 2023, and December 31, 2022, respectively.

The following tables present the collateral dependent loans and the related ACL allocated by segment of loans as of September 30, 2023 and December 31, 2022:


			Accounts								ACL
September 30, 2023	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	849	$	679	$	-	$	-	$	1,528	$	2
Leases		-		-		339		-		339		339
Commercial real estate – investor		26,724		-		-		-		26,724		4,848
Commercial real estate – owner occupied		17,636		-		-		-		17,636		4,201
Construction		7,206		-		-		-		7,206		-
Residential real estate – investor		32		-		-		-		32		-
Residential real estate – owner occupied		1,679		-		-		-		1,679		-
Multifamily		568		-		-		-		568		-
HELOC		39		-		-		-		39		-
Total	$	54,733	$	679	$	339	$	-	$	55,751	$	9,390

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 $3.2 million, $4.3 million and $4.2 million of allowance for unfunded commitments as of March 31, 2023, December 31, 2022 and March 31, 2022, respectively, recorded within Other Liabilities. The total ACL on unfunded commitments listed as of March 31, 2023, December 31, 2022, and March 31, 2022 excludes the purchase accounting adjustment of $596,000, $819,000 and $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 March 31, 2023 and December 31, 2022:~~

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

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

			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

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
March 31, 2023	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
September 30, 2023															Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	2,640	$	-	$	1,422	$	4,062	$	847,675	$	851,737	$	460	$	1,829	$	1,874	$	1,052	$	4,755	$	830,122	$	834,877	$	979
Leases		789		51		-		840		284,991		285,831		-		2,502		-		157		2,659		352,168		354,827		-
Commercial real estate – investor		5,395		22,966		2,018		30,379		1,026,408		1,056,787		-		2,205		16,728		16,116		35,049		1,012,073		1,047,122		-
Commercial real estate – owner occupied		2,914		9,162		1,833		13,909		856,206		870,115		-		15,232		120		1,879		17,231		791,819		809,050		-
Construction		873		-		116		989		173,694		174,683		-		118		200		7,206		7,524		195,022		202,546		-
Residential real estate – investor		322		-		1,233		1,555		55,165		56,720		-		252		-		277		529		53,233		53,762		140
Residential real estate – owner occupied		3,044		177		2,622		5,843		212,012		217,855		420		735		419		1,820		2,974		224,472		227,446		-
Multifamily		217		-		1,662		1,879		357,112		358,991		-		713		127		-		840		371,180		372,020		-
HELOC		303		182		409		894		104,047		104,941		86		646		88		259		993		101,062		102,055		90
Other		558		1		-		559		25,135		25,694		-		-		-		-		-		25,838		25,838		-
Total	$	17,055	$	32,539	$	11,315	$	60,909	$	3,942,445	$	4,003,354	$	966	$	24,232	$	19,556	$	28,766	$	72,554	$	3,956,989	$	4,029,543	$	1,209


													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 March 31, 2023, and December 31, 2022:~~

Nonaccrual loan detail

March 31, 2023

With no ACL

December 31, 2022

With no ACL
Commercial

$
2,351

$
1,892

$
7,189

$
6,598
Leases

856

173

1,876

-
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

241

241

251

-
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

2,495

2,495

2,538

1,322
HELOC

2,355

2,177

2,109

180
Other

2

2

2

-
Total

$
63,561

$
27,747

$
31,602

$
18,404

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

~~Credit Quality Indicators~~

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The table presents all nonaccrual loans as of September 30, 2023, and December 31, 2022:


Nonaccrual loan detail	September 30, 2023		With no ACL		December 31, 2022		With no ACL
Commercial	$	2,167	$	2,167	$	7,189	$	6,598
Leases		377		38		1,876		-
Commercial real estate – investor		26,724		11,786		4,346		4,244
Commercial real estate – owner occupied		18,290		3,833		8,050		3,813
Construction		7,206		7,206		251		-
Residential real estate – investor		1,362		1,362		1,528		675
Residential real estate – owner occupied		3,627		3,627		3,713		1,572
Multifamily		1,141		1,141		2,538		1,322
HELOC		1,222		1,222		2,109		180
Other		-		-		2		-
Total	$	62,116	$	32,382	$	31,602	$	18,404

The Company recognized $189,000 and $304,000 of interest on nonaccrual loans during the three months and nine months ended September 30, 2023, respectively.

Credit Quality Indicators

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

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

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

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

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

~~Credit quality indicators by loan segment and loan origination date at 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

-

-

-

-

-

-

-

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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, 2022,~~September 30, 2023 were as follows:


	2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total		2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial
Pass	$	225,056	$	70,608	$	21,597	$	12,742	$	6,957	$	2,651	$	447,821	$	-	$	787,432	$	215,492	$	187,682	$	41,464	$	13,359	$	10,676	$	4,315	$	311,562	$	1,379	$	785,929
Special Mention		1,875		272		1,182		2,432		-		-		21,286		-		27,047		-		500		244		-		51		-		29,855		-		30,650
Substandard		4,958		2,447		2,981		12,176		7		-		3,916		-		26,485		-		79		1,381		2,735		9,689		-		4,414		-		18,298
Total commercial		231,889		73,327		25,760		27,350		6,964		2,651		473,023		-		840,964		215,492		188,261		43,089		16,094		20,416		4,315		345,831		1,379		834,877

Leases
Pass		161,379		64,203	$	26,995		17,653		4,449		830		-		-		275,509		151,691		125,092	$	47,808		17,522		9,545		2,595		-		-		354,253
Special Mention		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Substandard		1,606		-		-		270		-		-		-		-		1,876		-		339		-		-		235		-		-		-		574
Total leases		162,985		64,203		26,995		17,923		4,449		830		-		-		277,385		151,691		125,431		47,808		17,522		9,780		2,595		-		-		354,827

Commercial real estate – investor
Pass																				176,779		341,597		203,972		111,333		59,770		67,264		8,148		-		968,863
Special Mention																				-		12,866		11,267		-		-		-		-		-		24,133
Substandard																				10,964		11,787		1,950		7,748		9,278		-		12,399		-		54,126
Total commercial real estate – investor																				187,743		366,250		217,189		119,081		69,048		67,264		20,547		-		1,047,122

Commercial real estate – owner occupied
Pass																				105,963		139,223		181,543		78,750		54,909		101,396		33,258		-		695,042
Special Mention																				1,758		11,722		18,180		26,480		222		354		-		-		58,716
Substandard																				-		14,994		19,926		1,142		18,811		419		-		-		55,292
Total commercial real estate – owner occupied																				107,721		165,939		219,649		106,372		73,942		102,169		33,258		-		809,050

Construction
Pass																				26,529		75,698		56,217		19,531		1,837		1,155		3,699		-		184,666
Special Mention																				305		312		-		-		-		-		-		-		617
Substandard																				-		7,206		-		10,057		-		-		-		-		17,263
Total construction																				26,834		83,216		56,217		29,588		1,837		1,155		3,699		-		202,546

Residential real estate – investor
Pass																				3,310		14,560		8,954		6,317		7,116		10,519		1,417		-		52,193
Special Mention																				-		-		67		-		-		-		-		-		67
Substandard																				-		398		-		-		418		686		-		-		1,502
Total residential real estate – investor																				3,310		14,958		9,021		6,317		7,534		11,205		1,417		-		53,762

Residential real estate – owner occupied
Pass																				26,371		41,915		41,439		26,544		15,147		71,637		766		-		223,819
Special Mention																				-		-		-		-		-		-		-		-		-
Substandard																				-		122		-		90		686		2,729		-		-		3,627
Total residential real estate – owner occupied																				26,371		42,037		41,439		26,634		15,833		74,366		766		-		227,446

Multifamily
Pass																				69,947		79,689		101,878		57,792		12,391		42,603		382		-		364,682
Special Mention																				-		170		3,505		326		1,656		540		-		-		6,197
Substandard																				-		887		-		-		-		254		-		-		1,141
Total multifamily																				69,947		80,746		105,383		58,118		14,047		43,397		382		-		372,020

HELOC
Pass																				1,765		2,760		211		1,443		1,631		2,494		90,317		-		100,621
Special Mention																				-		-		-		-		-		-		-		-		-
Substandard																				39		27		1		1		-		106		1,260		-		1,434
Total HELOC																				1,804		2,787		212		1,444		1,631		2,600		91,577		-		102,055

Other
Pass																				4,461		2,068		1,415		223		151		88		17,432				25,838
Special Mention																				-		-		-		-		-		-		-				-
Substandard																				-		-		-		-		-		-		-				-
Total other																				4,461		2,068		1,415		223		151		88		17,432		-		25,838

Total loans
Pass																				782,308		1,010,284		684,901		332,814		173,173		304,066		466,981		1,379		3,755,906
Special Mention																				2,063		25,570		33,263		26,806		1,929		894		29,855		-		120,380
Substandard																				11,003		35,839		23,258		21,773		39,117		4,194		18,073		-		153,257
Total loans																			$	795,374	$	1,071,693	$	741,422	$	381,393	$	214,219	$	309,154	$	514,909	$	1,379	$	4,029,543

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

2022

2021

2020

2019

2018

Prior

Revolving Loans

Revolving Loans Converted To Term Loans

Total
Commercial 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 $547,000 and $600,000 in residential real estate loans in the process of foreclosure as of March 31, 2023, and December 31, 2022, respectively.~~

~~Tableof 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 was no TDR activity for the three months ended March 31, 2022. TDRs were classified as being in default on a case-by-case basis when they failed to be in compliance with the modified terms. There was no TDR default activity for the period ended March 31, 2022, for loans that were restructured within the prior 12-month period.

~~Note 5 – Other Real Estate Owned~~

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

Three Months Ended


March 31,

Other real estate owned

2023

2022

Balance at beginning of period

$
1,561

$
2,356

Property additions, net of acquisition adjustments

291

87

Less:

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

328

69

Period valuation write-down

269

-

Balance at end of period

$
1,255

$
2,374

~~Activity in the valuation allowance was~~Credit quality indicators by loan segment and loan origination date at December 31, 2022, were as follows:


	Three Months Ended
	March 31,				2022		2021		2020		2019		2018		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial
Pass					$	225,056	$	70,608	$	21,597	$	12,742	$	6,957	$	2,651	$	447,821	$	-	$	787,432
Special Mention						1,875		272		1,182		2,432		-		-		21,286		-		27,047
Substandard						4,958		2,447		2,981		12,176		7		-		3,916		-		26,485
Total commercial						231,889		73,327		25,760		27,350		6,964		2,651		473,023		-		840,964
	2023		2022
Balance at beginning of period	$	856	$	1,179
Provision for unrealized losses		269		-
Reductions taken on sales		(272)		-
Balance at end of period	$	853	$	1,179
Leases
Pass						161,379		64,203	$	26,995		17,653		4,449		830		-		-		275,509
Special Mention						-		-		-		-		-		-		-		-		-
Substandard						1,606		-		-		270		-		-		-		-		1,876
Total leases						162,985		64,203		26,995		17,923		4,449		830		-		-		277,385

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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

~~Expenses related to OREO, net~~The gross charge-offs activity by loan type and year of ~~lease revenue includes:~~origination for the nine months ended September 30, 2023 were as follows:

Three Months Ended

March 31,



2023

2022

Loss (Gain) on sales, net

$
28

$
(49)

Provision for unrealized losses

269

-

Operating expenses

9

37

Less:

Lease revenue

-

-

Net OREO expense

$
306

$
(12)


Current period gross charge-offs	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
Commercial	$	-		-		17		364		-		46	$	-	$	-	$	427
Leases		-		870		-		-		12		-		-		-		882
Commercial real estate – investor		-		4,121		71		2,653		-		-		-		-		6,845
Commercial real estate – owner occupied		-		22		178		4		-		32		-		-		236
Construction		-		-		-		-		-		-		-		-		-
Residential real estate – investor		-		-		-		-		-		-		-		-		-
Residential real estate – owner occupied		-		-		-		-		-		-		-		-		-
Multifamily		-		-		-		-		-		-		-		-		-
HELOC		-		-		-		-		-		-		-		-		-
Other		-		3		26		7		-		265		-		-		301
Total	$	-	$	5,016	$	292	$	3,028	$	12	$	343		-		-	$	8,691

The Company had $176,000 and $600,000 in residential real estate loans in the process of foreclosure as of September 30, 2023 and December 31, 2022, respectively.

As of January 1, 2023, the Company prospectively adopted ASU 2022-02, Topic 326 “Troubled Debt Restructuring (“TDRs”) and Vintage Disclosures”, see Note 1. Fifteen loans, totaling $43.0 million in aggregate, were modified which were experiencing financial difficulty during the nine-month period ending September 30, 2023. There were no TDR loan modifications for the three months ended September 30, 2022, and there were two TDR loan modifications for an aggregate of $39,000 for the nine months ended September 30, 2022. TDRs were classified as being in default on a case-by-case basis when they failed to be in compliance with the modified terms. There were no financial difficulty loans modified in payment default as of September 30, 2023 and was no TDR default activity for the period ended September 30, 2023, for loans that were restructured within the prior 12-month period.

The following table presents the amortized costs basis of loans at September 30, 2023 that were both experiencing financial difficulty and modified during the period ended September 30, 2023 by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to amortized costs basis of each class of financing receivable is also presented below.


September 30, 2023	Term Extension		Combination - Term Extension and Interest Rate Reduction		Combination - Term Extension and Payment Delay		Total Loans Modified		% of Total Loan Segment Modified to Total Loan Segment
Commercial	$	1,713	$	979	$	-	$	2,692	0.3%
Commercial real estate – investor		12,755		-		10,608		23,363	2.2%
Commercial real estate – owner occupied		16,218		-		-		16,218	2.0%
Residential real estate – owner occupied		437		-		-		437	0.2%
Multifamily		254		-		-		254	0.1%
HELOC		39		-		-		39	0.0%
Total	$	31,416	$	979	$	10,608	$	43,003	1.1%

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The Company closely monitors the performance of loan modifications to borrowers experiencing financial difficulty. The following table presents the performance of loans that have been modified as of September 30, 2023.


September 30, 2023	30-59 days past due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loan Modified
Commercial	$	-	$	-	$	979	$	979	$	1,713	$	2,692
Commercial real estate – investor		-		-		-		-		23,363		23,363
Commercial real estate – owner occupied		-		-		-		-		16,218		16,218
Residential real estate – owner occupied		-		-		-		-		437		437
Multifamily		-		-		-		-		254		254
HELOC		-		-		-		-		39		39
Total	$	-	$	-	$	979	$	979	$	42,024	$	43,003

The following table summarizes the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the period ended September 30, 2023. The Company had two Commercial real estate – investor loans that had a payment modification, one changed to a single payment at maturity and the other changed from principal and interest to interest only until maturity.


September 30, 2023	Weighted-Average Term Extension (In Months)		Weighted-Average Interest Rate Change			Weighted-Average Delay of Payment (In Months)
Commercial		6.74		5.00	%		-
Commercial real estate – investor		9.81		-			7.17
Commercial real estate – owner occupied		14.00		-			-
Residential real estate – owner occupied		2.00		-			-
Multifamily		16.00		-			-
HELOC		24.00		-			-
Total		11.17		5.00	%		7.17

Note 65 – Deposits

Major classifications of deposits were as follows:


	March 31, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Noninterest bearing demand	$	1,950,144	$	2,051,702	$	1,862,659	$	2,051,702
Savings		1,108,610		1,145,592		1,003,498		1,145,592
NOW accounts		608,260		609,338		567,997		609,338
Money market accounts		799,300		862,170		702,176		862,170
Certificates of deposit of less than $100,000		238,257		244,017		248,272		244,017
Certificates of deposit of $100,000 through $250,000		147,887		157,438		162,901		157,438
Certificates of deposit of more than $250,000		44,762		40,466		66,817		40,466
Total deposits	$	4,897,220	$	5,110,723	$	4,614,320	$	5,110,723

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 76 – Borrowings

The following table is a summary of borrowings as of ~~March 31,~~September 30, 2023 and December 31, 2022. Junior subordinated debentures are discussed in more detail in Note 8.7.


	March 31, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Securities sold under repurchase agreements	$	27,897	$	32,156	$	25,894	$	32,156
Other short-term borrowings		315,000		90,000		435,000		90,000
Junior subordinated debentures		25,773		25,773
Junior subordinated debentures¹						25,773		25,773
Subordinated debentures		59,318		59,297		59,361		59,297
Senior notes		44,611		44,585		-		44,585
Notes payable and other borrowings		-		9,000		-		9,000
Total borrowings	$	472,599	$	260,811	$	546,028	$	260,811

¹See Note 7: Junior Subordinated Debentures

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 ~~$27.9~~$25.9 million at ~~March 31,~~September 30, 2023, and $32.2 million at December 31, 2022. The fair value of the pledged collateral was ~~$65.9~~$43.8 million at ~~March 31,~~September 30, 2023, and $71.4 million at December 31, 2022. At ~~March 31,~~September 30, 2023, there were no customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC. Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans. As of ~~March 31,~~September 30, 2023, the Bank had ~~$315.0~~$435.0 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, 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. FHLBC stock held at ~~March 31,~~September 30, 2023 was valued at ~~$15.3~~$20.9 million, and any potential FHLBC advances were collateralized by loans and securities with a principal balance of ~~$1.50~~$1.47 billion, which carried a FHLBC-calculated combined collateral value of ~~$1.06~~$1.02 billion. The Company had excess collateral of ~~$743.6~~$581.7 million available to secure borrowings at ~~March 31,~~September 30, 2023.

In the second quarter of 2021, we 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 used the net proceeds from the offering for general corporate 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~~three-month Term SOFR (as defined by 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 ~~March 31,~~September 30, 2023 and December 31, 2022, we had $59.4 million and $59.3 million of subordinated debentures outstanding, net of deferred issuance ~~costs.~~costs, respectively.

The Company ~~also had $44.6 million of~~issued 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~~included 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,~~June 30, 2023 and December 31, 2022 was ~~9.01%~~9.39% and 8.62%, respectively. The notes ~~are~~were 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. AsOn June 30, 2023, we redeemed all of ~~March 31, 2023, and December 31, 2022, unamortized~~the $45.0 million senior notes. Upon redemption, the related deferred debt issuance costs ~~related to the senior notes were $389,000 and $415,000, respectively, and are included~~of $362,000 was also recorded 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~~resulting in an effective cost of this debt issuance of 12.85% for the ~~ten-year term~~second quarter of ~~the notes and are included in the Consolidated Statements of Income.~~2023.

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~~payable and ~~Other Borrowings~~other borrowings on the Consolidated Balance Sheets, and the remaining $9.0 million balance of the note was paid off ~~as of~~on 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.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 87 – 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.~~SOFR. Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of ~~4.39%~~3.77% and ~~4.41%~~4.39% for the quarters ended ~~March 31,~~September 30, 2023 and ~~March 31,~~September 30, 2022, 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 Sheets, and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of ~~March 31,~~September 30, 2023 and December 31, 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 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 98 – 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~~2019 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 ~~March 31,~~September 30, 2023, ~~970,271~~975,712 shares remained available for issuance under the 2019 Plan. The Company has granted only restricted stock units under the 2019 Equity Plan.

~~Tableof Contents~~

~~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~~equity awards 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.

There were 230,399 and 251,055 restricted stock units issued under the 2019 Plan during the three months ended March 31, 2023 and March 31, 2022, 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 $948,000 in the first three months of 2023 and $795,000 for the first three months of 2022.

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

March 31, 2023

Weighted

Restricted

Average

Stock Shares

Grant Date

and Units

Fair Value
Unvested at January 1

649,210

$
12.84
Granted

230,399

17.21
Vested

(117,674)

12.26
Unvested at March 31

761,935

$
14.25

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

There were 240,149 and 268,160 restricted stock units issued under the 2019 Plan during the nine months ended September 30, 2023 and September 30, 2022, 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 $2.7 million for the nine months ended September 30, 2023 and $2.3 million for the nine months ended September 30, 2022.

A summary of changes in the Company’s unvested restricted awards for the nine months ended September 30, 2023, is as follows:


	September 30, 2023
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	649,210	$	12.84
Granted	240,149		17.02
Vested	(137,534)		12.53
Forfeited	(15,191)		14.25
Unvested at September 30	736,634	$	14.23

Total unrecognized compensation cost of restricted awards was $5.0 million as of September 30, 2023, which is expected to be recognized over a weighted-average period of 1.87 years.

Note 109 – Earnings Per Share

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


		Three Months Ended March 31,					Three Months Ended September 30,				Nine Months Ended September 30,
		2023		2022			2023		2022		2023		2022
Basic earnings per share:
Weighted-average common shares outstanding			44,619,118		44,461,045			44,675,489		44,565,626		44,653,451		44,509,072
Net income		$	23,607	$	12,020		$	24,335	$	19,523	$	73,504	$	43,790
Basic earnings per share		$	0.53	$	0.27		$	0.55	$	0.43	$	1.65	$	0.98

Diluted earnings per share:
Weighted-average common shares outstanding			44,619,118		44,461,045			44,675,489		44,565,626		44,653,451		44,509,072
Dilutive effect of unvested restricted awards ¹			697,480		700,670			752,920		655,915		736,767		698,920
Diluted average common shares outstanding			45,316,598		45,161,715			45,428,409		45,221,541		45,390,218		45,207,992

Net Income		$	23,607	$	12,020		$	24,335	$	19,523	$	73,504	$	43,790
Diluted earnings per share		$	0.52	$	0.27		$	0.54	$	0.43	$	1.62	$	0.97


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.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 1110 – Regulatory & Capital Matters

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

At ~~March 31,~~September 30, 2023, the Bank’s Tier 1 capital leverage ratio was ~~9.83%~~10.43%, an increase of 51111 basis points from December 31, 2022, and is above the 8.00% objective. The Bank’s total capital ratio was ~~13.10%~~13.57%, an increase of 3582 basis points from December 31, 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 ~~March 31,~~September 30, 2023 and December 31, 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, 2022, under the heading “Supervision and Regulation.”

At ~~March 31,~~September 30, 2023 and December 31, 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
March 31, 2023
September 30, 2023
Common equity tier 1 capital to risk weighted assets
Consolidated	$	478,610	9.91	%	$	338,070	7.00	%		N/A	N/A		$	530,368	11.00	%	$	337,507	7.00	%		N/A	N/A
Old Second Bank		577,986	11.98			337,721	7.00		$	313,598	6.50	%		601,999	12.49			337,389	7.00		$	313,290	6.50	%
Total capital to risk weighted assets
Consolidated		617,527	12.79			506,961	10.50			N/A	N/A			667,182	13.84			506,171	10.50			N/A	N/A
Old Second Bank		631,903	13.10			506,487	10.50			482,369	10.00			653,813	13.57			505,898	10.50			481,808	10.00
Tier 1 capital to risk weighted assets
Consolidated		503,610	10.43			410,420	8.50			N/A	N/A			555,368	11.52			409,777	8.50			N/A	N/A
Old Second Bank		577,986	11.98			410,090	8.50			385,967	8.00			601,999	12.49			409,687	8.50			385,588	8.00
Tier 1 capital to average assets
Consolidated		503,610	8.56			235,332	4.00			N/A	N/A			555,368	9.62			230,922	4.00			N/A	N/A
Old Second Bank		577,986	9.83			235,193	4.00			293,991	5.00			601,999	10.43			230,872	4.00			288,590	5.00

December 31, 2022
Common equity tier 1 capital to risk weighted assets
Consolidated	$	457,206	9.67	%	$	330,966	7.00	%		N/A	N/A		$	457,206	9.67	%	$	330,966	7.00	%		N/A	N/A
Old Second Bank		552,404	11.70			330,498	7.00		$	306,891	6.50	%		552,404	11.70			330,498	7.00		$	306,891	6.50	%
Total capital to risk weighted assets
Consolidated		592,039	12.52			496,518	10.50			N/A	N/A			592,039	12.52			496,518	10.50			N/A	N/A
Old Second Bank		602,237	12.75			495,960	10.50			472,343	10.00			602,237	12.75			495,960	10.50			472,343	10.00
Tier 1 capital to risk weighted assets
Consolidated		482,206	10.20			401,838	8.50			N/A	N/A			482,206	10.20			401,838	8.50			N/A	N/A
Old Second Bank		552,404	11.70			401,319	8.50			377,712	8.00			552,404	11.70			401,319	8.50			377,712	8.00
Tier 1 capital to average assets
Consolidated		482,206	8.14			236,956	4.00			N/A	N/A			482,206	8.14			236,956	4.00			N/A	N/A
Old Second Bank		552,404	9.32			237,083	4.00			296,354	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 ~~March 31,~~September 30, 2023, the capital measures of the Company exclude $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 ~~March 31,~~September 30, 2023, the Bank had capacity to pay dividends of ~~$51.2~~$70.4 million to the Company without prior regulatory approval. Pursuant to the Basel III rules, the Bank must keep a capital conservation buffer of 2.50% above the regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

Note 1211 – Fair Value Measurements

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

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

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

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

~~At March 31,~~During the nine-month period ended September 30, 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 at ~~March 31,~~September 30, 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 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~~other real estate owned (“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,~~September 30, 2023 and December 31, 2022, respectively, measured by the Company at fair value on a recurring basis:


	March 31, 2023								September 30, 2023
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	214,734	$	-	$	-	$	214,734	$	216,777	$	-	$	-	$	216,777
U.S. government agencies		-		56,703		-		56,703		-		55,821		-		55,821
U.S. government agencies mortgage-backed		-		121,938		-		121,938		-		104,569		-		104,569
States and political subdivisions		-		218,527		14,979		233,506		-		206,034		14,066		220,100
Corporate bonds		-		9,762		-		9,762		-		4,961		-		4,961
Collateralized mortgage obligations		-		454,106		-		454,106		-		386,679		-		386,679
Asset-backed securities		-		189,753		-		189,753		-		66,916		-		66,916
Collateralized loan obligations		-		174,566		-		174,566		-		173,795		-		173,795
Loans held-for-sale		-		946		-		946		-		2,297		-		2,297
Mortgage servicing rights		-		-		10,784		10,784		-		-		11,461		11,461
Interest rate swap agreements, including risk participation agreement		-		5,885		-		5,885		-		9,028		-		9,028
Mortgage banking derivatives		-		28		-		28		-		37		-		37
Total	$	214,734	$	1,232,214	$	25,763	$	1,472,711	$	216,777	$	1,010,137	$	25,527	$	1,252,441

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	10,007	$	-	$	10,007	$	-	$	14,293	$	-	$	14,293
Total	$	-	$	10,007	$	-	$	10,007	$	-	$	14,293	$	-	$	14,293

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	December 31, 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								Nine Months Ended September 30, 2023
	Securities available-for-sale								Securities available-for-sale
			Collateralized		States and		Mortgage				Collateralized		States and		Mortgage
	Asset-backed		Mortgage		Political		Servicing		Asset-backed		Mortgage		Political		Servicing
	Securities		Obligations		Subdivisions		Rights		Securities		Obligations		Subdivisions		Rights
Beginning balance January 1, 2023	$	15,012	$	6,770	$	14,229	$	11,189	$	15,012	$	6,770	$	14,229	$	11,189
Transfers into Level 3		-		-		-		-
Transfers out of Level 3		(14,885)		(6,764)		-		-		(14,885)		(6,764)		-		-
Total gains or losses
Included in earnings		(11)		-		(33)		(471)		(11)		-		(99)		232
Included in other comprehensive income		226		(6)		423		-		226		(6)		(132)		-
Purchases, issuances, sales, and settlements
Purchases		-		-		406		-		-		-		406		-
Issuances		-		-		-		120		-		-		-		420
Settlements		(342)		-		(46)		(54)		(342)		-		(338)		(380)
Ending balance March 31, 2023	$	-	$	-	$	14,979	$	10,784
Ending balance September 30, 2023									$	-	$	-	$	14,066	$	11,461

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Notes to Consolidated Financial Statements

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


	Three Months Ended March 31, 2022				Nine Months Ended September 30, 2022
	Securities available-for-sale				Securities available-for-sale
	States and		Mortgage		States and		Mortgage
	Political		Servicing		Political		Servicing
	Subdivisions		Rights		Subdivisions		Rights
Beginning balance January 1, 2022	$	14,092	$	7,097	$	15,236	$	7,097
Transfers into Level 3		-		-
Transfers out of Level 3		-		-
Total gains or losses
Included in earnings		(33)		3,228		(98)		4,384
Included in other comprehensive income		(938)		-		(1,333)		-
Purchases, issuances, sales, and settlements
Purchases		1,076		-
Issuances		-		301		519		756
Settlements		(364)		(250)		(1,015)		(776)
Ending balance March 31, 2022	$	13,833	$	10,376
Ending balance September 30, 2022					$	13,309	$	11,461

The following table and commentary present quantitative and qualitative information about Level 3 fair value measurements as of ~~March 31,~~September 30, 2023:


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

States and political subdivisions	$	14,979	Discounted Cash Flow	Discount Rate	2.8 - 4.8%	4.4	%	$	14,066	Discounted Cash Flow	Discount Rate	3.5 – 5.9%	4.3	%
				Liquidity Premium	0.3 - 0.5%	0.5	%				Liquidity Premium	0.3 – 0.5%	0.5	%

Mortgage servicing rights	$	10,784	Discounted Cash Flow	Discount Rate	9.0 - 11.0%	9.0	%	$	11,461	Discounted Cash Flow	Discount Rate	9.0 – 11.0%	9.0	%
				Prepayment Speed	4.2 - 29.1%	6.3	%				Prepayment Speed	0.0 – 16.4%	6.2	%

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
%


						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	%

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

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Notes to Consolidated Financial Statements

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

~~Assets and Liabilities Measured at Fair Value on a 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 loans and OREO. For assets measured at fair value on a nonrecurring basis at March 31,September 30, 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:


	March 31, 2023								September 30, 2023
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Individually evaluated loans¹	$	-	$	-	$	48,285	$	48,285	$	-	$	-	$	63,322	$	63,322
Other real estate owned, net²		-		-		1,255		1,255		-		-		407		407
Total	$	-	$	-	$	49,540	$	49,540	$	-	$	-	$	63,729	$	63,729

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, which had a carrying amount of $~~69.6~~82.0 million and a valuation allowance of $~~21.4~~18.7 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $~~3.8~~1.0 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2023.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $~~1.3~~407,000 ~~million~~ at ~~March 31,~~September 30, 2023, which is made up of the outstanding balance of $~~2.2~~525,000 ~~million, net of a purchase accounting adjustment of~~ ~~$131,000~~, and a valuation allowance of $~~853,000~~118,000.


	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

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, 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.

² OREO 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 1312 – Fair Values of Financial Instruments

The estimated fair values approximate carrying amount for all items except those described in the following table. Securities available-for-sale fair values are based upon market prices or dealer quotes, and if no such information is available, on the rate and term of the security. The carrying value of FHLBC stock approximates fair value as the stock is nonmarketable and can only be sold to the FHLBC or another member institution at par. ~~FHLBC stock is carried at cost and considered a Level 2 fair value. For March 31,~~At September 30, 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.

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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										September 30, 2023
	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	$	50,860	$	50,860	$	50,860	$	-	$	-	$	55,548	$	55,548	$	55,548	$	-	$	-
Interest earning deposits with financial institutions		52,162		52,162		52,162		-		-		53,485		53,485		53,485		-		-
Securities available-for-sale		1,455,068		1,455,068		214,734		1,225,355		14,979		1,229,618		1,229,618		216,777		998,775		14,066
FHLBC and FRBC stock		30,205		30,205		-		30,205		-		35,830		35,830		-		35,830		-
Loans held-for-sale		946		946		-		946		-		2,297		2,297		-		2,297		-
Net loans		4,003,354		3,842,384		-		-		3,842,384		3,977,814		3,855,774		-		-		3,855,774
Mortgage servicing rights		10,784		10,784		-		-		10,784		11,641		11,641		-		-		11,641
Interest rate swap agreements		5,735		5,735		-		5,735		-		8,980		8,980		-		8,980		-
Interest rate lock commitments and forward contracts		28		28		-		28		-		37		37		-		37		-
Interest receivable on securities and loans		24,214		24,214		-		24,214		-		25,921		25,921		-		25,921		-

Financial liabilities:
Noninterest bearing deposits	$	1,950,144	$	1,950,144	$	1,950,144	$	-	$	-	$	1,862,659	$	1,862,659	$	1,862,659	$	-	$	-
Interest bearing deposits		2,947,076		2,932,989		-		2,932,989		-		2,751,661		2,738,632		-		2,738,632		-
Securities sold under repurchase agreements		27,897		27,897		-		27,897		-		25,894		25,894		-		25,894		-
Other short-term borrowings		315,000		315,000		-		315,000		-		435,000		435,000		-		435,000		-
Junior subordinated debentures		25,773		19,330		-		19,330		-		25,773		19,072		-		19,072		-
Subordinated debentures		59,318		46,118		-		46,118		-		59,361		46,161		-		46,161		-
Senior notes		44,611		41,011		41,011		-		-		-		-		-		-		-
Note payable and other borrowings												-		-		-		-		-
Interest rate swap agreements		10,006		10,006		-		10,006		-		14,293		14,293		-		14,293		-
Interest payable on deposits and borrowings		2,029		2,029		-		2,029		-		3,066		3,066		-		3,066		-

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	December 31, 2022
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	56,632	$	56,632	$	56,632	$	-	$	-
Interest earning deposits with financial institutions		58,545		58,545		58,545		-		-
Securities available-for-sale		1,539,359		1,539,359		212,129		1,291,219		36,011
FHLBC and FRBC stock		20,530		20,530		-		20,530		-
Loans held-for-sale		491		491		-		491		-
Net loans		3,820,129		3,681,387		-		-		3,681,387
Mortgage servicing rights		11,189		11,189		-		-		11,189
Interest rate swap agreements		6,391		6,391		-		6,391		-
Interest rate lock commitments and forward contracts		76		76		-		76		-
Interest receivable on securities and loans		22,661		22,661		-		22,661		-

Financial liabilities:
Noninterest bearing deposits	$	2,051,702	$	2,051,702	$	2,051,702	$	-	$	-
Interest bearing deposits		3,059,021		3,042,740		-		3,042,740		-
Securities sold under repurchase agreements		32,156		32,156		-		32,156		-
Other short-term borrowings		90,000		90,000		-		90,000		-
Junior subordinated debentures		25,773		21,907		-		21,907		-
Subordinated debentures		59,297		52,322		-		52,322		-
Senior notes		44,585		44,248		44,248		-		-
Note payable and other borrowings		9,000		8,984		-		8,984		-
Interest rate swap agreements		12,264		12,264		-		12,264		-
Interest payable on deposits and borrowings		1,657		1,657		-		1,657		-

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

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. The aggregate fair value of the swaps ~~are~~is 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 hedge 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 and subsequently reclassified into interest income or interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts

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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 fixed-rate borrowings.

Interest rate swaps with notional amounts totaling $300.0 million and $250.0 million as of ~~March 31,~~September 30, 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,~~September 30, 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 ~~$5.0~~$7.0 million will be reclassified as an increase to interest income and an additional ~~$511,000~~$708,000 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,~~September 30, 2023 and December 31, 2022 were ~~$108.2~~$105.6 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 are recognized directly in earnings.

At ~~March 31,~~September 30, 2023 and December 31, 2022, the Company had ~~$8.1~~$9.2 million ~~of cash collateral pledged with two correspondent financial institutions~~ and $11.2 million of cash collateral pledged with two correspondent financial ~~institution,~~institutions, respectively. The Company held ~~$2.8~~$8.1 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~~through September 30, 2023, or during 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,~~September 30, 2023 and December 31, 2022 ~~were $10.9~~was $7.6 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.

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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 Sheets as of ~~March 31,~~September 30, 2023 and December 31, 2022.

Fair Value of Derivative Instruments


			March 31, 2023						September 30, 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	5	325,774	Other Assets	1,824	Other Liabilities	6,095	5	325,774	Other Assets	4,517	Other Liabilities	9,830
Total derivatives designated as hedging instruments				1,824		6,095				4,517		9,830

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	19	108,150	Other Assets	3,911	Other Liabilities	3,911	17	105,558	Other Assets	4,463	Other Liabilities	4,463
Interest rate lock commitments and forward contracts	41	10,930	Other Assets	28	Other Liabilities	-	28	7,613	Other Assets	37	Other Liabilities	-
Other contracts	4	44,097	Other Assets	150	Other Liabilities	1	4	44,892	Other Assets	48	Other Liabilities	-
Total derivatives not designated as hedging instruments				4,089		3,912				4,548		4,463


			December 31, 2022						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	4	275,774	Other Assets	2,737	Other Liabilities	8,610	4	275,774	Other Assets	2,737	Other Liabilities	8,610
Total derivatives designated as hedging instruments				2,737		8,610				2,737		8,610

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	21	110,647	Other Assets	3,654	Other Liabilities	3,654	21	110,647	Other Assets	3,654	Other Liabilities	3,654
Interest rate lock commitments and forward contracts	28	5,298	Other Assets	76	Other Liabilities	-	28	5,298	Other Assets	76	Other Liabilities	-
Other contracts	4	43,699	Other Assets	125	Other Liabilities	1	4	43,699	Other Assets	125	Other Liabilities	1
Total derivatives not designated as hedging instruments				3,855		3,655				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 ~~$3.1~~$3.8 million as of ~~March 31,~~September 30, 2023, and ~~$1.9~~$4.1 million as of ~~March 31,~~September 30, 2022. The amount of the loss reclassified from AOCI to net interest income on the income statement was ~~$1.0~~$3.9 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and ~~$16,000~~$15,000 of gain for ~~three~~the nine months ended ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 2023, and December 31, 2022.

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


	March 31, 2023						December 31, 2022						September 30, 2023						December 31, 2022
	Fixed		Variable		Total		Fixed		Variable		Total		Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	3,456	$	15,390	$	18,846	$	3,514	$	15,365	$	18,879	$	173	$	16,543	$	16,716	$	3,514	$	15,365	$	18,879
Performance standby		1,913		11,799		13,712		3,161		13,989		17,150		353		15,733		16,086		3,161		13,989		17,150
		5,369		27,189		32,558		6,675		29,354		36,029		526		32,276		32,802		6,675		29,354		36,029
Non-borrower:
Performance standby		-		67		67		-		67		67		-		67		67		-		67		67
Total letters of credit	$	5,369	$	27,256	$	32,625	$	6,675	$	29,421	$	36,096	$	526	$	32,343	$	32,869	$	6,675	$	29,421	$	36,096

Unused loan commitments:	$	138,829	$	800,693	$	939,522	$	139,070	$	860,255	$	999,325	$	146,201	$	710,271	$	856,472	$	139,070	$	860,255	$	999,325

As of ~~March 31,~~September 30, 2023, the Company evaluated current market conditions, including any impacts related to market interest rate changes and unused line of credit utilization trends during the ~~first~~second quarter of 2023, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments totaled ~~$3.2~~$2.7 million, excluding a ~~$596,000~~$149,000 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 ~~$1.4 million~~$235,000 for the ~~first~~third quarter of 2023, compared to the prior quarter end, is primarily related to a $1.2 million decrease in construction unfunded 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$223,000 decrease by accretion to interest income of the purchase accounting ~~adjustment.~~adjustment, as well as adjustments to historical benchmark assumptions, such as the funding rates and the period used to forecast those rates within the ACL calculation, resulting in a $12,000 reduction. 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 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 nine months ended ~~March 31,~~September 30, 2023, compared to the three and nine months ended ~~March 31,~~September 30, 2022, and our financial condition at ~~March 31,~~September 30, 2023, compared to December 31, 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, 2022. The results of operations for the three and nine months ended ~~March 31,~~September 30, 2023, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and ~~March 31,~~September 30, 2023 and 2022 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 48 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~~noninterest income, such as service charges, wealth management fees, loan fees, gains from the sale of newly originated loans, gains or losses on investments and certain other ~~non-interest~~noninterest 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,~~September 30, 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.

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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.~~report and in Note 2 of our Annual Report in Form 10-K.

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Recent Banking Events

There were three significant bank failures in the first five months of 2023, primarily due to the failed banks’ lack of liquidity as depositors sought to withdraw their deposits. Due to rising interest rates, the failed banks were unable to sell investment securities held to meet liquidity needs without realizing substantial losses. As a result of the ~~March 2023~~ bank closures during 2023 and 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 could increase the cost of our FDIC insurance assessment. Additionally, 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 have access but have not received or requested funds from this Program and, though we do have access to the Federal Reserve Discount Window, we have not accessed these funds and have an unused capacity of $18.7 million at September 30, 2023. The future impact of these failures on the economy, financial institutions and their depositors, as well as any governmental regulatory responses or actions resulting from the same, is difficult to predict at this time.

Financial Overview

Net income for the ~~first~~third quarter of 2023 was ~~$23.6~~$24.3 million, or ~~$0.52~~$0.54 per diluted share, compared to ~~$12.0~~$19.5 million, or ~~$0.27~~$0.43 per diluted share, for the ~~first~~third quarter of 2022. The increase was primarily due to growth in our loan portfolio and higher loan and security yields, partially offset by increased funding costs and increased other short-term borrowing, which resulted in growth in net interest income. Noninterest income ~~partially offset by lower noninterest income from reductions~~decreased in the third quarter of 2023, compared to the like quarter of 2022, as a result of net losses on security sales and a reduction in mortgage banking ~~revenues~~revenues. An increase was also noted in noninterest expense for the current quarter, primarily due to higher ~~market interest rates,~~salaries and ~~losses recognized on securities sold.~~employee benefits and $629,000 of liquidation and deconversion costs incurred in the third quarter of 2023 related to the 2022 sale of our Visa credit card portfolio. Also contributing to the increase in net income in the ~~first~~third quarter of 2023, compared to the ~~first~~third quarter of 2022, were acquisition costs, net of gains on branch sales, of ~~$5.3~~$2.0 million incurred in the prior year like quarter, compared to ~~$306,000 of net gains on~~no acquisition related costs or branch sales in the ~~first~~third quarter of 2023. Adjusted net income, a non-GAAP financial measure that excludes ~~merger-related~~Visa portfolio and land trust portfolio gains on sale, Visa portfolio liquidation and deconversion costs, ~~net of (gains)/losses on branch sales,~~and any merger related costs, as applicable, was ~~$23.4~~$24.8 million for the ~~first~~third quarter of 2023, compared to ~~$24.1~~$25.6 million for the ~~fourth~~second quarter of ~~2022,~~2023, and ~~$15.9~~$19.6 million for the ~~first~~third quarter of 2022. Adjusted net income was $73.8 million for the nine months ended September 30, 2023, compared to $49.4 million for the nine months ended September 30, 2022. See the discussion entitled “Non-GAAP Financial Measures” on page ~~38,~~40, 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						Nine Months Ended
	March 31,		December 31,		March 31,		September 30,		June 30,		September 30,		September 30,
	2023		2022		2022		2023		2023		2022		2023		2022
Net Income
Income before income taxes (GAAP)	$	32,013	$	31,853	$	16,443	$	32,484	$	34,973	$	26,577	$	99,470	$	59,696
Pre-tax income adjustments:
Merger-related costs, net of gains/losses on branch sales		(306)		617		5,335
Merger-related costs, net of losses/(gains) on branch sales								-		29		1,061		(277)		8,527
Liquidation and deconversion costs on Visa credit card portfolio								629		-		-		629		-
Gains on the sale of Visa credit card and land trust portfolios								-		-		(923)		-		(923)
Adjusted net income before taxes		31,707		32,470		21,778		33,113		35,002		26,715		99,822		67,300
Taxes on adjusted net income		8,326		8,398		5,858		8,307		9,419		7,091		26,051		17,944
Adjusted net income (non-GAAP)	$	23,381	$	24,072	$	15,920	$	24,806	$	25,583	$	19,624	$	73,771	$	49,356

Basic earnings per share (GAAP)	$	0.53	$	0.53	$	0.27	$	0.55	$	0.57	$	0.43	$	1.65	$	0.98
Diluted earnings per share (GAAP)		0.52		0.52		0.27		0.54		0.56		0.43		1.62		0.97
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP)		0.52		0.54		0.36		0.55		0.58		0.44		1.65		1.11
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP)		0.52		0.53		0.36		0.55		0.56		0.43		1.63		1.09

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

●

Net interest and dividend income was ~~$64.1~~$63.0 million for the ~~first~~third quarter of 2023, compared to ~~$41.2~~$55.6 million for the ~~first~~third quarter of 2022. Growth in interest and dividend income in the ~~first~~third quarter of 2023 was primarily due to loan growth and higher yields on loans, ~~and securities,~~ partially offset by higher funding ~~costs.~~and borrowing costs, as well as increased other short-term borrowings.

●

We recorded a net provision for credit losses of ~~$3.5~~$3.0 million in the ~~first~~third quarter of 2023, driven by a ~~$4.7~~$3.0 million increase in the allowance for credit losses on loans based on increased historical loss ~~rate updates,~~rates, loan growth, our assessment of nonperforming loan metrics and trends, and estimated future credit losses, net of a reversal of ~~$1.2 million~~$12,000 in our allowance for unfunded commitments based on ~~a slight reduction in construction unfunded commitments combined with changes in~~an adjustment of historical benchmark assumptions, such as funding rates and the ~~construction loss rate.~~period used to forecast those rates, within the ACL calculation. We recorded noa net provision for credit loss ~~expense~~of $4.5 million in the ~~first~~third quarter of 2022.

●

Noninterest income was ~~$7.4~~$9.9 million for the ~~first~~third quarter of 2023, compared to ~~$13.5~~$11.5 million for the ~~first~~third quarter of 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~~were security losses of ~~$1.7 million~~$924,000 due to strategic sales in ~~2023.~~the third quarter of 2023, compared to losses on the call of securities of $1,000 in the third quarter of 2022. Also contributing to the reduction in noninterest income was a $1.1 million decrease in other income, primarily due to the gain on sale of both our Visa credit card portfolio and the land trust portfolio in 2022. These decreases were partially offset by an increase of ~~$350,000 of service charges on deposits~~$195,000 in wealth management income and a ~~$627,000~~$773,000 increase in ~~other income.~~the cash surrender value of BOLI.

●

Noninterest expense was ~~$36.0~~$37.4 million for the ~~first~~third quarter of 2023, compared to ~~$38.3~~$36.0 million for the ~~first~~third quarter of 2022, ~~a decrease~~an increase of ~~$2.3~~$1.4 million, or ~~6.09%~~4.0%. Contributing to the ~~decrease~~increase in noninterest expense in the third quarter of 2023 was higher salaries and employee benefits, as well as $629,000 of net liquidation and deconversion costs from the 2022 sale of our Visa credit card portfolio. Partially offsetting the increase in noninterest expense was a reduction inof occupancy, furniture and equipment and computer and data processing ~~and net teller & bill paying~~ expenses, ~~in the first quarter of 2023,~~ primarily ~~stemming~~ from acquisition costs, net of gains on branch sales, incurred in the ~~first~~third quarter of 2022 stemming 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 from $4.9 million of computer and data processing and net teller & bill paying expenses related to the West Suburban acquisition.

●

We had a provision for income tax expense of ~~$8.4~~$8.1 million for the ~~first~~third quarter of 2023, compared to a provision for income tax expense of ~~$4.4~~$7.1 million for the ~~first~~third quarter of 2022. The ~~increase in~~effective tax ~~expense~~rate for ~~the first quarter of 2023~~these two periods was ~~due to the increase in pre-tax income, compared to the year over year quarter.~~25.1% and 26.5%, respectively.

●

Our community-focused banking franchise experienced growth of ~~$133.7~~$159.9 million in total loans in the first ~~quarter~~nine months of 2023, compared to the year ended December 31, 2022, and an increase of ~~$601.0~~$160.2 million in total loans compared to the ~~first~~third quarter of 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 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.

●

Nonaccrual loans increased ~~$32.0~~$30.5 million as of ~~March 31,~~September 30, 2023, compared to December 31, 2022, primarily due to a few larger credits that moved from substandard accrual to ~~substandard~~ nonaccrual in the first ~~quarter~~nine months of ~~2023, which include~~2023. There were additions of two office buildings and one health care ~~facility.~~facility credit as of March 31, 2023, and additions of one medical office development and one office building as of September 30, 2023. The additions are partially offset by three charge offs totaling $6.8 million, recorded in the third quarter of 2023. Nonperforming loans as a percent of total loans was 1.6% as of ~~March 31,~~September 30, 2023, compared to 0.9% as of December 31, 2022, and ~~1.1%~~1.4% as of ~~March 31,~~September 30, 2022. Classified assets increased to ~~$126.5~~$153.7 million as of ~~March 31,~~September 30, 2023, which is ~~$16.0~~$43.2 million, or ~~14.5%~~39.1% more than December 31, 2022, and ~~$57.5~~$38.4 million, or ~~83.4%~~33.3%, more than ~~March 31,~~September 30, 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

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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, 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 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 of our 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~~measures 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 ~~March 31,~~September 30, 2023 and 2022

Our income before taxes was ~~$32.0~~$32.5 million in the ~~first~~third quarter of 2023 compared to ~~$16.4~~$26.6 million in the ~~first~~third quarter of 2022. This increase in pretax income was primarily due to a ~~$26.8~~$7.5 million increase in net interest and dividend income, and a ~~$2.3~~$1.5 million decrease ~~in noninterest expenses. The increase in pretax income was partially offset by a $4.0 million increase in interest expense, a $3.5 million increase~~ in provision for credit ~~losses, and~~losses. Income before taxes was negatively impacted by a ~~$6.1~~$1.6 million decrease in noninterest income, ~~mainly~~primarily due to ~~$1.7 million~~$924,000 of security losses and a $1.1 million decrease in other income in the ~~first~~third quarter of 2023, ~~and~~as well as a ~~$4.8~~$1.4 million ~~decrease~~increase in ~~mortgage banking revenues.~~noninterest expense. Our net income was ~~$23.6~~$24.3 million, or ~~$0.52~~$0.54 per diluted share, for the ~~first~~third quarter of 2023, compared to net income of ~~$12.0~~$19.5 million, or ~~$0.27~~$0.43 per diluted share, for the ~~first~~third quarter of 2022. The Bank remains well positioned to navigate uncertain macroeconomics; we have mitigated interest rate risk, ~~tightened~~controlled expenses in ~~a recessionary~~an inflationary environment, and actively managed daily liquidity. Furthermore, we continue to possess strong liquidity metrics and an outsized securities portfolio for funding needs.

Net interest and dividend income was ~~$64.1~~$63.0 million in the ~~first~~third quarter of 2023, compared to ~~$41.2~~$55.6 million in the ~~first~~third quarter of 2022. The ~~$22.9~~$7.4 million increase was primarily driven by significant growth in our loan portfolio as well as the effect of higher market interest rates on our loan portfolios. Higher interest income was partially offset by an increase in interest expense in the third quarter of 2023, compared to the third quarter of 2022, primarily due to a rise in deposit interest rates, and an increase in other short-term borrowing expense due to additional FHLB advances. As of June 30, 2023, we redeemed the $45.0 million senior debt issuance that was due in 2026, which resulted in no senior debt interest expense recorded for the third quarter of 2023.

Nine months ended September 30, 2023 and 2022

Our income before taxes was $99.5 million for the nine months ended September 30, 2023 compared to $59.7 million for the nine months ended September 30, 2022. This increase in pretax income was primarily due to a $48.6 million increase in net interest and dividend income and a $3.3 million decrease in noninterest expenses. These changes were partially offset by a $3.5 million increase in provision for credit losses, and a $8.7 million decrease in noninterest income, mainly due to $4.1 million of security losses recorded in the first nine months of 2023 and a $4.5 million decrease in mortgage banking revenues. Our net income was $73.5 million, or $1.62 per diluted share, for the nine months ended September 30, 2023, compared to net income of $43.8 million, or $0.97 per diluted share, for the same period of 2022.

Net interest and dividend income was $190.7 million for the nine months ended September 30, 2023, compared to $142.1 million for the same period of 2022. The $48.6 million increase was primarily driven by significant growth in our loan portfolio as well as the effect of higher market interest rates on our loan and securities portfolios. Higher interest and dividend income was partially offset by an increase in interest expense in the first ~~quarter~~nine months of 2023, compared to the first ~~quarter~~nine months of 2022, primarily due to a rise in deposit interest rates, an increase in other short-term borrowing expense due to ~~additional~~ FHLB advances, and an increase in the rate paid on our senior notes. The senior notes ~~during~~redeemed on June 30, 2023 had an effective cost of 10.95% for the ~~first quarter~~ nine months ending September 30, 2023.

Tableof ~~2023, as the senior debt issuance is at LIBOR plus 385 basis points, and the floating interest rate of the three month LIBOR increased 462 basis points since the first quarter of 2022.~~Contents

Net Interest Income

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

Three months ended ~~March 31,~~September 30, 2023 and 2022

The increased yield of 3010 basis points on interest earning assets compared to the linked period was driven by ~~new~~ higher ~~yield~~yields on loan originations than those in the previous ~~periods~~period as well as repricing within the existing variable rate ~~portfolio. Average balances of interest earning assets totaled $5.51 billion~~portfolios 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 current quarter, as compared to the prior year like quarter, was the result of replacing older, lower yielding securities ~~with higher rate securities through a mix of maturities,~~available-for-sale and ~~strategic purchases and sales, as well as loan growth year over year.~~loans. Changes in the market interest rate environment impact ~~the portfolio~~earning assets at varying intervals depending on the repricing timeline of loans, as well as the securities maturity, paydown and purchase ~~activity.~~activities.

The year over year increase of ~~217~~136 basis points on interest earning assets was driven by significant increases to benchmark interest rates as well as strong loan growth throughout the period, specifically within the ~~commercial and~~leases, commercial real estate and multifamily portfolios, as these loan segments generally produce the greatest yield. 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, as we work to increase the weighted average yield in the portfolio.

Average balances of interest-bearing deposit accounts have decreased steadily since the third quarter of 2022 through the third quarter of 2023, from $3.23 billion to $2.79 billion, with decreases reflected in all deposit categories excluding time deposits. We have continued to control the cost of funds over the periods reflected, with the rate of overall interest-bearing deposits increasing to 65 basis points for the quarter ended September 30, 2023, from 40 basis points for the quarter ended June 30, 2023, and from nine basis points for the quarter ended September 30, 2022. A 32 basis point increase in the cost of money market funds for the quarter ended September 30, 2023 compared to prior linked quarter, and a 91 basis point increase compared to the prior year like quarter were both due to select deposit account exception pricing, and drove a significant portion of the overall increase. Average rates paid on time deposits for the quarter ended September 30, 2023 increased by 63 basis points and 140 basis points in the quarter over linked quarter and year over year quarters, respectively, primarily due to CD rate specials we offered.

Borrowing costs decreased in the third quarter of 2023 compared to the second quarter of 2023, primarily due to the redemption of the senior notes as of June 30, 2023, partially offset by an increase in average short-term borrowings of $24.6 million stemming from increased average FHLB advances over the prior quarter. The increase of $421.7 million year over year of average FHLB advances was based on daily liquidity needs. Subordinated and junior subordinated debt interest expense were essentially flat over each of the periods presented. We redeemed all of the $45.0 million senior notes, net of deferred issuance costs, on June 30, 2023, resulting in senior notes having no balance or related interest expense in the third quarter of 2023. In February 2023, we paid off the remaining balance of $9.0 million on the original $20.0 million term note issued in 2020, resulting in notes payable and other borrowings having no balance after that time.

Our net interest margin (GAAP) increased three basis points to 4.64% for the third quarter of 2023 compared to 4.61% for the second quarter of 2023, and increased 71 basis points compared to 3.93% for the third quarter of 2022. Our net interest margin (TE) increased two basis points to 4.66% for the third quarter of 2023, compared to 4.64% for the second quarter of 2023, and increased 70 basis points compared to 3.96% for the third quarter of 2022. The increase in the current quarter, compared to the prior quarter, is primarily due to the growth in loan interest income due to the rising interest rate environment, and a decrease in borrowing interest expense due to the redemption of the senior notes in June 2023. The increase in the current quarter, compared to the prior year like quarter, is primarily due to an increase in market interest rates, and the related rate resets on loans and securities during the past year, as well as continuing loan growth relative to a more modest increase in costs of interest-bearing liabilities. See the discussion entitled “Non-GAAP Financial Measures” and the tables on page 45 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

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Nine months ended September 30, 2023 and 2022

The year over year increase of 187 basis points on interest earning assets was driven by significant increases to benchmark interest rates as well as strong loan growth throughout the period, specifically within the leases, commercial real estate-investor, construction and multi-family 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~~$367.0 million infor the ~~first quarter of~~nine months ended September 30, 2023, compared to the ~~first quarter of~~nine months ended September 30, 2022, due to paydowns, changes in market value, and strategic sales. Due to market interest rate increases year over year, securities available-for-sale interest income was ~~$12.4~~$34.7 million infor the ~~first quarter of~~nine months ended September 30, 2023, compared to ~~$6.8~~$26.1 million for the like 2022 ~~quarter.~~period, reflecting an increase in yield of 134 basis points. Average loans, including loans held for sale, increased ~~$528.0~~$438.0 million in the ~~first quarter of~~nine months ended September 30, 2023, compared to the ~~first quarter of~~nine months ended September 30, 2022, primarily driven by the growth in ~~commercial,~~leases, commercial real estate-investor, construction, and ~~multifamily~~multi-family portfolios. Growth in the loan portfolio, as well as the rising interest rate environment, resulted in ~~$57.2~~$181.5 million of loan interest income in the ~~first quarter of~~nine months ended September 30, 2023, compared to ~~$36.4~~$121.3 million in the ~~first quarter~~like 2022 period, reflecting an increase in yield of ~~2022.~~152 basis points.

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Average balances of ~~interest bearing~~interest-bearing deposit accounts have decreased steadily since ~~the first quarter of~~September 30, 2022 through the ~~first quarter of~~nine months ended September 30, 2023, from ~~$3.40~~$3.32 billion to ~~$3.00~~$2.89 billion, with ~~these~~such decreases reflected in all ~~categories aside from NOW accounts which increased nominally.~~categories. We have continued to control the cost of funds over the periods reflected, with the rate of overall ~~interest bearing~~interest-bearing deposits increasing by 1735 basis points to 2543 basis points from eight basis points as of ~~March 31,~~September 30, 2022. A 1961 basis point increase in the cost of money market funds as of ~~March 31,~~September 30, 2023, compared to ~~December 31,~~September 30, 2022, ~~and 34 basis points increase compared to March 31, 2022 were both~~was due to select deposit account exception pricing and drove a significant portion of the overall increase. ~~Time~~Interest expense paid on time deposits ~~saw~~also contributed to the ~~next largest increase~~increased cost of ~~12 basis points and 39 basis points in the quarter to date and~~deposits year over year, ~~periods ending March 31,~~as the cost of average time deposits increased 89 basis points to 114 basis points for the nine months ended September 30, 2023, ~~respectively,~~compared to 25 basis points for the nine months ended September 30, 2022, primarily due to CD rate specials we offered.

Borrowing costs increased in the ~~first quarter of~~nine months ended September 30, 2023 primarily due to the increase in ~~average~~ short term borrowings ~~stemming~~ from higher average FHLB advance growth of ~~$156.5~~$342.5 million since ~~year end~~the nine months ended September 30, 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~~referenced three-month LIBOR, and rising market interest rates resulted in a ~~111~~557 basis point increase to ~~9.04%~~10.95%, from ~~7.93% as of December 31, 2022, and a 462~~5.38% for the nine months ended September 30, 2022. We redeemed these notes on June 30, 2023, which contributed to the significant basis point increase ~~from 4.42%~~due to the $362,000 in deferred issuance costs that were recognized as ~~of March 31, 2022.~~interest expense due to the early redemption. In the first quarter of 2023, we paid off the remaining balance of $9.0 million on the original $20.0 million term note issued in 2020, recorded within notes payable and other borrowings.

Our net interest margin (GAAP) increased 12135 basis points to ~~4.72%~~4.66% for the ~~first quarter of~~nine months ended September 30, 2023, compared to ~~4.60%~~3.31% for the ~~fourth quarter of 2022, and increased 187 basis points compared to 2.85% for the first quarter of~~nine months ended September 30, 2022. Our net interest margin (TE) increased 11135 basis points to ~~4.74%~~4.68% for the ~~first quarter of~~nine months ended September 30, 2023, compared to ~~4.63%~~3.33% for the ~~fourth quarter of 2022 and increased 186 basis points compared to 2.88% for the first quarter of~~nine months ended September 30, 2022. The increase in the current ~~quarter,~~period, compared to ~~both~~the prior ~~quarters,~~year like period, is primarily due to an increase in market interest rates, and the related rate resets on loans and securities during the past year, as well as continuing loan growth relative to a more modest increase in the cost of ~~interest bearing~~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.

The following tables set forth certain information relating to our average consolidated balance sheets and reflect the yield on average earning assets and cost of average ~~interest bearing~~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 2023 and 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
		March 31, 2023						December 31, 2022						March 31, 2022							September 30, 2023						June 30, 2023						September 30, 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		$	49,310		$	585	4.81	$	50,377		$	461	3.63	$	635,302		$	269	0.17		$	49,737		$	659	5.26	$	50,309		$	643	5.13	$	131,260		$	663	2.00
Securities:
Taxable			1,330,295			10,735	3.27		1,404,437			10,495	2.96		1,612,635			5,169	1.30			1,125,688			8,946	3.15		1,231,994			9,930	3.23		1,525,258			9,116	2.37
Non-taxable (TE)¹			173,324			1,693	3.96		171,567			1,697	3.92		195,240			1,667	3.47			169,523			1,687	3.95		172,670			1,692	3.93		178,090			1,686	3.76
Total securities (TE)¹			1,503,619			12,428	3.35		1,576,004			12,192	3.07		1,807,875			6,836	1.53			1,295,211			10,633	3.26		1,404,664			11,622	3.32		1,703,348			10,802	2.52
FHLBC and FRBC Stock			24,905			280	4.56		19,534			259	5.26		16,066			153	3.86			35,954			597	6.59		34,029			396	4.67		19,565			261	5.29
Loans and loans held-for-sale^{1, 2}			3,932,492			57,228	5.90		3,878,228			55,195	5.65		3,404,534			36,428	4.34			4,010,859			62,705	6.20		4,040,202			61,591	6.11		3,753,117			46,642	4.93
Total interest earning assets			5,510,326			70,521	5.19		5,524,143			68,107	4.89		5,863,777			43,686	3.02			5,391,761			74,594	5.49		5,529,204			74,252	5.39		5,607,290			58,368	4.13
Cash and due from banks			55,140			-	-		56,531			-	-		42,972			-	-			57,279			-	-		56,191			-	-		56,265			-	-
Allowance for credit losses on loans			(49,398)			-	-		(48,778)			-	-		(44,341)			-	-			(54,581)			-	-		(53,480)			-	-		(45,449)			-	-
Other noninterest bearing assets			382,579			-	-		395,726			-	-		370,987			-	-			384,059			-	-		379,576			-	-		377,850			-	-
Total assets		$	5,898,647					$	5,927,622					$	6,233,395						$	5,778,518					$	5,911,491					$	5,995,956

Liabilities and Stockholders' Equity
NOW accounts		$	601,030		$	242	0.16	$	623,408		$	225	0.14	$	599,481		$	89	0.06		$	576,138		$	440	0.30	$	600,957		$	312	0.21	$	612,174		$	148	0.10
Money market accounts			833,823			828	0.40		901,950			477	0.21		1,098,941			170	0.06			720,488			1,767	0.97		762,967			1,245	0.65		967,106			157	0.06
Savings accounts			1,126,040			79	0.03		1,155,409			74	0.03		1,201,075			138	0.05			1,027,987			351	0.14		1,073,172			185	0.07		1,186,001			75	0.03
Time deposits			434,655			664	0.62		450,111			571	0.50		495,452			277	0.23			466,250			1,982	1.69		436,524			1,156	1.06		459,925			335	0.29
Interest bearing deposits			2,995,548			1,813	0.25		3,130,878			1,347	0.17		3,394,949			674	0.08			2,790,863			4,540	0.65		2,873,620			2,898	0.40		3,225,206			715	0.09
Securities sold under repurchase agreements			31,080			9	0.12		33,275			10	0.12		39,204			11	0.11			24,945			27	0.43		25,575			7	0.11		33,733			10	0.12
Other short-term borrowings			200,833			2,345	4.74		44,293			436	3.91		-			-	-			427,174			5,840	5.42		402,527			5,160	5.14		5,435			44	3.21
Junior subordinated debentures			25,773			279	4.39		25,773			287	4.42		25,773			280	4.41			25,773			245	3.77		25,773			281	4.37		25,773			285	4.39
Subordinated debentures			59,308			546	3.73		59,286			546	3.65		59,222			546	3.74			59,350			547	3.66		59,329			546	3.69		59,265			546	3.66
Senior notes			44,599			994	9.04		44,572			891	7.93		44,494			485	4.42			-			-	-		44,134			1,414	12.85		44,546			728	6.48
Notes payable and other borrowings			5,400			87	6.53		9,978			137	5.45		19,009			103	2.20			-			-	-		-			-	-		10,989			111	4.01
Total interest bearing liabilities			3,362,541			6,073	0.73		3,348,055			3,654	0.43		3,582,651			2,099	0.24			3,328,105			11,199	1.34		3,430,958			10,306	1.20		3,404,947			2,439	0.28
Noninterest bearing deposits			2,002,801			-	-		2,083,503			-	-		2,093,293			-	-			1,867,201			-	-		1,920,448			-	-		2,092,301			-	-
Other liabilities			51,279			-	-		51,753			-	-		60,819			-	-			53,164			-	-		48,434			-	-		34,949			-	-
Stockholders' equity			482,026			-	-		444,311			-	-		496,632			-	-			530,048			-	-		511,651			-	-		463,759			-	-
Total liabilities and stockholders' equity		$	5,898,647					$	5,927,622					$	6,233,395						$	5,778,518					$	5,911,491					$	5,995,956
Net interest income (GAAP)					$	64,086					$	64,091					$	41,232						$	63,030					$	63,580					$	55,569
Net interest margin (GAAP)							4.72						4.60						2.85							4.64						4.61						3.93

Net interest income (TE)¹					$	64,448					$	64,453					$	41,587						$	63,395					$	63,946					$	55,929
Net interest margin (TE)¹							4.74						4.63						2.88							4.66						4.64						3.96
Interest bearing liabilities to earning assets			61.02	%					60.61	%					61.10	%						61.73	%					62.05	%					60.72	%

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 2023 and 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 ~~42,~~45, and includes loan fee expense of $780,000 for the third quarter of 2023, $242,000 for the second quarter of 2023, and $750,000 of loan fee income for the third quarter of 2022. Nonaccrual loans are included in the above-stated average balances.

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

	Nine Months Ended September 30,
	2023						2022
	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	49,787		$	1,887	5.07	$	395,948		$	1,714	0.58
Securities:
Taxable		1,228,576			29,611	3.22		1,582,549			21,071	1.78
Non-taxable (TE)¹		171,825			5,072	3.95		184,842			4,995	3.61
Total securities (TE)¹		1,400,401			34,683	3.31		1,767,391			26,066	1.97
Dividends from FHLBC and FRBC		31,670			1,273	5.37		18,888			677	4.79
Loans and loans held-for-sale ^{1 , 2}		3,994,804			181,524	6.08		3,556,798			121,337	4.56
Total interest earning assets		5,476,662			219,367	5.36		5,739,025			149,794	3.49
Cash and due from banks		56,211			-	-		50,918			-	-
Allowance for credit losses on loans		(52,505)			-	-		(44,719)			-	-
Other noninterest bearing assets		382,077			-	-		374,388			-	-
Total assets	$	5,862,445					$	6,119,612

Liabilities and Stockholders' Equity
NOW accounts	$	592,617		$	995	0.22	$	605,578		$	339	0.07
Money market accounts		772,011			3,840	0.67		1,039,717			482	0.06
Savings accounts		1,075,374			614	0.08		1,200,014			303	0.03
Time deposits		445,926			3,802	1.14		474,665			877	0.25
Interest bearing deposits		2,885,928			9,251	0.43		3,319,974			2,001	0.08
Securities sold under repurchase agreements		27,178			43	0.21		35,791			30	0.11
Other short-term borrowings		344,341			13,345	5.18		1,832			44	3.21
Junior subordinated debentures		25,773			805	4.18		25,773			849	4.40
Subordinated debentures		59,329			1,639	3.69		59,244			1,639	3.70
Senior note		29,414			2,408	10.95		44,520			1,791	5.38
Notes payable and other borrowings		1,780			87	6.53		14,338			309	2.88
Total interest bearing liabilities		3,373,743			27,578	1.09		3,501,472			6,663	0.25
Noninterest bearing deposits		1,929,653			-	-		2,101,749			-	-
Other liabilities		50,965			-	-		42,706			-	-
Stockholders' equity		508,084			-	-		473,685			-	-
Total liabilities and stockholders' equity	$	5,862,445					$	6,119,612
Net interest income (GAAP)				$	190,696					$	142,065
Net interest margin (GAAP)						4.66						3.31

Net interest income (TE)¹				$	191,789					$	143,131
Net interest margin (TE)¹						4.68						3.33
Interest bearing liabilities to earning assets		61.60	%					61.01	%

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 45, and includes fee expense of ~~$730,000 for the first quarter of 2023,~~$1.8 million and ~~loan fee income of $917,000 for the fourth quarter of 2022, and $1.6~~$2.1 million for the ~~first quarter of~~nine months ended September 30, 2023 and 2022, respectively. Nonaccrual loans are included in the above-stated average balances.

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Reconciliation of Tax-Equivalent Non-GAAP Financial Measures

Net interest and dividend income (TE) and net interest income (TE) to average interest earning assets are non-GAAP measures that have been adjusted on a TE basis using a marginal rate of 21% for 2023 and 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									Three Months Ended									Nine Months Ended
	March 31,			December 31,			March 31,			September 30,			June 30,			September 30,			September 30,
Net Interest Margin	2023			2022			2022			2023			2023			2022			2023			2022


Interest income (GAAP)	$	70,159		$	67,745		$	43,331		$	74,229		$	73,886		$	58,008		$	218,274		$	148,728
Taxable-equivalent adjustment:
Loans		6			6			5			11			11			6			28			17
Securities		356			356			350			354			355			354			1,065			1,049
Interest and dividend income (TE)		70,521			68,107			43,686			74,594			74,252			58,368			219,367			149,794
Interest expense (GAAP)		6,073			3,654			2,099			11,199			10,306			2,439			27,578			6,663
Net interest income (TE)	$	64,448		$	64,453		$	41,587		$	63,395		$	63,946		$	55,929		$	191,789		$	143,131
Net interest income (GAAP)	$	64,086		$	64,091		$	41,232		$	63,030		$	63,580		$	55,569		$	190,696		$	142,065
Average interest earning assets	$	5,510,326		$	5,524,143		$	5,863,777		$	5,391,761		$	5,529,204		$	5,607,290		$	5,476,662		$	5,739,025
Net interest margin (TE)											4.66	%		4.64	%		3.96	%		4.68	%		3.33	%
Net interest margin (GAAP)		4.72	%		4.60	%		2.85	%		4.64	%		4.61	%		3.93	%		4.66	%		3.31	%
Net interest margin (TE)		4.74	%		4.63	%		2.88	%

Noninterest Income

Three months ended ~~March 31,~~September 30, 2023 and 2022

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


							First Quarter 2023								3rd Quarter 2023
Noninterest Income	Three Months Ended						Percent Change From		Three Months Ended						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,	September 30,		June 30,		September 30,		June 30,	September 30,
	2023		2022		2022		2022	2022	2023		2023		2022		2023	2022
Wealth management	$	2,270	$	2,403	$	2,698	(5.5)	(15.9)	$	2,475	$	2,458	$	2,280	0.7	8.6
Service charges on deposits		2,424		2,499		2,074	(3.0)	16.9		2,504		2,362		2,661	6.0	(5.9)
Residential mortgage banking revenue
Secondary mortgage fees		59		62		139	(4.8)	(57.6)		66		76		81	(13.2)	(18.5)
MSRs mark to market (loss) gain		(525)		(431)		2,978	21.8	(117.6)
MSRs mark to market gain										281		96		548	192.7	(48.7)
Mortgage servicing income		516		518		519	(0.4)	(0.6)		519		499		514	4.0	1.0
Net gain on sales of mortgage loans		306		340		1,495	(10.0)	(79.5)		407		398		449	2.3	(9.4)
Total residential mortgage banking revenue		356		489		5,131	(27.2)	(93.1)		1,273		1,069		1,592	19.1	(20.0)
Securities losses, net		(1,675)		(910)		-	84.1	N/M		(924)		(1,547)		(1)	40.3	N/M
Change in cash surrender value of BOLI		242		376		124	(35.6)	95.2		919		418		146	119.9	529.5
Card related income		2,244		2,795		2,574	(19.7)	(12.8)		2,606		2,690		2,653	(3.1)	(1.8)
Other income		1,489		1,294		862	15.1	72.7		1,024		773		2,165	32.5	(52.7)
Total noninterest income	$	7,350	$	8,946	$	13,463	(17.8)	(45.4)	$	9,877	$	8,223	$	11,496	20.1	(14.1)

N/M - Not meaningful

Noninterest income decreased $1.6 million, or 17.8%, in the 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. The decrease from the fourth quarter of 2022 was primarily driven by a

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~~$765,000~~Noninterest income increased $1.7 million, or 20.1%, in the third quarter of 2023, compared to the second quarter of 2023, and decreased $1.6 million, or 14.1%, compared to the third quarter of 2022. The increase from the second quarter of 2023 was primarily driven by a $204,000 increase in residential mortgage banking revenue, a $623,000 decrease in securities losses, net, based on strategic sales, a $501,000 increase in the cash surrender value of BOLI, and a ~~$551,000 decline~~$251,000 increase in ~~card related~~other income primarily due to ~~decreased activity. These decreases~~contract incentives achieved on brokerage activities, as well as various recoveries on prior year sold mortgage claims.

The decrease in noninterest income of $1.6 million in the ~~first~~third quarter of 2023, compared to the ~~fourth quarter of 2022, were partially offset by a $195,000 increase in other income driven by credits received from a few vendors related to prior year service discounts.~~

~~The decrease in noninterest income of $6.1 million in the first quarter of 2023, compared to the first~~third quarter of 2022, is primarily due to a decrease of $4.8 million in residential mortgage banking revenue due to increases in market interest rates in the year over year period, reducing mortgage banking origination volume and related derivative revenue, as well as an increase in security losses, net, of ~~$1.7 million based~~$923,000 on strategic sales infor the quarter ended ~~March 31, 2023.~~September 30, 2023, a decrease of $267,000 on mortgage servicing rights mark to market gains, and a $1.1 million decrease in other income due to a $743,000 pretax gain on a Visa credit card portfolio sale and a $180,000 pretax gain on the sale of a land trust portfolio recorded in the third quarter of 2022. These decreases were partially offset by a ~~$350,000~~$773,000 increase in the cash surrender value of BOLI due to market interest rate changes.

Nine months ended September 30, 2023 and 2022

Noninterest Income

Nine Months Ended

YTD through September 30, 2023
(Dollars in thousands)

September 30,

September 30,

Percent


2023

2022

Change
Wealth management

$
7,203

$
7,484

(3.8)
Service charges on deposits

7,290

7,063

3.2
Residential mortgage banking revenue

Secondary mortgage fees

201

270

(25.6)
MSRs mark to market (loss) gain

(148)

3,608

(104.1)
Mortgage servicing income

1,534

1,612

(4.8)
Net gain on sales of mortgage loans

1,111

1,682

(33.9)
Total residential mortgage banking revenue

2,698

7,172

(62.4)
Securities losses, net

(4,146)

(34)

N/M
Change in cash surrender value of BOLI

1,579

342

361.7
Card related income

7,540

8,194

(8.0)
Other income

3,286

3,949

(16.8)
Total noninterest income

$
25,450

$
34,170

(25.5)

N/M - Not meaningful

Noninterest income decreased $8.7 million, or 25.5%, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. This decrease was primarily driven by a $4.5 million decline in mortgage banking revenue, comprised mostly of a $3.8 million decrease in MSRs mark to market gains and a $571,000 decrease in net gain on sales of mortgage loans. In addition, the current nine month period decreased due to a $4.1 million increase in net losses on the sale of securities for the year over year period. Partially offsetting these decreases was a $227,000 increase in service charges on deposits and a ~~$627,000~~$1.2 million increase in ~~other income driven by a few vendor credits related to prior year billings and volumes~~the cash surrender value of ~~activity.~~BOLI.

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Noninterest Expense

Three months ended ~~March 31,~~September 30, 2023 and 2022

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


										First Quarter 2023											3rd Quarter 2023
Noninterest Expense	Three Months Ended									Percent Change From		Three Months Ended									Percent Change From
(Dollars in thousands)	March 31,			December 31,			March 31,			December 31,	March 31,	September 30,			June 30,			September 30,			June 30,	September 30,
	2023			2022			2022			2022	2022	2023			2023			2022			2023	2022
Salaries	$	16,087		$	17,487		$	15,598		(8.0)	3.1	$	17,279		$	16,310		$	14,711		5.9	17.5
Officers incentive		1,827			3,876			994		(52.9)	83.8		2,773			2,397			2,787		15.7	(0.5)
Benefits and other		4,334			2,900			3,375		49.4	28.4		3,063			3,091			3,513		(0.9)	(12.8)
Total salaries and employee benefits		22,248			24,263			19,967		(8.3)	11.4		23,115			21,798			21,011		6.0	10.0
Occupancy, furniture and equipment expense		3,475			4,128			3,699		(15.8)	(6.1)		3,506			3,639			4,119		(3.7)	(14.9)
Computer and data processing		1,774			2,978			6,268		(40.4)	(71.7)		1,922			1,290			2,543		49.0	(24.4)
FDIC insurance		584			630			410		(7.3)	42.4		744			794			659		(6.3)	12.9
Net teller & bill paying		502			485			1,907		3.5	(73.7)		534			515			504		3.7	6.0
General bank insurance		305			298			315		2.3	(3.2)		300			306			257		(2.0)	16.7
Amortization of core deposit intangible asset		624			645			665		(3.3)	(6.2)		616			618			657		(0.3)	(6.2)
Advertising expense		142			130			182		9.2	(22.0)		93			103			83		(9.7)	12.0
Card related expense		1,216			1,304			534		(6.7)	127.7		1,347			1,222			1,453		10.2	(7.3)
Legal fees		319			225			257		41.8	24.1		97			283			212		(65.7)	(54.2)
Consulting & management fees		790			679			616		16.3	28.2		549			520			607		5.6	(9.6)
Other real estate owned expense, net		306			34			(12)		N/M	N/M		(27)			(98)			21		72.4	(228.6)
Other expense		3,637			3,885			3,444		(6.4)	5.6		4,627			3,840			3,862		20.5	19.8
Total noninterest expense	$	35,922		$	39,684		$	38,252		(9.5)	(6.1)	$	37,423		$	34,830		$	35,988		7.4	4.0
Efficiency ratio (GAAP)¹		47.52	%		52.44	%		72.70	%				50.08	%		46.84	%		53.08	%
Adjusted efficiency ratio (non-GAAP)²		47.66	%		51.29	%		61.92	%				48.82	%		46.49	%		51.90	%

~~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~~acquisition-related costs, net of ~~gain~~gains on branch sales, Visa credit card portfolio liquidation and related deconversion costs, as well as any merger related costs, if applicable, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, mark to market gains or losses on MSRs, gain on the sale of our Visa credit card and land trust portfolios, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the ~~section~~discussion entitled ~~“Reconciliation of Adjusted Efficiency Ratio Non-GAAP~~“Non-GAAP Financial Measures” ~~starting~~above and the table on page ~~44 for~~49 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.

Noninterest expense for the ~~first~~third quarter of 2023 ~~decreased $3.8~~increased $2.6 million, or ~~9.5%~~7.4%, compared to the ~~fourth~~second quarter of ~~2022,~~2023, and ~~decreased $2.3~~increased $1.4 million, or ~~6.1%~~4.0%, compared to the ~~first~~third quarter of 2022. The ~~decrease~~increase in the ~~first~~third quarter of 2023 compared to the ~~fourth~~second quarter of 2023 was attributable to a $1.3 million increase in salaries and employee benefits, primarily due to an increase in salaries and the officer incentive accrual. Also contributing to the increase in the third quarter of 2023 was a $632,000 increase in computer and data processing costs as the second quarter reflects software contract incentives, and a $787,000 increase in other expenses primarily due to $629,000 of liquidation costs recorded from the September 2023 Visa credit card portfolio deconversion, which was sold in the third quarter of 2022 and we continued to service through the third quarter of 2023. Partially offsetting the increase in noninterest expense in the third quarter

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~~2022~~of 2023 was a $186,000 decrease in legal fees, as the second quarter of 2023 experienced higher legal costs due to senior debt redemption, the proxy filing, and benefit plan reviews.

The year over year increase in noninterest expense is primarily attributable to a ~~$2.0~~$2.1 million ~~decrease~~increase in salaries and employee benefits, primarily due to ~~reductions in the officer incentive accrual, partially offset by~~ an increase in ~~employee benefits~~salaries due to higher wage rates and ~~other stemming from payroll taxes and 401k matching expense related to annual bonus payments made~~an increase in full-time equivalent employees in the ~~first~~current year. Also contributing to the increase was a $765,000 growth in other expense, which was primarily due to $629,000 of liquidation and deconversion costs recorded on the Visa credit card portfolio liquidation in the third quarter of 2023. ~~In addition, a $1.2 million decrease~~Partially offsetting the increase in ~~computer and data processing costs was recorded~~noninterest expense in the ~~first~~third quarter of 2023, compared to the ~~linked quarter, primarily due to 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~~third quarter of ~~2023; no OREO valuation reserve~~2022, was ~~recorded in the fourth quarter of 2022.~~

~~The year over year~~a $613,000 decrease in ~~noninterest expense is primarily attributable to~~furniture and equipment expenses, a ~~$4.5 million~~$621,000 decrease in computer and data processing expenses, and a ~~$1.4 million~~$115,000 decrease in ~~net teller & bill paying expense, both~~legal fees, all stemming from acquisition related costs that were recorded in the ~~first~~third quarter of 2022.

Nine months ended September 30, 2023 and 2022 ~~from our West Suburban acquisition. Partially offsetting~~

Noninterest Expense

Nine Months Ended

YTD through September 30, 2023
(Dollars in thousands)

September 30,

September 30,

Percent


2023

2022

Change
Salaries

$
49,676

$
46,304

7.3
Officers incentive

6,997

5,443

28.6
Benefits and other

10,488

10,563

(0.7)
Total salaries and employee benefits

67,161

62,310

7.8
Occupancy, furniture and equipment expense

10,620

10,864

(2.2)
Computer and data processing

4,986

12,817

(61.1)
FDIC insurance

2,122

1,771

19.8
Net teller & bill paying

1,551

3,245

(52.2)
General bank insurance

911

923

(1.3)
Amortization of core deposit intangible asset

1,858

1,981

(6.2)
Advertising expense

338

459

(26.4)
Card related expense

3,785

3,044

24.3
Legal fees

699

648

7.9
Consulting & management fees

1,859

1,746

6.5
Other real estate owned expense, net

181

96

88.5
Other expense

12,104

11,585

4.5
Total noninterest expense

$
108,175

$
111,489

(3.0)
Efficiency ratio (GAAP)¹

48.15
%

63.37
%

Adjusted efficiency ratio (non-GAAP)²

47.66
%

58.35
%

¹The efficiency ratio shown in the ~~decrease in~~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 net gains or losses on securities, and mark to market gains or losses on MSRs.
² The adjusted efficiency ratio shown in the ~~first quarter~~table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses, and acquisition-related costs, net of gains on branch sales, Visa credit card portfolio liquidation and related deconversion costs, as well as any merger related costs, if applicable, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, mark to market gains or losses on MSRs, gain on the sale of our Visa credit card and land trust portfolios, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the discussion entitled “Non-GAAP Financial Measures” above and the table on page 49 that provides a reconciliation of this non-GAAP financial measure to the most comparable GAAP equivalent.

Noninterest expense for the nine months ended September 30, 2023, decreased $3.3 million, or 3.0%, compared to the ~~first quarter~~nine months ended September 30, 2022, primarily due to a $7.8 million decrease in computer and data processing due to acquisition related costs incurred during the nine months ended September 30, 2022 as the result of ~~2022, was a $2.3 million increase~~our acquisition of West Suburban in ~~salaries~~December 2021. Salaries and employee benefits increased $4.9 million largely from incentives and ~~a $682,000 increase in card~~merit increases effective during the nine months ended September 30, 2023. Net teller & bill paying decreased $1.7 million largely due to acquisition related ~~expenses. Officer incentive compensation~~costs that were incurred during the nine months ended September 30, 2022. In addition, FDIC insurance increased ~~$833,000 in the first quarter of 2023, compared to the first quarter of 2022, as incentive accruals increased in the current year~~$351,000 due to growth in our ~~commercial~~asset size, a scheduled increase in rates

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used by the FDIC for assessments, as well as the absence of assessment credits fully utilized in the nine months ended September 30, 2022. Finally, card related expense increased $741,000 due to the growth in customer transactions and ~~sponsored finance lending teams year over year.~~related volume changes.

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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
	March 31,			December 31,			March 31,			March 31,			December 31,			March 31,			September 30,			June 30,			September 30,			September 30,			June 30,			September 30,
	2023			2022			2022			2023			2022			2022			2023			2023			2022			2023			2023			2022
Efficiency Ratio / Adjusted Efficiency Ratio

Noninterest expense	$	35,922		$	39,684		$	38,252		$	35,922		$	39,684		$	38,252		$	37,423		$	34,830		$	35,988		$	37,423		$	34,830		$	35,988
Less amortization of core deposit		624			645			665			624			645			665			616			618			657			616			618			657
Less other real estate expense, net		306			34			(12)			306			34			(12)
Less acquisition related costs, net of gain on branch sales		N/A			N/A			N/A			(306)			617			5,335
Less other real estate (income) expense, net																				(27)			(98)			21			(27)			(98)			21
Less acquisition related costs, net of losses/(gains) on branch sales																				N/A			N/A			N/A			-			29			1,061
Less liquidation and deconversion costs on Visa credit card portfolio																				N/A			N/A			N/A			629			-			-
Noninterest expense less adjustments	$	34,992		$	39,005		$	37,599		$	35,298		$	38,388		$	32,264		$	36,834		$	34,310		$	35,310		$	36,205		$	34,281		$	34,249

Net interest income	$	64,086		$	64,091		$	41,232		$	64,086		$	64,091		$	41,232		$	63,030		$	63,580		$	55,569		$	63,030		$	63,580		$	55,569
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			6			6			5			N/A			N/A			N/A			11			11			6
Securities		N/A			N/A			N/A			356			356			350			N/A			N/A			N/A			354			355			354
Net interest income including adjustments		64,086			64,091			41,232			64,448			64,453			41,587			63,030			63,580			55,569			63,395			63,946			55,929
Noninterest income		7,350			8,946			13,463			7,350			8,946			13,463			9,877			8,223			11,496			9,877			8,223			11,496
Less securities losses		(1,675)			(910)			-			(1,675)			(910)			-			(924)			(1,547)			(1)			(924)			(1,547)			(1)
Less MSRs mark to market (loss) gain		(525)			(431)			2,978			(525)			(431)			2,978
Less MSRs mark to market gains																				281			96			548			281			96			548
Less gain on Visa credit card portfolio sale																				N/A			N/A			N/A			-			-			743
Less gain on sale of land trust portfolio																				N/A			N/A			N/A			-			-			180
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			N/A			64			100			33			N/A			N/A			N/A			245			111			39
Noninterest income (excluding) / including adjustments		9,550			10,287			10,485			9,614			10,387			10,518			10,520			9,674			10,949			10,765			9,785			10,065

Net interest income including adjustments plus noninterest income (excluding) / including adjustments	$	73,636		$	74,378		$	51,717		$	74,062		$	74,840		$	52,105		$	73,550		$	73,254		$	66,518		$	74,160		$	73,731		$	65,994
Efficiency ratio / Adjusted efficiency ratio		47.52	%		52.44	%		72.70	%		47.66	%		51.29	%		61.92	%		50.08	%		46.84	%		53.08	%		48.82	%		46.49	%		51.90	%

N/A - not applicable

GAAP

Non-GAAP

Nine Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2023

2022

2023

2022

Efficiency Ratio / Adjusted Efficiency Ratio

(Dollars in thousands)

Noninterest expense

$
108,175

$
111,489

$
108,175

$
111,489

Less amortization of core deposit

1,858

1,981

1,858

1,981

Less other real estate expense, net

181

96

181

96

Less acquisition related costs, net of (gains)/losses on branch sales

N/A

N/A

(277)

8,527

Less liquidation and deconversion costs on Visa credit card portfolio

N/A

N/A

629

-

Noninterest expense less adjustments

$
106,136

$
109,412

$
105,784

$
100,885

Net interest income

$
190,696

$
142,065

$
190,696

$
142,065

Taxable-equivalent adjustment:

Loans

N/A

N/A

28

17

Securities

N/A

N/A

1,065

1,049

Net interest income including adjustments

190,696

142,065

191,789

143,131

Noninterest income

25,450

34,170

25,450

34,170

Less securities losses, net

(4,146)

(34)

(4,146)

(34)

Less MSRs mark to market (losses) gains

(148)

3,608

(148)

3,608

Less gain on Visa credit card portfolio sale

N/A

N/A

-

743

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Less gain on sale of land trust portfolio

N/A

N/A

-

180

Taxable-equivalent adjustment:

Change in cash surrender value of BOLI

N/A

N/A

420

91

Noninterest income (excluding) / including adjustments

29,744

30,596

30,164

29,764

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

$
220,440

$
172,661

$
221,953

$
172,895

Efficiency ratio / Adjusted efficiency ratio

48.15
%

63.37
%

47.66
%

58.35
%

N/A - not applicable

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Income Taxes

We recorded income tax expense of ~~$8.4~~$8.1 million for the ~~first~~third quarter of 2023 on ~~$32.0~~$32.5 million of pretax income, compared to income tax expense of ~~$8.2~~$9.4 million on ~~$31.9~~$35.0 million of pretax income in the ~~fourth~~second quarter of ~~2022,~~2023, and income tax expense of ~~$4.4~~$7.1 million on ~~$16.4~~$26.6 million of pretax income in the ~~first~~third quarter of 2022. Our effective tax rate was ~~26.3%~~25.1% in the ~~first~~third quarter of 2023, ~~25.9% for the fourth quarter of 2022, and~~ 26.9% for the ~~first~~second quarter of 2023, and 26.6% for the third quarter of 2022. The slight reduction in the effective tax rate for the third quarter of 2023 reflects the finalization of the 2022 income tax return, and related adjustments due to state apportionment factor changes and deferred tax allocations within the current period.
We recorded income tax expense of $26.0 million on $99.5 million of pretax income for the nine months ended September 30, 2023, compared to income tax expense of $15.9 million on $59.7 million of pretax income in the like 2022 period. The effective tax rate was 26.1% and 26.7% for the nine months ended September 30, 2023 and 2022, respectively.
Income tax expense reflected all relevant statutory tax rates and GAAP accounting. There were no significant changes in our ability to utilize our deferred tax assets during the quarter ended ~~March 31,~~September 30, 2023. We had no valuation reserve on the deferred tax assets as of ~~March 31,~~September 30, 2023.

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Financial Condition

Total assets ~~increased $32.0~~decreased $130.2 million to ~~$5.92~~$5.76 billion at ~~March 31,~~September 30, 2023, from $5.89 billion at December 31, 2022, due primarily to ~~an increase~~the decrease of $309.7 million in securities available-for-sale. The decrease in securities available-for-sale was primarily due to strategic sales. These decreases were partially offset by increases in net loans of ~~$129.8~~$157.7 million, ~~and~~ FHLB and FRB stock held of ~~$9.7~~$15.3 million, ~~partially offset by decreases~~and other assets of $12.2 million in cash and cash equivalents, $84.3 million in securities available-for-sale, and $6.9 million in deferred tax assets. The decrease in cash and cash equivalents was primarily due to the use of cash for loan growth, as well as the decrease in customer deposits.$8.7 million. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were ~~$4.90~~$4.61 billion at ~~March 31,~~September 30, 2023, a decrease of ~~$213.5~~$496.4 million from December 31, 2022, ~~primarily due to~~through a combination of seasonal ~~decreases of municipal deposits,~~activity as well as leakage from excess savings stemming from COVID-related government payments and ~~to a lesser extent declines in interest bearing demand accounts, savings, money market, NOW, and time deposits in the first quarter of 2023.~~opportunities for alternative investments.

March 31, 2023

September 30, 2023
Securities

As of

Percent Change From

As of

Percent Change From
(Dollars in thousands)

March 31,

December 31,

March 31,

December 31,

March 31,

September 30,

December 31,

September 30,

December 31,

September 30,


2023

2022

2022

2022

2022

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)

$
216,777

$
212,129

$
211,097

2.2

2.7
U.S. government agencies

56,703

56,048

59,036

1.2

(4.0)

55,821

56,048

55,963

(0.4)

(0.3)
U.S. government agencies mortgage-backed

121,938

124,990

153,148

(2.4)

(20.4)

104,569

124,990

127,626

(16.3)

(18.1)
States and political subdivisions

233,506

226,128

236,408

3.3

(1.2)

220,100

226,128

224,259

(2.7)

(1.9)
Corporate bonds

9,762

9,622

9,683

1.5

0.8

4,961

9,622

9,544

(48.4)

(48.0)
Collateralized mortgage obligations

454,106

533,768

696,513

(14.9)

(34.8)

386,679

533,768

587,846

(27.6)

(34.2)
Asset-backed securities

189,753

201,928

274,941

(6.0)

(31.0)

66,916

201,928

219,587

(66.9)

(69.5)
Collateralized loan obligations

174,566

174,746

166,158

(0.1)

5.1

173,795

174,746

173,837

(0.5)

(0.0)
Total securities

$
1,455,068

$
1,539,359

$
1,816,450

(5.5)

(19.9)

$
1,229,618

$
1,539,359

$
1,609,759

(20.1)

(23.6)

Securities available-for-sale decreased ~~$84.3~~$309.7 million as of ~~March 31,~~September 30, 2023 compared to December 31, 2022, and decreased ~~$361.4~~$380.1 million compared to ~~March 31,~~September 30, 2022. The decrease in the portfolio during the third quarter of 2023 was driven by securities sales totaling ~~$66.2~~$65.6 million and paydowns totaling ~~$37.4 million, partially offset by $4.0~~$29.6 million, in ~~purchases and a $17.9 million increase~~addition to growth in ~~market value.~~unrealized losses of $8.1 million. We continue to

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seek to position the portfolio in higher credit quality, shorter duration securities with an appropriate mix of fixed- and floating-rate exposures.

March 31, 2023
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 ¹
$
851,737

$
840,964

$
695,545

1.3

22.5
Leases

285,831

277,385

211,132

3.0

35.4
Commercial real estate – investor

1,056,787

987,635

748,267

7.0

41.2
Commercial real estate – owner occupied

870,115

854,879

873,292

1.8

(0.4)
Construction

174,683

180,535

165,558

(3.2)

5.5
Residential real estate – investor

56,720

57,353

62,846

(1.1)

(9.7)
Residential real estate – owner occupied

217,855

219,718

203,118

(0.8)

7.3
Multifamily

358,991

323,691

298,686

10.9

20.2
HELOC

104,941

109,202

120,241

(3.9)

(12.7)
Other ²

25,694

18,247

23,685

40.8

8.5
Total loans
$
4,003,354

$
3,869,609

$
3,402,370

3.5

17.7

September 30, 2023
Loans
As of

Percent Change From
(Dollars in thousands)
September 30,

December 31,

September 30,

December 31,

September 30,

2023

2022

2022

2022

2022
Commercial
$
834,877

$
840,964

$
888,081

(0.7)

(6.0)
Leases

354,827

277,385

251,603

27.9

41.0
Commercial real estate – investor

1,047,122

987,635

941,910

6.0

11.2
Commercial real estate – owner occupied

809,050

854,879

876,951

(5.4)

(7.7)
Construction

202,546

180,535

176,700

12.2

14.6
Residential real estate – investor

53,762

57,353

59,580

(6.3)

(9.8)
Residential real estate – owner occupied

227,446

219,718

220,969

3.5

2.9
Multifamily

372,020

323,691

322,856

14.9

15.2
HELOC

102,055

109,202

116,108

(6.5)

(12.1)
Other ¹

25,838

18,247

14,576

41.6

77.3
Total loans
$
4,029,543

$
3,869,609

$
3,869,334

4.1

4.1

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.~~
² The “Other” segment includes consumer loans and ~~overdrafts~~overdrafts.

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Total loans were ~~$4.0~~$4.03 billion as of ~~March 31,~~September 30, 2023, an increase of ~~$133.7~~$159.9 million from December 31, 2022. The increase in total loans in the first ~~three~~nine months of 2023, compared to December 31, 2022, was due primarily to growth in loan originations, net of paydowns, within leases of $77.4 million, commercial real estate – investor of ~~$69.2~~$59.5 million and multifamily of ~~$35.3~~$48.3 million ~~and~~offset by net reductions in commercial real estate – owner occupied of ~~$15.2~~$45.8 million from December 31, 2022. Total loans increased ~~$601.0~~$160.2 million from ~~March 31,~~September 30, 2022 to ~~March 31,~~September 30, 2023, primarily due to growth in loan originations, net of paydowns, within commercial real estate – investor of ~~$308.5 million, commercial of $156.2~~$105.2 million, leases of ~~$74.7~~$103.2 million and multifamily of ~~$60.3~~$49.2 million, offset by net reductions in commercial real estate – owner occupied of $67.9 million and commercial of $53.2 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 ~~70.9%~~69.8% of the portfolio as of ~~March 31,~~September 30, 2023, compared to 70.6% of the portfolio as of December 31, 2022. At September 30, 2023, our outstanding commercial real estate loans and undrawn commercial real estate commitments, excluding owner occupied real estate were equal to 288.9% of our Tier 1 capital plus allowance for credit losses, an increase from 304.2% at December 31, 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 and loans 90 days or greater past due. Prior to January 1, 2023, nonperforming loans also included performing troubled debt restructured loans accruing interest. Nonperforming loans increased by ~~$31.6~~$30.4 million to ~~$64.5~~$63.3 million at ~~March 31,~~September 30, 2023 from $32.9 million at December 31, 2022 and increased ~~$26.6~~$10.4 million from ~~$38.0~~$52.9 million at ~~March 31,~~September 30, 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 1.6% as of ~~March 31,~~September 30, 2023, 0.9% as of December 31, 2022, and ~~1.1%~~1.4% as of ~~March 31,~~September 30, 2022. The distribution of our nonperforming loans is shown in the following table.

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.~~

4653

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September 30, 2023

Nonperforming Loans
As of

Percent Change From

(Dollars in thousands)
September 30,

December 31,

September 30,

December 31,

September 30,

2023

2022

2022

2022

2022

Commercial
$
3,146

$
7,649

$
8,821

(58.9)

(64.3)

Leases

377

1,876

235

(79.9)

60.4

Commercial real estate – investor

26,724

4,346

17,945

514.9

48.9

Commercial real estate – owner occupied

18,290

8,223

9,581

122.4

90.9

Construction

7,206

251

7,525

N/M

(4.2)

Residential real estate – investor

1,502

1,672

1,380

(10.2)

8.8

Residential real estate – owner occupied

3,627

4,198

3,787

(13.6)

(4.2)

Multifamily

1,141

2,538

1,559

(55.0)

(26.8)

HELOC

1,312

2,158

2,065

(39.2)

(36.5)

Other ¹

-

2

2

(100.0)

(100.0)

Total nonperforming loans
$
63,325

$
32,913

$
52,900

92.4

19.7

¹ The “Other” segment includes consumer loans and overdrafts.
N/M – Not meaningful.

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

March 31, 2023

September 30, 2023
Nonperforming Assets

As of

Percent Change From

As of

Percent Change From
(Dollars in Thousands)

March 31,

December 31,

March 31,

December 31,

March 31,
(Dollars in thousands)

September 30,

December 31,

September 30,

December 31,

September 30,


2023

2022

2022

2022

2022

2023

2022

2022

2022

2022
Nonaccrual loans

$
63,561

$
31,602

$
35,973

101.1

76.7

$
62,116

$
31,602

$
32,126

96.6

93.4
Performing troubled debt restructured loans accruing interest ¹

N/A

49

1,242

N/A

N/A

N/A

49

22

N/A

N/A
Loans past due 90 days or more and still accruing interest

966

1,262

743

(23.5)

30.0

1,209

1,262

20,752

(4.2)

(94.2)
Total nonperforming loans

64,527

32,913

37,958

96.1

70.0

63,325

32,913

52,900

92.4

19.7
Other real estate owned

1,255

1,561

2,374

(19.6)

(47.1)

407

1,561

1,561

(73.9)

(73.9)
Total nonperforming assets

$
65,782

$
34,474

$
40,332

90.8

63.1

$
63,732

$
34,474

$
54,461

84.9

17.0

30-89 days past due loans and still accruing interest

$
24,770

$
7,508

$
20,835

$
28,486

$
7,508

$
8,197

Nonaccrual loans to total loans

1.6
%

0.8
%

1.1
%

1.5
%

0.8
%

0.8
%

Nonperforming loans to total loans

1.6
%

0.9
%

1.1
%

1.6
%

0.9
%

1.4
%

Nonperforming assets to total loans plus OREO

1.6
%

0.9
%

1.2
%

1.6
%

0.9
%

1.4
%

Allowance for credit losses

$
53,392

$
49,480

$
44,308

$
51,729

$
49,480

$
48,847

Allowance for credit losses to total loans

1.3
%

1.3
%

1.3
%

1.3
%

1.3
%

1.3
%

Allowance for credit losses to nonaccrual loans

84.0
%

156.6
%

123.2
%

83.3
%

156.6
%

152.1
%

N/A – Not 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.

Tableof Contents

Loan charge-offs, net of recoveries, for the ~~current~~third quarter of 2023, 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)	March 31,		% of	December 31,		% of	March 31,		% of	September 30,		% of	June 30,		% of	September 30,		% of
	2023		Total¹	2022		Total¹	2022		Total¹	2023		Total¹	2023		Total¹	2022		Total¹
Commercial	$	(124)	(16.8)	$	(8)	(0.9)	$	-	-	$	8	0.1	$	298	59.0	$	20	29.4
Leases		873	118.00		191	20.3		-	-		(95)	(1.4)		(7)	(1.4)		178	261.8
Commercial real estate – investor		(17)	(2.3)		776	82.6		213	72.7		6,754	102.4		51	10.1		105	154.4
Commercial real estate – owner occupied		(2)	(0.3)		(2)	(0.2)		113	38.6		23	0.3		198	39.2		(75)	(110.3)
Construction											(100)	(1.5)		-	-		-	-
Residential real estate – investor		(19)	(2.6)		(7)	(0.7)		(10)	(3.4)		(3)	-		(5)	(1.0)		(8)	(11.8)
Residential real estate – owner occupied		(10)	(1.4)		-	-		(83)	(28.3)		(25)	(0.4)		(36)	(7.1)		(113)	(166.2)
Multifamily		-	-		(6)	(0.6)		-	-		-	-		-	-		(63)	(92.6)
HELOC		(29)	(3.9)		(38)	(4.0)		(35)	(11.9)		(35)	(0.5)		(24)	(4.8)		(35)	(51.5)
Other ²		68	9.3		34	3.5		95	32.3		70	1.0		30	6.0		59	86.8
Net charge–offs	$	740	100.0	$	940	100.0	$	293	100.0	$	6,597	100.0	$	505	100.0	$	68	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 ~~$740,000~~$6.6 million were recorded for the ~~first~~third quarter of 2023, compared to net charge-offs of ~~$940,000~~$505,000 for the ~~fourth~~second quarter of ~~2022,~~2023, and net charge-offs of ~~$293,000~~$68,000 for the ~~first~~third quarter of 2022, reflecting continuing management attention to credit quality and remediation efforts. The net charge-offs for the ~~first~~third quarter of 2023 were primarily due to ~~six lease~~ charge offs of ~~$882,000~~three commercial real estate-investor loans of $6.8 million in aggregate. These three commercial real estate-investor credits had a reported reserve allocation of $4.7 million prior to the third quarter of 2023 charge-offs. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

Classified loans include nonaccrual 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.

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


							March 31, 2023								September 30, 2023
Classified Assets	As of						Percent Change From		As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,	September 30,		December 31,		September 30,		December 31,	September 30,
	2023		2022		2022		2022	2022	2023		2022		2022		2022	2022
Commercial	$	22,662	$	26,485	$	29,267	(14.4)	(22.6)	$	18,298	$	26,485	$	31,722	(30.9)	(42.3)
Leases		906		1,876		2,641	(51.7)	(65.7)		574		1,876		235	(69.4)	144.3
Commercial real estate – investor		52,615		27,410		8,809	92.0	497.3		54,126		27,410		28,252	97.5	91.6
Commercial real estate – owner occupied		37,545		40,890		13,259	(8.2)	183.2		55,292		40,890		42,698	35.2	29.5
Construction		241		1,333		3,185	(81.9)	(92.4)		17,263		1,333		1,347	N/M	N/M
Residential real estate – investor		1,702		1,714		1,544	(0.7)	10.2		1,502		1,714		1,285	(12.4)	16.9
Residential real estate – owner occupied		3,618		3,854		4,862	(6.1)	(25.6)		3,627		3,854		3,929	(5.9)	(7.7)
Multifamily		3,348		2,954		1,369	13.3	144.6		1,141		2,954		1,982	(61.4)	(42.4)
HELOC		2,635		2,411		1,669	9.3	57.9		1,434		2,411		2,278	(40.5)	(37.1)
Other ¹		2		2		3	-	(33.3)		-		2		2	(100.0)	(100.0)
Total classified loans		125,274		108,929		66,608	15.0	88.1		153,257		108,929		113,730	40.7	34.8
Other real estate owned		1,255		1,561		2,374	(19.6)	(47.1)		407		1,561		1,561	(73.9)	(73.9)
Total classified assets	$	126,529	$	110,490	$	68,982	14.5	83.4	$	153,664	$	110,490	$	115,291	39.1	33.3

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

N/M - Not meaningful

55

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Total classified loans increased $44.3 million and classified assets increased ~~$16.0~~$43.2 million as of ~~March 31,~~September 30, 2023 from ~~the levels at~~ December 31, 2022. The increase since December 31, 2022 is due to the addition of ~~$25.2~~$26.7 million of classified loans in commercial real estate – investor, primarily due to ~~three~~four large credits, two of which are office buildings, ~~and~~ one is an assisted living facility during the first six months of 2023, and one office building in the ~~first~~third quarter of 2023. The increase is also due to the growth in construction, primarily due to two large credits. The increase from ~~March 31,~~September 30, 2022 is primarily due to the same loan additions to commercial real estate – investor and ~~commercial real estate – owner occupied, increases of $43.8 million driven by six larger credits and $24.3 million primarily from the addition of two large credits, respectively.~~construction. 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 ~~20.04%~~23.51% for the period ended ~~March 31,~~September 30, 2023, compared to 18.36% as of December 31, 2022, and ~~12.04%~~19.23% as of ~~March 31,~~September 30, 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 allowance for credit losses (“ACL”) at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance ~~sheets~~sheet date.

At ~~March 31,~~September 30, 2023, our ACL on loans totaled ~~$53.4~~$51.7 million, and our ACL on unfunded commitments, included in other liabilities, totaled ~~$3.8~~$2.9 million. In the ~~first~~third quarter of 2023, we recorded provision expense on loans of ~~$4.7~~$3.0 million, based on our assessment of nonperforming loan metrics and trends and estimated future credit losses, and a ~~$1.2 million decrease in our reserve~~$12,000 reversal of provision on unfunded commitments, primarily due to ~~a reduction in construction unfunded commitments~~an adjustment of historical benchmark assumptions, such as funding rates and the ~~construction historical loss~~period used to forecast those rates, ~~as well as a reduction in~~within the ~~commercial substandard portfolio due to two large upgraded credits.~~ACL calculation. These ~~two entries~~adjustments resulted in a ~~$3.5~~$3.0 million net impact to the provision for credit losses for the ~~first~~third quarter of 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~~$51.7 million as of ~~March 31,~~September 30, 2023, $49.5 million as of December 31, 2022, and ~~$44.3~~$48.8 million as of ~~March 31,~~September 30, 2022. Our ACL on loans to total loans was 1.3% as of ~~March 31,~~September 30, 2023, compared to 1.3% as of December 31, 2022 and ~~March 31,~~September 30, 2022. See Item 7 – Critical Accounting Estimates in the Management Discussion and Analysis in our 2022 Annual Report in Form 10-K for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

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


		Three Months Ended									Three Months Ended								Nine Months Ended
	March 31,			December 31,			March 31,			September 30,			June 30,			September 30,			September 30,			September 30,
	2023			2022			2022			2023			2023			2022			2023			2022
Allowance at beginning of period	$	49,480		$	48,847		$	44,281		$	55,314		$	53,392		$	45,388		$	49,480		$	44,281
Charge–offs:
Commercial		27			2			30			20			380			67			427			149
Leases		882			193			-			-			-			178			882			178
Commercial real estate – investor		-			797			236			6,774			71			124			6,845			604
Commercial real estate – owner occupied		-			-			121			35			201			12			236			133
Construction		-			-			-			-			-			-			-			-
Residential real estate – investor		-			-			-			-			-			-			-			-
Residential real estate – owner occupied		-			-			-			-			-			-			-			-
Multifamily		-			2			-			-			-			-			-			-
HELOC		-			-			-			-			-			-			-			-
Other ¹		113			82			127			107			81			103			301			320
Total charge–offs		1,022			1,076			514			6,936			733			484			8,691			1,384
Recoveries:
Commercial		151			10			30			12			82			47			245			85
Leases		9			2			-			95			7			-			111			-
Commercial real estate – investor		17			21			23			20			20			19			57			60
Commercial real estate – owner occupied		2			2			8			12			3			87			17			102
Construction		-			-			-			100			-			-			100			-
Residential real estate – investor		19			7			10			3			5			8			27			23
Residential real estate – owner occupied		10			-			83			25			36			113			71			218
Multifamily		-			8			-			-			-			63			-			63
HELOC		29			38			35			35			24			35			88			102
Other ¹		45			48			32			37			51			44			133			120
Total recoveries		282			136			221			339			228			416			849			773
Net charge-offs		740			940			293			6,597			505			68			7,842			611
Provision for credit losses on loans		4,652			1,573			320			3,012			2,427			3,527			10,091			5,177
Allowance at end of period	$	53,392		$	49,480		$	44,308		$	51,729		$	55,314		$	48,847		$	51,729		$	48,847

Average total loans (exclusive of loans held–for–sale)	$	3,931,679		$	3,877,004		$	3,397,827		$	4,009,218		$	4,039,052		$	3,751,097		$	3,993,600		$	3,552,871
Net charge–offs to average loans		0.08	%		0.10	%		0.04	%		0.65	%		0.05	%		0.01	%		0.26	%		0.02	%
Allowance at period end to average loans		1.36	%		1.28	%		1.30	%		1.29	%		1.37	%		1.30	%		1.30	%		1.37	%

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

The coverage ratio of the ACL on loans to nonperforming loans was ~~82.7% March 31,~~81.3% as of September 30, 2023, which was a decrease from the coverage ratio of ~~150.3%~~90.3% as of ~~December 31, 2022~~June 30, 2023 and a decrease from ~~116.7%~~92.3% as of ~~March 31, 2022.~~September 30, 2023. When measured as a percentage of average loans, our total ACL on loans was ~~1.36% for the three months ended~~1.29% at September 30, 2023, 1.37% at June 30, 2023, and 1.30% ~~for the like period of March 31,~~at September 30, 2022.

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at ~~March 31,~~September 30, 2023, and general changes in lending policy, procedures and staffing, as well as other external 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. Continued volatility in the economic environment stemming from the impacts of and response to inflation, potential recession, and the war in Ukraine and the conflict in the Middle East, and the associated 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.

4957

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~~Other Real Estate Owned~~

As of March 31, 2023, OREO totaled $1.3 million, reflecting a $306,000 decrease from the $1.6 million at December 31, 2022, and a $1.1 million decrease from the $2.4 million at March 31, 2022. In the first quarter of 2023, we disposed of one property totaling $328,000 in net book value, which resulted in a loss on sale of OREO of $28,000. We transferred in two properties which increased total OREO net book value by $291,000. In the first quarter of 2023, we recorded two write-downs totaling $273,000 as well as a write-up for $4,000, totaling a $269,000 increase in valuation reserve, compared to no valuation reserve adjustments recorded in the fourth quarter of 2022 and the first quarter of 2022.

March 31, 2023
OREO
Three Months Ended

Percent Change From
(Dollars in thousands)
March 31,

December 31,

March 31,

December 31,

March 31,

2023

2022

2022

2022

2022
Balance at beginning of period
$
1,561

$
1,561

$
2,356

-

(33.7)

Property additions, net of acquisition adjustments

291

-

87

N/M

234.5

Less:

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

328

-

69

N/M

375.4

Period valuation write-down

269

-

-

N/M

N/M

Balance at end of period
$
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 $431,000, or approximately 34.3% of total OREO at 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)
March 31, 2023

December 31, 2022

March 31, 2022

Amount

% of Total

Amount

% of Total

Amount

% of Total
Single family residence
$
291

23
%

$
-

-
%

$
576

24
%
Lots (single family and commercial)

767

61
%

1,261

81
%

1,411

59
%
Vacant land

197

16
%

300

19
%

387

17
%
Total other real estate owned
$
1,255

100
%

$
1,561

100
%

$
2,374

100
%

Deposits and Borrowings

88

March 31, 2023

September 30, 2023
Deposits
As of

Percent Change From
As of

Percent Change From
(Dollars in thousands)
March 31,

December 31,

March 31,

December 31,

March 31,
September 30,

December 31,

September 30,

December 31,

September 30,

2023

2022

2022

2022

2022
2023

2022

2022

2022

2022
Noninterest bearing demand
$
1,950,144

$
2,051,702

$
2,132,606

(4.9)

(8.6)
$
1,862,659

$
2,051,702

$
2,098,144

(9.2)

(11.2)
Savings

1,108,610

1,145,592

1,228,783

(3.2)

(9.8)

1,003,498

1,145,592

1,164,036

(12.4)

(13.8)
NOW accounts

608,260

609,338

607,019

(0.2)

0.2

567,997

609,338

630,747

(6.8)

(9.9)
Money market accounts

799,300

862,170

1,098,581

(7.3)

(27.2)

702,176

862,170

931,813

(18.6)

(24.6)
Certificates of deposit of less than $100,000

238,257

244,017

286,116

(2.4)

(16.7)

248,272

244,017

258,071

1.7

(3.8)
Certificates of deposit of $100,000 through $250,000

147,887

157,438

135,682

(6.1)

9.0

162,901

157,438

148,411

3.5

9.8
Certificates of deposit of more than $250,000

44,762

40,466

55,758

10.6

(19.7)

66,817

40,466

50,137

65.1

33.3
Total deposits
$
4,897,220

$
5,110,723

$
5,544,545

(4.2)

(11.7)
$
4,614,320

$
5,110,723

$
5,281,359

(9.7)

(12.6)

~~Tableof Contents~~

Total deposits were ~~$4.90~~$4.61 billion at ~~March 31,~~September 30, 2023, which reflects a ~~$213.5~~$496.4 million decrease from total deposits of $5.11 billion at December 31, 2022, and a decrease of ~~$647.3~~$667.0 million from total deposits of ~~$5.54~~$5.28 billion at ~~March 31,~~September 30, 2022. The decrease in deposits at ~~March 31,~~September 30, 2023, compared to December 31, 2022, was primarily due to decreases in ~~non-interest bearing~~noninterest-bearing deposits of ~~$101.6~~$189.0 million, ~~savings accounts of $37.0 million and~~ money market accounts of ~~$62.9~~$160.0 million and savings accounts of $142.1 million. The decrease in deposits at ~~March 31,~~September 30, 2023, compared to ~~March 31,~~September 30, 2022, was primarily due to decreases in ~~non-interest bearing~~noninterest-bearing deposits of ~~$182.5~~$235.5 million, ~~savings accounts of $120.2 million, and~~ money market accounts of ~~$299.3~~$229.6 million, and savings accounts of $160.5 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 quarterly average deposits decreased ~~$489.9~~$659.4 million, or ~~8.9%~~12.4%, in the year over year period, driven by declines in our average demand deposits of ~~$90.5~~$225.1 million, and savings, NOW and money markets combined of ~~$338.6~~$440.7 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~~materially offsetting the significant expansion in those same accounts in the immediate aftermath of the pandemic.

The following table presents estimated insured and uninsured deposits at September 30, 2023 and December 31, 2022 by deposit type, as well as the weighted average rates for each year to date ending period.

(Dollars in thousands)
September 30, 2023

December 31, 2022

Total Deposits

Insured Deposits

Uninsured Deposits

Average Rate Paid

Total Deposits

Insured Deposits

Uninsured Deposits

Average Rate Paid
Noninterest bearing demand
$
1,862,659

$
1,202,051

$
660,608

-
%

$
2,051,702

$
1,327,379

$
724,323

-
%
Savings

1,003,498

935,664

67,834

0.08

1,145,592

1,065,153

80,439

0.03

NOW accounts

567,997

409,219

158,778

0.22

609,338

453,799

155,539

0.09

Money market accounts

702,176

490,539

211,637

0.67

862,170

588,923

273,247

0.10

Time deposits

477,990

414,227

63,763

1.14

441,921

381,980

59,941

0.31

Total
$
4,614,320

$
3,451,700

$
1,162,620

0.26
%

$
5,110,723

$
3,817,234

$
1,293,489

0.06
%

Collateralized public funds
$
264,322

$
15,410

$
248,912

$
262,318

$
15,879

$
246,439

Deposits declined 9.7% for the nine months ended September 30, 2023 due to retail and commercial run off. Total deposit run off year to date has been very granular, and not necessarily attributable to large deposit accounts. Our deposit retention efforts for commercial clients were more effective due to high touch relationships where we had a larger share of wallet. The largest reduction in total deposits was from retail customers due to personal and real estate tax payments, real estate transactions, investments, and consumer spending. In terms of product mix, we observed some migration into time deposits, drawn by CD rate specials. Overall, our deposit level remains stable and we continue to monitor customer relationships and liquidity levels daily.

In addition to deposits, we used other liquidity sources for our funding needs in all periods presented, such as repurchase agreements and other short-term borrowings with the FHLBC. Securities sold under repurchase agreements totaled ~~$27.9~~$25.9 million at ~~March 31,~~September 30, 2023, a ~~$4.3~~$6.3 million, or ~~13.2%~~19.5%, decrease from $32.2 million at December 31, 2022. Our excess liquidity on hand during much of 2022 allowed us to fund our short-term liquidity needs with cash on hand. During the third quarter of 2022, we began ~~utilizing~~re-utilizing short-term borrowings from the ~~FHLBC again.~~FHLBC. The outstanding balance of our short-term FHLBC borrowings was ~~$315.0~~$435.0 million as of ~~March 31,~~September 30, 2023, ~~and~~ $90.0 million as of December 31, ~~2022; there were no short-term borrowings outstanding~~2022, and $25.0 million as of ~~March 31,~~September 30, 2022.

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We are also indebted on $25.8 million, net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust II (“Trust II”). as of September 30, 2023. The Trust II issuance converted from fixed to floating rate at three month LIBOR, which is now three month Term SOFR, plus 150 basis points on June 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of ~~4.39%~~4.18% as of ~~March 31,~~September 30, 2023, as compared to 6.77%, which was the rate paid during the period prior to the June 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 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 were used for general corporate 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~~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. As of ~~March 31,~~September 30, 2023, we had ~~$59.3~~$59.4 million of subordinated debentures outstanding, net of deferred issuance costs.

In December 2016, we completed a $45.0 million senior note issuance. The notes ~~have~~had a ten-year term, and ~~include~~included interest payable semiannually at 5.75% for five years. Beginning December 31, 2021, the interest became payable quarterly at three month LIBOR plus 385 basis points. ~~As of March 31,~~On June 30, 2023, ~~we had $44.6 million of~~the senior ~~debt outstanding, net~~notes were redeemed in full. The remaining balance of deferred debt issuance ~~costs. At March 31, 2023, we were in compliance with all~~costs of ~~the financial covenants outlined within the~~$362,000 related to these senior ~~debt agreement.~~notes was recognized as interest expense as of June 30, 2023.

On February 24, 2023, we paid off the remaining $9.0 million balance in notes payable and other borrowings, resulting in no balance in this line item as of ~~March 31,~~September 30, 2023, compared to $9.0 million as of December 31, 2022, and ~~$18.0~~$10.0 million as of ~~March 31,~~September 30, 2022. The balance in notes payable was related to a $20.0 million dollar term note originated with a correspondent bank in the first quarter of 2020, to facilitate the redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures, completed on March 2, 2020.

Capital

As of ~~March 31,~~September 30, 2023, total stockholders’ equity was ~~$496.9~~$532.6 million, which was an increase of ~~$35.7~~$71.5 million from $461.1 million as of December 31, 2022. This increase is primarily attributable to an increase in retained earnings of ~~$21.4~~$66.8 million due to net income of ~~$23.6~~$73.5 million in the first ~~quarter~~nine months of 2023, partially offset by ~~$2.2~~$6.7 million of dividends paid to our common stockholders. In addition, total stockholders’ equity as of ~~March 31,~~September 30, 2023 increased over December 31, 2022, due to a reduction in unrealized net losses on available-for-sale securities, which ~~increased~~decreased accumulated other comprehensive ~~income~~loss by ~~$14.0~~$2.5 million in the first ~~three~~nine months of 2023, due to changes in market interest rates. Total stockholders’ equity as of ~~March 31,~~September 30, 2023 increased ~~$30.6~~$98.8 million compared to ~~March 31,~~September 30, 2022 due to net income year over year ~~less~~and the ~~reduction~~increase in accumulated other comprehensive ~~income~~loss of ~~$41.6~~$7.8 million year over year.

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


	Minimum Capital		Well Capitalized								Minimum Capital		Well Capitalized
	Adequacy with		Under Prompt								Adequacy with		Under Prompt
	Capital Conservation		Corrective Action		March 31,		December 31,		March 31,		Capital Conservation		Corrective Action		September 30,		December 31,		September 30,
	Buffer, if applicable¹		Provisions²		2023		2022		2022		Buffer, if applicable¹		Provisions²		2023		2022		2022
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		9.91	%	9.67	%	9.73	%	7.00	%	N/A		11.00	%	9.67	%	9.16	%
Total risk-based capital ratio	10.50	%	N/A		12.79	%	12.52	%	12.85	%	10.50	%	N/A		13.84	%	12.52	%	11.99	%
Tier 1 risk-based capital ratio	8.50	%	N/A		10.43	%	10.20	%	10.33	%	8.50	%	N/A		11.52	%	10.20	%	9.68	%
Tier 1 leverage ratio	4.00	%	N/A		8.56	%	8.14	%	7.00	%	4.00	%	N/A		9.62	%	8.14	%	7.70	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	11.98	%	11.70	%	12.74	%	7.00	%	6.50	%	12.49	%	11.70	%	11.60	%
Total risk-based capital ratio	10.50	%	10.00	%	13.10	%	12.75	%	13.83	%	10.50	%	10.00	%	13.57	%	12.75	%	12.64	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	11.98	%	11.70	%	12.74	%	8.50	%	8.00	%	12.49	%	11.70	%	11.60	%
Tier 1 leverage ratio	4.00	%	5.00	%	9.83	%	9.32	%	8.61	%	4.00	%	5.00	%	10.43	%	9.32	%	9.24	%

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.

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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 ~~March 31,~~September 30, 2023, ~~the~~our capital measures ~~of the Company~~ exclude $1.9 million, which is the modified CECL transition adjustment.

As of ~~March 31,~~September 30, 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, increased from 7.83% at December 31, 2022, to ~~8.39%~~9.25% at ~~March 31,~~September 30, 2023. Our GAAP tangible common equity to tangible assets ratio was ~~6.83%~~7.67% at ~~March 31,~~September 30, 2023, compared to 6.24% as of December 31, 2022. Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, increased from 6.28% at December 31, 2022, to ~~6.87%~~7.71% at ~~March 31,~~September 30, 2023, primarily due to an increase in tangible common equity in the ~~first~~third quarter of 2023. The increase in tangible common equity was due to an increase in retained earnings of ~~$21.4~~$66.8 million and an increase in accumulated other comprehensive ~~income~~loss of ~~$14.0~~$2.5 million primarily related to ~~a decline in~~improved unrealized losses on available-for-sale securities stemming from the changes in market interest rates.

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

March 31, 2023

December 31, 2022

September 30, 2023

December 31, 2022

Tangible common equity
GAAP

Non-GAAP

GAAP

Non-GAAP

GAAP

Non-GAAP

GAAP

Non-GAAP

(Dollars in thousands)

Total Equity
$
496,870

$
496,870

$
461,141

$
461,141

$
532,558

$
532,558

$
461,141

$
461,141

Less: Goodwill and intangible assets

99,532

99,532

100,156

100,156

98,298

98,298

100,156

100,156

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

N/A

2,611

N/A

2,736

N/A

2,364

N/A

2,736

Adjusted goodwill and intangible assets

99,532

96,921

100,156

97,420

98,298

95,934

100,156

97,420

Tangible common equity
$
397,338

$
399,949

$
360,985

$
363,721

$
434,260

$
436,624

$
360,985

$
363,721

Tangible assets

Total assets
$
5,920,283

$
5,920,283

$
5,888,317

$
5,888,317

$
5,758,156

$
5,758,156

$
5,888,317

$
5,888,317

Less: Adjusted goodwill and intangible assets

99,532

96,921

100,156

97,420

98,298

95,934

100,156

97,420

Tangible assets
$
5,820,751

$
5,823,362

$
5,788,161

$
5,790,897

$
5,659,858

$
5,662,222

$
5,788,161

$
5,790,897

Common equity to total assets

8.39
%

8.39
%

7.83
%

7.83
%

9.25
%

9.25
%

7.83
%

7.83
%
Tangible common equity to tangible assets

6.83
%

6.87
%

6.24
%

6.28
%

7.67
%

7.71
%

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~~third quarter of 2023, we ~~experienced strong~~continued to experience moderate 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~~sales 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, our senior management team monitors cash balances daily to ensure we have adequate liquidity to meet our operational and financing needs. As of ~~March 31,~~September 30, 2023, our cash on hand liquidity totaled ~~$103.0~~$109.0 million, a decrease of ~~$12.2~~$6.1 million over cash balances held as of December 31, 2022.

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Net cash inflows from operating activities were ~~$35.0~~$87.3 million during the first ~~three~~nine months of 2023, compared with net cash inflows of ~~$494,000~~$60.1 million in the same period of 2022. Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of outflows for the first ~~three~~nine months of 2023 ~~though~~compared to a ~~lesser extent than~~source of inflows for the like period of 2022. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and source of inflows for the like period of 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~~inflows from investing activities were ~~$42.9~~$124.5 million in the ~~three~~nine months ended ~~March 31,~~September 30, 2023, compared to net cash outflows of ~~$176.5~~$506.4 million in the same period in 2022. In the first ~~three~~nine months of 2023, securities transactions accounted for net inflows of ~~$90.0~~$306.0 million, and the principal change on loans accounted for net outflows of ~~$132.4~~$164.3 million. In the first ~~three~~nine months of 2022, securities transactions accounted for net outflows of ~~$199.3~~$66.9 million, and principal on loans funded, net of paydowns, accounted for net ~~inflows~~outflows of ~~$21.9~~$443.6 million. ~~Proceeds from sales of OREO accounted for $300,000 and $118,000 in investing cash inflows for the three months ended March 31, 2023 and 2022, respectively.~~

Net cash outflows from financing activities in the ~~three~~nine months ended ~~March 31,~~September 30, 2023, were ~~$4.2~~$218.0 million, compared with net cash ~~inflows~~outflows of ~~$58.6~~$189.7 million in the ~~three~~nine months ended ~~March 31,~~September 30, 2022. Net deposit outflows in the first ~~three~~nine months of 2023 were ~~$213.1~~$495.4 million

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compared to net deposit ~~inflows~~outflows of ~~$78.7~~$183.7 million in the first ~~three~~nine months of 2022. Other short-term borrowings had ~~$225.0~~$345.0 million of net cash inflows in the first ~~three~~nine months of 2023, compared to nonet cash inflows ~~or outflows~~of $25.0 million for other short-term borrowings in the first ~~three~~nine months of 2022. Changes in securities sold under repurchase agreements accounted for outflows of ~~$4.3~~$6.3 million and outflows of ~~$16.8~~$14.8 million for the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022, respectively. Dividends paid on our common stock totaled ~~$2.2~~$6.7 million infor both the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and ~~March 31,~~ 2022. The purchase of treasury stock in the first ~~three~~nine months of 2023 due to shares acquired with ~~restricted stock~~equity award vestings resulted in outflows of $605,000, compared to no cash ~~inflows or~~ outflows of $447,000 in the first ~~three~~nine months of 2022.

Cash and cash equivalents for the ~~three~~nine months ended ~~March 31,~~September 30, 2023, totaled ~~$103.0~~$109.0 million, as compared to $115.2 million as of December 31, 2022 and ~~$634.7~~$116.2 million as of ~~March 31,~~September 30, 2022. The decrease in cash and cash equivalents for the ~~three~~nine months ended ~~March 31,~~September 30, 2023 was mainly attributable to loan growth and the ~~payoff~~payoffs of the remaining balance of the term note and senior notes, as well as ~~seasonal~~ deposit outflows, partially offset by security sales and FHLB advances during the first ~~quarter~~nine months 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.

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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. A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in a volatile rate environment. We mitigate the impact of interest rate volatility to the Bank by managing our rate sensitivity under various scenarios.

~~The~~During the third quarter of 2023, the Federal Reserve ~~has slowed its pace of rate hikes to~~increased rates by 0.25% in July and held rates unchanged at the ~~March meeting – resulting in a federal funds rate target from 4.75% to 5.00%. We believe the~~September FOMC meeting. The current market expectation is ~~one 25 basis points rate hike at~~for rates to be unchanged for the ~~May meeting and the federal funds target rate to level off at 5.25%. The market has priced in rate cuts near the end~~remainder of 2023. The projected level of rate cuts in 2024 have been reduced and moved to later in the year, framing a “higher rates for a longer period” outcome. The Federal ~~Reserve’s objective of shrinking~~Reserve managed to shrink its balance sheet ~~has been slower than planned due~~ to ~~slower prepayments on mortgage-backed securities~~$8.0 trillion by September 2023, down from ~~the lack~~its peak of ~~refinancing activity. The Federal Reserve also provided additional liquidity facilities to financial institutions~~$8.7 trillion in March ~~2023, as a result its balance sheet remains at $8.6 trillion.~~2023.

We manage interest rate risk within guidelines established by policy which are intended to limit the amount of rate exposure. In practice, we seek to manage our interest rate risk exposure within our guidelines so that such exposure does not pose a material risk to our future ~~earnings.We~~earnings. We manage various market risks in the normal course of our operations, including credit, liquidity risk, and interest-rate risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of our business activities and operations. In addition, since we do not hold a trading portfolio, we are not exposed to significant market risk from trading activities. Our interest rate risk exposures at ~~March 31,~~September 30, 2023 and December 31, 2022 are outlined in the table below.

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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~~SOFR and ~~prime)~~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, 2022. We seek to monitor and manage interest rate risk within approved policy guidelines and limits. Asset and liability modeling and tracking is performed and presented to the Asset-Liability committee and the Board of Directors no less than quarterly. The presentations discuss our current and historical interest rate risk posture, shifts in the balance sheet composition, and the impact of interest rate movements on earnings and equity. Our current balance sheet is a moderately asset sensitive profile, as our variable rate assets reprice faster than our longer duration, low beta deposit base. Recent market events of failed liquidity management at other banks have been reviewed by the Asset-Liability committee. The committee concluded that we possess a strong liquidity profile and no new liquidity risks were identified. Prudently, we added new measures to assess liquidity risk and enhanced our reports to segment deposits by insured, uninsured, collateralized deposits; and monitor the bank’s funding sources and uses on a regular basis.

We also have a Risk Committee, chaired by our Chief Risk Officer, which reports no less than quarterly to senior management as well as our Board of Directors regarding compliance with risk tolerance limits, key risk factor changes, both internally and externally, due to portfolio changes as well as market conditions. Our enterprise risk management framework is governed by this committee, with input being provided by line of business managers, senior management and the Board.

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 ~~March 31,~~September 30, 2023, our net interest income profile remained sensitive to earnings gains (in both dollars and percentage) should interest rates rise. However, we ~~continue~~have moved to ~~have~~ a ~~lower sensitivity~~less sensitive profile ~~relative~~compared to December 31, 2022, ~~from~~due to the impact of interest rate swaps and ~~increase in~~sales of variable rate ~~funding.~~securities.

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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%, with no change in the slope of the yield curve.


	Analysis of Net Interest Income Sensitivity																		Analysis of Net Interest Income Sensitivity
	Immediate Changes in Rates																		Immediate Changes in Rates
(Dollars in thousands)		(2.0)	%		(1.0)	%		(0.5)	%		0.5	%		1.0	%		2.0	%		(2.0)	%		(1.0)	%		(0.5)	%		0.5	%		1.0	%		2.0	%
March 31, 2023
September 30, 2023
Dollar change	$	(42,566)		$	(21,044)		$	(10,322)		$	10,476		$	21,117		$	41,629		$	(37,003)		$	(18,371)		$	(9,055)		$	9,349		$	18,817		$	36,942
Percent change		(16.3)	%		(8.1)	%		(4.0)	%		4.0	%		8.1	%		15.9	%		(14.6)	%		(7.2)	%		(3.6)	%		3.7	%		7.4	%		14.5	%

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

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, balance sheet composition 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, although changes in interest rates affect our financial condition to a far greater degree than changes in the inflation ~~rate; however,~~rate, we monitor both. The annual US inflation rate ~~continues~~for September 2023 was 3.7%, a moderate increase quarter-over-quarter, while Core CPI eased to ~~slow to 5.0% from its peak of 9.1% in June 2022.~~4.1%. Management believes the inflation rate will continue to ~~trend~~come down, in response to monetary policy. In general, we expect higher inflation to increase borrowers’ needs for credit which drives GDP growth. As interest rates are expected to continue to move up modestly, we expect our net interest margin to correlate in this direction.albeit at a much slower rate than experienced year-to-date as of September 2023. The downside risks of high inflation 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 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~~risk of ~~higher~~high inflation has been contained with minimal impact to ~~be beneficial to us in the near term.~~our results.

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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 ~~March 31,~~September 30, 2023. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of ~~March 31,~~September 30, 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 ~~March 31,~~September 30, 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.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1.A. Risk Factors

Investing in shares of our common stock involves certain risks, including those identified and described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 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.”

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

~~Tableof Contents~~

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,~~Form 10-Q for the ~~first time in decades, significant inflationary pressures, evidenced by higher gas prices, higher food prices~~fiscal quarter ended March 31, 2023; and ~~other consumer items. Inflation represents a loss in purchasing power because~~(iii) Quarterly Report on Form 10-Q for 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. fiscal quarter ended June 30, 2023.

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

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not ~~applicable~~applicable.

Item 5.  Other Information

None.

5764

Table of Contents

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 ~~March 31,~~September 30, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three and nine months ended ~~March 31,~~September 30, 2023 and 2022; (iii) Consolidated Statements of Comprehensive Income (Loss) ~~Income~~ for the three and nine months ended ~~March 31,~~September 30, 2023 and 2022; (iv) Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022; (v) Consolidated Statements of ~~Stockholder’s~~Stockholders’ Equity for the three and nine months ended ~~March 31,~~September 30, 2023 and 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).

5865

Table of Contents

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

Chairman and Chief Executive Officer

(principal executive officer)

BY:
/s/ Bradley S. Adams

Bradley S. Adams

Executive Vice President,
Chief Operating Officer and Chief Financial Officer

(principal financial and accounting officer)

DATE: ~~May 9,~~November 8, 2023

5966


	PART I
		Page Number
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3637
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	5462
Item 4.	Controls and Procedures	5663
	PART II

Item 1.	Legal Proceedings	5664
Item 1.A.	Risk Factors	5664
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5764
Item 3.	Defaults Upon Senior Securities	5764
Item 4.	Mine Safety Disclosure	5764
Item 5.	Other Information	5764
Item 6.	Exhibits	5865

	Signatures	5966


	Three Months Ended
	March 31,
Other real estate owned	2023		2022
Balance at beginning of period	$	1,561	$	2,356
Property additions, net of acquisition adjustments		291		87
Less:
Proceeds from property disposals, net of participation purchase and gains/losses		328		69
Period valuation write-down		269		-
Balance at end of period	$	1,255	$	2,374


Noninterest Income	Nine Months Ended				YTD through September 30, 2023
(Dollars in thousands)	September 30,		September 30,		Percent
	2023		2022		Change
Wealth management	$	7,203	$	7,484	(3.8)
Service charges on deposits		7,290		7,063	3.2
Residential mortgage banking revenue
Secondary mortgage fees		201		270	(25.6)
MSRs mark to market (loss) gain		(148)		3,608	(104.1)
Mortgage servicing income		1,534		1,612	(4.8)
Net gain on sales of mortgage loans		1,111		1,682	(33.9)
Total residential mortgage banking revenue		2,698		7,172	(62.4)
Securities losses, net		(4,146)		(34)	N/M
Change in cash surrender value of BOLI		1,579		342	361.7
Card related income		7,540		8,194	(8.0)
Other income		3,286		3,949	(16.8)
Total noninterest income	$	25,450	$	34,170	(25.5)


							March 31, 2023
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 ¹	$	851,737	$	840,964	$	695,545	1.3	22.5
Leases		285,831		277,385		211,132	3.0	35.4
Commercial real estate – investor		1,056,787		987,635		748,267	7.0	41.2
Commercial real estate – owner occupied		870,115		854,879		873,292	1.8	(0.4)
Construction		174,683		180,535		165,558	(3.2)	5.5
Residential real estate – investor		56,720		57,353		62,846	(1.1)	(9.7)
Residential real estate – owner occupied		217,855		219,718		203,118	(0.8)	7.3
Multifamily		358,991		323,691		298,686	10.9	20.2
HELOC		104,941		109,202		120,241	(3.9)	(12.7)
Other ²		25,694		18,247		23,685	40.8	8.5
Total loans	$	4,003,354	$	3,869,609	$	3,402,370	3.5	17.7


							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


										March 31, 2023											September 30, 2023
Nonperforming Assets	As of									Percent Change From		As of									Percent Change From
(Dollars in Thousands)	March 31,			December 31,			March 31,			December 31,	March 31,
(Dollars in thousands)												September 30,			December 31,			September 30,			December 31,	September 30,
	2023			2022			2022			2022	2022	2023			2022			2022			2022	2022
Nonaccrual loans	$	63,561		$	31,602		$	35,973		101.1	76.7	$	62,116		$	31,602		$	32,126		96.6	93.4
Performing troubled debt restructured loans accruing interest ¹		N/A			49			1,242		N/A	N/A		N/A			49			22		N/A	N/A
Loans past due 90 days or more and still accruing interest		966			1,262			743		(23.5)	30.0		1,209			1,262			20,752		(4.2)	(94.2)
Total nonperforming loans		64,527			32,913			37,958		96.1	70.0		63,325			32,913			52,900		92.4	19.7
Other real estate owned		1,255			1,561			2,374		(19.6)	(47.1)		407			1,561			1,561		(73.9)	(73.9)
Total nonperforming assets	$	65,782		$	34,474		$	40,332		90.8	63.1	$	63,732		$	34,474		$	54,461		84.9	17.0


30-89 days past due loans and still accruing interest	$	24,770		$	7,508		$	20,835				$	28,486		$	7,508		$	8,197
Nonaccrual loans to total loans		1.6	%		0.8	%		1.1	%				1.5	%		0.8	%		0.8	%
Nonperforming loans to total loans		1.6	%		0.9	%		1.1	%				1.6	%		0.9	%		1.4	%
Nonperforming assets to total loans plus OREO		1.6	%		0.9	%		1.2	%				1.6	%		0.9	%		1.4	%

Allowance for credit losses	$	53,392		$	49,480		$	44,308				$	51,729		$	49,480		$	48,847
Allowance for credit losses to total loans		1.3	%		1.3	%		1.3	%				1.3	%		1.3	%		1.3	%
Allowance for credit losses to nonaccrual loans		84.0	%		156.6	%		123.2	%				83.3	%		156.6	%		152.1	%


							March 31, 2023
OREO	Three Months Ended						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2023		2022		2022		2022	2022
Balance at beginning of period	$	1,561	$	1,561	$	2,356	-	(33.7)
Property additions, net of acquisition adjustments		291		-		87	N/M	234.5
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		328		-		69	N/M	375.4
Period valuation write-down		269		-		-	N/M	N/M
Balance at end of period	$	1,255	$	1,561	$	2,374	(19.6)	(47.1)



OREO Properties by Type
(Dollars in thousands)	March 31, 2023				December 31, 2022				March 31, 2022
		Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	291	23	%	$	-	-	%	$	576	24	%
Lots (single family and commercial)		767	61	%		1,261	81	%		1,411	59	%
Vacant land		197	16	%		300	19	%		387	17	%
Total other real estate owned	$	1,255	100	%	$	1,561	100	%	$	2,374	100	%

88

							March 31, 2023								September 30, 2023
Deposits	As of						Percent Change From		As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,	September 30,		December 31,		September 30,		December 31,	September 30,
	2023		2022		2022		2022	2022	2023		2022		2022		2022	2022
Noninterest bearing demand	$	1,950,144	$	2,051,702	$	2,132,606	(4.9)	(8.6)	$	1,862,659	$	2,051,702	$	2,098,144	(9.2)	(11.2)
Savings		1,108,610		1,145,592		1,228,783	(3.2)	(9.8)		1,003,498		1,145,592		1,164,036	(12.4)	(13.8)
NOW accounts		608,260		609,338		607,019	(0.2)	0.2		567,997		609,338		630,747	(6.8)	(9.9)
Money market accounts		799,300		862,170		1,098,581	(7.3)	(27.2)		702,176		862,170		931,813	(18.6)	(24.6)
Certificates of deposit of less than $100,000		238,257		244,017		286,116	(2.4)	(16.7)		248,272		244,017		258,071	1.7	(3.8)
Certificates of deposit of $100,000 through $250,000		147,887		157,438		135,682	(6.1)	9.0		162,901		157,438		148,411	3.5	9.8
Certificates of deposit of more than $250,000		44,762		40,466		55,758	10.6	(19.7)		66,817		40,466		50,137	65.1	33.3
Total deposits	$	4,897,220	$	5,110,723	$	5,544,545	(4.2)	(11.7)	$	4,614,320	$	5,110,723	$	5,281,359	(9.7)	(12.6)



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 ~~March 31,~~September 30, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three and nine months ended ~~March 31,~~September 30, 2023 and 2022; (iii) Consolidated Statements of Comprehensive Income (Loss) ~~Income~~ for the three and nine months ended ~~March 31,~~September 30, 2023 and 2022; (iv) Consolidated Statements of Cash Flows for the ~~three~~nine months ended ~~March 31,~~September 30, 2023 and 2022; (v) Consolidated Statements of ~~Stockholder’s~~Stockholders’ Equity for the three and nine months ended ~~March 31,~~September 30, 2023 and 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
			Chairman and Chief Executive Officer
			(principal executive officer)


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


DATE: ~~May 9,~~November 8, 2023