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,~~June 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,~~August 4, 2023, the Registrant has ~~44,665,127~~44,675,057 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 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, 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)
	June 30,		December 31,
	2023		2022
Assets
Cash and due from banks	$	59,466	$	56,632
Interest earning deposits with financial institutions		53,144		58,545
Cash and cash equivalents		112,610		115,177
Securities available-for-sale, at fair value		1,335,622		1,539,359
Federal Home Loan Bank Chicago (“FHLBC”) and Federal Reserve Bank Chicago (“FRBC”) stock		36,730		20,530
Loans held-for-sale		1,218		491
Loans		4,015,525		3,869,609
Less: allowance for credit losses on loans		55,314		49,480
Net loans		3,960,211		3,820,129
Premises and equipment, net		72,797		72,355
Other real estate owned		761		1,561
Mortgage servicing rights, at fair value		11,041		11,189
Goodwill		86,478		86,478
Core deposit intangible		12,436		13,678
Bank-owned life insurance (“BOLI”)		107,268		106,608
Deferred tax assets, net		39,827		44,750
Other assets		106,943		56,012
Total assets	$	5,883,942	$	5,888,317

Liabilities
Deposits:
Noninterest bearing demand	$	1,897,694	$	2,051,702
Interest bearing:
Savings, NOW, and money market		2,368,033		2,617,100
Time		451,855		441,921
Total deposits		4,717,582		5,110,723
Securities sold under repurchase agreements		31,532		32,156
Other short-term borrowings		485,000		90,000
Junior subordinated debentures		25,773		25,773
Subordinated debentures		59,339		59,297
Senior notes		-		44,585
Notes payable and other borrowings		-		9,000
Other liabilities		50,761		55,642
Total liabilities		5,369,987		5,427,176

Stockholders’ Equity
Common stock		44,705		44,705
Additional paid-in capital		200,963		202,276
Retained earnings		355,219		310,512
Accumulated other comprehensive loss		(86,186)		(93,124)
Treasury stock		(746)		(3,228)
Total stockholders’ equity		513,955		461,141
Total liabilities and stockholders’ equity	$	5,883,942	$	5,888,317


	March 31, 2023		December 31, 2022		June 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		44,665,127		44,582,311
Treasury shares		40,023		122,839		40,023		122,839

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)

(unaudited)

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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Interest and dividend income
Loans, including fees	$	61,561	$	38,229	$	118,771	$	74,595
Loans held-for-sale		19		32		31		89
Securities:
Taxable		9,930		6,786		20,665		11,954
Tax exempt		1,337		1,297		2,674		2,615
Dividends from FHLBC and FRBC stock		396		263		676		416
Interest bearing deposits with financial institutions		643		782		1,228		1,051
Total interest and dividend income		73,886		47,389		144,045		90,720
Interest expense
Savings, NOW, and money market deposits		1,742		347		2,891		744
Time deposits		1,156		265		1,820		542
Securities sold under repurchase agreements		7		9		16		20
Other short-term borrowings		5,160		-		7,505		-
Junior subordinated debentures		281		284		560		564
Subordinated debentures		546		547		1,092		1,093
Senior notes		1,414		578		2,408		1,063
Notes payable and other borrowings		-		95		87		198
Total interest expense		10,306		2,125		16,379		4,224
Net interest and dividend income		63,580		45,264		127,666		86,496
Provision for credit losses		2,000		550		5,501		550
Net interest and dividend income after provision for credit losses		61,580		44,714		122,165		85,946
Noninterest income
Wealth management		2,458		2,506		4,728		5,204
Service charges on deposits		2,362		2,328		4,786		4,402
Secondary mortgage fees		76		50		135		189
Mortgage servicing rights mark to market gain (loss)		96		82		(429)		3,060
Mortgage servicing income		499		579		1,015		1,098
Net gain (loss) on sales of mortgage loans		398		(262)		704		1,233
Securities losses, net		(1,547)		(33)		(3,222)		(33)
Change in cash surrender value of BOLI		418		72		660		196
Card related income		2,690		2,965		4,934		5,532
Other income		773		924		2,262		1,793
Total noninterest income		8,223		9,211		15,573		22,674
Noninterest expense
Salaries and employee benefits		21,798		21,332		44,046		41,299
Occupancy, furniture and equipment		3,639		3,046		7,114		6,745
Computer and data processing		1,290		4,006		3,064		10,274
FDIC insurance		794		702		1,378		1,112
Net teller & bill paying		515		834		1,017		2,741
General bank insurance		306		351		611		666
Amortization of core deposit intangible		618		659		1,242		1,324
Advertising expense		103		194		245		376
Card related expense		1,222		1,057		2,438		1,591
Legal fees		283		179		602		436
Consulting & management fees		520		523		1,310		1,139
Other real estate expense, net		(98)		87		208		75
Other expense		3,840		4,279		7,477		7,723
Total noninterest expense		34,830		37,249		70,752		75,501
Income before income taxes		34,973		16,676		66,986		33,119
Provision for income taxes		9,411		4,429		17,817		8,852
Net income	$	25,562	$	12,247	$	49,169	$	24,267

Basic earnings per share	$	0.57	$	0.28	$	1.10	$	0.55
Diluted earnings per share		0.56		0.27		1.08		0.54
Dividends declared per share		0.05		0.05		0.10		0.10

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 June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Net Income	$	25,562	$	12,247	$	49,169	$	24,267

Unrealized holding (losses) gains on available-for-sale securities arising during the period		(8,360)		(40,485)		7,850		(105,314)
Related tax benefit (expense)		2,342		11,335		(2,194)		29,488
Holding (losses) gains, after tax, on available-for-sale securities		(6,018)		(29,150)		5,656		(75,826)

Less: Reclassification adjustment for the net losses realized during the period
Net realized losses		(1,547)		(33)		(3,222)		(33)
Related tax benefit		434		9		905		9
Net realized losses after tax		(1,113)		(24)		(2,317)		(24)
Other comprehensive (loss) income on available-for-sale securities		(4,905)		(29,126)		7,973		(75,802)

Changes in fair value of derivatives used for cash flow hedges		(3,017)		1,898		(1,415)		2,487
Related tax benefit (expense)		836		(532)		380		(697)
Other comprehensive (loss) income on cash flow hedges		(2,181)		1,366		(1,035)		1,790

Total other comprehensive (loss) income		(7,086)		(27,760)		6,938		(74,012)
Total comprehensive income (loss)	$	18,476	$	(15,513)	$	56,107	$	(49,745)

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

Balance, April 1, 2023	$	(76,014)	$	(3,086)	$	(79,100)
Other comprehensive loss, net of tax		(4,905)		(2,181)		(7,086)
Balance, June 30, 2023	$	(80,919)	$	(5,267)	$	(86,186)

For the Six Months Ended
Balance, January 1, 2022	$	11,139	$	(2,371)	$	8,768
Other comprehensive (loss) income, net of tax		(75,802)		1,790		(74,012)
Balance, June 30, 2022	$	(64,663)	$	(581)	$	(65,244)

Balance, January 1, 2023	$	(88,892)	$	(4,232)	$	(93,124)
Other comprehensive income (loss), net of tax		7,973		(1,035)		6,938
Balance, June 30, 2023	$	(80,919)	$	(5,267)	$	(86,186)

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,				Six Months Ended June 30,
	2023		2022		2023		2022
Cash flows from operating activities
Net income	$	23,607	$	12,020	$	49,169	$	24,267
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount amortization on securities		799		1,809		1,626		3,300
Securities losses, net		1,675		-		3,222		33
Provision for credit losses		3,501		-		5,501		550
Originations of loans held-for-sale		(10,206)		(32,739)		(24,570)		(49,648)
Proceeds from sales of loans held-for-sale		9,957		30,791		24,271		53,204
Net gains on sales of mortgage loans		(306)		(1,495)		(704)		(1,233)
Mortgage servicing rights mark to market loss (gain)		525		(2,978)		429		(3,060)
Net accretion of discount on loans and unfunded commitments		(1,180)		(2,382)		(2,093)		(3,841)
Net change in cash surrender value of BOLI		(242)		(124)		(660)		(196)
Net losses (gains) on sale of other real estate owned		28		(49)
Net gains on sale of other real estate owned						(158)		(130)
Provision for other real estate owned valuation losses		269		-		269		104
Depreciation of fixed assets and amortization of leasehold improvements		1,046		1,086		2,135		2,101
Net gains on disposal and transfer of fixed assets		(434)		-		(635)		(1,961)
Amortization of core deposit intangibles		624		665		1,242		1,324
Change in current income taxes receivable		7,043		2,955		(456)		(729)
Deferred tax expense		1,442		1,458		2,204		2,400
Change in accrued interest receivable and other assets		2,635		893		(50,594)		7,000
Accretion of purchase accounting adjustment on time deposits		(367)		(424)		(701)		(821)
Change in accrued interest payable and other liabilities		(6,344)		(11,739)		(5,709)		(7,033)
Stock based compensation		932		747		1,774		1,469
Net cash provided by operating activities		35,004		494		5,562		27,100
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		37,718		75,650		73,981		148,429
Proceeds from sales of securities available-for-sale		66,170		-		140,166		3,303
Purchases of securities available-for-sale		(4,186)		(266,250)		(4,186)		(301,129)
Purchases of FHLBC/FRBC stock		(9,675)		(8,717)
Net purchases of FHLBC/FRBC stock						(16,200)		(7,156)
Net change in loans		(132,445)		21,900		(143,966)		(199,955)
Proceeds from sales of other real estate owned, net of participations and improvements		300		118		1,165		845
Proceeds from disposition of premises and equipment		756		1,250		1,105		7,490
Net purchases of premises and equipment		(1,560)		(487)		(3,047)		(1,526)
Net cash used in investing activities		(42,922)		(176,536)
Net cash provided by (used in) investing activities						49,018		(349,699)
Cash flows from financing activities
Net change in deposits		(213,136)		78,737		(392,440)		(122,556)
Net change in securities sold under repurchase agreements		(4,259)		(16,816)		(624)		(12,738)
Net change in other short-term borrowings		225,000		-		395,000		-
Repayment of term note		(9,000)		(1,000)		(9,000)		(2,000)
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)		(4,478)		(4,423)
Purchase of treasury stock		(605)		-		(605)		(400)
Net cash (used in) provided by financing activities		(4,237)		58,648
Net cash used in financing activities						(57,147)		(148,173)
Net change in cash and cash equivalents		(12,155)		(117,394)		(2,567)		(470,772)
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	$	112,610	$	281,335

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

Balance, January 1, 2022		$	44,705	$	202,443	$	252,011	$	8,768	$	(5,900)	$	502,027
Balance, April 1, 2022															$	44,705	$	203,190	$	261,807	$	(37,484)	$	(5,900)	$	466,318
Net income																				12,247						12,247
Other comprehensive loss, net of tax																						(27,760)				(27,760)
Dividends declared on common stock, ($0.05 per share)																				(2,223)						(2,223)
Vesting of restricted stock																		(2,630)						2,630		-
Stock based compensation																		722								722
Purchase of treasury stock from taxes withheld on stock awards																								(400)		(400)
Balance, June 30, 2022															$	44,705	$	201,282	$	271,831	$	(65,244)	$	(3,670)	$	448,904

Balance, April 1, 2023															$	44,705	$	200,121	$	331,890	$	(79,100)	$	(746)	$	496,870
Net income							12,020						12,020							25,562						25,562
Other comprehensive loss, net of tax									(46,252)				(46,252)									(7,086)				(7,086)
Dividends declared on common stock, ($0.05 per share)							(2,224)						(2,224)							(2,233)						(2,233)
Stock based compensation					747								747					842								842
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
Balance, June 30, 2023															$	44,705	$	200,963	$	355,219	$	(86,186)	$	(746)	$	513,955


For the Six Months Ended

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


Balance, January 1, 2023	$	44,705	$	202,276	$	310,512	$	(93,124)	$	(3,228)	$	461,141
Net income						49,169						49,169
Other comprehensive income, net of tax								6,938				6,938
Dividends declared on common stock, ($0.10 per share)						(4,462)						(4,462)
Vesting of restricted stock				(3,087)						3,087		-
Stock based compensation				1,774								1,774
Purchase of treasury stock from taxes withheld on stock awards										(605)		(605)
Balance, June 30, 2023	$	44,705	$	200,963	$	355,219	$	(86,186)	$	(746)	$	513,955

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,~~June 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 is 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~~have planned accordingly for the transition of existing LIBOR exposures ~~prior to~~as the final LIBOR cessation date ofwas June 30, 2023.

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~~second quarter of 2023, the Company had no changes to significant accounting policies or estimates.

Subsequent Events

On ~~April~~July 18, 2023, our Board of Directors declared a cash dividend of $0.05 per share payable on ~~May 8,~~August 7, 2023, to stockholders of record as of ~~April~~July 28, 2023; dividends of $2.2 million are scheduled to be paid to stockholders on ~~May 8,~~August 7, 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~~$21.8 million at ~~March 31,~~June 30, 2023, and $5.6 million at December 31, 2022. FRBC stock was recorded at $14.9 million at ~~March 31,~~June 30, 2023 and December 31, 2022.

The following tables summarize the amortized cost and fair value of the securities portfolio at ~~March 31,~~June 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
June 30, 2023									Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	224,195	$	-	$	(9,461)	$	214,734	$	224,337	$	-	$	(9,724)	$	214,613
U.S. government agencies		60,952		-		(4,249)		56,703		60,593		-		(4,612)		55,981
U.S. government agencies mortgage-backed		135,504		-		(13,566)		121,938		129,973		-		(14,833)		115,140
States and political subdivisions		243,131		1,329		(10,954)		233,506		241,764		557		(12,787)		229,534
Corporate bonds		10,000		-		(238)		9,762		5,000		-		(118)		4,882
Collateralized mortgage obligations		510,992		-		(56,886)		454,106		468,029		-		(60,534)		407,495
Asset-backed securities		196,966		4		(7,217)		189,753		140,791		-		(6,472)		134,319
Collateralized loan obligations		178,903		-		(4,337)		174,566		177,523		-		(3,865)		173,658
Total securities available-for-sale	$	1,560,643	$	1,333	$	(106,908)	$	1,455,068	$	1,448,010	$	557	$	(112,945)	$	1,335,622


			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$ $6.9~~7.2~~ million and $6.8~~6.8~~ million at ~~March 31,~~June 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,~~June 30, 2023, by contractual maturity, are listed in the table below. Securities not due at a single maturity date are shown separately.


			Weighted						Weighted
	Amortized		Average		Fair		Amortized		Average		Fair
Securities available-for-sale	Cost		Yield		Value		Cost		Yield		Value
Due in one year or less	$	64,076	0.72	%	$	62,639	$	153,576	0.93	%	$	149,066
Due after one year through five years		245,837	1.14			233,060		151,098	1.19			140,669
Due after five years through ten years		48,750	3.02			45,537		52,232	3.03			48,401
Due after ten years		179,615	3.06			173,469		174,788	3.07			166,874
		538,278	1.90			514,705		531,694	1.91			505,010
Mortgage-backed and collateralized mortgage obligations		646,496	2.41			576,044		598,002	2.29			522,635
Asset-backed securities		196,966	5.12			189,753		140,791	5.15			134,319
Collateralized loan obligations		178,903	6.45			174,566		177,523	6.92			173,658
Total securities available-for-sale	$	1,560,643	3.04	%	$	1,455,068	$	1,448,010	3.00	%	$	1,335,622

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,~~June 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 ~~March 31,~~June 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										Less than 12 months					12 months or more
March 31, 2023	in an unrealized loss position					in an unrealized loss position					Total
June 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		Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. Treasuries	-	$	-	$	-	5	$	9,461	$	214,734	5	$	9,461	$	214,734	-	$	-	$	-	5	$	9,724	$	214,613	5	$	9,724	$	214,613
U.S. government agencies	-		-		-	9		4,249		56,703	9		4,249		56,703	-		-		-	9		4,612		55,981	9		4,612		55,981
U.S. government agencies mortgage-backed	3		143		2,235	127		13,423		119,703	130		13,566		121,938	3		177		2,188	127		14,656		112,952	130		14,833		115,140
States and political subdivisions	14		434		47,760	24		10,520		82,401	38		10,954		130,161	31		1,178		92,606	26		11,609		83,930	57		12,787		176,536
Corporate bonds	-		-		-	2		238		9,762	2		238		9,762	-		-		-	1		118		4,882	1		118		4,882
Collateralized mortgage obligations	13		794		23,540	157		56,092		430,566	170		56,886		454,106	3		381		7,817	149		60,153		399,678	152		60,534		407,495
Asset-backed securities	11		745		45,309	39		6,472		144,132	50		7,217		189,441	4		536		29,088	27		5,936		105,231	31		6,472		134,319
Collateralized loan obligations	5		222		13,632	29		4,115		160,934	34		4,337		174,566	1		8		2,970	33		3,857		170,688	34		3,865		173,658
Total securities available-for-sale	46	$	2,338	$	132,476	392	$	104,570	$	1,218,935	438	$	106,908	$	1,351,411	42	$	2,280	$	134,669	377	$	110,665	$	1,147,955	419	$	112,945	$	1,282,624


	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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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


		Three Months Ended						Six Months Ended
		June 30,						June 30,
Securities available-for-sale	2023			2022			2023			2022
Proceeds from sales of securities	$	73,996		$	3,303		$	140,166		$	3,303
Gross realized losses on securities		(1,547)			(33)			(3,222)			(33)
Net realized losses	$	(1,547)		$	(33)		$	(3,222)		$	(33)
Income tax benefit on net realized losses	$	434		$	9		$	905		$	9
Effective tax rate applied		28.1	%		27.3	%		28.1	%		27.3	%

As of June 30, 2023, securities valued at $938.5 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:


	June 30, 2023		December 31, 2022
Commercial ¹	$	820,027	$	840,964
Leases		314,919		277,385
Commercial real estate – investor		1,080,073		987,635
Commercial real estate – owner occupied		824,277		854,879
Construction		189,058		180,535
Residential real estate – investor		55,935		57,353
Residential real estate – owner occupied		218,205		219,718
Multifamily		383,184		323,691
HELOC		102,058		109,202
Other ²		27,789		18,247
Total loans		4,015,525		3,869,609
Allowance for credit losses on loans		(55,314)		(49,480)
Net loans ³	$	3,960,211	$	3,820,129

¹ Includes $1.2 million and $1.6 million of Paycheck Protection Program (“PPP”) loans at June 30, 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.

³ Excludes accrued interest receivable of $17.8 million and $15.9 million at June 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)

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

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

~~Note 4 – Loans and Allowance for Credit Losses on Loans~~

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

March 31, 2023

December 31, 2022
Commercial ¹

$
851,737

$
840,964
Leases

285,831

277,385
Commercial real estate – investor

1,056,787

987,635
Commercial real estate – owner occupied

870,115

854,879
Construction

174,683

180,535
Residential real estate – investor

56,720

57,353
Residential real estate – owner occupied

217,855

219,718
Multifamily

358,991

323,691
HELOC

104,941

109,202
Other ²

25,694

18,247
Total loans

4,003,354

3,869,609
Allowance for credit losses on loans

(53,392)

(49,480)
Net loans ³

$
3,949,962

$
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.~~

³ ~~Excludes accrued interest receivable of~~ ~~$17.0~~ ~~million and~~ ~~$15.9~~ ~~million at March 31, 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%~~71.0% and 70.6% of the portfolio at ~~March 31,~~June 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.

The following tables represent the activity in the allowance for credit losses for loans, or the ACL, for the three and six months ended ~~March 31,~~June 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 June 30, 2023
Commercial	$	11,968	$	(581)	$	27	$	151	$	11,511	$	11,511	$	319	$	380	$	82	$	11,532
Leases		2,865		774		882		9		2,766		2,766		(83)		-		7		2,690
Commercial real estate – investor		10,674		4,569		-		17		15,260		15,260		4,822		71		20		20,031
Commercial real estate – owner occupied		15,001		573		-		2		15,576		15,576		(2,816)		201		3		12,562
Construction		1,546		(501)		-		-		1,045		1,045		134		-		-		1,179
Residential real estate – investor		768		(41)		-		19		746		746		(8)		-		5		743
Residential real estate – owner occupied		2,046		(334)		-		10		1,722		1,722		110		-		36		1,868
Multifamily		2,453		212		-		-		2,665		2,665		72		-		-		2,737
HELOC		1,806		(47)		-		29		1,788		1,788		(118)		-		24		1,694
Other		353		28		113		45		313		313		(5)		81		51		278
Total											$	53,392	$	2,427	$	733	$	228	$	55,314
	$	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
Six months ended June 30, 2023
Commercial	$	11,968	$	(262)	$	407	$	233	$	11,532
Leases		2,865		691		882		16		2,690
Commercial real estate – investor		10,674		9,391		71		37		20,031
Commercial real estate – owner occupied		15,001		(2,243)		201		5		12,562
Construction		1,546		(367)		-		-		1,179
Residential real estate – investor		768		(49)		-		24		743
Residential real estate – owner occupied		2,046		(224)		-		46		1,868
Multifamily		2,453		284		-		-		2,737
HELOC		1,806		(165)		-		53		1,694
Other		353		23		194		96		278
Total	$	49,480	$	7,079	$	1,755	$	510	$	55,314



			Provision for
	Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three months ended June 30, 2022
Commercial	$	12,576	$	1,582	$	52	$	8	$	14,114
Leases		2,573		(837)		-		-		1,736
Commercial real estate – investor		10,690		(1,029)		243		18		9,436
Commercial real estate – owner occupied		8,139		3,332		-		7		11,478
Construction		2,858		(1,323)		-		-		1,535
Residential real estate – investor		703		(47)		-		5		661
Residential real estate – owner occupied		1,950		(103)		-		22		1,869
Multifamily		2,977		(543)		-		-		2,434
HELOC		1,675		(164)		-		31		1,542
Other		167		462		91		45		583
Total	$	44,308	$	1,330	$	386	$	136	$	45,388

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
Allowance for credit losses	Beginning		(Release of)						Ending
Six months ended June 30, 2022	Balance		Credit Losses		Charge-offs		Recoveries		Balance
Commercial	$	11,751	$	2,407	$	82	$	38	$	14,114
Leases		3,480		(1,744)		-		-		1,736
Commercial real estate – investor		10,795		(920)		480		41		9,436
Commercial real estate – owner occupied		4,913		6,671		121		15		11,478
Construction		3,373		(1,838)		-		-		1,535
Residential real estate – investor		760		(114)		-		15		661
Residential real estate – owner occupied		2,832		(1,068)		-		105		1,869
Multifamily		3,675		(1,241)		-		-		2,434
HELOC		2,510		(1,035)		-		67		1,542
Other		192		532		217		76		583
Total	$	44,281	$	1,650	$	900	$	357	$	45,388

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,~~June 30, 2023, our allowance for credit losses (“ACL”) on loans totaled ~~$53.4~~$55.3 million, and our ACL on unfunded commitments, included in other liabilities, totaled ~~$3.8~~$3.1 million including related purchase accounting adjustments. InDuring the first ~~quarter~~six months of 2023, we recorded net provision expense of ~~$3.5~~$5.5 million based on historical loss rate updates driven by higher charge offs in commercial real estate-investor, loan growth in the reserve of approximately $247.3 million, risk rating migration including an increased reserve on loans individually analyzed, and our assessment of ~~nonperforming loan metrics and trends, and~~ estimated future credit losses. The ACL on loans excludes ~~$3.2~~$2.7 million, $4.3 million and ~~$4.2~~$3.4 million of allowance for unfunded commitments as of ~~March 31,~~June 30, 2023, December 31, 2022 and ~~March 31,~~June 30, 2022, respectively, recorded within Other Liabilities. The total ACL on unfunded commitments listed as of ~~March 31,~~June 30, 2023, December 31, 2022, and ~~March 31,~~June 30, 2022 excludes the purchase accounting adjustment of ~~$596,000,~~$372,000, $819,000 and ~~$1.5~~$1.3 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,~~June 30, 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


			Accounts								ACL
June 30, 2023	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	859	$	91	$	-	$	-	$	950	$	20
Leases		-		-		637		-		637		637
Commercial real estate – investor		31,464		-		-		-		31,464		9,159
Commercial real estate – owner occupied		17,691		-		-		-		17,691		4,586
Construction		116		-		-		-		116		-
Residential real estate – investor		38		-		-		-		38		-
Residential real estate – owner occupied		1,486		-		-		-		1,486		-
Multifamily		591		-		-		-		591		-
HELOC		39		-		-		-		39		33
Total	$	52,284	$	91	$	637	$	-	$	53,012	$	14,435


			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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


													90 days or														90 days or
					90 Days or								Greater Past						90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and		30-59 Days		60-89 Days		Greater Past		Total Past						Due and
March 31, 2023	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
June 30, 2023															Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	2,640	$	-	$	1,422	$	4,062	$	847,675	$	851,737	$	460	$	-	$	879	$	91	$	970	$	819,057	$	820,027	$	-
Leases		789		51		-		840		284,991		285,831		-		453		37		-		490		314,429		314,919		-
Commercial real estate – investor		5,395		22,966		2,018		30,379		1,026,408		1,056,787		-		132		21		26,579		26,732		1,053,341		1,080,073		149
Commercial real estate – owner occupied		2,914		9,162		1,833		13,909		856,206		870,115		-		1,120		2,037		4,317		7,474		816,803		824,277		-
Construction		873		-		116		989		173,694		174,683		-		-		-		116		116		188,942		189,058		-
Residential real estate – investor		322		-		1,233		1,555		55,165		56,720		-		447		460		292		1,199		54,736		55,935		-
Residential real estate – owner occupied		3,044		177		2,622		5,843		212,012		217,855		420		179		731		2,248		3,158		215,047		218,205		-
Multifamily		217		-		1,662		1,879		357,112		358,991		-		6,386		326		-		6,712		376,472		383,184		-
HELOC		303		182		409		894		104,047		104,941		86		549		11		231		791		101,267		102,058		159
Other		558		1		-		559		25,135		25,694		-		1		2		-		3		27,786		27,789		-
Total	$	17,055	$	32,539	$	11,315	$	60,909	$	3,942,445	$	4,003,354	$	966	$	9,267	$	4,504	$	33,874	$	47,645	$	3,967,880	$	4,015,525	$	308


													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,~~June 30, 2023, and December 31, 2022:


Nonaccrual loan detail	March 31, 2023		With no ACL		December 31, 2022		With no ACL		June 30, 2023		With no ACL		December 31, 2022		With no ACL
Commercial	$	2,351	$	1,892	$	7,189	$	6,598	$	1,544	$	1,453	$	7,189	$	6,598
Leases		856		173		1,876		-		758		121		1,876		-
Commercial real estate – investor		30,397		11,210		4,346		4,244		31,464		12,368		4,346		4,244
Commercial real estate – owner occupied		19,691		4,560		8,050		3,813		18,857		4,329		8,050		3,813
Construction		241		241		251		-		116		116		251		-
Residential real estate – investor		1,555		1,379		1,528		675		1,445		1,445		1,528		675
Residential real estate – owner occupied		3,618		3,618		3,713		1,572		3,660		3,027		3,713		1,572
Multifamily		2,495		2,495		2,538		1,322		1,191		1,191		2,538		1,322
HELOC		2,355		2,177		2,109		180		1,890		1,890		2,109		180
Other		2		2		2		-		-		-		2		-
Total	$	63,561	$	27,747	$	31,602	$	18,404	$	60,925	$	25,940	$	31,602	$	18,404

The Company recognized ~~$86,000~~$29,000 of interest on nonaccrual loans during the three months ended ~~March 31,~~June 30, 2023.

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

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

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

~~Credit quality indicators by loan segment and loan origination date at 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,~~June 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	$	127,530	$	226,048	$	45,876	$	16,103	$	9,914	$	5,986	$	335,806	$	1,379	$	768,642
Special Mention		1,875		272		1,182		2,432		-		-		21,286		-		27,047		-		-		260		-		43		-		28,837		-		29,140
Substandard		4,958		2,447		2,981		12,176		7		-		3,916		-		26,485		-		3,010		1,432		2,815		11,354		-		3,634		-		22,245
Total commercial		231,889		73,327		25,760		27,350		6,964		2,651		473,023		-		840,964		127,530		229,058		47,568		18,918		21,311		5,986		368,277		1,379		820,027

Leases
Pass		161,379		64,203	$	26,995		17,653		4,449		830		-		-		275,509		86,364		138,055	$	53,672		20,558		12,036		3,260		-		-		313,945
Special Mention		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Substandard		1,606		-		-		270		-		-		-		-		1,876		-		637		-		-		337		-		-		-		974
Total leases		162,985		64,203		26,995		17,923		4,449		830		-		-		277,385		86,364		138,692		53,672		20,558		12,373		3,260		-		-		314,919

Commercial real estate – investor
Pass																				175,445		363,460		213,303		112,372		60,729		71,447		7,982		-		1,004,738
Special Mention																				-		12,885		-		5,409		-		-		-		-		18,294
Substandard																				351		17,681		1,947		5,033		10,597		9,119		12,313		-		57,041
Total commercial real estate – investor																				175,796		394,026		215,250		122,814		71,326		80,566		20,295		-		1,080,073

Commercial real estate – owner occupied
Pass																				94,424		145,156		185,929		83,503		57,794		111,532		33,885		-		712,223
Special Mention																				-		13,538		22,245		35,427		226		2,123		-		-		73,559
Substandard																				-		2,494		15,333		1,164		18,943		561		-		-		38,495
Total commercial real estate – owner occupied																				94,424		161,188		223,507		120,094		76,963		114,216		33,885		-		824,277

Construction
Pass																				10,078		73,533		56,855		25,249		1,865		1,216		2,144		-		170,940
Special Mention																				307		7,574		-		10,121		-		-		-		-		18,002
Substandard																				-		-		-		-		116		-		-		-		116
Total construction																				10,385		81,107		56,855		35,370		1,981		1,216		2,144		-		189,058

Residential real estate – investor
Pass																				2,101		14,624		9,201		6,702		8,029		11,616		1,880		-		54,153
Special Mention																				-		-		68		-		-		-		-		-		68
Substandard																				-		591		-		-		421		702		-		-		1,714
Total residential real estate – investor																				2,101		15,215		9,269		6,702		8,450		12,318		1,880		-		55,935

Residential real estate – owner occupied
Pass																				9,856		42,915		42,368		27,072		15,462		76,144		728		-		214,545
Special Mention																				-		-		-		-		-		-		-		-		-
Substandard																				-		125		-		92		696		2,747		-		-		3,660
Total residential real estate – owner occupied																				9,856		43,040		42,368		27,164		16,158		78,891		728		-		218,205

Multifamily
Pass																				51,855		81,441		117,460		68,474		12,666		43,224		343		-		375,463
Special Mention																				-		373		3,596		337		1,675		549		-		-		6,530
Substandard																				-		924		-		-		-		267		-		-		1,191
Total multifamily																				51,855		82,738		121,056		68,811		14,341		44,040		343		-		383,184

HELOC
Pass																				1,057		2,810		229		1,462		1,648		2,393		90,307		-		99,906
Special Mention																				-		-		-		-		-		-		-		-		-
Substandard																				41		28		1		-		-		209		1,873		-		2,152
Total HELOC																				1,098		2,838		230		1,462		1,648		2,602		92,180		-		102,058

Other
Pass																				4,463		2,405		1,577		267		91		103		18,883				27,789
Special Mention																				-		-		-		-		-		-		-				-
Substandard																				-		-		-		-		-		-		-				-
Total other																				4,463		2,405		1,577		267		91		103		18,883		-		27,789

Total loans
Pass																				563,173		1,090,447		726,470		361,762		180,234		326,921		491,958		1,379		3,742,344
Special Mention																				307		34,370		26,169		51,294		1,944		2,672		28,837		-		145,593
Substandard																				392		25,490		18,713		9,104		42,464		13,605		17,820		-		127,588
Total loans																			$	563,872	$	1,150,307	$	771,352	$	422,160	$	224,642	$	343,198	$	538,615	$	1,379	$	4,015,525

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				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
	March 31,
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
	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
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)

The gross charge-offs activity by loan type and year of origination at June 30, 2023 were as follows:


Current period gross charge-offs	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted To Term Loans		Total
Commercial	$	-	$	-	$	-	$	364	$	-	$	43	$	-	$	-	$	407
Leases		-		870		-		-		12		-		-		-		882
Commercial real estate – investor		-		-		71		-		-		-		-		-		71
Commercial real estate – owner occupied		-		22		179		-		-		-		-		-		201
Construction		-		-		-		-		-		-		-		-		-
Residential real estate – investor		-		-		-		-		-		-		-		-		-
Residential real estate – owner occupied		-		-		-		-		-		-		-		-		-
Multifamily		-		-		-		-		-		-		-		-		-
HELOC		-		-		-		-		-		-		-		-		-
Other		-		3		24		8		-		159		-		-		194
Total	$	-	$	895	$	274	$	372	$	12	$	202		-		-	$	1,755

~~Expenses related to OREO, net~~The Company had $215,000 and $600,000 in residential real estate loans in the process of ~~lease revenue includes:~~foreclosure as of June 30, 2023 and December 31, 2022, respectively.

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)

As of January 1, 2023, the Company prospectively adopted ASU 2022-02, Topic 326 “Troubled Debt Restructuring (“TDRs”) and Vintage Disclosures”, see Note 1. Eleven loans, $32.7 million in aggregate, were modified and were experiencing financial difficulty during the six-month period ending June 30, 2023. There were two TDR loan modifications for an aggregate of $41,000 for the three months ended June 30, 2022 and three TDR loan modifications for an aggregate of $1.1 million for the six months ended June 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 June 30, 2023 and was no TDR default activity for the period ended June 30, 2022, for loans that were restructured within the prior 12-month period.

The following table presents the amortized costs basis of loans at June 30, 2023 that were both experiencing financial difficulty and modified during the period ended June 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.


June 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	$	859	$	979	$	-	$	1,838	0.2%
Commercial real estate – investor		12,664		-		1,774		14,438	1.3%
Commercial real estate – owner occupied		16,318		-		-		16,318	2.0%
HELOC		60		-		-		60	0.1%
Total	$	29,901	$	979	$	1,774	$	32,654	0.8%

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 June 30, 2023.


June 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	$	-	$	-	$	-	$	-	$	1,838	$	1,838
Commercial real estate – investor		-		-		1,774		1,774		12,664		14,438
Commercial real estate – owner occupied		-		-		-		-		16,318		16,318
HELOC		-		-		-		-		60		60
Total	$	-	$	-	$	1,774	$	1,774	$	30,880	$	32,654

The following table summarizes the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty for the period ended June 30, 2023. The Company had one Commercial real estate – investor loan that had a payment modification, change to a single payment at maturity.


June 30, 2023	Weighted-Average Term Extension (In Months)		Weighted-Average Interest Rate Change			Weighted-Average Delay of Payment (In Months)
Commercial		4.90		5.00	%		-
Commercial real estate – investor		11.50		-			7.00
Commercial real estate – owner occupied		12.00		-			-
HELOC		24.00		-			-
Total		11.40		5.00	%		7.00

Note 65 – Deposits

Major classifications of deposits were as follows:


	March 31, 2023		December 31, 2022		June 30, 2023		December 31, 2022
Noninterest bearing demand	$	1,950,144	$	2,051,702	$	1,897,694	$	2,051,702
Savings		1,108,610		1,145,592		1,050,453		1,145,592
NOW accounts		608,260		609,338		586,121		609,338
Money market accounts		799,300		862,170		731,459		862,170
Certificates of deposit of less than $100,000		238,257		244,017		240,848		244,017
Certificates of deposit of $100,000 through $250,000		147,887		157,438		148,070		157,438
Certificates of deposit of more than $250,000		44,762		40,466		62,937		40,466
Total deposits	$	4,897,220	$	5,110,723	$	4,717,582	$	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,~~June 30, 2023 and December 31, 2022. Junior subordinated debentures are discussed in more detail in Note 8.7.


	March 31, 2023		December 31, 2022		June 30, 2023		December 31, 2022
Securities sold under repurchase agreements	$	27,897	$	32,156	$	31,532	$	32,156
Other short-term borrowings		315,000		90,000		485,000		90,000
Junior subordinated debentures		25,773		25,773
Junior subordinated debentures¹						25,773		25,773
Subordinated debentures		59,318		59,297		59,339		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	$	601,644	$	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~~$31.5 million at ~~March 31,~~June 30, 2023, and $32.2 million at December 31, 2022. The fair value of the pledged collateral was ~~$65.9~~$65.0 million at ~~March 31,~~June 30, 2023, and $71.4 million at December 31, 2022. At ~~March 31,~~June 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,~~June 30, 2023, the Bank had ~~$315.0~~$485.0 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,~~June 30, 2023 was valued at ~~$15.3~~$21.8 million, and any potential FHLBC advances were collateralized by loans and securities with a principal balance of ~~$1.50~~$1.48 billion, which carried a FHLBC-calculated combined collateral value of ~~$1.06~~$1.04 billion. The Company had excess collateral of ~~$743.6~~$551.3 million available to secure borrowings at ~~March 31,~~June 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 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,~~June 30, 2023 and December 31, 2022, we had $59.3 million of subordinated debentures outstanding, net of deferred issuance costs.

The Company ~~also had $44.6 million of~~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

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

included within Notes Payable and Other Borrowings on the Consolidated Balance Sheets, and the remaining $9.0 million balance of the note was paid off ~~as of~~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.

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. 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%~~4.37% and ~~4.41%~~4.42% for the quarters ended ~~March 31,~~June 30, 2023 and ~~March 31,~~June 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,~~June 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,~~June 30, 2023, ~~970,271~~967,600 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.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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~~238,149 and ~~251,055~~264,589 restricted stock units issued under the 2019 Plan during the ~~three~~six months ended ~~March 31,~~June 30, 2023 and ~~March 31,~~June 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 ~~$948,000 in~~$1.8 million for the ~~first three~~six months ofended June 30, 2023 and ~~$795,000~~$1.5 million for the ~~first three~~six months ofended June 30, 2022.

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


	March 31, 2023			June 30, 2023
		Weighted			Weighted
	Restricted	Average		Restricted	Average
	Stock Shares	Grant Date		Stock Shares	Grant Date
	and Units	Fair Value		and Units	Fair Value
Unvested at January 1	649,210	$	12.84	649,210	$	12.84
Granted	230,399		17.21	238,149		17.05
Vested	(117,674)		12.26	(117,674)		12.26
Unvested at March 31	761,935	$	14.25
Forfeited				(5,079)		13.55
Unvested at June 30				764,606	$	14.23

Total unrecognized compensation cost of restricted awards was ~~$6.8~~$6.1 million as of ~~March 31,~~June 30, 2023, which is expected to be recognized over a weighted-average period of ~~2.25~~2.06 years.

Note 9 – Earnings Per Share

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Basic earnings per share:
Weighted-average common shares outstanding		44,665,127		44,499,395		44,642,250		44,480,326
Net income	$	25,562	$	12,247	$	49,169	$	24,267
Basic earnings per share	$	0.57	$	0.28	$	1.10	$	0.55

Diluted earnings per share:
Weighted-average common shares outstanding		44,665,127		44,499,395		44,642,250		44,480,326
Dilutive effect of unvested restricted awards ¹		759,291		747,341		728,556		724,134
Diluted average common shares outstanding		45,424,418		45,246,736		45,370,806		45,204,460

Net Income	$	25,562	$	12,247	$	49,169	$	24,267
Diluted earnings per share	$	0.56	$	0.27	$	1.08	$	0.54


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

2324

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

~~Note 10 – Earnings Per Share~~

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

Three Months Ended March 31,


2023

2022


Basic earnings per share:

Weighted-average common shares outstanding

44,619,118

44,461,045

Net income

$
23,607

$
12,020

Basic earnings per share

$
0.53

$
0.27

Diluted earnings per share:

Weighted-average common shares outstanding

44,619,118

44,461,045

Dilutive effect of unvested restricted awards ¹

697,480

700,670

Diluted average common shares outstanding

45,316,598

45,161,715

Net Income

$
23,607

$
12,020

Diluted earnings per share

$
0.52

$
0.27

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

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,~~June 30, 2023, the Bank exceeded those thresholds.

At ~~March 31,~~June 30, 2023, the Bank’s Tier 1 capital leverage ratio was ~~9.83%~~9.70%, an increase of 5138 basis points from December 31, 2022, and is above the 8.00% objective. The Bank’s total capital ratio was ~~13.10%~~12.83%, an increase of 358 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,~~June 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,~~June 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
June 30, 2023
Common equity tier 1 capital to risk weighted assets
Consolidated	$	478,610	9.91	%	$	338,070	7.00	%		N/A	N/A		$	503,459	10.29	%	$	342,489	7.00	%		N/A	N/A
Old Second Bank		577,986	11.98			337,721	7.00		$	313,598	6.50	%		571,923	11.70			342,176	7.00		$	317,735	6.50	%
Total capital to risk weighted assets
Consolidated		617,527	12.79			506,961	10.50			N/A	N/A			643,871	13.16			513,727	10.50			N/A	N/A
Old Second Bank		631,903	13.10			506,487	10.50			482,369	10.00			627,335	12.83			513,407	10.50			488,959	10.00
Tier 1 capital to risk weighted assets
Consolidated		503,610	10.43			410,420	8.50			N/A	N/A			528,459	10.80			415,917	8.50			N/A	N/A
Old Second Bank		577,986	11.98			410,090	8.50			385,967	8.00			571,923	11.70			415,500	8.50			391,058	8.00
Tier 1 capital to average assets
Consolidated		503,610	8.56			235,332	4.00			N/A	N/A			528,459	8.96			235,919	4.00			N/A	N/A
Old Second Bank		577,986	9.83			235,193	4.00			293,991	5.00			571,923	9.70			235,845	4.00			294,806	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,~~June 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,~~June 30, 2023, the Bank had capacity to pay dividends of ~~$51.2~~$39.5 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 six-month period ended June 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,~~June 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,~~June 30, 2023 and December 31, 2022, respectively, measured by the Company at fair value on a recurring basis:


	March 31, 2023								June 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	$	214,613	$	-	$	-	$	214,613
U.S. government agencies		-		56,703		-		56,703		-		55,981		-		55,981
U.S. government agencies mortgage-backed		-		121,938		-		121,938		-		115,140		-		115,140
States and political subdivisions		-		218,527		14,979		233,506		-		214,596		14,938		229,534
Corporate bonds		-		9,762		-		9,762		-		4,882		-		4,882
Collateralized mortgage obligations		-		454,106		-		454,106		-		407,495		-		407,495
Asset-backed securities		-		189,753		-		189,753		-		134,319		-		134,319
Collateralized loan obligations		-		174,566		-		174,566		-		173,658		-		173,658
Loans held-for-sale		-		946		-		946		-		1,218		-		1,218
Mortgage servicing rights		-		-		10,784		10,784		-		-		11,041		11,041
Interest rate swap agreements, including risk participation agreement		-		5,885		-		5,885		-		6,560		-		6,560
Mortgage banking derivatives		-		28		-		28		-		77		-		77
Total	$	214,734	$	1,232,214	$	25,763	$	1,472,711	$	214,613	$	1,113,926	$	25,979	$	1,354,518

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	10,007	$	-	$	10,007	$	-	$	13,740	$	-	$	13,740
Total	$	-	$	10,007	$	-	$	10,007	$	-	$	13,740	$	-	$	13,740

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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								Six Months Ended June 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)		-		(66)		6,155
Included in other comprehensive income		226		(6)		423		-		226		(6)		622		-
Purchases, issuances, sales, and settlements
Purchases		-		-		406		-		-		-		406		-
Issuances		-		-		-		120		-		-		-		281
Settlements		(342)		-		(46)		(54)		(342)		-		(253)		(6,584)
Ending balance March 31, 2023	$	-	$	-	$	14,979	$	10,784
Ending balance June 30, 2023									$	-	$	-	$	14,938	$	11,041

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Notes to Consolidated Financial Statements

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


	Three Months Ended March 31, 2022				Six Months Ended June 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		(65)		3,630
Included in other comprehensive income		(938)		-		(1,562)		-
Purchases, issuances, sales, and settlements
Purchases		1,076		-
Issuances		-		301		-		565
Settlements		(364)		(250)		(521)		(570)
Ending balance March 31, 2022	$	13,833	$	10,376
Ending balance June 30, 2022					$	13,088	$	10,722

The following table and commentary present quantitative and qualitative information about Level 3 fair value measurements as of ~~March 31,~~June 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	%	$	14,938	Discounted Cash Flow	Discount Rate	3.1 – 5.2%	4.5	%
				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	%	$	11,041	Discounted Cash Flow	Discount Rate	9.0 – 11.0%	9.0	%
				Prepayment Speed	4.2 - 29.1%	6.3	%				Prepayment Speed	3.0 – 22.3%	6.3	%

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

Weighted
Measured at fair value

Significant Unobservable

Average
on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

States and political subdivisions

$
14,229

Discounted Cash Flow

Discount Rate

2.3 - 5.8%

4.4
%

Liquidity Premium

0.3 - 0.5%

0.5
%

Collateralized mortgage obligations

$
6,770

Discounted Cash Flow

Discount Rate

7.0 - 7.0%

7.0
%

Asset-backed securities

$
15,012

Discounted Cash Flow

Discount Rate

6.2 - 6.5%

6.3
%

Mortgage servicing rights

$
11,189

Discounted Cash Flow

Discount Rate

9.0 - 11.0%

9.0
%

Prepayment Speed

3.6 - 27.3%

6.2
%


						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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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

~~Assets and Liabilities Measured at Fair Value on a 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,June 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								June 30, 2023
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Individually evaluated loans¹	$	-	$	-	$	48,285	$	48,285	$	-	$	-	$	56,361	$	56,361
Other real estate owned, net²		-		-		1,255		1,255		-		-		761		761
Total	$	-	$	-	$	49,540	$	49,540	$	-	$	-	$	57,122	$	57,122

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~~81.1 million and a valuation allowance of $~~21.4~~24.7 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $~~3.8~~7.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2023.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $~~1.3~~761,000 ~~million~~ at ~~March 31,~~June 30, 2023, which is made up of the outstanding balance of $~~2.2~~1.0 million, net of a purchase accounting adjustment of $~~131,000~~130,000 and a valuation allowance of $~~853,000~~114,000.


	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,~~June 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										June 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	$	-	$	-	$	59,466	$	59,466	$	59,466	$	-	$	-
Interest earning deposits with financial institutions		52,162		52,162		52,162		-		-		53,144		53,144		53,144		-		-
Securities available-for-sale		1,455,068		1,455,068		214,734		1,225,355		14,979		1,335,622		1,335,622		214,613		1,106,071		14,938
FHLBC and FRBC stock		30,205		30,205		-		30,205		-		36,730		36,730		-		36,730		-
Loans held-for-sale		946		946		-		946		-		1,218		1,218		-		1,218		-
Net loans		4,003,354		3,842,384		-		-		3,842,384		3,960,211		3,833,624		-		-		3,833,624
Mortgage servicing rights		10,784		10,784		-		-		10,784		11,041		11,041						11,041
Interest rate swap agreements		5,735		5,735		-		5,735		-		6,452		6,452		-		6,452		-
Interest rate lock commitments and forward contracts		28		28		-		28		-		77		77		-		77		-
Interest receivable on securities and loans		24,214		24,214		-		24,214		-		24,708		24,708		-		24,708		-

Financial liabilities:
Noninterest bearing deposits	$	1,950,144	$	1,950,144	$	1,950,144	$	-	$	-	$	1,897,694	$	1,897,694	$	1,897,694	$	-	$	-
Interest bearing deposits		2,947,076		2,932,989		-		2,932,989		-		2,819,888		2,805,372		-		2,805,372		-
Securities sold under repurchase agreements		27,897		27,897		-		27,897		-		31,532		31,532		-		31,532		-
Other short-term borrowings		315,000		315,000		-		315,000		-		485,000		485,000		-		485,000		-
Junior subordinated debentures		25,773		19,330		-		19,330		-		25,773		19,588		-		19,588		-
Subordinated debentures		59,318		46,118		-		46,118		-		59,339		47,339		-		47,339		-
Senior notes		44,611		41,011		41,011		-		-		-		-		-		-		-
Note payable and other borrowings												-		-		-		-		-
Interest rate swap agreements		10,006		10,006		-		10,006		-		13,740		13,740		-		13,740		-
Interest payable on deposits and borrowings		2,029		2,029		-		2,029		-		1,950		1,950		-		1,950		-

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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 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,~~June 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,~~June 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~~$6.8 million will be reclassified as an increase to interest income and an additional ~~$511,000~~$688,000 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,~~June 30, 2023 and December 31, 2022 were ~~$108.2~~$106.4 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,~~June 30, 2023 and December 31, 2022, the Company had ~~$8.1~~$10.4 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~~$5.7 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~~second quarter of 2023 and in the year of 2022. The Company offsets derivative assets and liabilities that are subject to a master netting arrangement.

The Company also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards. The interest rate risk associated with these loan interest rate lock commitments is managed with contracts for future deliveries of loans as well as selling forward mortgage-backed securities contracts. Loan interest rate lock commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The notional amount of these commitments at ~~March 31,~~June 30, 2023 and December 31, 2022 were ~~$10.9~~$10.0 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,~~June 30, 2023 and December 31, 2022.

Fair Value of Derivative Instruments


			March 31, 2023						June 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	2,623	Other Liabilities	9,911
Total derivatives designated as hedging instruments				1,824		6,095				2,623		9,911

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	19	108,150	Other Assets	3,911	Other Liabilities	3,911	18	106,379	Other Assets	3,829	Other Liabilities	3,829
Interest rate lock commitments and forward contracts	41	10,930	Other Assets	28	Other Liabilities	-	40	10,029	Other Assets	77	Other Liabilities	-
Other contracts	4	44,097	Other Assets	150	Other Liabilities	1	4	43,994	Other Assets	108	Other Liabilities	-
Total derivatives not designated as hedging instruments				4,089		3,912				4,014		3,829


			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~~$5.3 million as of ~~March 31,~~June 30, 2023, and ~~$1.9 million~~$581,000 as of ~~March 31,~~June 30, 2022. The amount of the loss reclassified from AOCI to interest income on the income statement was ~~$1.0~~$2.4 million for the ~~three~~six months ended ~~March 31,~~June 30, 2023 and $16,000 ~~of gain~~ for ~~three~~the six months ended ~~March 31, 2022.~~June 30, 2022, respectively.

Credit-risk-related Contingent Features

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

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

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

●

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

●

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

●

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

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

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


	March 31, 2023						December 31, 2022						June 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	$	2,116	$	16,370	$	18,486	$	3,514	$	15,365	$	18,879
Performance standby		1,913		11,799		13,712		3,161		13,989		17,150		1,513		12,511		14,024		3,161		13,989		17,150
		5,369		27,189		32,558		6,675		29,354		36,029		3,629		28,881		32,510		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	$	3,629	$	28,948	$	32,577	$	6,675	$	29,421	$	36,096

Unused loan commitments:	$	138,829	$	800,693	$	939,522	$	139,070	$	860,255	$	999,325	$	139,654	$	765,693	$	905,347	$	139,070	$	860,255	$	999,325

As of ~~March 31,~~June 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~~$372,000 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~~$650,000 for the ~~first~~second quarter of 2023, compared to the prior quarter end, is primarily related to 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 ~~$1.2 million decrease in construction unfunded commitment levels~~$427,000 reduction, 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. 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 six months ended ~~March 31,~~June 30, 2023, compared to the three and six months ended ~~March 31,~~June 30, 2022, and our financial condition at ~~March 31,~~June 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 six months ended ~~March 31,~~June 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,~~June 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 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 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,~~June 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.

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 $17.4 million at June 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~~second quarter of 2023 was ~~$23.6~~$25.6 million, or ~~$0.52~~$0.56 per diluted share, compared to ~~$12.0~~$12.2 million, or $0.27 per diluted share, for the ~~first~~second quarter of 2022. The increase was primarily due to growth in our loan portfolio and higher loan and security yields, which resulted in growth in net interest income, partially offset by lower noninterest income ~~from reductions in mortgage banking revenues~~ primarily due to ~~higher market interest rates, and~~ losses recognized on securities sold. Also contributing to the increase in net income in the ~~first~~second quarter of 2023, compared to the ~~first~~second quarter of 2022, were reduced acquisition costs, net of gains on branch sales, of ~~$5.3~~$2.1 million incurred in the prior year like quarter, compared to ~~$306,000~~$29,000 of net ~~gains~~losses on branch sales in the ~~first~~second quarter of 2023. Adjusted net income, a non-GAAP financial measure that excludes merger-related costs, net of losses/(gains)~~/losses~~ on branch sales, was $25.6 million for the second quarter of 2023, compared to $23.4 million for the first quarter of 2023, ~~compared to $24.1~~and $13.8 million for the ~~fourth~~second quarter of ~~2022, and $15.9~~2022. Adjusted net income, net of losses/(gains) on branch sales, was $49.0 million for the ~~first quarter of~~six months ended June 30, 2023, compared to $29.7 million for the six months ended June 30, 2022. See the discussion entitled “Non-GAAP Financial Measures” on page ~~38,~~39, 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						Six Months Ended
	March 31,		December 31,		March 31,		June 30,		March 31,		June 30,		June 30,
	2023		2022		2022		2023		2023		2022		2023		2022
Net Income
Income before income taxes (GAAP)	$	32,013	$	31,853	$	16,443	$	34,973	$	32,013	$	16,676	$	66,986	$	33,119
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		(306)		2,131		(277)		7,466
Adjusted net income before taxes		31,707		32,470		21,778		35,002		31,707		18,807		66,709		40,585
Taxes on adjusted net income		8,326		8,398		5,858		9,419		8,326		4,995		17,745		10,853
Adjusted net income (non-GAAP)	$	23,381	$	24,072	$	15,920	$	25,583	$	23,381	$	13,812	$	48,964	$	29,732

Basic earnings per share (GAAP)	$	0.53	$	0.53	$	0.27	$	0.57	$	0.53	$	0.28	$	1.10	$	0.55
Diluted earnings per share (GAAP)		0.52		0.52		0.27		0.56		0.52		0.27		1.08		0.54
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP)		0.52		0.54		0.36		0.58		0.52		0.31		1.10		0.67
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP)		0.52		0.53		0.36		0.56		0.52		0.31		1.08		0.66

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

●

Net interest and dividend income was ~~$64.1~~$63.6 million for the ~~first~~second quarter of 2023, compared to ~~$41.2~~$45.3 million for the ~~first~~second quarter of 2022. Growth in interest and dividend income in the ~~first~~second quarter of 2023 was primarily due to loan growth and higher yields on loans and securities, partially offset by higher funding and borrowing costs.

●

We recorded a net provision for credit losses of ~~$3.5~~$2.0 million in the ~~first~~second quarter of 2023, driven by a ~~$4.7~~$2.4 million increase in the allowance for credit losses on loans based on historical loss rate updates, loan growth, our assessment of nonperforming loan metrics and trends, and estimated future credit losses, net of a reversal of ~~$1.2 million~~$427,000 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 $550,000 in the ~~first~~second quarter of 2022.

●

Noninterest income was ~~$7.4~~$8.2 million for the ~~first~~second quarter of 2023, compared to ~~$13.5~~$9.2 million for the ~~first~~second quarter of 2022. Contributing to the decrease ~~was a $3.5~~were security losses of $1.5 million ~~decline~~due to strategic sales in ~~mortgage servicing rights mark to market gains, a $1.2 million decrease~~the second quarter of 2023 compared

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~~of net gain on sales of mortgage loans, and~~to security losses of ~~$1.7 million due to strategic sales~~$33,000 in ~~2023.~~the second quarter of 2022. These decreases were partially offset by an increase of ~~$350,000 of service charges on deposits~~$620,000 in mortgage banking related income and a ~~$627,000~~$346,000 increase in ~~other income.~~the cash surrender value of BOLI.

●

Noninterest expense was ~~$36.0~~$34.8 million for the ~~first~~second quarter of 2023, compared to ~~$38.3~~$37.2 million for the ~~first~~second quarter of 2022, a decrease of ~~$2.3~~$2.4 million, or ~~6.09%~~6.5%. Contributing to the decrease was a reduction in computer and data processing and net teller & bill paying expenses in the ~~first~~second quarter of 2023, primarily stemming from acquisition costs incurred in the ~~first~~second quarter of 2022 from our West Suburban acquisition in the fourth quarter of 2021. ~~In addition, we~~We recorded net ~~gains~~losses on branch sales of ~~$306,000~~$29,000 in the ~~first~~second quarter of 2023, compared to ~~$5.3~~$2.1 million of acquisition-related cost, net of gains on branch sales, in the ~~first~~second quarter of 2022, primarily ~~from $4.9 million of~~within computer and data processing, salaries and ~~net teller & bill paying expenses~~employee benefits, and other expense related to the West Suburban acquisition.

●

We had a provision for income tax expense of ~~$8.4~~$9.4 million for the ~~first~~second quarter of 2023, compared to a provision for income tax expense of $4.4 million for the ~~first~~second quarter of 2022. The ~~increase in~~effective tax ~~expense for the first quarter of 2023~~rate was ~~due to the increase in pre-tax income, compared to the year over year quarter.~~26.9% and 26.6%, respectively.

●

Our community-focused banking franchise experienced growth of ~~$133.7~~$145.9 million in total loans in the ~~first~~second quarter of 2023, compared to the year ended December 31, 2022, and an increase of ~~$601.0~~$390.5 million in total loans compared to the ~~first~~second 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~~$29.3 million as of ~~March 31,~~June 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 of 2023 and remain at June 30, 2023, which include two office buildings and one health care facility. Nonperforming loans as a percent of total loans was ~~1.6%~~1.5% as of ~~March 31,~~June 30, 2023, compared to 0.9% as of December 31, 2022, and ~~1.1%~~1.2% as of ~~March 31,~~June 30, 2022. Classified assets increased to ~~$126.5~~$128.3 million as of ~~March 31,~~June 30, 2023, which is ~~$16.0~~$17.9 million, or ~~14.5%~~16.2% more than December 31, 2022, and ~~$57.5~~$23.6 million, or ~~83.4%~~22.5%, more than ~~March 31,~~June 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 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 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,~~June 30, 2023 and 2022

Our income before taxes was ~~$32.0~~$35.0 million in the ~~first~~second quarter of 2023 compared to ~~$16.4~~$16.7 million in the ~~first~~second quarter of 2022. This increase in pretax income was primarily due to a ~~$26.8~~$26.5 million increase in interest and dividend income and a ~~$2.3~~$2.4 million decrease in noninterest expenses. The increase in pretax income was partially offset by ~~a $4.0~~an $8.2 million increase in interest expense, a ~~$3.5~~$1.5 million increase in provision for credit losses, and a ~~$6.1 million~~$988,000 decrease in noninterest income, mainly due to ~~$1.7~~$1.5 million of security losses in the ~~first~~second quarter of ~~2023 and a $4.8 million decrease in mortgage banking revenues.~~2023. Our net income was ~~$23.6~~$25.6 million, or ~~$0.52~~$0.56 per diluted share, for the ~~first~~second quarter of 2023, compared to net income of ~~$12.0~~$12.2 million, or $0.27 per diluted share, for the ~~first~~second quarter of 2022. The Bank remains well positioned to navigate uncertain macroeconomics; we have mitigated interest rate risk, tightened expenses in a recessionary environment, and actively managed daily liquidity. Furthermore, we continue to possess strong liquidity metrics and an outsized securities portfolio for funding needs.

Net interest and dividend income was ~~$64.1~~$63.6 million in the ~~first~~second quarter of 2023, compared to ~~$41.2~~$45.3 million in the ~~first~~second quarter of 2022. The ~~$22.9~~$18.3 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 second quarter of 2023, compared to the second quarter 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 during the second quarter of 2023, as the senior debt issuance is at LIBOR plus 385 basis points and carried an interest rate of 9.39% at June 30, 2023. As of June 30, 2023, we redeemed the $45.0 million senior debt issuance that was due in 2026, and the related deferred debt issuance costs of $362,000 were also recorded as interest expense, resulting in an effective cost of this debt issuance of 12.85% for the second quarter of 2023.

Six months ended June 30, 2023 and 2022

Our income before taxes was $67.0 million for the six months ended June 30, 2023 compared to $33.1 million for the six months ended June 30, 2022. This increase in pretax income was primarily due to a $53.3 million increase in interest and dividend income and a $4.7 million decrease in noninterest expenses. These changes were partially offset by a $12.2 million increase in interest expense, a $5.0 million increase in provision for credit losses, and a $7.1 million decrease in noninterest income, mainly due to $3.2 million of security losses recorded in the first six months of 2023 and a $4.2 million decrease in mortgage banking revenues. Our net income was $49.2 million, or $1.08 per diluted share, for the six months ended June 30, 2023, compared to net income of $24.3 million, or $0.54 per diluted share, for the same period of 2022.

Net interest and dividend income was $127.7 million for the six months ended June 30, 2023, compared to $86.5 million for the same period of 2022. The $41.2 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~~six months of 2023, compared to the first ~~quarter~~six 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 during the first ~~quarter~~six months of 2023. The senior notes redeemed on June 30, 2023 ashad an effective cost of 10.95% for 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.~~six months ending June 30, 2023.

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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,~~June 30, 2023 and 2022

The increased yield of 3020 basis points on interest earning assets for the quarter ended June 30, 2023, compared to the prior 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~~206 basis points on interest earning assets for the quarters ended June 30, 2023 and 2022 was driven by significant increases to benchmark interest rates as well as strong loan growth throughout the period, specifically within the commercial, leases, and commercial real estate 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 and timely purchases of higher yielding securities, as we work to increase the weighted average yield in the portfolio.

Average balances of interest bearing deposit accounts have decreased steadily since the second quarter of 2022 through the second quarter of 2023, from $3.34 billion to $2.87 billion, with these decreases reflected in all deposit categories. We have continued to control the cost of funds over the periods reflected, with the rate of overall interest bearing deposits increasing to 40 basis points for the quarter ended June 30, 2023, compared to 25 basis points for the quarter ended March 31, 2023, and seven basis points for the quarter ended June 30, 2022. A 25 basis point increase in the cost of money market funds for the quarter ended June 30, 2023, compared to prior linked quarter and a 59 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 June 30, 2023 also increased by 44 basis points and 83 basis points in the quarter over linked quarter and year over year quarters, respectively, primarily due to CD rate specials we offered.

Borrowing costs increased in the second quarter of 2023, primarily due to the increase in average short term borrowings of $201.7 million stemming from growth in average FHLB advances over the prior linked quarter, and an average increase of $402.5 million in the year over year quarters based on daily liquidity needs. Subordinated and junior subordinated debt interest expense were essentially flat over each of the periods presented. Senior notes had the most significant interest expense increase, as this issuance references three month LIBOR, and rising market interest rates as well as recognition of $362,000 of deferred debt issuance costs upon redemption resulted in a 381 basis point increase to 12.85% for the quarter ended June 30, 2023, from 9.04% for the quarter ended March 31, 2023, and a 764 basis point increase from 5.21% for the quarter ended June 30, 2022. On June 30, 2023 we redeemed the $45.0 million senior notes, net of deferred issuance costs, which were originally due in 2026. 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) decreased eleven basis points to 4.61% for the second quarter of 2023, compared to 4.72% for the first quarter of 2023, but increased 145 basis points compared to 3.16% for the second quarter of 2022. Our net interest margin (TE) decreased 10 basis points to 4.64% for the second quarter of 2023, compared to 4.74% for the first quarter of 2023, but increased 146 basis points compared to 3.18% for the second quarter of 2022. The decrease in the current quarter, compared to the prior linked quarter, is primarily due to increases in interest expense from FHLB advances and redemption of the senior notes. 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 Presentations” and the table on page 45 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

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Six months ended June 30, 2023 and 2022

The year over year increase of 211 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~~estate-investor 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~~$346.1 million infor the ~~first quarter of~~six months ended June 30, 2023, compared to the ~~first quarter of~~six months ended June 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~~$24.1 million infor the ~~first quarter of~~six months ended June 30, 2023, compared to ~~$6.8~~$15.3 million for the like 2022 ~~quarter.~~period. Average loans, including loans held for sale, increased ~~$528.0~~$529.7 million in the ~~first quarter of~~six months ended June 30, 2023, compared to the ~~first quarter of~~six months ended June 30, 2022, primarily driven by the growth in commercial, leases, commercial real estate-investor, and ~~multifamily~~multi-family portfolios. Growth in the loan portfolio, as well as the rising interest rate environment, resulted in ~~$57.2~~$118.8 million of loan interest income in the ~~first quarter of~~six months ended June 30, 2023, compared to ~~$36.4~~$74.7 million in the ~~first quarter of 2022.~~like 2022 period.

~~Tableof Contents~~

Average balances of interest bearing deposit accounts have decreased steadily since ~~the first quarter of~~June 30, 2022 through the ~~first quarter of~~six months ended June 30, 2023 from ~~$3.40~~$3.37 billion to ~~$3.00~~$2.93 billion, with these 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 deposits increasing by 1724 basis points to 2532 basis points from eight basis points as of ~~March 31,~~June 30, 2022. A 1946 basis point increase in the cost of money market funds as of ~~March 31,~~June 30, 2023, compared to ~~December 31,~~June 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~~growth in 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 61 basis points to 84 basis points for the six months ended June 30, 2023, ~~respectively,~~compared to 23 basis points for the six months ended June 30, 2022, primarily due to CD rate specials we offered.

Borrowing costs increased in the ~~first quarter of~~six months ended June 30, 2023 primarily due to the increase in ~~average~~ short term borrowings stemming from average FHLB advance growth of ~~$156.5~~$302.2 million since ~~year end~~the six months ended June 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 LIBOR, and rising market interest rates resulted in a ~~111~~613 basis point increase to ~~9.04%~~10.95%, from ~~7.93% as of December 31, 2022, and a 462~~4.82% for the six months ended June 30, 2022. Also contributing to the significant basis point increase ~~from 4.42%~~on senior notes was the $362,000 in deferred issuance costs that were recognized as interest expense due to the early redemption of ~~March 31, 2022.~~the debt on June 30, 2023. 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 12166 basis points to ~~4.72%~~4.66% for the ~~first quarter of~~six months ended June 30, 2023, compared to ~~4.60%~~3.00% for the ~~fourth quarter of 2022, and increased 187 basis points compared to 2.85% for the first quarter of~~six months ended June 30, 2022. Our net interest margin (TE) increased 11166 basis points to ~~4.74%~~4.69% for the ~~first quarter of~~six months ended June 30, 2023, compared to ~~4.63%~~3.03% for the ~~fourth quarter of 2022 and increased 186 basis points compared to 2.88% for the first quarter of~~six months ended June 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 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 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							June 30, 2023						March 31, 2023						June 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		$	50,309		$	643	5.13	$	49,310		$	585	4.81	$	426,820		$	782	0.73
Securities:
Taxable			1,330,295			10,735	3.27		1,404,437			10,495	2.96		1,612,635			5,169	1.30			1,231,994			9,930	3.23		1,330,295			10,735	3.27		1,610,713			6,786	1.69
Non-taxable (TE)¹			173,324			1,693	3.96		171,567			1,697	3.92		195,240			1,667	3.47			172,670			1,692	3.93		173,324			1,693	3.96		181,386			1,642	3.63
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			1,404,664			11,622	3.32		1,503,619			12,428	3.35		1,792,099			8,428	1.89
FHLBC and FRBC Stock			24,905			280	4.56		19,534			259	5.26		16,066			153	3.86			34,029			396	4.67		24,905			280	4.56		20,994			263	5.02
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			4,040,202			61,591	6.11		3,932,492			57,228	5.90		3,508,856			38,267	4.37
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			5,529,204			74,252	5.39		5,510,326			70,521	5.19		5,748,769			47,740	3.33
Cash and due from banks			55,140			-	-		56,531			-	-		42,972			-	-			56,191			-	-		55,140			-	-		53,371			-	-
Allowance for credit losses on loans			(49,398)			-	-		(48,778)			-	-		(44,341)			-	-			(53,480)			-	-		(49,398)			-	-		(44,354)			-	-
Other noninterest bearing assets			382,579			-	-		395,726			-	-		370,987			-	-			379,576			-	-		382,579			-	-		374,309			-	-
Total assets		$	5,898,647					$	5,927,622					$	6,233,395						$	5,911,491					$	5,898,647					$	6,132,095

Liabilities and Stockholders' Equity
NOW accounts		$	601,030		$	242	0.16	$	623,408		$	225	0.14	$	599,481		$	89	0.06		$	600,957		$	312	0.21	$	601,030		$	242	0.16	$	604,937		$	102	0.07
Money market accounts			833,823			828	0.40		901,950			477	0.21		1,098,941			170	0.06			762,967			1,245	0.65		833,823			828	0.40		1,054,552			155	0.06
Savings accounts			1,126,040			79	0.03		1,155,409			74	0.03		1,201,075			138	0.05			1,073,172			185	0.07		1,126,040			79	0.03		1,213,133			90	0.03
Time deposits			434,655			664	0.62		450,111			571	0.50		495,452			277	0.23			436,524			1,156	1.06		434,655			664	0.62		469,009			265	0.23
Interest bearing deposits			2,995,548			1,813	0.25		3,130,878			1,347	0.17		3,394,949			674	0.08			2,873,620			2,898	0.40		2,995,548			1,813	0.25		3,341,631			612	0.07
Securities sold under repurchase agreements			31,080			9	0.12		33,275			10	0.12		39,204			11	0.11			25,575			7	0.11		31,080			9	0.12		34,496			9	0.10
Other short-term borrowings			200,833			2,345	4.74		44,293			436	3.91		-			-	-			402,527			5,160	5.14		200,833			2,345	4.74		-			-	-
Junior subordinated debentures			25,773			279	4.39		25,773			287	4.42		25,773			280	4.41			25,773			281	4.37		25,773			279	4.39		25,773			284	4.42
Subordinated debentures			59,308			546	3.73		59,286			546	3.65		59,222			546	3.74			59,329			546	3.69		59,308			546	3.73		59,244			547	3.70
Senior notes			44,599			994	9.04		44,572			891	7.93		44,494			485	4.42			44,134			1,414	12.85		44,599			994	9.04		44,520			578	5.21
Notes payable and other borrowings			5,400			87	6.53		9,978			137	5.45		19,009			103	2.20			-			-	-		5,400			87	6.53		13,103			95	2.91
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			3,430,958			10,306	1.20		3,362,541			6,073	0.73		3,518,767			2,125	0.24
Noninterest bearing deposits			2,002,801			-	-		2,083,503			-	-		2,093,293			-	-			1,920,448			-	-		2,002,801			-	-		2,119,667			-	-
Other liabilities			51,279			-	-		51,753			-	-		60,819			-	-			48,434			-	-		51,279			-	-		32,636			-	-
Stockholders' equity			482,026			-	-		444,311			-	-		496,632			-	-			511,651			-	-		482,026			-	-		461,025			-	-
Total liabilities and stockholders' equity		$	5,898,647					$	5,927,622					$	6,233,395						$	5,911,491					$	5,898,647					$	6,132,095
Net interest income (GAAP)					$	64,086					$	64,091					$	41,232						$	63,580					$	64,086					$	45,264
Net interest margin (GAAP)							4.72						4.60						2.85							4.61						4.72						3.16

Net interest income (TE)¹					$	64,448					$	64,453					$	41,587						$	63,946					$	64,448					$	45,615
Net interest margin (TE)¹							4.74						4.63						2.88							4.64						4.74						3.18
Interest bearing liabilities to earning assets			61.02	%					60.61	%					61.10	%						62.05	%					61.02	%					61.21	%

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 $242,000 for the second quarter of 2023, $730,000 for the first quarter of 2023, and ~~loan fee income of $917,000~~$588,000 for the ~~fourth~~second quarter of ~~2022,~~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)

	Six Months Ended June 30,
	2023						2022
	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	49,812		$	1,228	4.97	$	530,485		$	1,051	0.40
Securities:
Taxable		1,280,873			20,665	3.25		1,611,669			11,954	1.50
Non-taxable (TE)¹		172,995			3,385	3.95		188,275			3,310	3.55
Total securities (TE)¹		1,453,868			24,050	3.34		1,799,944			15,264	1.71
Dividends from FHLBC and FRBC		29,492			676	4.62		18,543			416	4.52
Loans and loans held-for-sale ^{1 , 2}		3,986,644			118,819	6.01		3,456,984			74,695	4.36
Total interest earning assets		5,519,816			144,773	5.29		5,805,956			91,426	3.18
Cash and due from banks		55,668			-	-		48,200			-	-
Allowance for credit losses on loans		(51,450)			-	-		(44,348)			-	-
Other noninterest bearing assets		381,070			-	-		372,657			-	-
Total assets	$	5,905,104					$	6,182,465

Liabilities and Stockholders' Equity
NOW accounts	$	600,993		$	555	0.19	$	602,225		$	191	0.06
Money market accounts		798,199			2,073	0.52		1,076,624			325	0.06
Savings accounts		1,099,460			263	0.05		1,207,137			228	0.04
Time deposits		435,595			1,820	0.84		482,157			542	0.23
Interest bearing deposits		2,934,247			4,711	0.32		3,368,143			1,286	0.08
Securities sold under repurchase agreements		28,312			16	0.11		36,837			20	0.11
Other short-term borrowings		302,238			7,505	5.01		-			-	-
Junior subordinated debentures		25,773			560	4.38		25,773			564	4.41
Subordinated debentures		59,318			1,092	3.71		59,233			1,093	3.72
Senior note		44,365			2,408	10.95		44,507			1,063	4.82
Notes payable and other borrowings		2,685			87	6.53		16,040			198	2.49
Total interest bearing liabilities		3,396,938			16,379	0.97		3,550,533			4,224	0.24
Noninterest bearing deposits		1,961,397			-	-		2,106,553			-	-
Other liabilities		49,849			-	-		46,648			-	-
Stockholders' equity		496,920			-	-		478,731			-	-
Total liabilities and stockholders' equity	$	5,905,104					$	6,182,465
Net interest income (GAAP)				$	127,666					$	86,496
Net interest margin (GAAP)						4.66						3.00

Net interest income (TE)¹				$	128,394					$	87,202
Net interest margin (TE)¹						4.69						3.03
Interest bearing liabilities to earning assets		61.54	%					61.15	%

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 $972,000 and $1.3 million for the ~~first quarter of~~six months ended June 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									Six Months Ended
	March 31,			December 31,			March 31,			June 30,			March 31,			June 30,			June 30,
Net Interest Margin	2023			2022			2022			2023			2023			2022			2023			2022


Interest income (GAAP)	$	70,159		$	67,745		$	43,331		$	73,886		$	70,159		$	47,389		$	144,045		$	90,720
Taxable-equivalent adjustment:
Loans		6			6			5			11			6			6			17			11
Securities		356			356			350			355			356			345			711			695
Interest and dividend income (TE)		70,521			68,107			43,686			74,252			70,521			47,740			144,773			91,426
Interest expense (GAAP)		6,073			3,654			2,099			10,306			6,073			2,125			16,379			4,224
Net interest income (TE)	$	64,448		$	64,453		$	41,587		$	63,946		$	64,448		$	45,615		$	128,394		$	87,202
Net interest income (GAAP)	$	64,086		$	64,091		$	41,232		$	63,580		$	64,086		$	45,264		$	127,666		$	86,496
Average interest earning assets	$	5,510,326		$	5,524,143		$	5,863,777		$	5,529,204		$	5,510,326		$	5,748,769		$	5,519,816		$	5,805,956
Net interest margin (GAAP)		4.72	%		4.60	%		2.85	%		4.61	%		4.72	%		3.16	%		4.66	%		3.00	%
Net interest margin (TE)		4.74	%		4.63	%		2.88	%		4.64	%		4.74	%		3.18	%		4.69	%		3.03	%

Noninterest Income

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

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


							First Quarter 2023								2nd 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,	June 30,		March 31,		June 30,		March 31,	June 30,
	2023		2022		2022		2022	2022	2023		2023		2022		2023	2022
Wealth management	$	2,270	$	2,403	$	2,698	(5.5)	(15.9)	$	2,458	$	2,270	$	2,506	8.3	(1.9)
Service charges on deposits		2,424		2,499		2,074	(3.0)	16.9		2,362		2,424		2,328	(2.6)	1.5
Residential mortgage banking revenue
Secondary mortgage fees		59		62		139	(4.8)	(57.6)		76		59		50	28.8	52.0
MSRs mark to market (loss) gain		(525)		(431)		2,978	21.8	(117.6)
MSRs mark to market gain (loss)										96		(525)		82	118.3	17.1
Mortgage servicing income		516		518		519	(0.4)	(0.6)		499		516		579	(3.3)	(13.8)
Net gain on sales of mortgage loans		306		340		1,495	(10.0)	(79.5)
Net gain (loss) on sales of mortgage loans										398		306		(262)	30.1	251.9
Total residential mortgage banking revenue		356		489		5,131	(27.2)	(93.1)		1,069		356		449	200.3	138.1
Securities losses, net		(1,675)		(910)		-	84.1	N/M		(1,547)		(1,675)		(33)	(7.6)	N/M
Change in cash surrender value of BOLI		242		376		124	(35.6)	95.2		418		242		72	72.7	480.6
Card related income		2,244		2,795		2,574	(19.7)	(12.8)		2,690		2,244		2,965	19.9	(9.3)
Other income		1,489		1,294		862	15.1	72.7		773		1,489		924	(48.1)	(16.3)
Total noninterest income	$	7,350	$	8,946	$	13,463	(17.8)	(45.4)	$	8,223	$	7,350	$	9,211	11.9	(10.7)

N/M - Not meaningful

Noninterest income ~~decreased $1.6 million,~~increased $873,000, or ~~17.8%~~11.9%, in the ~~first~~second quarter of 2023, compared to the ~~fourth~~first quarter of ~~2022,~~2023, and decreased ~~$6.1 million,~~$988,000, or ~~45.4%~~10.7%, compared to the ~~first~~second quarter of 2022. The ~~decrease~~increase from the ~~fourth~~first quarter of ~~2022~~2023 was primarily driven by a $621,000 increase in mortgage servicing rights (“MSR”) mark to market gains, a $188,000 increase in wealth management income, a

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$~~765,000 increase~~128,000 decrease in securities losses, net, based on strategic sales, and a ~~$551,000 decline~~$446,000 increase in card related income primarily due to ~~decreased~~increased activity. These ~~decreases~~increases in noninterest income in the ~~first~~second quarter of 2023, compared to the ~~fourth~~first quarter of ~~2022,~~2023, were partially offset by a ~~$195,000 increase~~$716,000 decrease in other income driven by credits received in the first quarter of 2023 from a few vendors related to prior year service discounts.

The decrease in noninterest income of ~~$6.1 million~~$988,000 in the ~~first~~second quarter of 2023, compared to the ~~first~~second 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 of ~~$1.7~~$1.5 million ~~based~~ on strategic sales infor the quarter ended ~~March 31,~~June 30, 2023. These decreases were partially offset by a ~~$350,000~~$660,000 increase in net gains on sales of mortgage loans and a $346,000 increase in the cash surrender value of BOLI due to market interest rate changes.

Six months ended June 30, 2023 and 2022


Noninterest Income	Six Months Ended				YTD through June 30, 2023
(Dollars in thousands)	June 30,		June 30,		Percent
	2023		2022		Change
Wealth management	$	4,728	$	5,204	(9.1)
Service charges on deposits		4,786		4,402	8.7
Residential mortgage banking revenue
Secondary mortgage fees		135		189	(28.6)
MSRs mark to market (loss) gain		(429)		3,060	(114.0)
Mortgage servicing income		1,015		1,098	(7.6)
Net gain on sales of mortgage loans		704		1,233	(42.9)
Total residential mortgage banking revenue		1,425		5,580	(74.5)
Securities losses, net		(3,222)		(33)	N/M
Change in cash surrender value of BOLI		660		196	236.7
Card related income		4,934		5,532	(10.8)
Other income		2,262		1,793	26.2
Total noninterest income	$	15,573	$	22,674	(31.3)

N/M - Not meaningful

Noninterest income decreased $7.1 million, or 31.3%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. This decrease was primarily driven by a $4.2 million decline in mortgage banking revenue, comprised mostly of a $3.5 million decrease in MSRs mark to market gains and a $529,000 decrease in net gain on sales of mortgage loans. In addition, the current six month period decreased due to a $3.2 million increase in net losses on the sale of securities for the year over year period. Partially offsetting these decreases was a $384,000 increase in service charges on deposits, a $464,000 increase in the cash surrender value of BOLI, and a ~~$627,000~~$469,000 increase in other ~~income driven by a few vendor credits related to prior year billings and volumes of activity.~~income.

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Noninterest Expense

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

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


										First Quarter 2023											2nd 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,	June 30,			March 31,			June 30,			March 31,	June 30,
	2023			2022			2022			2022	2022	2023			2023			2022			2023	2022
Salaries	$	16,087		$	17,487		$	15,598		(8.0)	3.1	$	16,310		$	16,087		$	15,995		1.4	2.0
Officers incentive		1,827			3,876			994		(52.9)	83.8		2,397			1,827			1,662		31.2	44.2
Benefits and other		4,334			2,900			3,375		49.4	28.4		3,091			4,334			3,675		(28.7)	(15.9)
Total salaries and employee benefits		22,248			24,263			19,967		(8.3)	11.4		21,798			22,248			21,332		(2.0)	2.2
Occupancy, furniture and equipment expense		3,475			4,128			3,699		(15.8)	(6.1)		3,639			3,475			3,046		4.7	19.5
Computer and data processing		1,774			2,978			6,268		(40.4)	(71.7)		1,290			1,774			4,006		(27.3)	(67.8)
FDIC insurance		584			630			410		(7.3)	42.4		794			584			702		36.0	13.1
Net teller & bill paying		502			485			1,907		3.5	(73.7)		515			502			834		2.6	(38.2)
General bank insurance		305			298			315		2.3	(3.2)		306			305			351		0.3	(12.8)
Amortization of core deposit intangible asset		624			645			665		(3.3)	(6.2)		618			624			659		(1.0)	(6.2)
Advertising expense		142			130			182		9.2	(22.0)		103			142			194		(27.5)	(46.9)
Card related expense		1,216			1,304			534		(6.7)	127.7		1,222			1,216			1,057		0.5	15.6
Legal fees		319			225			257		41.8	24.1		283			319			179		(11.3)	58.1
Consulting & management fees		790			679			616		16.3	28.2		520			790			523		(34.2)	(0.6)
Other real estate owned expense, net		306			34			(12)		N/M	N/M		(98)			306			87		(132.0)	(212.6)
Other expense		3,637			3,885			3,444		(6.4)	5.6		3,840			3,637			4,279		5.6	(10.3)
Total noninterest expense	$	35,922		$	39,684		$	38,252		(9.5)	(6.1)	$	34,830		$	35,922		$	37,249		(3.0)	(6.5)
Efficiency ratio (GAAP)¹		47.52	%		52.44	%		72.70	%				46.84	%		47.52	%		67.07	%
Adjusted efficiency ratio (non-GAAP)²		47.66	%		51.29	%		61.92	%				46.49	%		47.66	%		62.73	%

N/M - Not meaningful

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

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses and merger-related costs, net of gain on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” starting on page 4449 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the ~~first~~second quarter of 2023 decreased ~~$3.8~~$1.1 million, or ~~9.5%, compared to the fourth quarter of 2022, and decreased $2.3 million, or 6.1%~~3.0%, compared to the first quarter of 2023, and decreased $2.4 million, or 6.5%, compared to the second quarter of 2022. The decrease in the ~~first~~second quarter of 2023 compared to the ~~fourth~~first quarter of

~~Tableof Contents~~

~~2022~~ 2023 was attributable to a ~~$2.0 million~~$450,000 decrease in salaries and employee benefits, primarily due to reductions in ~~the officer incentive accrual,~~employee benefits expense related to a decline in group insurance premiums and payroll taxes, partially offset by an increase in ~~employee benefits~~salaries and ~~other stemming from payroll taxes and 401k matching expense related~~the officer incentive accrual. Also contributing to ~~annual bonus payments made~~the decrease in the ~~first~~second quarter of ~~2023. In addition,~~2023 was a ~~$1.2 million~~$484,000 decrease in computer and data processing costs ~~was recorded in~~as the first quarter of 2023 ~~compared to the linked quarter, primarily~~including additional costs due to ~~the~~ timing of software contracts and incentives. Noninterest expense was further ~~increased by~~decreased in the second quarter of 2023 as there were no OREO valuation adjustments recorded compared to a $269,000 OREO valuation reserve recorded on two properties in the first quarter of ~~2023; no OREO valuation reserve was recorded~~2023, reflected in ~~the fourth quarter of 2022.~~other real estate owned expense, net.

The year over year decrease in noninterest expense is primarily attributable to a ~~$4.5~~$2.7 million decrease in computer and data processing expenses and a ~~$1.4 million~~$319,000 decrease in net teller & bill paying expense, both stemming from acquisition related costs in the ~~first~~second quarter of 2022 from our West Suburban acquisition. Partially offsetting the decrease in noninterest expense in the ~~first~~second quarter of 2023,

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compared to the ~~first~~second quarter of 2022, was a ~~$2.3 million~~$466,000 increase in salaries and employee benefits and a ~~$682,000~~$593,000 increase in ~~card related~~occupancy, furniture and equipment expenses. Officer incentive compensation increased ~~$833,000~~$735,000 in the ~~first~~second quarter of 2023, compared to the ~~first~~second quarter of 2022, as incentive accruals increased in the current year due to growth in our commercial and sponsored finance lending ~~teams~~team staffing year over ~~year.~~year, as well as loan growth in the year over year periods.

Six months ended June 30, 2023 and 2022


Noninterest Expense	Six Months Ended						YTD through June 30, 2023
(Dollars in thousands)	June 30,			June 30,			Percent
	2023			2022			Change
Salaries	$	32,397		$	31,593		2.5
Officers incentive		4,224			2,656		59.0
Benefits and other		7,425			7,050		5.3
Total salaries and employee benefits		44,046			41,299		6.7
Occupancy, furniture and equipment expense		7,114			6,745		5.5
Computer and data processing		3,064			10,274		(70.2)
FDIC insurance		1,378			1,112		23.9
Net teller & bill paying		1,017			2,741		(62.9)
General bank insurance		611			666		(8.3)
Amortization of core deposit intangible asset		1,242			1,324		(6.2)
Advertising expense		245			376		(34.8)
Card related expense		2,438			1,591		53.2
Legal fees		602			436		38.1
Consulting & management fees		1,310			1,139		15.0
Other real estate owned expense, net		208			75		177.3
Other expense		7,477			7,723		(3.2)
Total noninterest expense	$	70,752		$	75,501		(6.3)
Efficiency ratio (GAAP)¹		47.18	%		69.81	%
Adjusted efficiency ratio (non-GAAP)²		47.08	%		62.33	%

N/M - Not meaningful

² The adjusted efficiency ratio shown in the table above is a non-GAAP financial measure calculated as noninterest expense, excluding amortization of core deposits, OREO expenses and merger-related costs, net of gain on branch sales, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities, mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI. See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” starting on page 49 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the six months ended June 30, 2023, decreased $4.7 million, or 6.3%, compared to the six months ended June 30, 2022, primarily due to a $7.2 million decrease in computer and data processing due to acquisition related costs incurred during the six months ended June 30, 2022 as the result of our acquisition of West Suburban in December 2021. Salaries and employee benefits increased $2.7 million largely from incentives and merit increases effective during the six months ended June 30, 2023. Occupancy, furniture and equipment increased $369,000, or 5.5%. Net teller & bill paying decreased $1.7 million largely due to acquisition related costs that were incurred during the six months ended June 30, 2022. In addition, FDIC insurance increased $266,000 due to growth in our asset size, a scheduled increase in rates used by the FDIC for assessments, as well as the absence of assessment credits fully utilized in the 2022 year to date period. Finally, card related expense increased $847,000 due to the growth in customer transactions and 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,			June 30,			March 31,			June 30,			June 30,			March 31,			June 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		$	34,830		$	35,922		$	37,249		$	34,830		$	35,922		$	37,249
Less amortization of core deposit		624			645			665			624			645			665			618			624			659			618			624			659
Less other real estate expense, net		306			34			(12)			306			34			(12)			(98)			306			87			(98)			306			87
Less acquisition related costs, net of gain on branch sales		N/A			N/A			N/A			(306)			617			5,335
Less acquisition related costs, net of losses/(gains) on branch sales																				N/A			N/A			N/A			29			(306)			2,132
Noninterest expense less adjustments	$	34,992		$	39,005		$	37,599		$	35,298		$	38,388		$	32,264		$	34,310		$	34,992		$	36,503		$	34,281		$	35,298		$	34,371

Net interest income	$	64,086		$	64,091		$	41,232		$	64,086		$	64,091		$	41,232		$	63,580		$	64,086		$	45,264		$	63,580		$	64,086		$	45,264
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			6			6			5			N/A			N/A			N/A			11			6			6
Securities		N/A			N/A			N/A			356			356			350			N/A			N/A			N/A			355			356			345
Net interest income including adjustments		64,086			64,091			41,232			64,448			64,453			41,587			63,580			64,086			45,264			63,946			64,448			45,615
Noninterest income		7,350			8,946			13,463			7,350			8,946			13,463			8,223			7,350			9,211			8,223			7,350			9,211
Less securities losses		(1,675)			(910)			-			(1,675)			(910)			-			(1,547)			(1,675)			(33)			(1,547)			(1,675)			(33)
Less MSRs mark to market (loss) gain		(525)			(431)			2,978			(525)			(431)			2,978
Less MSRs mark to market gain (loss)																				96			(525)			82			96			(525)			82
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			111			64			19
Noninterest income (excluding) / including adjustments		9,550			10,287			10,485			9,614			10,387			10,518			9,674			9,550			9,162			9,785			9,614			9,181

Net interest income including adjustments plus noninterest income (excluding) / including adjustments	$	73,636		$	74,378		$	51,717		$	74,062		$	74,840		$	52,105		$	73,254		$	73,636		$	54,426		$	73,731		$	74,062		$	54,796
Efficiency ratio / Adjusted efficiency ratio		47.52	%		52.44	%		72.70	%		47.66	%		51.29	%		61.92	%		46.84	%		47.52	%		67.07	%		46.49	%		47.66	%		62.73	%

N/A - not applicable


	GAAP						Non-GAAP
		Six Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2023			2022			2023			2022
Efficiency Ratio / Adjusted Efficiency Ratio
(Dollars in thousands)

Noninterest expense	$	70,752		$	75,501		$	70,752		$	75,501
Less amortization of core deposit		1,242			1,324			1,242			1,324
Less other real estate expense, net		208			75			208			75
Less acquisition related costs, net of (gains)/losses on branch sales		N/A			N/A			(277)			7,466
Noninterest expense less adjustments	$	69,302		$	74,102		$	69,579		$	66,636

Net interest income	$	127,666		$	86,496		$	127,666		$	86,496
Taxable-equivalent adjustment:
Loans		N/A			N/A			17			11
Securities		N/A			N/A			711			695
Net interest income including adjustments		127,666			86,496			128,394			87,202
Noninterest income		15,573			22,674			15,573			22,674
Less securities losses, net		(3,222)			(33)			(3,222)			(33)
Less MSRs mark to market (losses) gains		(429)			3,060			(429)			3,060
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			175			52
Noninterest income (excluding) / including adjustments		19,224			19,647			19,399			19,699

Net interest income including adjustments plus noninterest income (excluding) / including adjustments	$	146,890		$	106,143		$	147,793		$	106,901
Efficiency ratio / Adjusted efficiency ratio		47.18	%		69.81	%		47.08	%		62.33	%

N/A - not applicable

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Income Taxes

We recorded income tax expense of ~~$8.4~~$9.4 million for the ~~first~~second quarter of 2023 on ~~$32.0~~$35.0 million of pretax income, compared to income tax expense of ~~$8.2~~$8.4 million on ~~$31.9 million of pretax income in the fourth quarter of 2022, and income tax expense of $4.4 million on $16.4~~$32.0 million of pretax income in the first quarter of 2023, and income tax expense of $4.4 million on $16.7 million of pretax income in the second quarter of 2022. Our effective tax rate was 26.9% in the second quarter of 2023, 26.3% infor the first quarter of 2023, ~~25.9%~~and 26.6% for the ~~fourth~~second quarter of ~~2022, and 26.9%~~2022.

We recorded income tax expense of $17.8 million on $67.0 million of pretax income for the ~~first quarter~~six months ended June 30, 2023, compared to income tax expense of ~~2022.~~ $8.9 million on $33.1 million of pretax income in the like 2022 period. The effective tax rate was 26.6% and 26.7% for the six months ended June 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,~~June 30, 2023. We had no valuation reserve on the deferred tax assets as of ~~March 31,~~June 30, 2023.

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Financial Condition

Total assets ~~increased $32.0~~decreased $4.4 million to ~~$5.92~~$5.88 billion at ~~March 31,~~June 30, 2023, from $5.89 billion at December 31, 2022, due primarily to ~~an increase in net loans of $129.8 million and FHLB and FRB stock held of $9.7 million, partially offset by~~ decreases of ~~$12.2~~$2.6 million in cash and cash equivalents, ~~$84.3~~$203.7 million in securities available-for-sale, and ~~$6.9~~$4.9 million in deferred tax assets. The decrease in ~~cash and cash equivalents~~securities available-for-sale was primarily due to ~~the use~~strategic sales. These decreases were partially offset by increases in net loans of ~~cash for loan growth, as well as the decrease~~$140.1 million, FHLB and FRB stock held of $16.2 million, and other assets of $50.9 million. The increase in ~~customer deposits.~~other assets is due to a timing difference related to a clients transactions effected by overnight sweeps. We continue to actively assess potential investment opportunities to utilize our excess liquidity. Total deposits were ~~$4.90~~$4.72 billion at ~~March 31,~~June 30, 2023, a decrease of ~~$213.5~~$393.1 million from December 31, 2022, primarily due to seasonal decreases of municipal deposits, and to a lesser extent declines in interest bearing demand accounts, savings, money market, and NOW ~~and time deposits~~accounts in ~~the first quarter of~~ 2023.


							March 31, 2023								June 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,	June 30,		December 31,		June 30,		December 31,	June 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)	$	214,613	$	212,129	$	214,820	1.2	(0.1)
U.S. government agencies		56,703		56,048		59,036	1.2	(4.0)		55,981		56,048		57,896	(0.1)	(3.3)
U.S. government agencies mortgage-backed		121,938		124,990		153,148	(2.4)	(20.4)		115,140		124,990		141,836	(7.9)	(18.8)
States and political subdivisions		233,506		226,128		236,408	3.3	(1.2)		229,534		226,128		233,652	1.5	(1.8)
Corporate bonds		9,762		9,622		9,683	1.5	0.8		4,882		9,622		9,543	(49.3)	(48.8)
Collateralized mortgage obligations		454,106		533,768		696,513	(14.9)	(34.8)		407,495		533,768		641,498	(23.7)	(36.5)
Asset-backed securities		189,753		201,928		274,941	(6.0)	(31.0)		134,319		201,928		259,622	(33.5)	(48.3)
Collateralized loan obligations		174,566		174,746		166,158	(0.1)	5.1		173,658		174,746		175,549	(0.6)	(1.1)
Total securities	$	1,455,068	$	1,539,359	$	1,816,450	(5.5)	(19.9)	$	1,335,622	$	1,539,359	$	1,734,416	(13.2)	(23.0)

Securities available-for-sale decreased ~~$84.3~~$203.7 million as of ~~March 31,~~June 30, 2023 compared to December 31, 2022, and decreased ~~$361.4~~$398.8 million compared to ~~March 31,~~June 30, 2022. The decrease in the portfolio during the second quarter of 2023 was driven by securities sales totaling ~~$66.2~~ $74.0

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million and paydowns totaling ~~$37.4 million, partially offset by $4.0 million in purchases and a $17.9 million increase in market value.~~$30.9 million. We continue to seek to position the portfolio in higher credit quality, shorter duration securities with an appropriate mix of fixed- and floating-rate exposures.

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


							June 30, 2023
Loans	As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,
	2023		2022		2022		2022	2022
Commercial	$	820,027	$	840,964	$	806,725	(2.5)	1.6
Leases		314,919		277,385		230,677	13.5	36.5
Commercial real estate – investor		1,080,073		987,635		834,395	9.4	29.4
Commercial real estate – owner occupied		824,277		854,879		870,181	(3.6)	(5.3)
Construction		189,058		180,535		170,037	4.7	11.2
Residential real estate – investor		55,935		57,353		61,220	(2.5)	(8.6)
Residential real estate – owner occupied		218,205		219,718		207,836	(0.7)	5.0
Multifamily		383,184		323,691		310,706	18.4	23.3
HELOC		102,058		109,202		120,138	(6.5)	(15.0)
Other ¹		27,789		18,247		13,155	52.3	111.2
Total loans	$	4,015,525	$	3,869,609	$	3,625,070	3.8	10.8

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.

~~Tableof Contents~~

Total loans were ~~$4.0~~$4.02 billion as of ~~March 31,~~June 30, 2023, an increase of ~~$133.7~~$145.9 million from December 31, 2022. The increase in total loans in the first ~~three~~six months of 2023, compared to December 31, 2022, was due primarily to growth in loan originations, net of paydowns, within commercial real estate – investor of ~~$69.2~~$92.4 million, multifamily of ~~$35.3~~$59.5 million and leases of $37.5 million offset by net reductions in commercial real estate – owner occupied of ~~$15.2~~$30.6 million from December 31, 2022. Total loans increased ~~$601.0~~$390.5 million from ~~March 31,~~June 30, 2022 to ~~March 31,~~June 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~~$245.7 million, leases of ~~$74.7~~$84.2 million and multifamily of ~~$60.3~~$72.5 million, offset by net reductions in commercial real estate – owner occupied of $45.9 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%~~71.0% of the portfolio as of ~~March 31,~~June 30, 2023, compared to 70.6% of the portfolio as of December 31, 2022. At June 30, 2023, our outstanding commercial real estate loans and undrawn commercial real estate commitments, excluding owner occupied real estate were equal to 311.0% 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~~$28.3 million to ~~$64.5~~$61.2 million at ~~March 31,~~June 30, 2023 from $32.9 million at December 31, 2022 and increased ~~$26.6~~$19.1 million from ~~$38.0~~$42.1 million at ~~March 31,~~June 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%~~1.5% as of ~~March 31,~~June 30, 2023, 0.9% as of December 31, 2022, and ~~1.1%~~1.2% as of ~~March 31,~~June 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.~~

4651

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							June 30, 2023
Nonperforming Loans	As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,
	2023		2022		2022		2022	2022
Commercial	$	1,544	$	7,649	$	11,600	(79.8)	(86.7)
Leases		758		1,876		2,005	(59.6)	(62.2)
Commercial real estate – investor		31,613		4,346		8,324	627.4	279.8
Commercial real estate – owner occupied		18,857		8,223		10,670	129.3	76.7
Construction		116		251		1,238	(53.8)	(90.6)
Residential real estate – investor		1,445		1,672		1,092	(13.6)	32.3
Residential real estate – owner occupied		3,660		4,198		3,642	(12.8)	0.5
Multifamily		1,191		2,538		907	(53.1)	31.3
HELOC		2,049		2,158		2,613	(5.1)	(21.6)
Other ¹		-		2		3	(100.0)	(100.0)
Total nonperforming loans	$	61,233	$	32,913	$	42,094	86.0	45.5

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

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


										March 31, 2023											June 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)												June 30,			December 31,			June 30,			December 31,	June 30,
	2023			2022			2022			2022	2022	2023			2022			2022			2022	2022
Nonaccrual loans	$	63,561		$	31,602		$	35,973		101.1	76.7	$	60,925		$	31,602		$	35,712		92.8	70.6
Performing troubled debt restructured loans accruing interest ¹		N/A			49			1,242		N/A	N/A		N/A			49			1,108		N/A	N/A
Loans past due 90 days or more and still accruing interest		966			1,262			743		(23.5)	30.0		308			1,262			5,274		(75.6)	(94.2)
Total nonperforming loans		64,527			32,913			37,958		96.1	70.0		61,233			32,913			42,094		86.0	45.5
Other real estate owned		1,255			1,561			2,374		(19.6)	(47.1)		761			1,561			1,624		(51.2)	(53.1)
Total nonperforming assets	$	65,782		$	34,474		$	40,332		90.8	63.1	$	61,994		$	34,474		$	43,718		79.8	41.8


30-89 days past due loans and still accruing interest	$	24,770		$	7,508		$	20,835				$	12,449		$	7,508		$	24,681
Nonaccrual loans to total loans		1.6	%		0.8	%		1.1	%				1.5	%		0.8	%		1.0	%
Nonperforming loans to total loans		1.6	%		0.9	%		1.1	%				1.5	%		0.9	%		1.2	%
Nonperforming assets to total loans plus OREO		1.6	%		0.9	%		1.2	%				1.5	%		0.9	%		1.2	%

Allowance for credit losses	$	53,392		$	49,480		$	44,308				$	55,314		$	49,480		$	45,388
Allowance for credit losses to total loans		1.3	%		1.3	%		1.3	%				1.4	%		1.3	%		1.3	%
Allowance for credit losses to nonaccrual loans		84.0	%		156.6	%		123.2	%				90.8	%		156.6	%		127.1	%

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.

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


Loan Charge–offs, Net of Recoveries	Three Months Ended									Three Months Ended
(Dollars in thousands)	March 31,		% of	December 31,		% of	March 31,		% of	June 30,		% of	March 31,		% of	June 30,		% of
	2023		Total¹	2022		Total¹	2022		Total¹	2023		Total¹	2023		Total¹	2022		Total¹
Commercial	$	(124)	(16.8)	$	(8)	(0.9)	$	-	-	$	298	59.0	$	(124)	(16.8)	$	44	17.6
Leases		873	118.00		191	20.3		-	-		(7)	(1.4)		873	118.0		-	-
Commercial real estate – investor		(17)	(2.3)		776	82.6		213	72.7		51	10.1		(17)	(2.3)		225	90.0
Commercial real estate – owner occupied		(2)	(0.3)		(2)	(0.2)		113	38.6		198	39.2		(2)	(0.3)		(7)	(2.8)
Residential real estate – investor		(19)	(2.6)		(7)	(0.7)		(10)	(3.4)		(5)	(1.0)		(19)	(2.6)		(5)	(2.0)
Residential real estate – owner occupied		(10)	(1.4)		-	-		(83)	(28.3)		(36)	(7.1)		(10)	(1.4)		(22)	(8.8)
Multifamily		-	-		(6)	(0.6)		-	-
HELOC		(29)	(3.9)		(38)	(4.0)		(35)	(11.9)		(24)	(4.8)		(29)	(3.9)		(31)	(12.4)
Other ²		68	9.3		34	3.5		95	32.3		30	6.0		68	9.3		46	18.4
Net charge–offs	$	740	100.0	$	940	100.0	$	293	100.0	$	505	100.0	$	740	100.0	$	250	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~~$505,000 were recorded for the ~~first~~second quarter of 2023, compared to net charge-offs of ~~$940,000~~$740,000 for the ~~fourth~~first quarter of ~~2022,~~2023, and net charge-offs of ~~$293,000~~$250,000 for the ~~first~~second quarter of 2022, reflecting continuing management attention to credit quality and remediation efforts. The net charge-offs for the ~~first~~second quarter of 2023 were primarily due to ~~six lease~~ charge offs of ~~$882,000~~one commercial real estate-owner occupied loan and one commercial loan totaling $598,000 in aggregate. 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

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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								June 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,	June 30,		December 31,		June 30,		December 31,	June 30,
	2023		2022		2022		2022	2022	2023		2022		2022		2022	2022
Commercial	$	22,662	$	26,485	$	29,267	(14.4)	(22.6)	$	22,245	$	26,485	$	31,577	(16.0)	(29.6)
Leases		906		1,876		2,641	(51.7)	(65.7)		974		1,876		2,005	(48.1)	(51.4)
Commercial real estate – investor		52,615		27,410		8,809	92.0	497.3		57,041		27,410		30,407	108.1	87.6
Commercial real estate – owner occupied		37,545		40,890		13,259	(8.2)	183.2		38,495		40,890		28,715	(5.9)	34.1
Construction		241		1,333		3,185	(81.9)	(92.4)		116		1,333		1,238	(91.3)	(90.6)
Residential real estate – investor		1,702		1,714		1,544	(0.7)	10.2		1,714		1,714		1,246	-	37.6
Residential real estate – owner occupied		3,618		3,854		4,862	(6.1)	(25.6)		3,660		3,854		3,785	(5.0)	(3.3)
Multifamily		3,348		2,954		1,369	13.3	144.6		1,191		2,954		1,336	(59.7)	(10.9)
HELOC		2,635		2,411		1,669	9.3	57.9		2,152		2,411		2,853	(10.7)	(24.6)
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		127,588		108,929		103,164	17.1	23.7
Other real estate owned		1,255		1,561		2,374	(19.6)	(47.1)		761		1,561		1,624	(51.2)	(53.1)
Total classified assets	$	126,529	$	110,490	$	68,982	14.5	83.4	$	128,349	$	110,490	$	104,788	16.2	22.5

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

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Total classified loans increased $18.7 million and classified assets increased ~~$16.0~~$17.9 million as of ~~March 31,~~June 30, 2023 from ~~the levels at~~ December 31, 2022. The increase is due to the addition of ~~$25.2~~$29.6 million of classified loans in commercial real estate – investor, primarily due to three large credits, two of which are office buildings and one is an assisted living facility in the first ~~quarter~~six months of 2023. The increase from ~~March 31,~~June 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.~~investor. 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%~~20.46% for the period ended ~~March 31,~~June 30, 2023, compared to 18.36% as of December 31, 2022, and ~~12.04%~~17.79% as of ~~March 31,~~June 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,~~June 30, 2023, our ACL on loans totaled ~~$53.4~~$55.3 million, and our ACL on unfunded commitments, included in other liabilities, totaled ~~$3.8~~$3.1 million. In the ~~first~~second quarter of 2023, we recorded provision expense on loans of ~~$4.7~~$2.4 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~~$427,000 release 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~~$2.0 million net impact to the provision for credit losses for the ~~first~~second 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~~$55.3 million as of ~~March 31,~~June 30, 2023, $49.5 million as of December 31, 2022, and ~~$44.3~~$45.4 million as of ~~March 31,~~June 30, 2022. Our ACL on loans to total loans was 1.4% as of June 30, 2023, compared to 1.3% as of ~~March 31, 2023,~~ December 31, 2022 and ~~March 31,~~June 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								Six Months Ended
	March 31,			December 31,			March 31,			June 30,			March 31,			June 30,			June 30,			June 30,
	2023			2022			2022			2023			2023			2022			2023			2022
Allowance at beginning of period	$	49,480		$	48,847		$	44,281		$	53,392		$	49,480		$	44,308		$	49,480		$	44,281
Charge–offs:
Commercial		27			2			30			380			27			52			407			82
Leases		882			193			-			-			882			-			882			-
Commercial real estate – investor		-			797			236			71			-			243			71			480
Commercial real estate – owner occupied		-			-			121			201			-			-			201			121
Construction		-			-			-			-			-			-			-			-
Residential real estate – investor		-			-			-			-			-			-			-			-
Residential real estate – owner occupied		-			-			-			-			-			-			-			-
Multifamily		-			2			-			-			-			-			-			-
HELOC		-			-			-			-			-			-			-			-
Other ¹		113			82			127			81			113			91			194			217
Total charge–offs		1,022			1,076			514			733			1,022			386			1,755			900
Recoveries:
Commercial		151			10			30			82			151			8			233			38
Leases		9			2			-			7			9			-			16			-
Commercial real estate – investor		17			21			23			20			17			18			37			41
Commercial real estate – owner occupied		2			2			8			3			2			7			5			15
Construction		-			-			-			-			-			-			-			-
Residential real estate – investor		19			7			10			5			19			5			24			15
Residential real estate – owner occupied		10			-			83			36			10			22			46			105
Multifamily		-			8			-			-			-			-			-			-
HELOC		29			38			35			24			29			31			53			67
Other ¹		45			48			32			51			45			45			96			76
Total recoveries		282			136			221			228			282			136			510			357
Net charge-offs		740			940			293			505			740			250			1,245			543
Provision for credit losses on loans		4,652			1,573			320			2,427			4,652			1,330			7,079			1,650
Allowance at end of period	$	53,392		$	49,480		$	44,308		$	55,314		$	53,392		$	45,388		$	55,314		$	45,388

Average total loans (exclusive of loans held–for–sale)	$	3,931,679		$	3,877,004		$	3,397,827		$	4,039,052		$	3,931,679		$	3,505,806		$	3,985,662		$	3,452,115
Net charge–offs to average loans		0.08	%		0.10	%		0.04	%		0.05	%		0.08	%		0.03	%		0.06	%		0.03	%
Allowance at period end to average loans		1.36	%		1.28	%		1.30	%		1.37	%		1.36	%		1.29	%		1.39	%		1.31	%

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,~~90.3% June 30, 2023, which was a decrease from the coverage ratio of ~~150.3%~~162.2% as of ~~December~~March 31, ~~2022~~2023 and a decrease from ~~116.7%~~107.8% as of ~~March 31,~~June 30, 2022. When measured as a percentage of average loans, our total ACL on loans was ~~1.36% for the three months ended~~1.39% at June 30, 2023 and ~~1.30%~~1.31% for the like period of ~~March 31,~~June 30, 2022.

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at ~~March 31,~~June 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 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.

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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								June 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,	June 30,		December 31,		June 30,		December 31,	June 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)	$	1,897,694	$	2,051,702	$	2,078,272	(7.5)	(8.7)
Savings		1,108,610		1,145,592		1,228,783	(3.2)	(9.8)		1,050,453		1,145,592		1,199,027	(8.3)	(12.4)
NOW accounts		608,260		609,338		607,019	(0.2)	0.2		586,121		609,338		609,558	(3.8)	(3.8)
Money market accounts		799,300		862,170		1,098,581	(7.3)	(27.2)		731,459		862,170		994,616	(15.2)	(26.5)
Certificates of deposit of less than $100,000		238,257		244,017		286,116	(2.4)	(16.7)		240,848		244,017		268,723	(1.3)	(10.4)
Certificates of deposit of $100,000 through $250,000		147,887		157,438		135,682	(6.1)	9.0		148,070		157,438		140,266	(6.0)	5.6
Certificates of deposit of more than $250,000		44,762		40,466		55,758	10.6	(19.7)		62,937		40,466		52,393	55.5	20.1
Total deposits	$	4,897,220	$	5,110,723	$	5,544,545	(4.2)	(11.7)	$	4,717,582	$	5,110,723	$	5,342,855	(7.7)	(11.7)

~~Tableof Contents~~

Total deposits were ~~$4.90~~$4.72 billion at ~~March 31,~~June 30, 2023, which reflects a ~~$213.5~~$393.1 million decrease from total deposits of $5.11 billion at December 31, 2022, and a decrease of ~~$647.3~~$625.3 million from total deposits of ~~$5.54~~$5.34 billion at ~~March 31,~~June 30, 2022. The decrease in deposits at ~~March 31,~~June 30, 2023, compared to December 31, 2022, was primarily due to decreases in non-interest bearing deposits of ~~$101.6~~$154.0 million, savings accounts of ~~$37.0~~$95.1 million and money market accounts of ~~$62.9~~$130.7 million. The decrease in deposits at ~~March 31,~~June 30, 2023, compared to ~~March 31,~~June 30, 2022 was primarily due to decreases in non-interest bearing deposits of ~~$182.5~~$180.6 million, savings accounts of ~~$120.2~~$148.6 million, and money market accounts of ~~$299.3~~$263.2 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~~$667.2 million, or ~~8.9%~~12.2%, in the year over year period, driven by declines in our average demand deposits of ~~$90.5~~$199.2 million, and savings, NOW and money markets combined of ~~$338.6~~$435.5 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 June 30, 2023 and December 31, 2022 by deposit type, as well as the weighted average rates for each quarter to date ending period.


(Dollars in thousands)	June 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	$	1,897,694	$	1,250,055	$	647,639	-	%	$	2,051,702	$	1,327,379	$	724,323	-	%
Savings		1,050,453		980,137		70,316	0.05			1,145,592		1,065,153		80,439	0.03
NOW accounts		586,121		424,084		162,037	0.19			609,338		453,799		155,539	0.09
Money market accounts		731,459		511,142		220,317	0.52			862,170		588,923		273,247	0.10
Time deposits		451,855		380,312		71,543	0.84			441,921		381,980		59,941	0.31
Total	$	4,717,582	$	3,545,730	$	1,171,852	0.19	%	$	5,110,723	$	3,817,234	$	1,293,489	0.06	%

Collateralized public funds	$	279,360	$	15,841	$	263,519			$	262,318	$	15,880	$	246,439

Deposits declined 7.7% for the six months ended June 30, 2023, primarily due to retail run off, partially offset by a seasonal pick up in public fund deposits. Deposit run off year to date has been very granular, and not necessarily attributable to a few large deposit accounts. The largest component of deposit increases were seasonal funds from our public fund clients, while the largest reduction in total deposits was driven by retail customers stemming from tax payments, including personal income as well as real estate taxes, and real estate transactions. In terms of product mix, we observed some migration into time deposits, which was expected due to CD rate specials offered. Overall, our deposit level has been stable from observation of recent trends and we expect that to continue going forward.

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~~$31.5 million at ~~March 31,~~June 30, 2023, a ~~$4.3 million,~~

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$624,000, or ~~13.2%~~1.9%, 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 short-term borrowings from the FHLBC again. The outstanding balance of our short-term FHLBC borrowings was ~~$315.0~~$485.0 million as of ~~March 31,~~June 30, 2023 and $90.0 million as of December 31, 2022; there were no short-term borrowings outstanding as of ~~March 31,~~June 30, 2022.

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”). The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of ~~4.39%~~4.38% as of ~~March 31,~~June 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 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,~~June 30, 2023, we had $59.3 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,~~June 30, 2023, compared to $9.0 million as of December 31, 2022, and ~~$18.0~~$11.0 million as of ~~March 31,~~June 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.

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Capital

As of ~~March 31,~~June 30, 2023, total stockholders’ equity was ~~$496.9~~$514.0 million, which was an increase of ~~$35.7~~$52.9 million from $461.1 million as of December 31, 2022. This increase is primarily attributable to an increase in retained earnings of ~~$21.4~~$44.7 million due to net income of ~~$23.6~~$49.2 million in the first ~~quarter~~six months of 2023, partially offset by ~~$2.2~~$4.5 million of dividends paid to our common stockholders. In addition, total stockholders’ equity as of ~~March 31,~~June 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~~$6.9 million in the first ~~three~~six months of 2023, due to changes in market interest rates. Total stockholders’ equity as of ~~March 31,~~June 30, 2023 increased ~~$30.6~~$65.1 million compared to ~~March 31,~~June 30, 2022 due to net income year over year, less the ~~reduction~~increase in accumulated other comprehensive ~~income~~loss of ~~$41.6~~$20.9 million year over year.

~~Tableof Contents~~

The following table shows the regulatory capital ratios and the current well capitalized regulatory requirements for the Company and the Bank as of the 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		June 30,		December 31,		June 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		10.29	%	9.67	%	9.35	%
Total risk-based capital ratio	10.50	%	N/A		12.79	%	12.52	%	12.85	%	10.50	%	N/A		13.16	%	12.52	%	12.27	%
Tier 1 risk-based capital ratio	8.50	%	N/A		10.43	%	10.20	%	10.33	%	8.50	%	N/A		10.80	%	10.20	%	9.91	%
Tier 1 leverage ratio	4.00	%	N/A		8.56	%	8.14	%	7.00	%	4.00	%	N/A		8.96	%	8.14	%	7.24	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	11.98	%	11.70	%	12.74	%	7.00	%	6.50	%	11.70	%	11.70	%	12.24	%
Total risk-based capital ratio	10.50	%	10.00	%	13.10	%	12.75	%	13.83	%	10.50	%	10.00	%	12.83	%	12.75	%	13.25	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	11.98	%	11.70	%	12.74	%	8.50	%	8.00	%	11.70	%	11.70	%	12.24	%
Tier 1 leverage ratio	4.00	%	5.00	%	9.83	%	9.32	%	8.61	%	4.00	%	5.00	%	9.70	%	9.32	%	8.94	%

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

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

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

As of ~~March 31,~~June 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%~~8.73% at ~~March 31,~~June 30, 2023. Our GAAP tangible common equity to tangible assets ratio was ~~6.83%~~7.17% at ~~March 31,~~June 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%~~7.21% at ~~March 31,~~June 30, 2023, primarily due to an increase in tangible common equity in the ~~first~~second quarter of 2023. The increase in tangible common equity was due to an increase in retained earnings of ~~$21.4~~$44.7 million and ~~an increase~~a decrease in accumulated other comprehensive ~~income~~loss of ~~$14.0~~$6.9 million primarily related to a decline in 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						June 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		$	513,955		$	513,955		$	461,141		$	461,141
Less: Goodwill and intangible assets		99,532			99,532			100,156			100,156			98,914			98,914			100,156			100,156
Add: Limitation of exclusion of core deposit intangible (80%)		N/A			2,611			N/A			2,736			N/A			2,487			N/A			2,736
Adjusted goodwill and intangible assets		99,532			96,921			100,156			97,420			98,914			96,427			100,156			97,420
Tangible common equity	$	397,338		$	399,949		$	360,985		$	363,721		$	415,041		$	417,528		$	360,985		$	363,721
Tangible assets
Total assets	$	5,920,283		$	5,920,283		$	5,888,317		$	5,888,317		$	5,883,942		$	5,883,942		$	5,888,317		$	5,888,317
Less: Adjusted goodwill and intangible assets		99,532			96,921			100,156			97,420			98,914			96,427			100,156			97,420
Tangible assets	$	5,820,751		$	5,823,362		$	5,788,161		$	5,790,897		$	5,785,028		$	5,787,515		$	5,788,161		$	5,790,897

Common equity to total assets		8.39	%		8.39	%		7.83	%		7.83	%		8.73	%		8.73	%		7.83	%		7.83	%
Tangible common equity to tangible assets		6.83	%		6.87	%		6.24	%		6.28	%		7.17	%		7.21	%		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~~second quarter of 2023, we ~~experienced strong~~continued to experience 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,~~June 30, 2023, our cash on hand liquidity totaled ~~$103.0~~$112.6 million, a decrease of ~~$12.2~~$2.6 million over cash balances held as of December 31, 2022.

Net cash inflows from operating activities were ~~$35.0~~$5.6 million during the first ~~three~~six months of 2023, compared with net cash inflows of ~~$494,000~~$27.1 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~~six 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~~six months ended ~~March 31,~~June 30, 2023 and 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~~$49.0 million in the ~~three~~six months ended ~~March 31,~~June 30, 2023, compared to net cash outflows of ~~$176.5~~$349.7 million in the same period in 2022. In the first ~~three~~six months of 2023, securities transactions accounted for net inflows of ~~$90.0~~$210.0 million, and the principal change on loans accounted for net outflows of ~~$132.4~~$144.0 million. In the first ~~three~~six months of 2022, securities transactions accounted for net outflows of ~~$199.3~~$149.4 million, and principal on loans funded, net of paydowns, accounted for net ~~inflows~~outflows of ~~$21.9~~$200.0 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~~six months ended ~~March 31,~~June 30, 2023, were ~~$4.2~~$57.1 million, compared with net cash ~~inflows~~outflows of ~~$58.6~~$148.2 million in the ~~three~~six months ended ~~March 31,~~June 30, 2022. Net deposit outflows in the first ~~three~~six months of 2023 were ~~$213.1~~$392.4 million

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compared to net deposit ~~inflows~~outflows of ~~$78.7~~$122.6 million in the first ~~three~~six months of 2022. Other short-term borrowings had ~~$225.0~~$395.0 million of net cash inflows in the first ~~three~~six months of 2023, compared to no cash inflows or outflows for other short-term borrowings in the first ~~three~~six months of 2022. Changes in securities sold under repurchase agreements accounted for outflows of ~~$4.3 million~~$624,000 and outflows of ~~$16.8~~$12.7 million for the ~~three~~six months ended ~~March 31,~~June 30, 2023 and 2022, respectively. Dividends paid on our common stock totaled ~~$2.2~~$4.5 million in the ~~three~~six months ended ~~March 31,~~June 30, 2023, ~~and March 31, 2022.~~compared to dividends paid of $4.4 million for the like 2022 period. The purchase of treasury stock in the first ~~three~~six 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 $400,000 in the first ~~three~~six months of 2022.

Cash and cash equivalents for the ~~three~~six months ended ~~March 31,~~June 30, 2023, totaled ~~$103.0~~$112.6 million, as compared to $115.2 million as of December 31, 2022 and ~~$634.7~~$281.3 million as of ~~March 31,~~June 30, 2022. The decrease in cash and cash equivalents for the ~~three~~six months ended ~~March 31,~~June 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~~six 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.

The Federal Reserve ~~has~~ slowed its pace of aggressive rate hikes toin the second quarter of 2023. The Federal Reserve took a pause at its June 2023 meeting and have implemented a 0.25% hike at the ~~March~~July 2023 meeting, ~~– resulting in~~reaching a federal funds rate ~~target from 4.75% to 5.00%. We believe the current market expectation is one 25 basis points rate hike at the May meeting and the federal funds target rate to level off at~~of 5.25%. The ~~market~~forward curve has shifted out from prior quarter expectations, as current indications reach a peak in July with flat rates through the remainder of 2023. The curve also priced in interest rate cuts ~~near the end~~in 2024, in anticipation of ~~2023.~~an economic slowdown. The Federal Reserve’s objective of shrinking its balance sheet has been slower than planned due to slower prepayments on mortgage-backed securities from the lack of refinancing ~~activity. The Federal Reserve also provided additional liquidity facilities to financial institutions in March 2023, as a result~~activity, its balance sheet remains large at ~~$8.6~~$8.3 trillion.

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,~~June 30, 2023 and December 31, 2022 are outlined in the table below.

~~Tableof Contents~~

Our net income can be significantly influenced by a variety of external factors, including: overall economic conditions, policies and actions of regulatory authorities, the amounts of and rates at which assets and liabilities reprice, variances in prepayment of loans and securities other than those that are assumed, early withdrawal of deposits, exercise of call options on borrowings or securities, competition, a general rise or decline in interest rates, changes in the slope of the yield-curve, changes in historical relationships between indices (such as ~~LIBOR~~SOFR and prime), and balance sheet growth or contraction. Our asset-liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our on-balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 19 of our consolidated financial statements found in in our Annual Report on Form 10-K for the year ended December 31, 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 mix, 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 continue to 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, and collateralized deposits. Additionally, we 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,~~June 30, 2023, our net interest income profile remained sensitive to earnings gains (in both dollars and percentage) should interest rates rise. However, we continue to have a ~~lower sensitivity~~less sensitive profile relative 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
June 30, 2023
Dollar change	$	(42,566)		$	(21,044)		$	(10,322)		$	10,476		$	21,117		$	41,629		$	(37,532)		$	(18,699)		$	(9,266)		$	9,366		$	18,873		$	37,228
Percent change		(16.3)	%		(8.1)	%		(4.0)	%		4.0	%		8.1	%		15.9	%		(15.0)	%		(7.5)	%		(3.7)	%		3.7	%		7.5	%		14.9	%

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 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~~slowed to ~~slow~~3.0% relative to ~~5.0% from its~~a peak of 9.1% in the year-over-year period ended June 30, 2022. Management believes the inflation rate will continue to ~~trend~~notch 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 the first half of 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~~rate environment. We seek to mitigate the impact of interest rate volatility onto the Bank by ~~seeking to ensure that~~managing rate sensitive of both 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,~~June 30, 2023. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of ~~March 31,~~June 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,~~June 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~~and (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 and other consumer items. Inflation represents a loss in purchasing power because the value of investments does not keep up with inflation and erodes the purchasing power of money and the potential value of investments over time. Accordingly, inflation can result in material adverse effects upon our customers, their businesses and, as a result, our financial position and results of operation. fiscal quarter ended March 31, 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

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibits:



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

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

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

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

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

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SIGNATURES

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


	OLD SECOND BANCORP, INC.


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


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


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

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	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	5461
Item 4.	Controls and Procedures	5662
	PART II

Item 1.	Legal Proceedings	5663
Item 1.A.	Risk Factors	5663
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5763
Item 3.	Defaults Upon Senior Securities	5763
Item 4.	Mine Safety Disclosure	5763
Item 5.	Other Information	5763
Item 6.	Exhibits	5864

	Signatures	5965


	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


							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	%