UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~June~~September 30, 2023


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

For transition period from to

Commission File Number 000-10537

(Exact name of Registrant as specified in its charter)


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

37 South River Street, Aurora, Illinois 60507

(Address of principal executive offices) (Zip Code)

(630) 892-0202

(Registrant’s telephone number, including area code)

Not applicable

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

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


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

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

Yes ☒ No ☐

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

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

Large accelerated filer☐Accelerated filer☒

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

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

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

Yes ☐ No ☒

As of ~~August 4,~~November 3, 2023, the Registrant has ~~44,675,057~~44,697,917 shares of common stock outstanding at $1.00 par value per share.

Table of Contents

OLD SECOND BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

Cautionary Note Regarding Forward-Looking Statements

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

●

our ability to execute our growth strategy;

●

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

●

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

●

risks with respect to our ability to successfully expand and integrate businesses and operations that we acquire, as well our ability to identify and complete future mergers or acquisitions;

●

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

●

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

●

~~the transition away from LIBOR to an alternative reference rate;~~

●

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

●

any negative perception of our reputation or financial strength;

●

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

●

our ability to 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;

●

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

●

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

●

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

●

changes in trade policy and any related tariffs; and

●

each of the factors and risks under the heading “Risk Factors” in our 2022 Annual Report on Form 10-K and in subsequent filings we make with the SEC.

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

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)


	(unaudited)				(unaudited)
	June 30,		December 31,		September 30,		December 31,
	2023		2022		2023		2022
Assets
Cash and due from banks	$	59,466	$	56,632	$	55,548	$	56,632
Interest earning deposits with financial institutions		53,144		58,545		53,485		58,545
Cash and cash equivalents		112,610		115,177		109,033		115,177
Securities available-for-sale, at fair value		1,335,622		1,539,359		1,229,618		1,539,359
Federal Home Loan Bank Chicago (“FHLBC”) and Federal Reserve Bank Chicago (“FRBC”) stock		36,730		20,530		35,830		20,530
Loans held-for-sale		1,218		491		2,297		491
Loans		4,015,525		3,869,609		4,029,543		3,869,609
Less: allowance for credit losses on loans		55,314		49,480		51,729		49,480
Net loans		3,960,211		3,820,129		3,977,814		3,820,129
Premises and equipment, net		72,797		72,355		76,472		72,355
Other real estate owned		761		1,561		407		1,561
Mortgage servicing rights, at fair value		11,041		11,189		11,461		11,189
Goodwill		86,478		86,478		86,478		86,478
Core deposit intangible		12,436		13,678		11,820		13,678
Bank-owned life insurance (“BOLI”)		107,268		106,608		108,187		106,608
Deferred tax assets, net		39,827		44,750		44,051		44,750
Other assets		106,943		56,012		64,688		56,012
Total assets	$	5,883,942	$	5,888,317	$	5,758,156	$	5,888,317

Liabilities
Deposits:
Noninterest bearing demand	$	1,897,694	$	2,051,702	$	1,862,659	$	2,051,702
Interest bearing:
Savings, NOW, and money market		2,368,033		2,617,100		2,273,671		2,617,100
Time		451,855		441,921		477,990		441,921
Total deposits		4,717,582		5,110,723		4,614,320		5,110,723
Securities sold under repurchase agreements		31,532		32,156		25,894		32,156
Other short-term borrowings		485,000		90,000		435,000		90,000
Junior subordinated debentures		25,773		25,773		25,773		25,773
Subordinated debentures		59,339		59,297		59,361		59,297
Senior notes		-		44,585		-		44,585
Notes payable and other borrowings		-		9,000		-		9,000
Other liabilities		50,761		55,642		65,250		55,642
Total liabilities		5,369,987		5,427,176		5,225,598		5,427,176

Stockholders’ Equity
Common stock		44,705		44,705		44,705		44,705
Additional paid-in capital		200,963		202,276		201,553		202,276
Retained earnings		355,219		310,512		377,320		310,512
Accumulated other comprehensive loss		(86,186)		(93,124)		(90,619)		(93,124)
Treasury stock		(746)		(3,228)		(401)		(3,228)
Total stockholders’ equity		513,955		461,141		532,558		461,141
Total liabilities and stockholders’ equity	$	5,883,942	$	5,888,317	$	5,758,156	$	5,888,317


	June 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
	Common		Common		Common		Common
	Stock		Stock		Stock		Stock
Par value	$	1.00	$	1.00	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000		60,000,000		60,000,000
Shares issued		44,705,150		44,705,150		44,705,150		44,705,150
Shares outstanding		44,665,127		44,582,311		44,684,987		44,582,311
Treasury shares		40,023		122,839		20,163		122,839

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)


	(unaudited)				(unaudited)				(unaudited)				(unaudited)
	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022		2023		2022		2023		2022
Interest and dividend income
Loans, including fees	$	61,561	$	38,229	$	118,771	$	74,595	$	62,665	$	46,614	$	181,436	$	121,209
Loans held-for-sale		19		32		31		89		29		22		60		111
Securities:
Taxable		9,930		6,786		20,665		11,954		8,946		9,116		29,611		21,071
Tax exempt		1,337		1,297		2,674		2,615		1,333		1,332		4,007		3,946
Dividends from FHLBC and FRBC stock		396		263		676		416		597		261		1,273		677
Interest bearing deposits with financial institutions		643		782		1,228		1,051		659		663		1,887		1,714
Total interest and dividend income		73,886		47,389		144,045		90,720		74,229		58,008		218,274		148,728
Interest expense
Savings, NOW, and money market deposits		1,742		347		2,891		744		2,558		380		5,449		1,124
Time deposits		1,156		265		1,820		542		1,982		335		3,802		877
Securities sold under repurchase agreements		7		9		16		20		27		10		43		30
Other short-term borrowings		5,160		-		7,505		-		5,840		44		13,345		44
Junior subordinated debentures		281		284		560		564		245		285		805		849
Subordinated debentures		546		547		1,092		1,093		547		546		1,639		1,639
Senior notes		1,414		578		2,408		1,063		-		728		2,408		1,791
Notes payable and other borrowings		-		95		87		198		-		111		87		309
Total interest expense		10,306		2,125		16,379		4,224		11,199		2,439		27,578		6,663
Net interest and dividend income		63,580		45,264		127,666		86,496		63,030		55,569		190,696		142,065
Provision for credit losses		2,000		550		5,501		550		3,000		4,500		8,501		5,050
Net interest and dividend income after provision for credit losses		61,580		44,714		122,165		85,946		60,030		51,069		182,195		137,015
Noninterest income
Wealth management		2,458		2,506		4,728		5,204		2,475		2,280		7,203		7,484
Service charges on deposits		2,362		2,328		4,786		4,402		2,504		2,661		7,290		7,063
Secondary mortgage fees		76		50		135		189		66		81		201		270
Mortgage servicing rights mark to market gain (loss)		96		82		(429)		3,060		281		548		(148)		3,608
Mortgage servicing income		499		579		1,015		1,098		519		514		1,534		1,612
Net gain (loss) on sales of mortgage loans		398		(262)		704		1,233
Net gain on sales of mortgage loans										407		449		1,111		1,682
Securities losses, net		(1,547)		(33)		(3,222)		(33)		(924)		(1)		(4,146)		(34)
Change in cash surrender value of BOLI		418		72		660		196		919		146		1,579		342
Card related income		2,690		2,965		4,934		5,532		2,606		2,653		7,540		8,194
Other income		773		924		2,262		1,793		1,024		2,165		3,286		3,949
Total noninterest income		8,223		9,211		15,573		22,674		9,877		11,496		25,450		34,170
Noninterest expense
Salaries and employee benefits		21,798		21,332		44,046		41,299		23,115		21,011		67,161		62,310
Occupancy, furniture and equipment		3,639		3,046		7,114		6,745		3,506		4,119		10,620		10,864
Computer and data processing		1,290		4,006		3,064		10,274		1,922		2,543		4,986		12,817
FDIC insurance		794		702		1,378		1,112		744		659		2,122		1,771
Net teller & bill paying		515		834		1,017		2,741		534		504		1,551		3,245
General bank insurance		306		351		611		666		300		257		911		923
Amortization of core deposit intangible		618		659		1,242		1,324		616		657		1,858		1,981
Advertising expense		103		194		245		376		93		83		338		459
Card related expense		1,222		1,057		2,438		1,591		1,347		1,453		3,785		3,044
Legal fees		283		179		602		436		97		212		699		648
Consulting & management fees		520		523		1,310		1,139		549		607		1,859		1,746
Other real estate expense, net		(98)		87		208		75
Other real estate (income) expense, net										(27)		21		181		96
Other expense		3,840		4,279		7,477		7,723		4,627		3,862		12,104		11,585
Total noninterest expense		34,830		37,249		70,752		75,501		37,423		35,988		108,175		111,489
Income before income taxes		34,973		16,676		66,986		33,119		32,484		26,577		99,470		59,696
Provision for income taxes		9,411		4,429		17,817		8,852		8,149		7,054		25,966		15,906
Net income	$	25,562	$	12,247	$	49,169	$	24,267	$	24,335	$	19,523	$	73,504	$	43,790

Basic earnings per share	$	0.57	$	0.28	$	1.10	$	0.55	$	0.55	$	0.43	$	1.65	$	0.98
Diluted earnings per share		0.56		0.27		1.08		0.54		0.54		0.43		1.62		0.97
Dividends declared per share		0.05		0.05		0.10		0.10		0.05		0.05		0.15		0.15

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(unaudited)

(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)


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

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

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

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

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



	Accumulated		Accumulated		Total		Accumulated		Accumulated		Total
	Unrealized Gain		Unrealized Gain		Accumulated Other		Unrealized Gain		Unrealized Gain		Accumulated Other
	(Loss) on Securities		(Loss) on Derivative		Comprehensive		(Loss) on Securities		(Loss) on Derivative		Comprehensive
(unaudited)	Available-for -Sale		Instruments		Income/(Loss)		Available-for -Sale		Instruments		Income/(Loss)
For the Three Months Ended
Balance, April 1, 2022	$	(35,537)	$	(1,947)	$	(37,484)
Balance, July 1, 2022							$	(64,663)	$	(581)	$	(65,244)
Other comprehensive loss, net of tax								(29,637)		(3,508)		(33,145)
Balance, September 30, 2022							$	(94,300)	$	(4,089)	$	(98,389)

Balance, July 1, 2023							$	(80,919)	$	(5,267)	$	(86,186)
Other comprehensive (loss) income, net of tax		(29,126)		1,366		(27,760)		(5,860)		1,427		(4,433)
Balance, June 30, 2022	$	(64,663)	$	(581)	$	(65,244)
Balance, September 30, 2023							$	(86,779)	$	(3,840)	$	(90,619)

Balance, April 1, 2023	$	(76,014)	$	(3,086)	$	(79,100)
For the Nine Months Ended
Balance, January 1, 2022							$	11,139	$	(2,371)	$	8,768
Other comprehensive loss, net of tax		(4,905)		(2,181)		(7,086)		(105,439)		(1,718)		(107,157)
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, September 30, 2022							$	(94,300)	$	(4,089)	$	(98,389)

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

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Six Months Ended June 30,

2023

2022

Cash flows from operating activities

Net income

$
49,169

$
24,267

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

Net premium / discount amortization on securities

1,626

3,300

Securities losses, net

3,222

33

Provision for credit losses

5,501

550

Originations of loans held-for-sale

(24,570)

(49,648)

Proceeds from sales of loans held-for-sale

24,271

53,204

Net gains on sales of mortgage loans

(704)

(1,233)

Mortgage servicing rights mark to market loss (gain)

429

(3,060)

Net accretion of discount on loans and unfunded commitments

(2,093)

(3,841)

Net change in cash surrender value of BOLI

(660)

(196)

Net gains on sale of other real estate owned

(158)

(130)

Provision for other real estate owned valuation losses

269

104

Depreciation of fixed assets and amortization of leasehold improvements

2,135

2,101

Net gains on disposal and transfer of fixed assets

(635)

(1,961)

Amortization of core deposit intangibles

1,242

1,324

Change in current income taxes receivable

(456)

(729)

Deferred tax expense

2,204

2,400

Change in accrued interest receivable and other assets

(50,594)

7,000

Accretion of purchase accounting adjustment on time deposits

(701)

(821)

Change in accrued interest payable and other liabilities

(5,709)

(7,033)

Stock based compensation

1,774

1,469

Net cash provided by operating activities

5,562

27,100

Cash flows from investing activities

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

73,981

148,429

Proceeds from sales of securities available-for-sale

140,166

3,303

Purchases of securities available-for-sale

(4,186)

(301,129)

Net purchases of FHLBC/FRBC stock

(16,200)

(7,156)

Net change in loans

(143,966)

(199,955)

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

1,165

845

Proceeds from disposition of premises and equipment

1,105

7,490

Net purchases of premises and equipment

(3,047)

(1,526)

Net cash provided by (used in) investing activities

49,018

(349,699)

Cash flows from financing activities

Net change in deposits

(392,440)

(122,556)

Net change in securities sold under repurchase agreements

(624)

(12,738)

Net change in other short-term borrowings

395,000

-

Repayment of term note

(9,000)

(2,000)

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

-

(6,056)

Repayment of senior notes

(45,000)

-

Dividends paid on common stock

(4,478)

(4,423)

Purchase of treasury stock

(605)

(400)

Net cash used in financing activities

(57,147)

(148,173)

Net change in cash and cash equivalents

(2,567)

(470,772)

Cash and cash equivalents at beginning of period

115,177

752,107

Cash and cash equivalents at end of period

$
112,610

$
281,335


	(unaudited)
	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities
Net income	$	73,504	$	43,790
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount amortization on securities		2,506		4,259
Securities losses, net		4,146		34
Provision for credit losses		8,501		5,050
Originations of loans held-for-sale		(39,068)		(65,103)
Proceeds from sales of loans held-for-sale		37,962		69,263
Net gains on sales of mortgage loans		(1,111)		(1,682)
Mortgage servicing rights mark to market loss (gain)		148		(3,608)
Net accretion of discount on loans and unfunded commitments		(2,620)		(5,473)
Net change in cash surrender value of BOLI		(1,579)		(342)
Net gains on sale of other real estate owned		(229)		(163)
Provision for other real estate owned valuation losses		269		104
Depreciation of fixed assets and amortization of leasehold improvements		3,246		3,079
Net gains on disposal and transfer of fixed assets		(636)		(1,872)
Amortization of core deposit intangibles		1,858		1,981
Change in current income taxes receivable		1,070		7,279
Deferred tax expense		(289)		(1,854)
Change in accrued interest receivable and other assets		(10,053)		1,036
Accretion of purchase accounting adjustment on time deposits		(1,004)		(1,207)
Change in accrued interest payable and other liabilities		7,991		3,314
Stock based compensation		2,709		2,176
Net cash provided by operating activities		87,321		60,061
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		104,471		231,483
Proceeds from sales of securities available-for-sale		205,738		3,303
Purchases of securities available-for-sale		(4,186)		(301,649)
Net purchases of FHLBC/FRBC stock		(15,300)		(6,156)
Net change in loans		(164,252)		(443,628)
Proceeds from sales of other real estate owned, net of participations and improvements		1,800		941
Proceeds from disposition of premises and equipment		4,460		12,167
Net purchases of premises and equipment		(8,217)		(2,670)
Cash paid for acquisition, net of cash and cash equivalents acquired		-		(146)
Net cash provided by (used in) investing activities		124,514		(506,355)
Cash flows from financing activities
Net change in deposits		(495,399)		(183,666)
Net change in securities sold under repurchase agreements		(6,262)		(14,840)
Net change in other short-term borrowings		345,000		25,000
Repayment of term note		(9,000)		(3,000)
Net change in notes payable and other borrowings, excluding term note		-		(6,056)
Repayment of senior notes		(45,000)		-
Dividends paid on common stock		(6,713)		(6,650)
Purchase of treasury stock		(605)		(447)
Net cash used in financing activities		(217,979)		(189,659)
Net change in cash and cash equivalents		(6,144)		(635,953)
Cash and cash equivalents at beginning of period		115,177		752,107
Cash and cash equivalents at end of period	$	109,033	$	116,154

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in

Stockholders’ Equity

(In thousands)

Accumulated

Additional

Other

Total
(unaudited)
Common

Paid-In

Retained

Comprehensive

Treasury

Stockholders’


Stock

Capital

Earnings

Income (Loss)

Stock

Equity
For the Three Months Ended

Balance, 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

25,562

25,562
Other comprehensive loss, net of tax

(7,086)

(7,086)
Dividends declared on common stock, ($0.05 per share)

(2,233)

(2,233)
Stock based compensation

842

842
Balance, June 30, 2023

$
44,705

$
200,963

$
355,219

$
(86,186)

$
(746)

$
513,955


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

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

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


For the Six Months Ended
For the Nine Months Ended

Balance, January 1, 2022	$	44,705	$	202,443	$	252,011	$	8,768	$	(5,900)	$	502,027	$	44,705	$	202,443	$	252,011	$	8,768	$	(5,900)	$	502,027
Net income						24,267						24,267						43,790						43,790
Other comprehensive loss, net of tax								(74,012)				(74,012)								(107,157)				(107,157)
Dividends declared on common stock, ($0.10 per share)						(4,447)						(4,447)
Dividends declared on common stock, ($0.15 per share)																		(6,675)						(6,675)
Vesting of restricted stock				(2,630)						2,630		-				(2,919)						2,919		-
Stock based compensation				1,469								1,469				2,176								2,176
Purchase of treasury stock from taxes withheld on stock awards										(400)		(400)										(447)		(447)
Balance, June 30, 2022	$	44,705	$	201,282	$	271,831	$	(65,244)	$	(3,670)	$	448,904
Balance, September 30, 2022													$	44,705	$	201,700	$	289,126	$	(98,389)	$	(3,428)	$	433,714


Balance, January 1, 2023	$	44,705	$	202,276	$	310,512	$	(93,124)	$	(3,228)	$	461,141	$	44,705	$	202,276	$	310,512	$	(93,124)	$	(3,228)	$	461,141
Net income						49,169						49,169						73,504						73,504
Other comprehensive income, net of tax								6,938				6,938								2,505				2,505
Dividends declared on common stock, ($0.10 per share)						(4,462)						(4,462)
Dividends declared on common stock, ($0.15 per share)																		(6,696)						(6,696)
Vesting of restricted stock				(3,087)						3,087		-				(3,432)						3,432		-
Stock based compensation				1,774								1,774				2,709								2,709
Purchase of treasury stock from taxes withheld on stock awards										(605)		(605)										(605)		(605)
Balance, June 30, 2023	$	44,705	$	200,963	$	355,219	$	(86,186)	$	(746)	$	513,955
Balance, September 30, 2023													$	44,705	$	201,553	$	377,320	$	(90,619)	$	(401)	$	532,558

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

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

Recent Accounting Pronouncements

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

ASU 2018-16, ASU 2020-04, ASU 2021-01, and ASU 2022-06 – In October 2018, the Financial Standards Board, or FASB, issued ASU No. 2018-16 “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting.” ASU 2018-16 adds the SOFR overnight index swap rate to the list of United States (U.S.) benchmark rates eligible for hedge accounting purposes, which is the fourth rate permissible to be used as a U.S. benchmark rate. This guidance was effective for annual and interim periods beginning after December 15, 2018, and did not have a material impact on the financial condition or liquidity of the Company. ASU 2020-04 and ASU 2021-01 Reference Rate Reform (Topic 848) were issued on March 12, 2020 and January 7, 2021, respectively, and each provide further guidance on optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships due to the discontinuation of LIBOR. In addition, on March 5, 2021, the International Swaps and Derivatives Association (“ISDA”) issued a statement with an “Index Cessation Event Announcement,” which confirmed the extension of the cessation of LIBOR-referenced rates from December 31, 2021, to June 30, 2023, for certain rate tenors. ASU 2022-06 further defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

ASU 2022-01 – On March 28, 2022, the FASB issued ASU 2022-01 “Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method.” The goal of this new hedging standard is to better align the economic results of risk management activities with hedge accounting, by allowing multiple layers of a single closed portfolio to be hedged, as compared to the single-layer, or last of layer method, allowed with the adoption of ASU 2017-12. ASU 2022-01 is effective for public business entities for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, and was adopted by the Company as of January 1, 2023. There was no material impact of the pronouncement to the financial statements of the Company.

ASU 2022-02 – On March 31, 2022, the FASB issued ASU 2022-02 “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.” The amendments eliminate certain troubled debt restructuring (“TDR”) recognition and measurement guidance previously in effect, and consideration of the TDRs similar to other modified loans under CECL is now required. ASU 2022-02 also requires enhancements to vintage loan disclosures, requiring detail be provided on current-period gross write-offs and disclosure of the amortized cost basis of financing receivables by credit quality indicators and by loan portfolio class of the gross charge-off based on year of origination. ASU 2022-02 was effective for fiscal years beginning after December 15, 2022, including interim periods within those years, and was adopted prospectively by the Company as of January 1, 2023. There was no material impact of the pronouncement to the financial statements of the Company.

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

Subsequent Events

On ~~July 18,~~October 17, 2023, our Board of Directors declared a cash dividend of $0.05 per share payable on ~~August 7,~~November 6, 2023, to stockholders of record as of ~~July 28,~~October 27, 2023; dividends of $2.2 million are scheduled to be paid to stockholders on ~~August 7,~~November 6, 2023.

Note 2 – Acquisition

On December 1, 2021, the Company completed its acquisition of West Suburban Bancorp, Inc. (“West Suburban”), a bank holding company, and its wholly owned subsidiary, West Suburban Bank, based in Lombard, Illinois, with operations throughout our existing market footprint. At closing, the Company acquired $2.94 billion of assets, $1.50 billion of loans, $1.07 billion of securities, and $2.69 billion of deposits, net of fair value adjustments. Under the terms of the merger agreement, each outstanding share of West Suburban common stock was exchanged for 42.413 shares of Company common stock, plus $271.15 of cash. This resulted in merger consideration of $295.2 million, based on the closing price of the Company’s common stock on the date of acquisition, which consisted of 15.7 million shares of the Company’s common stock and $100.7 million of cash. Goodwill of $67.9 million associated with the acquisition was recorded by the Company, which was the result of expected synergies, operational efficiencies and other factors. The acquisition of West Suburban was accounted for as a business combination, and none of the $67.9 million of goodwill recorded is expected to be deductible for income tax purposes.

Note 3 – Securities

Investment Portfolio Management

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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 ~~$21.8~~$20.9 million at ~~June~~September 30, 2023, and $5.6 million at December 31, 2022. FRBC stock was recorded at $14.9 million at ~~June~~September 30, 2023 and December 31, 2022.

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


			Gross		Gross						Gross		Gross
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
June 30, 2023	Cost¹		Gains		Losses		Value
September 30, 2023									Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	224,337	$	-	$	(9,724)	$	214,613	$	224,481	$	-	$	(7,704)	$	216,777
U.S. government agencies		60,593		-		(4,612)		55,981		60,197		-		(4,376)		55,821
U.S. government agencies mortgage-backed		129,973		-		(14,833)		115,140		122,653		-		(18,084)		104,569
States and political subdivisions		241,764		557		(12,787)		229,534		240,107		142		(20,149)		220,100
Corporate bonds		5,000		-		(118)		4,882		5,000		-		(39)		4,961
Collateralized mortgage obligations		468,029		-		(60,534)		407,495		450,470		54		(63,845)		386,679
Asset-backed securities		140,791		-		(6,472)		134,319		71,241		-		(4,325)		66,916
Collateralized loan obligations		177,523		-		(3,865)		173,658		175,995		10		(2,210)		173,795
Total securities available-for-sale	$	1,448,010	$	557	$	(112,945)	$	1,335,622	$	1,350,144	$	206	$	(120,732)	$	1,229,618


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

¹ Excludes accrued interest receivable of ~~$6.9~~$6.7 million and $6.8 million at ~~June~~September 30, 2023 and December 31, 2022, respectively, that is recorded in other assets on the consolidated balance sheets.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The fair value, amortized cost and weighted average yield of debt securities at ~~June~~September 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	$	153,576	0.93	%	$	149,066	$	49,989	0.64	%	$	49,804
Due after one year through five years		151,098	1.19			140,669		253,955	1.17			241,430
Due after five years through ten years		52,232	3.03			48,401		60,975	2.92			53,882
Due after ten years		174,788	3.07			166,874		164,866	3.11			152,543
		531,694	1.91			505,010		529,785	1.92			497,659
Mortgage-backed and collateralized mortgage obligations		598,002	2.29			522,635		573,123	2.29			491,248
Asset-backed securities		140,791	5.15			134,319		71,241	4.24			66,916
Collateralized loan obligations		177,523	6.92			173,658		175,995	7.21			173,795
Total securities available-for-sale	$	1,448,010	3.00	%	$	1,335,622	$	1,350,144	3.00	%	$	1,229,618

At ~~June~~September 30, 2023, the Company had no securities issued from any one originator, other than the U.S. Government and its agencies, which individually amounted to over 10% of the Company’s stockholders’ equity.

Securities with unrealized losses with no corresponding allowance for credit losses at ~~June~~September 30, 2023 and December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):


	Less than 12 months					12 months or more										Less than 12 months					12 months or more
June 30, 2023	in an unrealized loss position					in an unrealized loss position					Total
September 30, 2023																in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair		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	$	9,724	$	214,613	5	$	9,724	$	214,613	-	$	-	$	-	5	$	7,704	$	216,777	5	$	7,704	$	216,777
U.S. government agencies	-		-		-	9		4,612		55,981	9		4,612		55,981	-		-		-	9		4,376		55,821	9		4,376		55,821
U.S. government agencies mortgage-backed	3		177		2,188	127		14,656		112,952	130		14,833		115,140	-		-		-	128		18,084		104,569	128		18,084		104,569
States and political subdivisions	31		1,178		92,606	26		11,609		83,930	57		12,787		176,536	44		3,232		110,511	30		16,917		104,582	74		20,149		215,093
Corporate bonds	-		-		-	1		118		4,882	1		118		4,882	-		-		-	1		39		4,961	1		39		4,961
Collateralized mortgage obligations	3		381		7,817	149		60,153		399,678	152		60,534		407,495	2		14		756	146		63,831		379,159	148		63,845		379,915
Asset-backed securities	4		536		29,088	27		5,936		105,231	31		6,472		134,319	-		-		-	19		4,325		66,916	19		4,325		66,916
Collateralized loan obligations	1		8		2,970	33		3,857		170,688	34		3,865		173,658	-		-		-	33		2,210		170,803	33		2,210		170,803
Total securities available-for-sale	42	$	2,280	$	134,669	377	$	110,665	$	1,147,955	419	$	112,945	$	1,282,624	46	$	3,246	$	111,267	371	$	117,486	$	1,103,588	417	$	120,732	$	1,214,855


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

Each quarter, we perform an analysis to determine if any of the unrealized losses on securities available-for-sale are comprised of credit losses as compared to unrealized losses due to market interest rate adjustments. Our assessment includes a review of the unrealized loss for each security issuance held; the financial condition and near-term prospects of the issuer, including external credit ratings and recent downgrades; and our ability and intent to hold the security for a period of time sufficient for a recovery in value. We also consider the extent to which the securities are issued by the federal government or its agencies, and any guarantee of issued amounts by those agencies. The portfolio continues to consist of a mix of fixed 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 September 30, 2023, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the third quarter of 2023.

Table of 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~~nine months ended:


		Three Months Ended						Six Months Ended						Three Months Ended					Nine Months Ended
		June 30,						June 30,						September 30,					September 30,
Securities available-for-sale	2023			2022			2023			2022			2023			2022		2023			2022
Proceeds from sales of securities	$	73,996		$	3,303		$	140,166		$	3,303		$	65,572		$	-	$	205,738		$	3,303
Gross realized losses on securities		(1,547)			(33)			(3,222)			(33)			(924)			(1)		(4,146)			(34)
Net realized losses	$	(1,547)		$	(33)		$	(3,222)		$	(33)		$	(924)		$	(1)	$	(4,146)		$	(34)
Income tax benefit on net realized losses	$	434		$	9		$	905		$	9		$	260		$	1	$	1,165		$	10
Effective tax rate applied		28.1	%		27.3	%		28.1	%		27.3	%		28.1	%		N/M		28.1	%		29.4	%

N/M - Not meaningful

As of ~~June~~September 30, 2023, securities valued at ~~$938.5~~$808.7 million were pledged for borrowings, and for other purposes, an increase from $547.8 million of securities pledged at year-end 2022.

Note 4 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:


	June 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Commercial ¹	$	820,027	$	840,964
Commercial					$	834,877	$	840,964
Leases		314,919		277,385		354,827		277,385
Commercial real estate – investor		1,080,073		987,635		1,047,122		987,635
Commercial real estate – owner occupied		824,277		854,879		809,050		854,879
Construction		189,058		180,535		202,546		180,535
Residential real estate – investor		55,935		57,353		53,762		57,353
Residential real estate – owner occupied		218,205		219,718		227,446		219,718
Multifamily		383,184		323,691		372,020		323,691
HELOC		102,058		109,202		102,055		109,202
Other ²		27,789		18,247
Other ¹						25,838		18,247
Total loans		4,015,525		3,869,609		4,029,543		3,869,609
Allowance for credit losses on loans		(55,314)		(49,480)		(51,729)		(49,480)
Net loans ³	$	3,960,211	$	3,820,129
Net loans ²					$	3,977,814	$	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.

³² Excludes accrued interest receivable of $~~17.8~~19.2 million and $15.9 million at ~~June~~September 30, 2023 and December 31, 2022, respectively, that is recorded in other assets on the consolidated balance sheets.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company seeks to assure access to collateral, in the event of borrower default, through adherence to lending laws, the Company’s lending standards and credit monitoring procedures. Although the Bank makes loans primarily within its market area, there are no significant concentrations of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector. The real estate related categories listed above represent 69.8% and 70.6% of the portfolio at September 30, 2023, and December 31, 2022, respectively, and include a mix of owner occupied and non-owner occupied commercial real estate, residential, construction and multifamily loans.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

of loans where the customers’ ability to honor loan terms is dependent upon a single economic sector. The real estate related categories listed above represent 71.0% and 70.6% of the portfolio at 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~~nine months ended ~~June~~September 30, 2023 and 2022:



			Provision for										Provision for
	Beginning		(Release of)						Ending		Beginning		(Release of)						Ending
Allowance for credit losses	Balance		Credit Losses		Charge-offs		Recoveries		Balance		Balance		Credit Losses		Charge-offs		Recoveries		Balance
Three months ended June 30, 2023
Three months ended September 30, 2023
Commercial	$	11,511	$	319	$	380	$	82	$	11,532	$	11,532	$	(1,025)	$	20	$	12	$	10,499
Leases		2,766		(83)		-		7		2,690		2,690		(193)		-		95		2,592
Commercial real estate – investor		15,260		4,822		71		20		20,031		20,031		4,726		6,774		20		18,003
Commercial real estate – owner occupied		15,576		(2,816)		201		3		12,562		12,562		(154)		35		12		12,385
Construction		1,045		134		-		-		1,179		1,179		(39)		-		100		1,240
Residential real estate – investor		746		(8)		-		5		743		743		(55)		-		3		691
Residential real estate – owner occupied		1,722		110		-		36		1,868		1,868		(36)		-		25		1,857
Multifamily		2,665		72		-		-		2,737		2,737		(165)		-		-		2,572
HELOC		1,788		(118)		-		24		1,694		1,694		(77)		-		35		1,652
Other		313		(5)		81		51		278		278		30		107		37		238
Total	$	53,392	$	2,427	$	733	$	228	$	55,314	$	55,314	$	3,012	$	6,936	$	339	$	51,729



			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
Six months ended June 30, 2023
Nine months ended September 30, 2023
Commercial	$	11,968	$	(262)	$	407	$	233	$	11,532	$	11,968	$	(1,287)	$	427	$	245	$	10,499
Leases		2,865		691		882		16		2,690		2,865		498		882		111		2,592
Commercial real estate – investor		10,674		9,391		71		37		20,031		10,674		14,117		6,845		57		18,003
Commercial real estate – owner occupied		15,001		(2,243)		201		5		12,562		15,001		(2,397)		236		17		12,385
Construction		1,546		(367)		-		-		1,179		1,546		(406)		-		100		1,240
Residential real estate – investor		768		(49)		-		24		743		768		(104)		-		27		691
Residential real estate – owner occupied		2,046		(224)		-		46		1,868		2,046		(260)		-		71		1,857
Multifamily		2,453		284		-		-		2,737		2,453		119		-		-		2,572
HELOC		1,806		(165)		-		53		1,694		1,806		(242)		-		88		1,652
Other		353		23		194		96		278		353		53		301		133		238
Total	$	49,480	$	7,079	$	1,755	$	510	$	55,314	$	49,480	$	10,091	$	8,691	$	849	$	51,729



			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 June 30, 2022
Three months ended September 30, 2022
Commercial	$	12,576	$	1,582	$	52	$	8	$	14,114	$	14,114	$	(919)	$	67	$	47	$	13,175
Leases		2,573		(837)		-		-		1,736		1,736		(24)		178		-		1,534
Commercial real estate – investor		10,690		(1,029)		243		18		9,436		9,436		256		124		19		9,587
Commercial real estate – owner occupied		8,139		3,332		-		7		11,478		11,478		3,618		12		87		15,171
Construction		2,858		(1,323)		-		-		1,535		1,535		9		-		-		1,544
Residential real estate – investor		703		(47)		-		5		661		661		147		-		8		816
Residential real estate – owner occupied		1,950		(103)		-		22		1,869		1,869		149		-		113		2,131
Multifamily		2,977		(543)		-		-		2,434		2,434		33		-		63		2,530
HELOC		1,675		(164)		-		31		1,542		1,542		386		-		35		1,963
Other		167		462		91		45		583		583		(128)		103		44		396
Total	$	44,308	$	1,330	$	386	$	136	$	45,388	$	45,388	$	3,527	$	484	$	416	$	48,847

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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



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

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

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

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


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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Provision for

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

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

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


													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
September 30, 2023	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	1,829	$	1,874	$	1,052	$	4,755	$	830,122	$	834,877	$	979
Leases		2,502		-		157		2,659		352,168		354,827		-
Commercial real estate – investor		2,205		16,728		16,116		35,049		1,012,073		1,047,122		-
Commercial real estate – owner occupied		15,232		120		1,879		17,231		791,819		809,050		-
Construction		118		200		7,206		7,524		195,022		202,546		-
Residential real estate – investor		252		-		277		529		53,233		53,762		140
Residential real estate – owner occupied		735		419		1,820		2,974		224,472		227,446		-
Multifamily		713		127		-		840		371,180		372,020		-
HELOC		646		88		259		993		101,062		102,055		90
Other		-		-		-		-		25,838		25,838		-
Total	$	24,232	$	19,556	$	28,766	$	72,554	$	3,956,989	$	4,029,543	$	1,209


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

At June 30, 2023, our allowance for credit losses (“ACL”) on loans totaled $55.3 million, and our ACL on unfunded commitments, included in other liabilities, totaled $3.1 million including related purchase accounting adjustments. During the first six months of 2023, we recorded net provision expense of $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 estimated future credit losses. The ACL on loans excludes $2.7 million, $4.3 million and $3.4 million of allowance for unfunded commitments as of June 30, 2023, December 31, 2022 and June 30, 2022, respectively, recorded within Other Liabilities. The total ACL on unfunded commitments listed as of June 30, 2023, December 31, 2022, and June 30, 2022 excludes the purchase accounting adjustment of $372,000, $819,000 and $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 June 30, 2023 and December 31, 2022:~~

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

1516

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

Greater Past

30-59 Days

60-89 Days

Greater Past

Total Past

Due and
June 30, 2023

Past Due

Past Due

Due

Due

Current

Total Loans

Accruing
Commercial

$
-

$
879

$
91

$
970

$
819,057

$
820,027

$
-
Leases

453

37

-

490

314,429

314,919

-
Commercial real estate – investor

132

21

26,579

26,732

1,053,341

1,080,073

149
Commercial real estate – owner occupied

1,120

2,037

4,317

7,474

816,803

824,277

-
Construction

-

-

116

116

188,942

189,058

-
Residential real estate – investor

447

460

292

1,199

54,736

55,935

-
Residential real estate – owner occupied

179

731

2,248

3,158

215,047

218,205

-
Multifamily

6,386

326

-

6,712

376,472

383,184

-
HELOC

549

11

231

791

101,267

102,058

159
Other

1

2

-

3

27,786

27,789

-
Total

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


Nonaccrual loan detail	June 30, 2023		With no ACL		December 31, 2022		With no ACL		September 30, 2023		With no ACL		December 31, 2022		With no ACL
Commercial	$	1,544	$	1,453	$	7,189	$	6,598	$	2,167	$	2,167	$	7,189	$	6,598
Leases		758		121		1,876		-		377		38		1,876		-
Commercial real estate – investor		31,464		12,368		4,346		4,244		26,724		11,786		4,346		4,244
Commercial real estate – owner occupied		18,857		4,329		8,050		3,813		18,290		3,833		8,050		3,813
Construction		116		116		251		-		7,206		7,206		251		-
Residential real estate – investor		1,445		1,445		1,528		675		1,362		1,362		1,528		675
Residential real estate – owner occupied		3,660		3,027		3,713		1,572		3,627		3,627		3,713		1,572
Multifamily		1,191		1,191		2,538		1,322		1,141		1,141		2,538		1,322
HELOC		1,890		1,890		2,109		180		1,222		1,222		2,109		180
Other		-		-		2		-		-		-		2		-
Total	$	60,925	$	25,940	$	31,602	$	18,404	$	62,116	$	32,382	$	31,602	$	18,404

The Company recognized ~~$29,000~~$189,000 and $304,000 of interest on nonaccrual loans during the three months and nine months ended ~~June~~September 30, ~~2023.~~2023, respectively.

Credit Quality Indicators

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

~~Tableof Contents~~

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

~~Notes to Consolidated Financial Statements~~

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

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

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

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

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

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


	2023		2022		2021		2020		2019		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	$	127,530	$	226,048	$	45,876	$	16,103	$	9,914	$	5,986	$	335,806	$	1,379	$	768,642	$	215,492	$	187,682	$	41,464	$	13,359	$	10,676	$	4,315	$	311,562	$	1,379	$	785,929
Special Mention		-		-		260		-		43		-		28,837		-		29,140		-		500		244		-		51		-		29,855		-		30,650
Substandard		-		3,010		1,432		2,815		11,354		-		3,634		-		22,245		-		79		1,381		2,735		9,689		-		4,414		-		18,298
Total commercial		127,530		229,058		47,568		18,918		21,311		5,986		368,277		1,379		820,027		215,492		188,261		43,089		16,094		20,416		4,315		345,831		1,379		834,877

Leases
Pass		86,364		138,055	$	53,672		20,558		12,036		3,260		-		-		313,945		151,691		125,092	$	47,808		17,522		9,545		2,595		-		-		354,253
Special Mention		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Substandard		-		637		-		-		337		-		-		-		974		-		339		-		-		235		-		-		-		574
Total leases		86,364		138,692		53,672		20,558		12,373		3,260		-		-		314,919		151,691		125,431		47,808		17,522		9,780		2,595		-		-		354,827

Commercial real estate – investor
Pass		175,445		363,460		213,303		112,372		60,729		71,447		7,982		-		1,004,738		176,779		341,597		203,972		111,333		59,770		67,264		8,148		-		968,863
Special Mention		-		12,885		-		5,409		-		-		-		-		18,294		-		12,866		11,267		-		-		-		-		-		24,133
Substandard		351		17,681		1,947		5,033		10,597		9,119		12,313		-		57,041		10,964		11,787		1,950		7,748		9,278		-		12,399		-		54,126
Total commercial real estate – investor		175,796		394,026		215,250		122,814		71,326		80,566		20,295		-		1,080,073		187,743		366,250		217,189		119,081		69,048		67,264		20,547		-		1,047,122

Commercial real estate – owner occupied
Pass		94,424		145,156		185,929		83,503		57,794		111,532		33,885		-		712,223		105,963		139,223		181,543		78,750		54,909		101,396		33,258		-		695,042
Special Mention		-		13,538		22,245		35,427		226		2,123		-		-		73,559		1,758		11,722		18,180		26,480		222		354		-		-		58,716
Substandard		-		2,494		15,333		1,164		18,943		561		-		-		38,495		-		14,994		19,926		1,142		18,811		419		-		-		55,292
Total commercial real estate – owner occupied		94,424		161,188		223,507		120,094		76,963		114,216		33,885		-		824,277		107,721		165,939		219,649		106,372		73,942		102,169		33,258		-		809,050

Construction
Pass		10,078		73,533		56,855		25,249		1,865		1,216		2,144		-		170,940		26,529		75,698		56,217		19,531		1,837		1,155		3,699		-		184,666
Special Mention		307		7,574		-		10,121		-		-		-		-		18,002		305		312		-		-		-		-		-		-		617
Substandard		-		-		-		-		116		-		-		-		116		-		7,206		-		10,057		-		-		-		-		17,263
Total construction		10,385		81,107		56,855		35,370		1,981		1,216		2,144		-		189,058		26,834		83,216		56,217		29,588		1,837		1,155		3,699		-		202,546

Residential real estate – investor
Pass		2,101		14,624		9,201		6,702		8,029		11,616		1,880		-		54,153		3,310		14,560		8,954		6,317		7,116		10,519		1,417		-		52,193
Special Mention		-		-		68		-		-		-		-		-		68		-		-		67		-		-		-		-		-		67
Substandard		-		591		-		-		421		702		-		-		1,714		-		398		-		-		418		686		-		-		1,502
Total residential real estate – investor		2,101		15,215		9,269		6,702		8,450		12,318		1,880		-		55,935		3,310		14,958		9,021		6,317		7,534		11,205		1,417		-		53,762

Residential real estate – owner occupied
Pass		9,856		42,915		42,368		27,072		15,462		76,144		728		-		214,545		26,371		41,915		41,439		26,544		15,147		71,637		766		-		223,819
Special Mention		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Substandard		-		125		-		92		696		2,747		-		-		3,660		-		122		-		90		686		2,729		-		-		3,627
Total residential real estate – owner occupied		9,856		43,040		42,368		27,164		16,158		78,891		728		-		218,205		26,371		42,037		41,439		26,634		15,833		74,366		766		-		227,446

Multifamily
Pass		51,855		81,441		117,460		68,474		12,666		43,224		343		-		375,463		69,947		79,689		101,878		57,792		12,391		42,603		382		-		364,682
Special Mention		-		373		3,596		337		1,675		549		-		-		6,530		-		170		3,505		326		1,656		540		-		-		6,197
Substandard		-		924		-		-		-		267		-		-		1,191		-		887		-		-		-		254		-		-		1,141
Total multifamily		51,855		82,738		121,056		68,811		14,341		44,040		343		-		383,184		69,947		80,746		105,383		58,118		14,047		43,397		382		-		372,020

HELOC
Pass		1,057		2,810		229		1,462		1,648		2,393		90,307		-		99,906		1,765		2,760		211		1,443		1,631		2,494		90,317		-		100,621
Special Mention		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Substandard		41		28		1		-		-		209		1,873		-		2,152		39		27		1		1		-		106		1,260		-		1,434
Total HELOC		1,098		2,838		230		1,462		1,648		2,602		92,180		-		102,058		1,804		2,787		212		1,444		1,631		2,600		91,577		-		102,055

Other
Pass		4,463		2,405		1,577		267		91		103		18,883				27,789		4,461		2,068		1,415		223		151		88		17,432				25,838
Special Mention		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-				-
Substandard		-		-		-		-		-		-		-				-		-		-		-		-		-		-		-				-
Total other		4,463		2,405		1,577		267		91		103		18,883		-		27,789		4,461		2,068		1,415		223		151		88		17,432		-		25,838

Total loans
Pass		563,173		1,090,447		726,470		361,762		180,234		326,921		491,958		1,379		3,742,344		782,308		1,010,284		684,901		332,814		173,173		304,066		466,981		1,379		3,755,906
Special Mention		307		34,370		26,169		51,294		1,944		2,672		28,837		-		145,593		2,063		25,570		33,263		26,806		1,929		894		29,855		-		120,380
Substandard		392		25,490		18,713		9,104		42,464		13,605		17,820		-		127,588		11,003		35,839		23,258		21,773		39,117		4,194		18,073		-		153,257
Total loans	$	563,872	$	1,150,307	$	771,352	$	422,160	$	224,642	$	343,198	$	538,615	$	1,379	$	4,015,525	$	795,374	$	1,071,693	$	741,422	$	381,393	$	214,219	$	309,154	$	514,909	$	1,379	$	4,029,543

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

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

Leases

Pass

161,379

64,203

$
26,995

17,653

4,449

830

-

-

275,509
Special Mention

-

-

-

-

-

-

-

-

-
Substandard

1,606

-

-

270

-

-

-

-

1,876
Total leases

162,985

64,203

26,995

17,923

4,449

830

-

-

277,385

Commercial real estate – investor

Pass

416,094

228,686

118,491

63,845

46,935

46,406

7,113

-

927,570
Special Mention

5,349

1,417

5,490

10,206

1,070

9,123

-

-

32,655
Substandard

12,332

2,018

-

10,763

-

2,297

-

-

27,410
Total commercial real estate – investor

433,775

232,121

123,981

84,814

48,005

57,826

7,113

-

987,635

Commercial real estate – owner occupied

Pass

169,703

223,731

105,669

47,351

49,367

86,660

33,745

-

716,226
Special Mention

8,430

22,242

48,184

17,668

231

1,008

-

-

97,763
Substandard

2,546

17,129

1,191

16,962

-

3,062

-

-

40,890
Total commercial real estate – owner occupied

180,679

263,102

155,044

81,981

49,598

90,730

33,745

-

854,879

Construction

Pass

53,058

65,758

39,542

2,390

226

1,408

1,523

-

163,905
Special Mention

-

-

15,297

-

-

-

-

-

15,297
Substandard

1,217

-

-

116

-

-

-

-

1,333
Total construction

54,275

65,758

54,839

2,506

226

1,408

1,523

-

180,535

Residential real estate – investor

Pass

14,737

9,910

6,945

8,585

4,853

9,548

991

-

55,569
Special Mention

-

70

-

-

-

-

-

-

70
Substandard

621

-

-

499

186

408

-

-

1,714
Total residential real estate – investor

15,358

9,980

6,945

9,084

5,039

9,956

991

-

57,353

Residential real estate – owner occupied

Pass

41,885

44,884

28,418

16,146

12,152

70,741

1,638

-

215,864
Special Mention

-

-

-

-

-

-

-

-

-
Substandard

131

267

237

723

131

2,365

-

-

3,854
Total residential real estate – owner occupied

42,016

45,151

28,655

16,869

12,283

73,106

1,638

-

219,718

Multifamily

Pass

76,877

126,257

52,262

13,125

39,703

6,098

329

-

314,651
Special Mention

377

3,683

342

1,684

-

-

-

-

6,086
Substandard

2,100

-

-

-

587

267

-

-

2,954
Total multifamily

79,354

129,940

52,604

14,809

40,290

6,365

329

-

323,691

HELOC

Pass

2,760

517

1,497

1,703

657

2,288

97,258

-

106,680
Special Mention

-

-

-

-

-

-

111

-

111
Substandard

62

1

-

-

67

309

1,972

-

2,411
Total HELOC

2,822

518

1,497

1,703

724

2,597

99,341

-

109,202

Other

Pass

4,195

2,835

432

167

69

111

10,436

-

18,245
Special Mention

-

-

-

-

-

-

-

-

-
Substandard

-

-

1

-

-

-

1

-

2
Total other

4,195

2,835

433

167

69

111

10,437

-

18,247

Total loans

Pass

1,165,744

837,389

401,848

183,707

165,368

226,741

600,854

-

3,581,651
Special Mention

16,031

27,684

70,495

31,990

1,301

10,131

21,397

-

179,029
Substandard

25,573

21,862

4,410

41,509

978

8,708

5,889

-

108,929
Total loans

$
1,207,348

$
886,935

$
476,753

$
257,206

$
167,647

$
245,580

$
628,140

$
-

$
3,869,609



	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

Leases
Pass		161,379		64,203	$	26,995		17,653		4,449		830		-		-		275,509
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		1,606		-		-		270		-		-		-		-		1,876
Total leases		162,985		64,203		26,995		17,923		4,449		830		-		-		277,385

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

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

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

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

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

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

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

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

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

Table of 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~~for the nine months ended September 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		2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Loans Converted to Term Loans		Total
Commercial	$	-	$	-	$	-	$	364	$	-	$	43	$	-	$	-	$	407	$	-		-		17		364		-		46	$	-	$	-	$	427
Leases		-		870		-		-		12		-		-		-		882		-		870		-		-		12		-		-		-		882
Commercial real estate – investor		-		-		71		-		-		-		-		-		71		-		4,121		71		2,653		-		-		-		-		6,845
Commercial real estate – owner occupied		-		22		179		-		-		-		-		-		201		-		22		178		4		-		32		-		-		236
Construction		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Residential real estate – investor		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Residential real estate – owner occupied		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Multifamily		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
HELOC		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Other		-		3		24		8		-		159		-		-		194		-		3		26		7		-		265		-		-		301
Total	$	-	$	895	$	274	$	372	$	12	$	202		-		-	$	1,755	$	-	$	5,016	$	292	$	3,028	$	12	$	343		-		-	$	8,691

The Company had ~~$215,000~~$176,000 and $600,000 in residential real estate loans in the process of foreclosure as of ~~June~~September 30, 2023 and December 31, 2022, respectively.

As of January 1, 2023, the Company prospectively adopted ASU 2022-02, Topic 326 “Troubled Debt Restructuring (“TDRs”) and Vintage Disclosures”, see Note 1. ~~Eleven~~Fifteen loans, ~~$32.7~~totaling $43.0 million in aggregate, were modified ~~and~~which were experiencing financial difficulty during the ~~six-month~~nine-month period ending ~~June~~September 30, 2023. There were no TDR loan modifications for the three months ended September 30, 2022, and there were two TDR loan modifications for an aggregate of ~~$41,000~~$39,000 for the ~~three~~nine months ended ~~June 30, 2022 and three TDR loan modifications for an aggregate of $1.1 million for the six months ended June~~September 30, 2022. TDRs were classified as being in default on a case-by-case basis when they failed to be in compliance with the modified terms. There were no financial difficulty loans modified in payment default as of ~~June~~September 30, 2023 and was no TDR default activity for the period ended ~~June~~September 30, ~~2022,~~2023, for loans that were restructured within the prior 12-month period.

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

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%


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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The Company closely monitors the performance of loan modifications to borrowers experiencing financial difficulty. The following table presents the performance of loans that have been modified as of ~~June~~September 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
September 30, 2023													30-59 days past due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loan Modified
Commercial	$	-	$	-	$	-	$	-	$	1,838	$	1,838	$	-	$	-	$	979	$	979	$	1,713	$	2,692
Commercial real estate – investor		-		-		1,774		1,774		12,664		14,438		-		-		-		-		23,363		23,363
Commercial real estate – owner occupied		-		-		-		-		16,318		16,318		-		-		-		-		16,218		16,218
Residential real estate – owner occupied														-		-		-		-		437		437
Multifamily														-		-		-		-		254		254
HELOC		-		-		-		-		60		60		-		-		-		-		39		39
Total	$	-	$	-	$	1,774	$	1,774	$	30,880	$	32,654	$	-	$	-	$	979	$	979	$	42,024	$	43,003

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


June 30, 2023	Weighted-Average Term Extension (In Months)		Weighted-Average Interest Rate Change			Weighted-Average Delay of Payment (In Months)
September 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	%		-		6.74		5.00	%		-
Commercial real estate – investor		11.50		-			7.00		9.81		-			7.17
Commercial real estate – owner occupied		12.00		-			-		14.00		-			-
Residential real estate – owner occupied									2.00		-			-
Multifamily									16.00		-			-
HELOC		24.00		-			-		24.00		-			-
Total		11.40		5.00	%		7.00		11.17		5.00	%		7.17

Note 5 – Deposits

Major classifications of deposits were as follows:


	June 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Noninterest bearing demand	$	1,897,694	$	2,051,702	$	1,862,659	$	2,051,702
Savings		1,050,453		1,145,592		1,003,498		1,145,592
NOW accounts		586,121		609,338		567,997		609,338
Money market accounts		731,459		862,170		702,176		862,170
Certificates of deposit of less than $100,000		240,848		244,017		248,272		244,017
Certificates of deposit of $100,000 through $250,000		148,070		157,438		162,901		157,438
Certificates of deposit of more than $250,000		62,937		40,466		66,817		40,466
Total deposits	$	4,717,582	$	5,110,723	$	4,614,320	$	5,110,723

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 6 – Borrowings

The following table is a summary of borrowings as of ~~June~~September 30, 2023 and December 31, 2022. Junior subordinated debentures are discussed in more detail in Note 7.


	June 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Securities sold under repurchase agreements	$	31,532	$	32,156	$	25,894	$	32,156
Other short-term borrowings		485,000		90,000		435,000		90,000
Junior subordinated debentures¹		25,773		25,773		25,773		25,773
Subordinated debentures		59,339		59,297		59,361		59,297
Senior notes		-		44,585		-		44,585
Notes payable and other borrowings		-		9,000		-		9,000
Total borrowings	$	601,644	$	260,811	$	546,028	$	260,811
¹See Note 7: Junior Subordinated Debentures

The Company enters into deposit sweep transactions where the transaction amounts are secured by pledged securities. These transactions consistently mature overnight from the transaction date and are governed by sweep repurchase agreements. All sweep repurchase agreements are treated as financings secured by U.S. government agencies and collateralized mortgage-backed securities, and had a carrying amount of ~~$31.5~~$25.9 million at ~~June~~September 30, 2023, and $32.2 million at December 31, 2022. The fair value of the pledged collateral was ~~$65.0~~$43.8 million at ~~June~~September 30, 2023, and $71.4 million at December 31, 2022. At ~~June~~September 30, 2023, there were no customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC. Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans. As of ~~June~~September 30, 2023, the Bank had ~~$485.0~~$435.0 million in short-term advances outstanding under the FHLBC. There were $90.0 million in short-term advances as of December 31, 2022. The Bank assumed $23.4 million of long-term FHLBC advances with our ABC Bank acquisition in 2018, which were recorded in notes payable and other borrowings. The remaining balance of $5.9 million was paid off in full during the second quarter of 2022. FHLBC stock held at ~~June~~September 30, 2023 was valued at ~~$21.8~~$20.9 million, and any potential FHLBC advances were collateralized by loans and securities with a principal balance of ~~$1.48~~$1.47 billion, which carried a FHLBC-calculated combined collateral value of ~~$1.04~~$1.02 billion. The Company had excess collateral of ~~$551.3~~$581.7 million available to secure borrowings at ~~June~~September 30, 2023.

In the second quarter of 2021, we issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). The Notes were offered and sold to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended and the provisions of Regulation D promulgated thereunder. The Company used the net proceeds from the offering for general corporate purposes. The Notes bear interest at a fixed annual rate of 3.50%, from and including the date of issuance to but excluding April 15, 2026, payable semi-annually in arrears. From and including April 15, 2026 to, but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to ~~Three-Month~~three-month Term SOFR (as defined by the Note) plus 273 basis points, payable quarterly in arrears. As of ~~June~~September 30, 2023 and December 31, 2022, we had $59.4 million and $59.3 million of subordinated debentures outstanding, net of deferred issuance ~~costs.~~costs, respectively.

The Company issued senior notes in December 2016 with a ten-year maturity, and terms 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 June 30, 2023 and December 31, 2022 was 9.39% and 8.62%, respectively. The notes 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. On June 30, 2023, we redeemed all of the $45.0 million senior notes. Upon redemption, the related deferred debt issuance costs of $362,000 was also recorded as interest expense, resulting in an effective cost of this debt issuance of 12.85% for the second quarter of 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~~payable and ~~Other Borrowings~~other borrowings on the Consolidated Balance Sheets, and the remaining $9.0 million balance of the note was paid off on February 24, 2023. The Company also has an undrawn line of credit of $30.0 million with a correspondent bank to be used for short-term funding needs; advances under this line can be outstanding up to 360 days from the date of issuance. This line of credit has not been utilized since early 2019.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 7 – Junior Subordinated Debentures

The Company issued $25.0 million of cumulative trust preferred securities through a private placement completed by an unconsolidated subsidiary, Old Second Capital Trust II, in April 2007. These trust preferred securities mature in 30 years, but subject to regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017. The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017, and now have a floating rate of 150 basis points over three-month ~~LIBOR.~~SOFR. Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of ~~4.37%~~3.77% and ~~4.42%~~4.39% for the quarters ended ~~June~~September 30, 2023 and ~~June~~September 30, 2022, respectively. The Company issued a ~~new~~ $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering. The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

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

Note 8 – 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 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 ~~June~~September 30, 2023, ~~967,600~~975,712 shares remained available for issuance under the 2019 Plan. The Company has granted only restricted stock units under the 2019 Equity Plan.

Generally, 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 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.

Tableof Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

There were ~~238,149~~240,149 and ~~264,589~~268,160 restricted stock units issued under the 2019 Plan during the ~~six~~nine months ended ~~June~~September 30, 2023 and ~~June~~September 30, 2022, respectively. Compensation expense is recognized over the vesting period of the restricted stock units based on the market value of the award on the issue date. Total compensation cost that has been recorded for the 2019 Plan was ~~$1.8~~$2.7 million for the ~~six~~nine months ended ~~June~~September 30, 2023 and ~~$1.5~~$2.3 million for the ~~six~~nine months ended ~~June~~September 30, 2022.

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


	June 30, 2023			September 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	238,149		17.05	240,149		17.02
Vested	(117,674)		12.26	(137,534)		12.53
Forfeited	(5,079)		13.55	(15,191)		14.25
Unvested at June 30	764,606	$	14.23
Unvested at September 30				736,634	$	14.23

Total unrecognized compensation cost of restricted awards was ~~$6.1~~$5.0 million as of ~~June~~September 30, 2023, which is expected to be recognized over a weighted-average period of ~~2.06~~1.87 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,					Three Months Ended September 30,				Nine Months Ended September 30,
		2023		2022		2023		2022			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			44,675,489		44,565,626		44,653,451		44,509,072
Net income		$	25,562	$	12,247	$	49,169	$	24,267		$	24,335	$	19,523	$	73,504	$	43,790
Basic earnings per share		$	0.57	$	0.28	$	1.10	$	0.55		$	0.55	$	0.43	$	1.65	$	0.98

Diluted earnings per share:
Weighted-average common shares outstanding			44,665,127		44,499,395		44,642,250		44,480,326			44,675,489		44,565,626		44,653,451		44,509,072
Dilutive effect of unvested restricted awards ¹			759,291		747,341		728,556		724,134			752,920		655,915		736,767		698,920
Diluted average common shares outstanding			45,424,418		45,246,736		45,370,806		45,204,460			45,428,409		45,221,541		45,390,218		45,207,992

Net Income		$	25,562	$	12,247	$	49,169	$	24,267		$	24,335	$	19,523	$	73,504	$	43,790
Diluted earnings per share		$	0.56	$	0.27	$	1.08	$	0.54		$	0.54	$	0.43	$	1.62	$	0.97


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

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

At ~~June~~September 30, 2023, the Bank’s Tier 1 capital leverage ratio was ~~9.70%~~10.43%, an increase of 38111 basis points from December 31, 2022, and is above the 8.00% objective. The Bank’s total capital ratio was ~~12.83%~~13.57%, an increase of 882 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 ~~June~~September 30, 2023 and December 31, 2022.

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 ~~June~~September 30, 2023 and December 31, 2022, the Company, on a consolidated basis, exceeded the minimum thresholds to be considered “well capitalized” under current regulatory defined capital ratios.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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



					Minimum Capital				Well Capitalized								Minimum Capital				Well Capitalized
					Adequacy with Capital				Under Prompt Corrective								Adequacy with Capital				Under Prompt Corrective
	Actual				Conservation Buffer, if applicable¹				Action Provisions²				Actual				Conservation Buffer, if applicable¹				Action Provisions²
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2023
September 30, 2023
Common equity tier 1 capital to risk weighted assets
Consolidated	$	503,459	10.29	%	$	342,489	7.00	%		N/A	N/A		$	530,368	11.00	%	$	337,507	7.00	%		N/A	N/A
Old Second Bank		571,923	11.70			342,176	7.00		$	317,735	6.50	%		601,999	12.49			337,389	7.00		$	313,290	6.50	%
Total capital to risk weighted assets
Consolidated		643,871	13.16			513,727	10.50			N/A	N/A			667,182	13.84			506,171	10.50			N/A	N/A
Old Second Bank		627,335	12.83			513,407	10.50			488,959	10.00			653,813	13.57			505,898	10.50			481,808	10.00
Tier 1 capital to risk weighted assets
Consolidated		528,459	10.80			415,917	8.50			N/A	N/A			555,368	11.52			409,777	8.50			N/A	N/A
Old Second Bank		571,923	11.70			415,500	8.50			391,058	8.00			601,999	12.49			409,687	8.50			385,588	8.00
Tier 1 capital to average assets
Consolidated		528,459	8.96			235,919	4.00			N/A	N/A			555,368	9.62			230,922	4.00			N/A	N/A
Old Second Bank		571,923	9.70			235,845	4.00			294,806	5.00			601,999	10.43			230,872	4.00			288,590	5.00

December 31, 2022
Common equity tier 1 capital to risk weighted assets
Consolidated	$	457,206	9.67	%	$	330,966	7.00	%		N/A	N/A		$	457,206	9.67	%	$	330,966	7.00	%		N/A	N/A
Old Second Bank		552,404	11.70			330,498	7.00		$	306,891	6.50	%		552,404	11.70			330,498	7.00		$	306,891	6.50	%
Total capital to risk weighted assets
Consolidated		592,039	12.52			496,518	10.50			N/A	N/A			592,039	12.52			496,518	10.50			N/A	N/A
Old Second Bank		602,237	12.75			495,960	10.50			472,343	10.00			602,237	12.75			495,960	10.50			472,343	10.00
Tier 1 capital to risk weighted assets
Consolidated		482,206	10.20			401,838	8.50			N/A	N/A			482,206	10.20			401,838	8.50			N/A	N/A
Old Second Bank		552,404	11.70			401,319	8.50			377,712	8.00			552,404	11.70			401,319	8.50			377,712	8.00
Tier 1 capital to average assets
Consolidated		482,206	8.14			236,956	4.00			N/A	N/A			482,206	8.14			236,956	4.00			N/A	N/A
Old Second Bank		552,404	9.32			237,083	4.00			296,354	5.00			552,404	9.32			237,083	4.00			296,354	5.00

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

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

As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition. As of ~~June~~September 30, 2023, the capital measures of the Company exclude $1.9 million, which is the modified CECL transition adjustment.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Dividend Restrictions

In addition to the above requirements, banking regulations and capital guidelines generally limit the amount of dividends that may be paid by a bank without prior regulatory approval. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s profits, combined with the retained profit of the previous two years, subject to the capital requirements described above. As of ~~June~~September 30, 2023, the Bank had capacity to pay dividends of ~~$39.5~~$70.4 million to the Company without prior regulatory approval. Pursuant to the Basel III rules, the Bank must keep a capital conservation buffer of 2.50% above the regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

Note 11 – Fair Value Measurements

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

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

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

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

During the ~~six-month~~nine-month period ended ~~June~~September 30, 2023, $14.9 million of asset-backed securities and $6.8 million of collateralized mortgage obligations were transferred to Level 2 from Level 3. There were no transfers between levels at ~~June~~September 30, 2022.

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

●

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

●

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

●

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

●

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

●

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

●

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

●

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

●

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

●

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

●

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

●

The fair value of 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 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 ~~June~~September 30, 2023 and December 31, 2022, respectively, measured by the Company at fair value on a recurring basis:


	June 30, 2023								September 30, 2023
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	214,613	$	-	$	-	$	214,613	$	216,777	$	-	$	-	$	216,777
U.S. government agencies		-		55,981		-		55,981		-		55,821		-		55,821
U.S. government agencies mortgage-backed		-		115,140		-		115,140		-		104,569		-		104,569
States and political subdivisions		-		214,596		14,938		229,534		-		206,034		14,066		220,100
Corporate bonds		-		4,882		-		4,882		-		4,961		-		4,961
Collateralized mortgage obligations		-		407,495		-		407,495		-		386,679		-		386,679
Asset-backed securities		-		134,319		-		134,319		-		66,916		-		66,916
Collateralized loan obligations		-		173,658		-		173,658		-		173,795		-		173,795
Loans held-for-sale		-		1,218		-		1,218		-		2,297		-		2,297
Mortgage servicing rights		-		-		11,041		11,041		-		-		11,461		11,461
Interest rate swap agreements, including risk participation agreement		-		6,560		-		6,560		-		9,028		-		9,028
Mortgage banking derivatives		-		77		-		77		-		37		-		37
Total	$	214,613	$	1,113,926	$	25,979	$	1,354,518	$	216,777	$	1,010,137	$	25,527	$	1,252,441

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	13,740	$	-	$	13,740	$	-	$	14,293	$	-	$	14,293
Total	$	-	$	13,740	$	-	$	13,740	$	-	$	14,293	$	-	$	14,293

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


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

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

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


	Six Months Ended June 30, 2023								Nine Months Ended September 30, 2023
	Securities available-for-sale								Securities available-for-sale
			Collateralized		States and		Mortgage				Collateralized		States and		Mortgage
	Asset-backed		Mortgage		Political		Servicing		Asset-backed		Mortgage		Political		Servicing
	Securities		Obligations		Subdivisions		Rights		Securities		Obligations		Subdivisions		Rights
Beginning balance January 1, 2023	$	15,012	$	6,770	$	14,229	$	11,189	$	15,012	$	6,770	$	14,229	$	11,189
Transfers out of Level 3		(14,885)		(6,764)		-		-		(14,885)		(6,764)		-		-
Total gains or losses
Included in earnings		(11)		-		(66)		6,155		(11)		-		(99)		232
Included in other comprehensive income		226		(6)		622		-		226		(6)		(132)		-
Purchases, issuances, sales, and settlements
Purchases		-		-		406		-		-		-		406		-
Issuances		-		-		-		281		-		-		-		420
Settlements		(342)		-		(253)		(6,584)		(342)		-		(338)		(380)
Ending balance June 30, 2023	$	-	$	-	$	14,938	$	11,041
Ending balance September 30, 2023									$	-	$	-	$	14,066	$	11,461

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	Six Months Ended June 30, 2022				Nine Months Ended September 30, 2022
	Securities available-for-sale				Securities available-for-sale
	States and		Mortgage		States and		Mortgage
	Political		Servicing		Political		Servicing
	Subdivisions		Rights		Subdivisions		Rights
Beginning balance January 1, 2022	$	15,236	$	7,097	$	15,236	$	7,097
Total gains or losses
Included in earnings		(65)		3,630		(98)		4,384
Included in other comprehensive income		(1,562)		-		(1,333)		-
Purchases, issuances, sales, and settlements
Issuances		-		565		519		756
Settlements		(521)		(570)		(1,015)		(776)
Ending balance June 30, 2022	$	13,088	$	10,722
Ending balance September 30, 2022					$	13,309	$	11,461

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

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

14,938

Discounted Cash Flow

Discount Rate

3.1 – 5.2%

4.5

14,066

Discounted Cash Flow

Discount Rate

3.5 – 5.9%

4.3

Liquidity Premium

0.3 – 0.5%

0.5

Liquidity Premium

0.3 – 0.5%

0.5

Mortgage servicing rights

11,041

Discounted Cash Flow

Discount Rate

9.0 – 11.0%

9.0

11,461

Discounted Cash Flow

Discount Rate

9.0 – 11.0%

9.0

Prepayment Speed

3.0 – 22.3%

6.3

Prepayment Speed

0.0 – 16.4%

6.2

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


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

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

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

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

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

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

~~June~~September 30, 2023 and December 31, 2022, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:


	June 30, 2023								September 30, 2023
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Individually evaluated loans¹	$	-	$	-	$	56,361	$	56,361	$	-	$	-	$	63,322	$	63,322
Other real estate owned, net²		-		-		761		761		-		-		407		407
Total	$	-	$	-	$	57,122	$	57,122	$	-	$	-	$	63,729	$	63,729

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, which had a carrying amount of $~~81.1~~82.0 million and a valuation allowance of $~~24.7~~18.7 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $~~7.1~~1.0 million for the ~~six~~nine months ended ~~June~~September 30, 2023.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $~~761,000~~407,000 at ~~June~~September 30, 2023, which is made up of the outstanding balance of $~~1.0~~525,000 ~~million, net of a purchase accounting adjustment of~~ ~~$130,000~~, and a valuation allowance of $~~114,000~~118,000.


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

¹ Represents carrying value and related write-downs of loans for which adjustments are substantially based on the appraised value of collateral for collateral-dependent loans, which had a carrying amount of $65.3 million and a valuation allowance of $17.6 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $12.2 million for the year December 31, 2022.

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

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

Note 12 – 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 June~~At September 30, 2023 and December 31, 2022, the fair values of loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The fair value of time deposits was estimated using discounted future cash flows at current rates offered for deposits of similar remaining maturities. The fair values of borrowings were estimated based on interest rates available to the Company for debt with similar terms and remaining maturities. The fair value of off balance sheet volume was not considered material.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


	June 30, 2023										September 30, 2023
	Carrying		Fair								Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	59,466	$	59,466	$	59,466	$	-	$	-	$	55,548	$	55,548	$	55,548	$	-	$	-
Interest earning deposits with financial institutions		53,144		53,144		53,144		-		-		53,485		53,485		53,485		-		-
Securities available-for-sale		1,335,622		1,335,622		214,613		1,106,071		14,938		1,229,618		1,229,618		216,777		998,775		14,066
FHLBC and FRBC stock		36,730		36,730		-		36,730		-		35,830		35,830		-		35,830		-
Loans held-for-sale		1,218		1,218		-		1,218		-		2,297		2,297		-		2,297		-
Net loans		3,960,211		3,833,624		-		-		3,833,624		3,977,814		3,855,774		-		-		3,855,774
Mortgage servicing rights		11,041		11,041						11,041		11,641		11,641		-		-		11,641
Interest rate swap agreements		6,452		6,452		-		6,452		-		8,980		8,980		-		8,980		-
Interest rate lock commitments and forward contracts		77		77		-		77		-		37		37		-		37		-
Interest receivable on securities and loans		24,708		24,708		-		24,708		-		25,921		25,921		-		25,921		-

Financial liabilities:
Noninterest bearing deposits	$	1,897,694	$	1,897,694	$	1,897,694	$	-	$	-	$	1,862,659	$	1,862,659	$	1,862,659	$	-	$	-
Interest bearing deposits		2,819,888		2,805,372		-		2,805,372		-		2,751,661		2,738,632		-		2,738,632		-
Securities sold under repurchase agreements		31,532		31,532		-		31,532		-		25,894		25,894		-		25,894		-
Other short-term borrowings		485,000		485,000		-		485,000		-		435,000		435,000		-		435,000		-
Junior subordinated debentures		25,773		19,588		-		19,588		-		25,773		19,072		-		19,072		-
Subordinated debentures		59,339		47,339		-		47,339		-		59,361		46,161		-		46,161		-
Senior notes		-		-		-		-		-		-		-		-		-		-
Note payable and other borrowings		-		-		-		-		-		-		-		-		-		-
Interest rate swap agreements		13,740		13,740		-		13,740		-		14,293		14,293		-		14,293		-
Interest payable on deposits and borrowings		1,950		1,950		-		1,950		-		3,066		3,066		-		3,066		-

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


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

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

Note 13 – Derivatives, Hedging Activities and Financial Instruments with Off-Balance Sheet Risk

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. The aggregate fair value of the swaps ~~are~~is recorded in other assets or other liabilities with changes in fair value recorded in other comprehensive income, net of tax. The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income and subsequently reclassified into interest income or interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

Interest rate swaps with notional amounts totaling $300.0 million and $250.0 million as of ~~June~~September 30, 2023 and December 31, 2022, respectively, were designated as cash flow hedges of certain variable rate commercial and commercial real estate loan pools. Each of these hedges were executed to pay variable and receive fixed rate cash flows. Each of these hedges was determined to be effective during all periods presented and the Company expects the hedges to remain effective during the remaining terms of the swaps.

An interest rate swap with a notional amount of $25.8 million as of ~~June~~September 30, 2023 and December 31, 2022, is designated as a cash flow hedge of junior subordinated debentures and was executed to pay fixed and receive variable rate cash flows. The hedge was determined to be effective during all periods presented and the Company expects the hedge to remain effective during the remaining terms of the swap.

During the next twelve months, the Company estimates that an additional ~~$6.8~~$7.0 million will be reclassified as an increase to interest income and an additional ~~$688,000~~$708,000 will be reclassified as an increase to interest expense.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of interest rate swaps with its loan customers as of ~~June~~September 30, 2023 and December 31, 2022 were ~~$106.4~~$105.6 million and $110.6 million, respectively. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

At ~~June~~September 30, 2023 and December 31, 2022, the Company had ~~$10.4~~$9.2 million and $11.2 million of cash collateral pledged with two correspondent financial institutions, respectively. The Company held ~~$5.7~~$8.1 million and $5.3 million of cash pledged from one correspondent financial institution to support the interest rate swap activity during the years presented, respectively. No investment securities were required to be pledged to any correspondent financial institution during ~~second quarter of~~ 2023 ~~and in the year of~~through September 30, 2023, or during 2022. The Company offsets derivative assets and liabilities that are subject to a master netting arrangement.

The Company also grants mortgage loan interest rate lock commitments to borrowers, subject to normal loan underwriting standards. The interest rate risk associated with these loan interest rate lock commitments is managed with contracts for future deliveries of loans as well as selling forward mortgage-backed securities contracts. Loan interest rate lock commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The notional amount of these commitments at ~~June~~September 30, 2023 and December 31, 2022 ~~were $10.0~~was $7.6 million and $5.3 million, respectively. Commitments to originate residential mortgage loans held-for-sale and forward commitments to sell residential mortgage loans or forward MBS contracts are considered derivative instruments and changes in the fair value are recorded to mortgage banking revenue. Fair values are estimated based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheets as of ~~June~~September 30, 2023 and December 31, 2022.

Fair Value of Derivative Instruments


			June 30, 2023						September 30, 2023
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	5	325,774	Other Assets	2,623	Other Liabilities	9,911	5	325,774	Other Assets	4,517	Other Liabilities	9,830
Total derivatives designated as hedging instruments				2,623		9,911				4,517		9,830

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	18	106,379	Other Assets	3,829	Other Liabilities	3,829	17	105,558	Other Assets	4,463	Other Liabilities	4,463
Interest rate lock commitments and forward contracts	40	10,029	Other Assets	77	Other Liabilities	-	28	7,613	Other Assets	37	Other Liabilities	-
Other contracts	4	43,994	Other Assets	108	Other Liabilities	-	4	44,892	Other Assets	48	Other Liabilities	-
Total derivatives not designated as hedging instruments				4,014		3,829				4,548		4,463


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

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	21	110,647	Other Assets	3,654	Other Liabilities	3,654	21	110,647	Other Assets	3,654	Other Liabilities	3,654
Interest rate lock commitments and forward contracts	28	5,298	Other Assets	76	Other Liabilities	-	28	5,298	Other Assets	76	Other Liabilities	-
Other contracts	4	43,699	Other Assets	125	Other Liabilities	1	4	43,699	Other Assets	125	Other Liabilities	1
Total derivatives not designated as hedging instruments				3,855		3,655				3,855		3,655

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

The fair value and cash flow hedge accounting related to derivatives covered under ASC Subtopic 815-20 impacted Accumulated Other Comprehensive Income (“AOCI”) and the Income Statement. The loss recognized in AOCI on derivatives totaled ~~$5.3~~$3.8 million as of ~~June~~September 30, 2023, and ~~$581,000~~$4.1 million as of ~~June~~September 30, 2022. The amount of the loss reclassified from AOCI to net interest income on the income statement was ~~$2.4~~$3.9 million for the ~~six~~nine months ended ~~June~~September 30, 2023 and ~~$16,000~~$15,000 of gain for the ~~six~~nine months ended ~~June~~September 30, ~~2022, respectively.~~2022.

Credit-risk-related Contingent Features

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

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

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Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

●

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

●

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

●

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

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

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


	June 30, 2023						December 31, 2022						September 30, 2023						December 31, 2022
	Fixed		Variable		Total		Fixed		Variable		Total		Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	2,116	$	16,370	$	18,486	$	3,514	$	15,365	$	18,879	$	173	$	16,543	$	16,716	$	3,514	$	15,365	$	18,879
Performance standby		1,513		12,511		14,024		3,161		13,989		17,150		353		15,733		16,086		3,161		13,989		17,150
		3,629		28,881		32,510		6,675		29,354		36,029		526		32,276		32,802		6,675		29,354		36,029
Non-borrower:
Performance standby		-		67		67		-		67		67		-		67		67		-		67		67
Total letters of credit	$	3,629	$	28,948	$	32,577	$	6,675	$	29,421	$	36,096	$	526	$	32,343	$	32,869	$	6,675	$	29,421	$	36,096

Unused loan commitments:	$	139,654	$	765,693	$	905,347	$	139,070	$	860,255	$	999,325	$	146,201	$	710,271	$	856,472	$	139,070	$	860,255	$	999,325

As of ~~June~~September 30, 2023, the Company evaluated current market conditions, including any impacts related to market interest rate changes and unused line of credit utilization trends during the second quarter of 2023, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments totaled $2.7 million, excluding a ~~$372,000~~$149,000 purchase accounting adjustment on unfunded commitments recorded from our West Suburban acquisition, which is being accreted to interest income over the estimated life of the unused commitments. The resultant decrease in the ACL for unfunded commitments of ~~$650,000~~$235,000 for the ~~second~~third quarter of 2023, compared to the prior quarter end, is primarily related to a $223,000 decrease by accretion to interest income of the purchase accounting adjustment, as well as adjustments to historical benchmark assumptions, such as the funding rates and the period used to forecast those rates within the ACL calculation, resulting in a ~~$427,000 reduction, as well as a $223,000 decrease by accretion to interest income of the purchase accounting adjustment.~~$12,000 reduction. The Company will continue to assess the credit risk at least quarterly, and adjust the allowance for unfunded commitments, which is carried within other liabilities on our Consolidated Balance Sheets, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

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

Overview

The following discussion provides additional information regarding our operations for the three and ~~six~~nine months ended ~~June~~September 30, 2023, compared to the three and ~~six~~nine months ended ~~June~~September 30, 2022, and our financial condition at ~~June~~September 30, 2023, compared to December 31, 2022. This discussion should be read in conjunction with our consolidated financial statements as well as the financial and statistical data appearing elsewhere in this report and our Form 10-K for the year ended December 31, 2022. The results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2023, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and ~~June~~September 30, 2023 and 2022 amounts are unaudited.

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

We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” on page 3 of this report.

Business Overview

The Company is a bank holding company headquartered in Aurora, Illinois. Through our wholly-owned subsidiary bank, Old Second National Bank, a national banking organization also headquartered in Aurora, Illinois, we offer a wide range of financial services through our 48 banking centers located in Cook, DeKalb, DuPage, Kane, Kendall, LaSalle and Will counties in Illinois. These banking centers offer access to a full range of traditional retail and commercial banking services including treasury management operations as well as fiduciary and wealth management services. We focus our business on establishing and maintaining relationships with our clients while maintaining a commitment to provide for the financial services needs of the communities in which we operate. We emphasize relationships with individual customers as well as small to medium-sized businesses throughout our market area. We also have extensive wealth management services, which includes a registered investment advisory platform in addition to trust administration and trust services related to personal and corporate trusts and employee benefit plan administration services.

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

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

As of ~~June~~September 30, 2023, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession, our reported and regulatory capital ratios could be adversely impacted by credit losses.

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Merger with West Suburban Bancorp, Inc.

On December 1, 2021, we completed our merger with West Suburban Bancorp, Inc. (“West Suburban”), the holding company for West Suburban Bank. Under the terms of the merger agreement, each share of West Suburban common stock was converted into 42.413 shares of our common stock and $271.15 in cash. Total cash and stock consideration paid was approximately $295.2 million. With the acquisition of West Suburban, we acquired 34 branches in DuPage, Kane, Kendall and Will counties in Illinois. The transaction is discussed in more detail in Note 2 to our Consolidated Financial Statements included in this report 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 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~~$18.7 million at ~~June~~September 30, 2023. The future impact of these failures on the economy, financial institutions and their depositors, as well as any governmental regulatory responses or actions resulting from the same, is difficult to predict at this time.

Financial Overview

Net income for the ~~second~~third quarter of 2023 was ~~$25.6~~$24.3 million, or ~~$0.56~~$0.54 per diluted share, compared to ~~$12.2~~$19.5 million, or ~~$0.27~~$0.43 per diluted share, for the ~~second~~third quarter of 2022. The increase was primarily due to growth in our loan portfolio and higher loan and security yields, partially offset by increased funding costs and increased other short-term borrowing, which resulted in growth in net interest income. Noninterest income ~~partially offset by lower~~decreased in the third quarter of 2023, compared to the like quarter of 2022, as a result of net losses on security sales and a reduction in mortgage banking revenues. An increase was also noted in noninterest ~~income~~expense for the current quarter, primarily due to ~~losses recognized on securities sold.~~higher salaries and employee benefits and $629,000 of liquidation and deconversion costs incurred in the third quarter of 2023 related to the 2022 sale of our Visa credit card portfolio. Also contributing to the increase in net income in the ~~second~~third quarter of 2023, compared to the ~~second~~third quarter of 2022, were ~~reduced~~ acquisition costs, net of gains on branch sales, of ~~$2.1~~$2.0 million incurred in the prior year like quarter, compared to ~~$29,000 of net losses on~~no acquisition related costs or branch sales in the ~~second~~third quarter of 2023. Adjusted net income, a non-GAAP financial measure that excludes ~~merger-related~~Visa portfolio and land trust portfolio gains on sale, Visa portfolio liquidation and deconversion costs, ~~net~~and any merger related costs, as applicable, was $24.8 million for the third quarter of ~~losses/(gains) on branch sales, was~~2023, compared to $25.6 million for the second quarter of 2023, ~~compared to $23.4~~and $19.6 million for the ~~first quarter of 2023, and $13.8 million for the second~~third quarter of 2022. Adjusted net income ~~net of losses/(gains) on branch sales,~~ was ~~$49.0~~$73.8 million for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to ~~$29.7~~$49.4 million for the ~~six~~nine months ended ~~June~~September 30, 2022. See the discussion entitled “Non-GAAP Financial Measures” on page ~~39,~~40, as well as the table below, which provides a reconciliation of this non-GAAP measure to the most comparable GAAP equivalents.


	Quarters Ended						Six Months Ended				Quarters Ended						Nine Months Ended
	June 30,		March 31,		June 30,		June 30,				September 30,		June 30,		September 30,		September 30,
	2023		2023		2022		2023		2022		2023		2023		2022		2023		2022
Net Income
Income before income taxes (GAAP)	$	34,973	$	32,013	$	16,676	$	66,986	$	33,119	$	32,484	$	34,973	$	26,577	$	99,470	$	59,696
Pre-tax income adjustments:
Merger-related costs, net of losses/(gains) on branch sales		29		(306)		2,131		(277)		7,466		-		29		1,061		(277)		8,527
Liquidation and deconversion costs on Visa credit card portfolio												629		-		-		629		-
Gains on the sale of Visa credit card and land trust portfolios												-		-		(923)		-		(923)
Adjusted net income before taxes		35,002		31,707		18,807		66,709		40,585		33,113		35,002		26,715		99,822		67,300
Taxes on adjusted net income		9,419		8,326		4,995		17,745		10,853		8,307		9,419		7,091		26,051		17,944
Adjusted net income (non-GAAP)	$	25,583	$	23,381	$	13,812	$	48,964	$	29,732	$	24,806	$	25,583	$	19,624	$	73,771	$	49,356

Basic earnings per share (GAAP)	$	0.57	$	0.53	$	0.28	$	1.10	$	0.55	$	0.55	$	0.57	$	0.43	$	1.65	$	0.98
Diluted earnings per share (GAAP)		0.56		0.52		0.27		1.08		0.54		0.54		0.56		0.43		1.62		0.97
Adjusted basic earnings per share excluding acquisition-related costs (non-GAAP)		0.58		0.52		0.31		1.10		0.67		0.55		0.58		0.44		1.65		1.11
Adjusted diluted earnings per share excluding acquisition-related costs (non-GAAP)		0.56		0.52		0.31		1.08		0.66		0.55		0.56		0.43		1.63		1.09

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

●

Net interest and dividend income was ~~$63.6~~$63.0 million for the ~~second~~third quarter of 2023, compared to ~~$45.3~~$55.6 million for the ~~second~~third quarter of 2022. Growth in interest and dividend income in the ~~second~~third quarter of 2023 was primarily due to loan growth and higher yields on loans, ~~and securities,~~ partially offset by higher funding and borrowing ~~costs.~~costs, as well as increased other short-term borrowings.

●

We recorded a net provision for credit losses of ~~$2.0~~$3.0 million in the ~~second~~third quarter of 2023, driven by a ~~$2.4~~$3.0 million increase in the allowance for credit losses on loans based on increased historical loss ~~rate updates,~~rates, loan growth, our assessment of nonperforming loan metrics and trends, and estimated future credit losses, net of a reversal of ~~$427,000~~$12,000 in our allowance for unfunded commitments based on an adjustment of historical benchmark assumptions, such as funding rates and the period used to forecast those rates, within the ACL calculation. We recorded a net provision for credit loss of ~~$550,000~~$4.5 million in the ~~second~~third quarter of 2022.

●

Noninterest income was ~~$8.2~~$9.9 million for the ~~second~~third quarter of 2023, compared to ~~$9.2~~$11.5 million for the ~~second~~third quarter of 2022. Contributing to the decrease were security losses of ~~$1.5 million~~$924,000 due to strategic sales in the ~~second~~third quarter of 2023, compared

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to ~~security~~ losses on the call of ~~$33,000~~securities of $1,000 in the ~~second~~third quarter of 2022. Also contributing to the reduction in noninterest income was a $1.1 million decrease in other income, primarily due to the gain on sale of both our Visa credit card portfolio and the land trust portfolio in 2022. These decreases were partially offset by an increase of ~~$620,000~~$195,000 in ~~mortgage banking related~~wealth management income and a ~~$346,000~~$773,000 increase in the cash surrender value of BOLI.

●

Noninterest expense was ~~$34.8~~$37.4 million for the ~~second~~third quarter of 2023, compared to ~~$37.2~~$36.0 million for the ~~second~~third quarter of 2022, ~~a decrease~~an increase of ~~$2.4~~$1.4 million, or ~~6.5%~~4.0%. Contributing to the ~~decrease~~increase in noninterest expense in the third quarter of 2023 was higher salaries and employee benefits, as well as $629,000 of net liquidation and deconversion costs from the 2022 sale of our Visa credit card portfolio. Partially offsetting the increase in noninterest expense was a reduction inof occupancy, furniture and equipment and computer and data processing ~~and net teller & bill paying~~ expenses, ~~in the second quarter of 2023,~~ primarily ~~stemming~~ from acquisition costs, net of gains on branch sales, incurred in the ~~second~~third quarter of 2022 stemming from our West Suburban acquisition in the fourth quarter of 2021. We recorded net losses on branch sales of $29,000 in the second quarter of 2023, compared to $2.1 million of acquisition-related cost, net of gains on branch sales, in the second quarter of 2022, primarily within computer and data processing, salaries and employee benefits, and other expense related to the West Suburban acquisition.

●

We had a provision for income tax expense of ~~$9.4~~$8.1 million for the ~~second~~third quarter of 2023, compared to a provision for income tax expense of ~~$4.4~~$7.1 million for the ~~second~~third quarter of 2022. The effective tax rate for these two periods was ~~26.9%~~25.1% and ~~26.6%~~26.5%, respectively.

●

Our community-focused banking franchise experienced growth of ~~$145.9~~$159.9 million in total loans in the ~~second quarter~~first nine months of 2023, compared to the year ended December 31, 2022, and an increase of ~~$390.5~~$160.2 million in total loans compared to the ~~second~~third quarter of 2022. We believe we are positioned for continued loan growth, though likely at a slower pace, as we continue to serve our customers’ needs in a competitive economic environment. We continue to seek to provide value to our customers and the communities in which we operate, by executing on growth opportunities in our local markets and developing new banking relationships, while seeking to ensure the safety and soundness of our Bank, our customers, and our employees.

●

Nonaccrual loans increased ~~$29.3~~$30.5 million as of ~~June~~September 30, 2023, compared to December 31, 2022, primarily due to a few larger credits that moved from substandard accrual to ~~substandard~~ nonaccrual in the first ~~quarter~~nine months of ~~2023 and remain at June 30, 2023, which include~~2023. There were additions of two office buildings and one health care ~~facility.~~facility credit as of March 31, 2023, and additions of one medical office development and one office building as of September 30, 2023. The additions are partially offset by three charge offs totaling $6.8 million, recorded in the third quarter of 2023. Nonperforming loans as a percent of total loans was ~~1.5%~~1.6% as of ~~June~~September 30, 2023, compared to 0.9% as of December 31, 2022, and ~~1.2%~~1.4% as of ~~June~~September 30, 2022. Classified assets increased to ~~$128.3~~$153.7 million as of ~~June~~September 30, 2023, which is ~~$17.9~~$43.2 million, or ~~16.2%~~39.1% more than December 31, 2022, and ~~$23.6~~$38.4 million, or ~~22.5%~~33.3%, more than ~~June~~September 30, 2022.

Critical Accounting Estimates

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

Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion

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and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022. There have been no material changes to our critical accounting policies or the estimates made pursuant to those policies during the most recent quarter from those disclosed in our 2022 Annual Report in Form 10-K.

Non-GAAP Financial Measures

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

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Results of Operations

Overview

Three months ended ~~June~~September 30, 2023 and 2022

Our income before taxes was ~~$35.0~~$32.5 million in the ~~second~~third quarter of 2023 compared to ~~$16.7~~$26.6 million in the ~~second~~third quarter of 2022. This increase in pretax income was primarily due to a ~~$26.5~~$7.5 million increase in net interest and dividend income, and a ~~$2.4~~$1.5 million decrease in provision for credit losses. Income before taxes was negatively impacted by a $1.6 million decrease in noninterest ~~expenses. The increase~~income, primarily due to $924,000 of security losses and a $1.1 million decrease in ~~pretax~~other income ~~was partially offset by an $8.2~~in the third quarter of 2023, as well as a $1.4 million increase in ~~interest expense, a $1.5 million increase in provision for credit losses, and a $988,000 decrease in~~ noninterest ~~income, mainly due to $1.5 million of security losses in the second quarter of 2023.~~expense. Our net income was ~~$25.6~~$24.3 million, or ~~$0.56~~$0.54 per diluted share, for the ~~second~~third quarter of 2023, compared to net income of ~~$12.2~~$19.5 million, or ~~$0.27~~$0.43 per diluted share, for the ~~second~~third quarter of 2022. The Bank remains well positioned to navigate uncertain macroeconomics; we have mitigated interest rate risk, ~~tightened~~controlled expenses in ~~a recessionary~~an inflationary environment, and actively managed daily liquidity. Furthermore, we continue to possess strong liquidity metrics and an outsized securities portfolio for funding needs.

Net interest and dividend income was ~~$63.6~~$63.0 million in the ~~second~~third quarter of 2023, compared to ~~$45.3~~$55.6 million in the ~~second~~third quarter of 2022. The ~~$18.3~~$7.4 million increase was primarily driven by significant growth in our loan portfolio as well as the effect of higher market interest rates on our loan ~~and securities~~ portfolios. Higher interest ~~and dividend~~ income was partially offset by an increase in interest expense in the ~~second~~third quarter of 2023, compared to the ~~second~~third quarter of 2022, primarily due to a rise in deposit interest rates, and an increase in other short-term borrowing expense due to additional FHLB advances, 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.advances. As of June 30, 2023, we redeemed the $45.0 million senior debt issuance that was due in 2026, ~~and the related deferred~~which resulted in no senior debt ~~issuance costs of $362,000 were also recorded as~~ interest expense ~~resulting in an effective cost of this debt issuance of 12.85%~~recorded for the ~~second~~third quarter of 2023.

~~Six~~Nine months ended ~~June~~September 30, 2023 and 2022

Our income before taxes was ~~$67.0~~$99.5 million for the ~~six~~nine months ended ~~June~~September 30, 2023 compared to ~~$33.1~~$59.7 million for the ~~six~~nine months ended ~~June~~September 30, 2022. This increase in pretax income was primarily due to a ~~$53.3~~$48.6 million increase in net interest and dividend income and a ~~$4.7~~$3.3 million decrease in noninterest expenses. These changes were partially offset by a ~~$12.2 million increase in interest expense, a $5.0~~$3.5 million increase in provision for credit losses, and a ~~$7.1~~$8.7 million decrease in noninterest income, mainly due to ~~$3.2~~$4.1 million of security losses recorded in the first ~~six~~nine months of 2023 and a ~~$4.2~~$4.5 million decrease in mortgage banking revenues. Our net income was ~~$49.2~~$73.5 million, or ~~$1.08~~$1.62 per diluted share, for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to net income of ~~$24.3~~$43.8 million, or ~~$0.54~~$0.97 per diluted share, for the same period of 2022.

Net interest and dividend income was ~~$127.7~~$190.7 million for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to ~~$86.5~~$142.1 million for the same period of 2022. The ~~$41.2~~$48.6 million increase was primarily driven by significant growth in our loan portfolio as well as the effect of higher market interest rates on our loan and securities portfolios. Higher interest and dividend income was partially offset by an increase in interest expense in the first ~~six~~nine months of 2023, compared to the first ~~six~~nine months of 2022, primarily due to a rise in deposit interest rates, an increase in other short-term borrowing expense due to FHLB advances, and an increase in the rate paid on our senior ~~notes during the first six months of 2023.~~notes. The senior notes redeemed on June 30, 2023 had an effective cost of 10.95% for the ~~six~~nine months ending ~~June~~September 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 ~~June~~September 30, 2023 and 2022

The increased yield of 2010 basis points on interest earning assets ~~for the quarter ended June 30, 2023,~~ compared to the ~~prior~~ linked period was driven by higher yields on loan originations than those in the previous period as well as repricing within the existing variable rate portfolios for securities available-for-sale and loans. Changes in the market interest rate environment impact earning assets at varying intervals depending on the repricing timeline of loans, as well as the securities maturity, paydown and purchase activities.

The year over year increase of ~~206~~136 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 and multifamily portfolios, as these loan segments generally produce the greatest yield. The increases in benchmark interest rates impacted yields on the securities portfolio through the inverse relationship between interest rates and market value coupled with maturities and strategic sales of lower yielding assets, ~~and timely purchases of higher yielding securities,~~ as we work to increase the weighted average yield in the portfolio.

Average balances of ~~interest bearing~~interest-bearing deposit accounts have decreased steadily since the ~~second~~third quarter of 2022 through the ~~second~~third quarter of 2023, from ~~$3.34~~$3.23 billion to ~~$2.87~~$2.79 billion, with ~~these~~ decreases reflected in all deposit ~~categories.~~categories excluding time deposits. We have continued to control the cost of funds over the periods reflected, with the rate of overall ~~interest bearing~~interest-bearing deposits increasing to 65 basis points for the quarter ended September 30, 2023, from 40 basis points for the quarter ended June 30, 2023, ~~compared to 25~~and from nine basis points for the quarter ended ~~March 31, 2023, and seven basis points for the quarter ended June~~September 30, 2022. A 2532 basis point increase in the cost of money market funds for the quarter ended ~~June~~September 30, 2023 compared to prior linked quarter, and a 5991 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~~September 30, 2023 ~~also~~ increased by 4463 basis points and 83140 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~~decreased in the third quarter of 2023 compared to the second quarter of 2023, primarily due to the redemption of the senior notes as of June 30, 2023, partially offset by an increase in average ~~short term~~short-term borrowings of ~~$201.7~~$24.6 million stemming from ~~growth in~~increased average FHLB advances over the prior ~~linked quarter, and an average~~quarter. The increase of ~~$402.5~~$421.7 million ~~in the~~ year over year ~~quarters~~of average FHLB advances was based on daily liquidity needs. Subordinated and junior subordinated debt interest expense were essentially flat over each of the periods presented. ~~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~~We redeemed all 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~~on June 30, 2023, resulting in ~~2026.~~senior notes having no balance or related interest expense in the third quarter of 2023. In February 2023, we paid off the remaining balance of $9.0 million on the original $20.0 million term note issued in 2020, resulting in notes payable and other borrowings having no balance after that time.

Our net interest margin (GAAP) ~~decreased eleven~~increased three basis points to 4.64% for the third quarter of 2023 compared to 4.61% for the second quarter of 2023, ~~compared to 4.72% for the first quarter of 2023, but~~and increased ~~145~~71 basis points compared to ~~3.16%~~3.93% for the ~~second~~third quarter of 2022. Our net interest margin (TE) ~~decreased 10~~increased two basis points to 4.66% for the third quarter of 2023, compared to 4.64% for the second quarter of 2023, ~~compared to 4.74% for the first quarter of 2023, but~~and increased ~~146~~70 basis points compared to ~~3.18%~~3.96% for the ~~second~~third quarter of 2022. The ~~decrease~~increase in the current quarter, compared to the prior ~~linked~~ quarter, is primarily due to ~~increases~~the growth in loan interest income due to the rising interest rate environment, and a decrease in borrowing interest expense ~~from FHLB advances and~~due to the redemption of the senior ~~notes.~~notes in June 2023. The increase in the current quarter, compared to the prior year like quarter, is primarily due to an increase in market interest rates, and the related rate resets on loans and securities during the past year, as well as continuing loan growth relative to a more modest increase in costs of ~~interest bearing~~interest-bearing liabilities. See the discussion entitled “Non-GAAP ~~Presentations”~~Financial Measures” and the ~~table~~tables on page 45 that provide a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent.

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~~Six~~Nine months ended ~~June~~September 30, 2023 and 2022

The year over year increase of ~~211~~187 basis points on interest earning assets was driven by significant increases to benchmark interest rates as well as strong loan growth throughout the period, specifically within the leases, commercial real estate-investor, construction and multi-family portfolios. The increases in benchmark interest rates impacted yields on the securities portfolio through the inverse relationship between interest rates and market value coupled with maturities and strategic sales of lower yielding assets and timely purchase of higher yielding securities as we work to increase the weighted average yield in the portfolio. Average securities available-for-sale decreased ~~$346.1~~$367.0 million for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to the ~~six~~nine months ended ~~June~~September 30, 2022, due to paydowns, changes in market value, and strategic sales. Due to market interest rate increases year over year, securities available-for-sale interest income was ~~$24.1~~$34.7 million for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to ~~$15.3~~$26.1 million for the like 2022 ~~period.~~period, reflecting an increase in yield of 134 basis points. Average loans, including loans held for sale, increased ~~$529.7~~$438.0 million in the ~~six~~nine months ended ~~June~~September 30, 2023, compared to the ~~six~~nine months ended ~~June~~September 30, 2022, primarily driven by the growth in ~~commercial,~~ leases, commercial real estate-investor, construction, and multi-family portfolios. Growth in the loan portfolio, as well as the rising interest rate environment, resulted in ~~$118.8~~$181.5 million of loan interest income in the ~~six~~nine months ended ~~June~~September 30, 2023, compared to ~~$74.7~~$121.3 million in the like 2022 ~~period.~~period, reflecting an increase in yield of 152 basis points.

Average balances of ~~interest bearing~~interest-bearing deposit accounts have decreased steadily since ~~June~~September 30, 2022 through the ~~six~~nine months ended ~~June~~September 30, 2023, from ~~$3.37~~$3.32 billion to ~~$2.93~~$2.89 billion, with ~~these~~such decreases reflected in all categories. We have continued to control the cost of funds over the periods reflected, with the rate of overall ~~interest bearing~~interest-bearing deposits increasing by 2435 basis points to 3243 basis points from eight basis points as of ~~June~~September 30, 2022. A 4661 basis point increase in the cost of money market funds as of ~~June~~September 30, 2023, compared to ~~June~~September 30, 2022, was due to select deposit account exception pricing and drove a significant portion of the overall increase. Interest expense paid on time deposits also contributed to the ~~growth in~~increased cost of deposits year over year, as the cost of average time deposits increased 6189 basis points to 84114 basis points for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to 2325 basis points for the ~~six~~nine months ended ~~June~~September 30, 2022, primarily due to CD rate specials we offered.

Borrowing costs increased in the ~~six~~nine months ended ~~June~~September 30, 2023 primarily due to the increase in short term borrowings ~~stemming~~ from higher average FHLB advance growth of ~~$302.2~~$342.5 million since the ~~six~~nine months ended ~~June~~September 30, 2022, based on daily liquidity needs. Subordinated and junior subordinated debt interest expense remained flat over the periods presented. Senior notes interest expense had the most significant interest expense increase, as this issuance ~~references three month~~referenced three-month LIBOR, and rising market interest rates resulted in a ~~613~~557 basis point increase to 10.95%, from ~~4.82%~~5.38% for the ~~six~~nine months ended September 30, 2022. We redeemed these notes on June 30, ~~2022. Also contributing~~2023, which contributed to the significant basis point increase ~~on senior notes was~~due to the $362,000 in deferred issuance costs that were recognized as interest expense due to the early ~~redemption of the debt on June 30, 2023.~~redemption. In the first quarter of 2023, we paid off the remaining balance of $9.0 million on the original $20.0 million term note issued in 2020, recorded within notes payable and other borrowings.

Our net interest margin (GAAP) increased ~~166~~135 basis points to 4.66% for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to ~~3.00%~~3.31% for the ~~six~~nine months ended ~~June~~September 30, 2022. Our net interest margin (TE) increased ~~166~~135 basis points to ~~4.69%~~4.68% for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to ~~3.03%~~3.33% for the ~~six~~nine months ended ~~June~~September 30, 2022. The increase in the current period, compared to the prior year like period, is primarily due to an increase in market interest rates, and the related rate resets on loans and securities during the past year, as well as continuing loan growth relative to a more modest increase in the cost of ~~interest bearing~~interest-bearing liabilities.

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

The following tables set forth certain information relating to our average consolidated balance sheets and reflect the yield on average earning assets and cost of average ~~interest bearing~~interest-bearing liabilities for the periods indicated. These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period. Average balances are derived from daily balances. For purposes of discussion, net interest income and net interest income to total earning assets in the following tables have been adjusted to a non-GAAP TE basis using a marginal rate of 21% in 2023 and 2022 to compare returns more appropriately on tax-exempt loans and securities to other earning assets.

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

		Quarters Ended																			Quarters Ended
		June 30, 2023						March 31, 2023						June 30, 2022							September 30, 2023						June 30, 2023						September 30, 2022
		Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate		Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
		Balance			Expense		%	Balance			Expense		%	Balance			Expense		%		Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions		$	50,309		$	643	5.13	$	49,310		$	585	4.81	$	426,820		$	782	0.73		$	49,737		$	659	5.26	$	50,309		$	643	5.13	$	131,260		$	663	2.00
Securities:
Taxable			1,231,994			9,930	3.23		1,330,295			10,735	3.27		1,610,713			6,786	1.69			1,125,688			8,946	3.15		1,231,994			9,930	3.23		1,525,258			9,116	2.37
Non-taxable (TE)¹			172,670			1,692	3.93		173,324			1,693	3.96		181,386			1,642	3.63			169,523			1,687	3.95		172,670			1,692	3.93		178,090			1,686	3.76
Total securities (TE)¹			1,404,664			11,622	3.32		1,503,619			12,428	3.35		1,792,099			8,428	1.89			1,295,211			10,633	3.26		1,404,664			11,622	3.32		1,703,348			10,802	2.52
FHLBC and FRBC Stock			34,029			396	4.67		24,905			280	4.56		20,994			263	5.02			35,954			597	6.59		34,029			396	4.67		19,565			261	5.29
Loans and loans held-for-sale^{1, 2}			4,040,202			61,591	6.11		3,932,492			57,228	5.90		3,508,856			38,267	4.37			4,010,859			62,705	6.20		4,040,202			61,591	6.11		3,753,117			46,642	4.93
Total interest earning assets			5,529,204			74,252	5.39		5,510,326			70,521	5.19		5,748,769			47,740	3.33			5,391,761			74,594	5.49		5,529,204			74,252	5.39		5,607,290			58,368	4.13
Cash and due from banks			56,191			-	-		55,140			-	-		53,371			-	-			57,279			-	-		56,191			-	-		56,265			-	-
Allowance for credit losses on loans			(53,480)			-	-		(49,398)			-	-		(44,354)			-	-			(54,581)			-	-		(53,480)			-	-		(45,449)			-	-
Other noninterest bearing assets			379,576			-	-		382,579			-	-		374,309			-	-			384,059			-	-		379,576			-	-		377,850			-	-
Total assets		$	5,911,491					$	5,898,647					$	6,132,095						$	5,778,518					$	5,911,491					$	5,995,956

Liabilities and Stockholders' Equity
NOW accounts		$	600,957		$	312	0.21	$	601,030		$	242	0.16	$	604,937		$	102	0.07		$	576,138		$	440	0.30	$	600,957		$	312	0.21	$	612,174		$	148	0.10
Money market accounts			762,967			1,245	0.65		833,823			828	0.40		1,054,552			155	0.06			720,488			1,767	0.97		762,967			1,245	0.65		967,106			157	0.06
Savings accounts			1,073,172			185	0.07		1,126,040			79	0.03		1,213,133			90	0.03			1,027,987			351	0.14		1,073,172			185	0.07		1,186,001			75	0.03
Time deposits			436,524			1,156	1.06		434,655			664	0.62		469,009			265	0.23			466,250			1,982	1.69		436,524			1,156	1.06		459,925			335	0.29
Interest bearing deposits			2,873,620			2,898	0.40		2,995,548			1,813	0.25		3,341,631			612	0.07			2,790,863			4,540	0.65		2,873,620			2,898	0.40		3,225,206			715	0.09
Securities sold under repurchase agreements			25,575			7	0.11		31,080			9	0.12		34,496			9	0.10			24,945			27	0.43		25,575			7	0.11		33,733			10	0.12
Other short-term borrowings			402,527			5,160	5.14		200,833			2,345	4.74		-			-	-			427,174			5,840	5.42		402,527			5,160	5.14		5,435			44	3.21
Junior subordinated debentures			25,773			281	4.37		25,773			279	4.39		25,773			284	4.42			25,773			245	3.77		25,773			281	4.37		25,773			285	4.39
Subordinated debentures			59,329			546	3.69		59,308			546	3.73		59,244			547	3.70			59,350			547	3.66		59,329			546	3.69		59,265			546	3.66
Senior notes			44,134			1,414	12.85		44,599			994	9.04		44,520			578	5.21			-			-	-		44,134			1,414	12.85		44,546			728	6.48
Notes payable and other borrowings			-			-	-		5,400			87	6.53		13,103			95	2.91			-			-	-		-			-	-		10,989			111	4.01
Total interest bearing liabilities			3,430,958			10,306	1.20		3,362,541			6,073	0.73		3,518,767			2,125	0.24			3,328,105			11,199	1.34		3,430,958			10,306	1.20		3,404,947			2,439	0.28
Noninterest bearing deposits			1,920,448			-	-		2,002,801			-	-		2,119,667			-	-			1,867,201			-	-		1,920,448			-	-		2,092,301			-	-
Other liabilities			48,434			-	-		51,279			-	-		32,636			-	-			53,164			-	-		48,434			-	-		34,949			-	-
Stockholders' equity			511,651			-	-		482,026			-	-		461,025			-	-			530,048			-	-		511,651			-	-		463,759			-	-
Total liabilities and stockholders' equity		$	5,911,491					$	5,898,647					$	6,132,095						$	5,778,518					$	5,911,491					$	5,995,956
Net interest income (GAAP)					$	63,580					$	64,086					$	45,264						$	63,030					$	63,580					$	55,569
Net interest margin (GAAP)							4.61						4.72						3.16							4.64						4.61						3.93

Net interest income (TE)¹					$	63,946					$	64,448					$	45,615						$	63,395					$	63,946					$	55,929
Net interest margin (TE)¹							4.64						4.74						3.18							4.66						4.64						3.96
Interest bearing liabilities to earning assets			62.05	%					61.02	%					61.21	%						61.73	%					62.05	%					60.72	%

¹Represents a non-GAAP financial measure. See the discussion entitled “Reconciliation of Tax-Equivalent Non-GAAP Financial Measures” below that provides a reconciliation of each non-GAAP measure to the most comparable GAAP equivalent. Tax equivalent basis is calculated using a marginal tax rate of 21% in 2023 and 2022.

² Interest income from loans is shown on a tax equivalent basis, which is a non-GAAP financial measure, as discussed in the table on page 45, and includes loan fee expense of $780,000 for the third quarter of 2023, $242,000 for the second quarter of 2023, ~~$730,000~~and $750,000 of loan fee income for the ~~first quarter of 2023, and $588,000 for the second~~third quarter of 2022. Nonaccrual loans are included in the above-stated average balances.

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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)

	Six Months Ended June 30,												Nine Months Ended September 30,
	2023						2022						2023						2022
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	49,812		$	1,228	4.97	$	530,485		$	1,051	0.40	$	49,787		$	1,887	5.07	$	395,948		$	1,714	0.58
Securities:
Taxable		1,280,873			20,665	3.25		1,611,669			11,954	1.50		1,228,576			29,611	3.22		1,582,549			21,071	1.78
Non-taxable (TE)¹		172,995			3,385	3.95		188,275			3,310	3.55		171,825			5,072	3.95		184,842			4,995	3.61
Total securities (TE)¹		1,453,868			24,050	3.34		1,799,944			15,264	1.71		1,400,401			34,683	3.31		1,767,391			26,066	1.97
Dividends from FHLBC and FRBC		29,492			676	4.62		18,543			416	4.52		31,670			1,273	5.37		18,888			677	4.79
Loans and loans held-for-sale ^{1 , 2}		3,986,644			118,819	6.01		3,456,984			74,695	4.36		3,994,804			181,524	6.08		3,556,798			121,337	4.56
Total interest earning assets		5,519,816			144,773	5.29		5,805,956			91,426	3.18		5,476,662			219,367	5.36		5,739,025			149,794	3.49
Cash and due from banks		55,668			-	-		48,200			-	-		56,211			-	-		50,918			-	-
Allowance for credit losses on loans		(51,450)			-	-		(44,348)			-	-		(52,505)			-	-		(44,719)			-	-
Other noninterest bearing assets		381,070			-	-		372,657			-	-		382,077			-	-		374,388			-	-
Total assets	$	5,905,104					$	6,182,465					$	5,862,445					$	6,119,612

Liabilities and Stockholders' Equity
NOW accounts	$	600,993		$	555	0.19	$	602,225		$	191	0.06	$	592,617		$	995	0.22	$	605,578		$	339	0.07
Money market accounts		798,199			2,073	0.52		1,076,624			325	0.06		772,011			3,840	0.67		1,039,717			482	0.06
Savings accounts		1,099,460			263	0.05		1,207,137			228	0.04		1,075,374			614	0.08		1,200,014			303	0.03
Time deposits		435,595			1,820	0.84		482,157			542	0.23		445,926			3,802	1.14		474,665			877	0.25
Interest bearing deposits		2,934,247			4,711	0.32		3,368,143			1,286	0.08		2,885,928			9,251	0.43		3,319,974			2,001	0.08
Securities sold under repurchase agreements		28,312			16	0.11		36,837			20	0.11		27,178			43	0.21		35,791			30	0.11
Other short-term borrowings		302,238			7,505	5.01		-			-	-		344,341			13,345	5.18		1,832			44	3.21
Junior subordinated debentures		25,773			560	4.38		25,773			564	4.41		25,773			805	4.18		25,773			849	4.40
Subordinated debentures		59,318			1,092	3.71		59,233			1,093	3.72		59,329			1,639	3.69		59,244			1,639	3.70
Senior note		44,365			2,408	10.95		44,507			1,063	4.82		29,414			2,408	10.95		44,520			1,791	5.38
Notes payable and other borrowings		2,685			87	6.53		16,040			198	2.49		1,780			87	6.53		14,338			309	2.88
Total interest bearing liabilities		3,396,938			16,379	0.97		3,550,533			4,224	0.24		3,373,743			27,578	1.09		3,501,472			6,663	0.25
Noninterest bearing deposits		1,961,397			-	-		2,106,553			-	-		1,929,653			-	-		2,101,749			-	-
Other liabilities		49,849			-	-		46,648			-	-		50,965			-	-		42,706			-	-
Stockholders' equity		496,920			-	-		478,731			-	-		508,084			-	-		473,685			-	-
Total liabilities and stockholders' equity	$	5,905,104					$	6,182,465					$	5,862,445					$	6,119,612
Net interest income (GAAP)				$	127,666					$	86,496					$	190,696					$	142,065
Net interest margin (GAAP)						4.66						3.00						4.66						3.31

Net interest income (TE)¹				$	128,394					$	87,202					$	191,789					$	143,131
Net interest margin (TE)¹						4.69						3.03						4.68						3.33
Interest bearing liabilities to earning assets		61.54	%					61.15	%					61.60	%					61.01	%

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 45, and includes fee expense of ~~$972,000~~$1.8 million and ~~$1.3~~$2.1 million for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, respectively. Nonaccrual loans are included in the above-stated average balances.

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Reconciliation of Tax-Equivalent Non-GAAP Financial Measures

Net interest and dividend income (TE) and net interest income (TE) to average interest earning assets are non-GAAP measures that have been adjusted on a TE basis using a marginal rate of 21% for 2023 and 2022 to compare returns more appropriately on tax-exempt loans and securities to other earning assets. The table below provides a reconciliation of each non-GAAP (TE) measure to the GAAP equivalent for the periods indicated:


	Three Months Ended									Six Months Ended						Three Months Ended									Nine Months Ended
	June 30,			March 31,			June 30,			June 30,						September 30,			June 30,			September 30,			September 30,
Net Interest Margin	2023			2023			2022			2023			2022			2023			2023			2022			2023			2022


Interest income (GAAP)	$	73,886		$	70,159		$	47,389		$	144,045		$	90,720		$	74,229		$	73,886		$	58,008		$	218,274		$	148,728
Taxable-equivalent adjustment:
Loans		11			6			6			17			11			11			11			6			28			17
Securities		355			356			345			711			695			354			355			354			1,065			1,049
Interest and dividend income (TE)		74,252			70,521			47,740			144,773			91,426			74,594			74,252			58,368			219,367			149,794
Interest expense (GAAP)		10,306			6,073			2,125			16,379			4,224			11,199			10,306			2,439			27,578			6,663
Net interest income (TE)	$	63,946		$	64,448		$	45,615		$	128,394		$	87,202		$	63,395		$	63,946		$	55,929		$	191,789		$	143,131
Net interest income (GAAP)	$	63,580		$	64,086		$	45,264		$	127,666		$	86,496		$	63,030		$	63,580		$	55,569		$	190,696		$	142,065
Average interest earning assets	$	5,529,204		$	5,510,326		$	5,748,769		$	5,519,816		$	5,805,956		$	5,391,761		$	5,529,204		$	5,607,290		$	5,476,662		$	5,739,025
Net interest margin (TE)																	4.66	%		4.64	%		3.96	%		4.68	%		3.33	%
Net interest margin (GAAP)		4.61	%		4.72	%		3.16	%		4.66	%		3.00	%		4.64	%		4.61	%		3.93	%		4.66	%		3.31	%
Net interest margin (TE)		4.64	%		4.74	%		3.18	%		4.69	%		3.03	%

Noninterest Income

Three months ended ~~June~~September 30, 2023 and 2022

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


							2nd Quarter 2023								3rd Quarter 2023
Noninterest Income	Three Months Ended						Percent Change From		Three Months Ended						Percent Change From
(Dollars in thousands)	June 30,		March 31,		June 30,		March 31,	June 30,	September 30,		June 30,		September 30,		June 30,	September 30,
	2023		2023		2022		2023	2022	2023		2023		2022		2023	2022
Wealth management	$	2,458	$	2,270	$	2,506	8.3	(1.9)	$	2,475	$	2,458	$	2,280	0.7	8.6
Service charges on deposits		2,362		2,424		2,328	(2.6)	1.5		2,504		2,362		2,661	6.0	(5.9)
Residential mortgage banking revenue
Secondary mortgage fees		76		59		50	28.8	52.0		66		76		81	(13.2)	(18.5)
MSRs mark to market gain (loss)		96		(525)		82	118.3	17.1
MSRs mark to market gain										281		96		548	192.7	(48.7)
Mortgage servicing income		499		516		579	(3.3)	(13.8)		519		499		514	4.0	1.0
Net gain (loss) on sales of mortgage loans		398		306		(262)	30.1	251.9
Net gain on sales of mortgage loans										407		398		449	2.3	(9.4)
Total residential mortgage banking revenue		1,069		356		449	200.3	138.1		1,273		1,069		1,592	19.1	(20.0)
Securities losses, net		(1,547)		(1,675)		(33)	(7.6)	N/M		(924)		(1,547)		(1)	40.3	N/M
Change in cash surrender value of BOLI		418		242		72	72.7	480.6		919		418		146	119.9	529.5
Card related income		2,690		2,244		2,965	19.9	(9.3)		2,606		2,690		2,653	(3.1)	(1.8)
Other income		773		1,489		924	(48.1)	(16.3)		1,024		773		2,165	32.5	(52.7)
Total noninterest income	$	8,223	$	7,350	$	9,211	11.9	(10.7)	$	9,877	$	8,223	$	11,496	20.1	(14.1)

N/M - Not meaningful

Noninterest income increased $873,000, or 11.9%, in the second quarter of 2023, compared to the first quarter of 2023, and decreased $988,000, or 10.7%, compared to the second quarter of 2022. The increase from the first quarter of 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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~~$128,000~~Noninterest income increased $1.7 million, or 20.1%, in the third quarter of 2023, compared to the second quarter of 2023, and decreased $1.6 million, or 14.1%, compared to the third quarter of 2022. The increase from the second quarter of 2023 was primarily driven by a $204,000 increase in residential mortgage banking revenue, a $623,000 decrease in securities losses, net, based on strategic sales, a $501,000 increase in the cash surrender value of BOLI, and a ~~$446,000~~$251,000 increase in ~~card related~~other income primarily due to ~~increased activity. These increases~~contract incentives achieved on brokerage activities, as well as various recoveries on prior year sold mortgage claims.

The decrease in noninterest income of $1.6 million in the ~~second~~third quarter of 2023, compared to the ~~first quarter of 2023, were partially offset by a $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 $988,000 in the second quarter of 2023, compared to the second~~third quarter of 2022, is primarily due to an increase in security losses, net, of ~~$1.5 million~~$923,000 on strategic sales for the quarter ended ~~June~~September 30, ~~2023.~~2023, a decrease of $267,000 on mortgage servicing rights mark to market gains, and a $1.1 million decrease in other income due to a $743,000 pretax gain on a Visa credit card portfolio sale and a $180,000 pretax gain on the sale of a land trust portfolio recorded in the third quarter of 2022. These decreases were partially offset by a ~~$660,000 increase in net gains on sales of mortgage loans and a $346,000~~$773,000 increase in the cash surrender value of BOLI due to market interest rate changes.

~~Six~~Nine months ended ~~June~~September 30, 2023 and 2022


Noninterest Income	Six Months Ended				YTD through June 30, 2023	Nine Months Ended				YTD through September 30, 2023
(Dollars in thousands)	June 30,		June 30,		Percent	September 30,		September 30,		Percent
	2023		2022		Change	2023		2022		Change
Wealth management	$	4,728	$	5,204	(9.1)	$	7,203	$	7,484	(3.8)
Service charges on deposits		4,786		4,402	8.7		7,290		7,063	3.2
Residential mortgage banking revenue
Secondary mortgage fees		135		189	(28.6)		201		270	(25.6)
MSRs mark to market (loss) gain		(429)		3,060	(114.0)		(148)		3,608	(104.1)
Mortgage servicing income		1,015		1,098	(7.6)		1,534		1,612	(4.8)
Net gain on sales of mortgage loans		704		1,233	(42.9)		1,111		1,682	(33.9)
Total residential mortgage banking revenue		1,425		5,580	(74.5)		2,698		7,172	(62.4)
Securities losses, net		(3,222)		(33)	N/M		(4,146)		(34)	N/M
Change in cash surrender value of BOLI		660		196	236.7		1,579		342	361.7
Card related income		4,934		5,532	(10.8)		7,540		8,194	(8.0)
Other income		2,262		1,793	26.2		3,286		3,949	(16.8)
Total noninterest income	$	15,573	$	22,674	(31.3)	$	25,450	$	34,170	(25.5)

N/M - Not meaningful

Noninterest income decreased ~~$7.1~~$8.7 million, or ~~31.3%~~25.5%, for the ~~six~~nine months ended ~~June~~September 30, 2023 compared to the ~~six~~nine months ended ~~June~~September 30, 2022. This decrease was primarily driven by a ~~$4.2~~$4.5 million decline in mortgage banking revenue, comprised mostly of a ~~$3.5~~$3.8 million decrease in MSRs mark to market gains and a ~~$529,000~~$571,000 decrease in net gain on sales of mortgage loans. In addition, the current ~~six~~nine month period decreased due to a ~~$3.2~~$4.1 million increase in net losses on the sale of securities for the year over year period. Partially offsetting these decreases was a ~~$384,000~~$227,000 increase in service charges on deposits and a ~~$464,000~~$1.2 million increase in the cash surrender value of ~~BOLI, and a $469,000 increase in other income.~~BOLI.

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Noninterest Expense

Three months ended ~~June~~September 30, 2023 and 2022

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


										2nd Quarter 2023											3rd Quarter 2023
Noninterest Expense	Three Months Ended									Percent Change From		Three Months Ended									Percent Change From
(Dollars in thousands)	June 30,			March 31,			June 30,			March 31,	June 30,	September 30,			June 30,			September 30,			June 30,	September 30,
	2023			2023			2022			2023	2022	2023			2023			2022			2023	2022
Salaries	$	16,310		$	16,087		$	15,995		1.4	2.0	$	17,279		$	16,310		$	14,711		5.9	17.5
Officers incentive		2,397			1,827			1,662		31.2	44.2		2,773			2,397			2,787		15.7	(0.5)
Benefits and other		3,091			4,334			3,675		(28.7)	(15.9)		3,063			3,091			3,513		(0.9)	(12.8)
Total salaries and employee benefits		21,798			22,248			21,332		(2.0)	2.2		23,115			21,798			21,011		6.0	10.0
Occupancy, furniture and equipment expense		3,639			3,475			3,046		4.7	19.5		3,506			3,639			4,119		(3.7)	(14.9)
Computer and data processing		1,290			1,774			4,006		(27.3)	(67.8)		1,922			1,290			2,543		49.0	(24.4)
FDIC insurance		794			584			702		36.0	13.1		744			794			659		(6.3)	12.9
Net teller & bill paying		515			502			834		2.6	(38.2)		534			515			504		3.7	6.0
General bank insurance		306			305			351		0.3	(12.8)		300			306			257		(2.0)	16.7
Amortization of core deposit intangible asset		618			624			659		(1.0)	(6.2)		616			618			657		(0.3)	(6.2)
Advertising expense		103			142			194		(27.5)	(46.9)		93			103			83		(9.7)	12.0
Card related expense		1,222			1,216			1,057		0.5	15.6		1,347			1,222			1,453		10.2	(7.3)
Legal fees		283			319			179		(11.3)	58.1		97			283			212		(65.7)	(54.2)
Consulting & management fees		520			790			523		(34.2)	(0.6)		549			520			607		5.6	(9.6)
Other real estate owned expense, net		(98)			306			87		(132.0)	(212.6)		(27)			(98)			21		72.4	(228.6)
Other expense		3,840			3,637			4,279		5.6	(10.3)		4,627			3,840			3,862		20.5	19.8
Total noninterest expense	$	34,830		$	35,922		$	37,249		(3.0)	(6.5)	$	37,423		$	34,830		$	35,988		7.4	4.0
Efficiency ratio (GAAP)¹		46.84	%		47.52	%		67.07	%				50.08	%		46.84	%		53.08	%
Adjusted efficiency ratio (non-GAAP)²		46.49	%		47.66	%		62.73	%				48.82	%		46.49	%		51.90	%

~~N/M - Not meaningful~~

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

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

Noninterest expense for the ~~second~~third quarter of 2023 ~~decreased $1.1~~increased $2.6 million, or ~~3.0%, compared to the first quarter of 2023, and decreased $2.4 million, or 6.5%~~7.4%, compared to the second quarter of 2023, and increased $1.4 million, or 4.0%, compared to the third quarter of 2022. The ~~decrease~~increase in the ~~second~~third quarter of 2023 compared to the ~~first~~second quarter of 2023 was attributable to a ~~$450,000 decrease~~$1.3 million increase in salaries and employee benefits, primarily due to ~~reductions in employee benefits expense related to a decline in group insurance premiums and payroll taxes, partially offset by~~ an increase in salaries and the officer incentive accrual. Also contributing to the ~~decrease~~increase in the ~~second~~third quarter of 2023 was a ~~$484,000 decrease~~$632,000 increase in computer and data processing costs as the ~~first~~second quarter ~~of 2023 including additional costs~~reflects software contract incentives, and a $787,000 increase in other expenses primarily due to ~~timing~~$629,000 of ~~software contracts and incentives. Noninterest expense~~liquidation costs recorded from the September 2023 Visa credit card portfolio deconversion, which was ~~further decreased~~sold 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, reflected in other real estate owned expense, net.

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

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

The year over year increase in noninterest expense is primarily attributable to a ~~$466,000~~$2.1 million increase in salaries and employee benefits, ~~and a $593,000~~primarily due to an increase in ~~occupancy, furniture~~salaries due to higher wage rates and ~~equipment expenses. Officer incentive compensation increased $735,000~~an increase in full-time equivalent employees in the ~~second~~current year. Also contributing to the increase was a $765,000 growth in other expense, which was primarily due to $629,000 of liquidation and deconversion costs recorded on the Visa credit card portfolio liquidation in the third quarter of 2023. Partially offsetting the increase in noninterest expense in the third quarter of 2023, compared to the ~~second~~third quarter of 2022, ~~as incentive accruals increased~~was a $613,000 decrease in furniture and equipment expenses, a $621,000 decrease in computer and data processing expenses, and a $115,000 decrease in legal fees, all stemming from acquisition related costs that were recorded in the ~~current year due to growth in our commercial and sponsored finance lending team staffing year over year, as well as loan growth in the year over year periods.~~third quarter of 2022.

~~Six~~Nine months ended ~~June~~September 30, 2023 and 2022


Noninterest Expense	Six Months Ended						YTD through June 30, 2023	Nine Months Ended						YTD through September 30, 2023
(Dollars in thousands)	June 30,			June 30,			Percent	September 30,			September 30,			Percent
	2023			2022			Change	2023			2022			Change
Salaries	$	32,397		$	31,593		2.5	$	49,676		$	46,304		7.3
Officers incentive		4,224			2,656		59.0		6,997			5,443		28.6
Benefits and other		7,425			7,050		5.3		10,488			10,563		(0.7)
Total salaries and employee benefits		44,046			41,299		6.7		67,161			62,310		7.8
Occupancy, furniture and equipment expense		7,114			6,745		5.5		10,620			10,864		(2.2)
Computer and data processing		3,064			10,274		(70.2)		4,986			12,817		(61.1)
FDIC insurance		1,378			1,112		23.9		2,122			1,771		19.8
Net teller & bill paying		1,017			2,741		(62.9)		1,551			3,245		(52.2)
General bank insurance		611			666		(8.3)		911			923		(1.3)
Amortization of core deposit intangible asset		1,242			1,324		(6.2)		1,858			1,981		(6.2)
Advertising expense		245			376		(34.8)		338			459		(26.4)
Card related expense		2,438			1,591		53.2		3,785			3,044		24.3
Legal fees		602			436		38.1		699			648		7.9
Consulting & management fees		1,310			1,139		15.0		1,859			1,746		6.5
Other real estate owned expense, net		208			75		177.3		181			96		88.5
Other expense		7,477			7,723		(3.2)		12,104			11,585		4.5
Total noninterest expense	$	70,752		$	75,501		(6.3)	$	108,175		$	111,489		(3.0)
Efficiency ratio (GAAP)¹		47.18	%		69.81	%			48.15	%		63.37	%
Adjusted efficiency ratio (non-GAAP)²		47.08	%		62.33	%			47.66	%		58.35	%

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

Noninterest expense for the ~~six~~nine months ended ~~June~~September 30, 2023, decreased ~~$4.7~~$3.3 million, or ~~6.3%~~3.0%, compared to the ~~six~~nine months ended ~~June~~September 30, 2022, primarily due to a ~~$7.2~~$7.8 million decrease in computer and data processing due to acquisition related costs incurred during the ~~six~~nine months ended ~~June~~September 30, 2022 as the result of our acquisition of West Suburban in December 2021. Salaries and employee benefits increased ~~$2.7~~$4.9 million largely from incentives and merit increases effective during the ~~six~~nine months ended ~~June~~September 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~~nine months ended ~~June~~September 30, 2022. In addition, FDIC insurance increased ~~$266,000~~$351,000 due to growth in our asset size, a scheduled increase in rates

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used by the FDIC for assessments, as well as the absence of assessment credits fully utilized in the ~~2022 year to date period.~~nine months ended September 30, 2022. Finally, card related expense increased ~~$847,000~~$741,000 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

Three Months Ended

Three Months Ended

June 30,

March 31,

June 30,

June 30,

March 31,

June 30,

2023

2023

2022

2023

2023

2022

Efficiency Ratio / Adjusted Efficiency Ratio

Noninterest expense

$
34,830

$
35,922

$
37,249

$
34,830

$
35,922

$
37,249

Less amortization of core deposit

618

624

659

618

624

659

Less other real estate expense, net

(98)

306

87

(98)

306

87

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

$
34,310

$
34,992

$
36,503

$
34,281

$
35,298

$
34,371

Net interest income

$
63,580

$
64,086

$
45,264

$
63,580

$
64,086

$
45,264

Taxable-equivalent adjustment:

Loans

N/A

N/A

N/A

11

6

6

Securities

N/A

N/A

N/A

355

356

345

Net interest income including adjustments

63,580

64,086

45,264

63,946

64,448

45,615

Noninterest income

8,223

7,350

9,211

8,223

7,350

9,211

Less securities losses

(1,547)

(1,675)

(33)

(1,547)

(1,675)

(33)

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

111

64

19

Noninterest income (excluding) / including adjustments

9,674

9,550

9,162

9,785

9,614

9,181

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

$
73,254

$
73,636

$
54,426

$
73,731

$
74,062

$
54,796

Efficiency ratio / Adjusted efficiency ratio

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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Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures

GAAP

Non-GAAP

Three Months Ended

Three Months Ended

September 30,

June 30,

September 30,

September 30,

June 30,

September 30,

2023

2023

2022

2023

2023

2022

Efficiency Ratio / Adjusted Efficiency Ratio

Noninterest expense

$
37,423

$
34,830

$
35,988

$
37,423

$
34,830

$
35,988

Less amortization of core deposit

616

618

657

616

618

657

Less other real estate (income) expense, net

(27)

(98)

21

(27)

(98)

21

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

N/A

N/A

N/A

-

29

1,061

Less liquidation and deconversion costs on Visa credit card portfolio

N/A

N/A

N/A

629

-

-

Noninterest expense less adjustments

$
36,834

$
34,310

$
35,310

$
36,205

$
34,281

$
34,249

Net interest income

$
63,030

$
63,580

$
55,569

$
63,030

$
63,580

$
55,569

Taxable-equivalent adjustment:

Loans

N/A

N/A

N/A

11

11

6

Securities

N/A

N/A

N/A

354

355

354

Net interest income including adjustments

63,030

63,580

55,569

63,395

63,946

55,929

Noninterest income

9,877

8,223

11,496

9,877

8,223

11,496

Less securities losses

(924)

(1,547)

(1)

(924)

(1,547)

(1)

Less MSRs mark to market gains

281

96

548

281

96

548

Less gain on Visa credit card portfolio sale

N/A

N/A

N/A

-

-

743

Less gain on sale of land trust portfolio

N/A

N/A

N/A

-

-

180

Taxable-equivalent adjustment:

Change in cash surrender value of BOLI

N/A

N/A

N/A

245

111

39

Noninterest income (excluding) / including adjustments

10,520

9,674

10,949

10,765

9,785

10,065

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

$
73,550

$
73,254

$
66,518

$
74,160

$
73,731

$
65,994

Efficiency ratio / Adjusted efficiency ratio

50.08
%

46.84
%

53.08
%

48.82
%

46.49
%

51.90
%

N/A - not applicable

GAAP

Non-GAAP

Nine Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,

2023

2022

2023

2022

Efficiency Ratio / Adjusted Efficiency Ratio

(Dollars in thousands)

Noninterest expense

$
108,175

$
111,489

$
108,175

$
111,489

Less amortization of core deposit

1,858

1,981

1,858

1,981

Less other real estate expense, net

181

96

181

96

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

N/A

N/A

(277)

8,527

Less liquidation and deconversion costs on Visa credit card portfolio

N/A

N/A

629

-

Noninterest expense less adjustments

$
106,136

$
109,412

$
105,784

$
100,885

Net interest income

$
190,696

$
142,065

$
190,696

$
142,065

Taxable-equivalent adjustment:

Loans

N/A

N/A

28

17

Securities

N/A

N/A

1,065

1,049

Net interest income including adjustments

190,696

142,065

191,789

143,131

Noninterest income

25,450

34,170

25,450

34,170

Less securities losses, net

(4,146)

(34)

(4,146)

(34)

Less MSRs mark to market (losses) gains

(148)

3,608

(148)

3,608

Less gain on Visa credit card portfolio sale

N/A

N/A

-

743

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Less gain on sale of land trust portfolio

N/A

N/A

-

180

Taxable-equivalent adjustment:

Change in cash surrender value of BOLI

N/A

N/A

420

91

Noninterest income (excluding) / including adjustments

29,744

30,596

30,164

29,764

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

$
220,440

$
172,661

$
221,953

$
172,895

Efficiency ratio / Adjusted efficiency ratio

48.15
%

63.37
%

47.66
%

58.35
%

N/A - not applicable

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Income Taxes

We recorded income tax expense of ~~$9.4~~$8.1 million for the ~~second~~third quarter of 2023 on ~~$35.0~~$32.5 million of pretax income, compared to income tax expense of ~~$8.4~~$9.4 million on ~~$32.0 million of pretax income in the first quarter of 2023, and income tax expense of $4.4 million on $16.7~~$35.0 million of pretax income in the second quarter of 2023, and income tax expense of $7.1 million on $26.6 million of pretax income in the third quarter of 2022. Our effective tax rate was ~~26.9%~~25.1% in the ~~second~~third quarter of 2023, ~~26.3%~~26.9% for the ~~first~~second quarter of 2023, and 26.6% for the ~~second~~third quarter of 2022. The slight reduction in the effective tax rate for the third quarter of 2023 reflects the finalization of the 2022 income tax return, and related adjustments due to state apportionment factor changes and deferred tax allocations within the current period.
We recorded income tax expense of ~~$17.8~~$26.0 million on ~~$67.0~~$99.5 million of pretax income for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to income tax expense of ~~$8.9~~$15.9 million on ~~$33.1~~$59.7 million of pretax income in the like 2022 period. The effective tax rate was ~~26.6%~~26.1% and 26.7% for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, respectively.
Income tax expense reflected all relevant statutory tax rates and GAAP accounting. There were no significant changes in our ability to utilize our deferred tax assets during the quarter ended ~~June~~September 30, 2023. We had no valuation reserve on the deferred tax assets as of ~~June~~September 30, 2023.
Financial Condition

Total assets decreased ~~$4.4~~$130.2 million to ~~$5.88~~$5.76 billion at ~~June~~September 30, 2023, from $5.89 billion at December 31, 2022, due primarily to ~~decreases~~the decrease of ~~$2.6 million in cash and cash equivalents, $203.7~~$309.7 million in securities ~~available-for-sale, and $4.9 million in deferred tax assets.~~available-for-sale. The decrease in securities available-for-sale was primarily due to strategic sales. These decreases were partially offset by increases in net loans of ~~$140.1~~$157.7 million, FHLB and FRB stock held of ~~$16.2~~$15.3 million, and other assets of ~~$50.9~~$8.7 million. ~~The increase in 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 ~~$4.72~~$4.61 billion at ~~June~~September 30, 2023, a decrease of ~~$393.1~~$496.4 million from December 31, 2022, ~~primarily due to~~through a combination of seasonal ~~decreases of municipal deposits,~~activity as well as leakage from excess savings stemming from COVID-related government payments and ~~to a lesser extent declines in interest bearing demand accounts, savings, money market, and NOW accounts in 2023.~~opportunities for alternative investments.

June 30, 2023

September 30, 2023
Securities

As of

Percent Change From

As of

Percent Change From
(Dollars in thousands)

June 30,

December 31,

June 30,

December 31,

June 30,

September 30,

December 31,

September 30,

December 31,

September 30,


2023

2022

2022

2022

2022

2023

2022

2022

2022

2022
Securities available-for-sale, at fair value

U.S. Treasuries

$
214,613

$
212,129

$
214,820

1.2

(0.1)

$
216,777

$
212,129

$
211,097

2.2

2.7
U.S. government agencies

55,981

56,048

57,896

(0.1)

(3.3)

55,821

56,048

55,963

(0.4)

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

115,140

124,990

141,836

(7.9)

(18.8)

104,569

124,990

127,626

(16.3)

(18.1)
States and political subdivisions

229,534

226,128

233,652

1.5

(1.8)

220,100

226,128

224,259

(2.7)

(1.9)
Corporate bonds

4,882

9,622

9,543

(49.3)

(48.8)

4,961

9,622

9,544

(48.4)

(48.0)
Collateralized mortgage obligations

407,495

533,768

641,498

(23.7)

(36.5)

386,679

533,768

587,846

(27.6)

(34.2)
Asset-backed securities

134,319

201,928

259,622

(33.5)

(48.3)

66,916

201,928

219,587

(66.9)

(69.5)
Collateralized loan obligations

173,658

174,746

175,549

(0.6)

(1.1)

173,795

174,746

173,837

(0.5)

(0.0)
Total securities

$
1,335,622

$
1,539,359

$
1,734,416

(13.2)

(23.0)

$
1,229,618

$
1,539,359

$
1,609,759

(20.1)

(23.6)

Securities available-for-sale decreased ~~$203.7~~$309.7 million as of ~~June~~September 30, 2023 compared to December 31, 2022, and decreased ~~$398.8~~$380.1 million compared to ~~June~~September 30, 2022. The decrease in the portfolio during the ~~second~~third quarter of 2023 was driven by securities sales totaling ~~$74.0~~$65.6 million and paydowns totaling $29.6 million, in addition to growth in unrealized losses of $8.1 million. We continue to

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~~million and paydowns totaling $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.


							June 30, 2023								September 30, 2023
Loans	As of						Percent Change From		As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,	September 30,		December 31,		September 30,		December 31,	September 30,
	2023		2022		2022		2022	2022	2023		2022		2022		2022	2022
Commercial	$	820,027	$	840,964	$	806,725	(2.5)	1.6	$	834,877	$	840,964	$	888,081	(0.7)	(6.0)
Leases		314,919		277,385		230,677	13.5	36.5		354,827		277,385		251,603	27.9	41.0
Commercial real estate – investor		1,080,073		987,635		834,395	9.4	29.4		1,047,122		987,635		941,910	6.0	11.2
Commercial real estate – owner occupied		824,277		854,879		870,181	(3.6)	(5.3)		809,050		854,879		876,951	(5.4)	(7.7)
Construction		189,058		180,535		170,037	4.7	11.2		202,546		180,535		176,700	12.2	14.6
Residential real estate – investor		55,935		57,353		61,220	(2.5)	(8.6)		53,762		57,353		59,580	(6.3)	(9.8)
Residential real estate – owner occupied		218,205		219,718		207,836	(0.7)	5.0		227,446		219,718		220,969	3.5	2.9
Multifamily		383,184		323,691		310,706	18.4	23.3		372,020		323,691		322,856	14.9	15.2
HELOC		102,058		109,202		120,138	(6.5)	(15.0)		102,055		109,202		116,108	(6.5)	(12.1)
Other ¹		27,789		18,247		13,155	52.3	111.2		25,838		18,247		14,576	41.6	77.3
Total loans	$	4,015,525	$	3,869,609	$	3,625,070	3.8	10.8	$	4,029,543	$	3,869,609	$	3,869,334	4.1	4.1

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

Total loans were ~~$4.02~~$4.03 billion as of ~~June~~September 30, 2023, an increase of ~~$145.9~~$159.9 million from December 31, 2022. The increase in total loans in the first ~~six~~nine months of 2023, compared to December 31, 2022, was due primarily to growth in loan originations, net of paydowns, within leases of $77.4 million, commercial real estate – investor of ~~$92.4 million, multifamily of~~ $59.5 million and ~~leases~~multifamily of ~~$37.5~~$48.3 million offset by net reductions in commercial real estate – owner occupied of ~~$30.6~~$45.8 million from December 31, 2022. Total loans increased ~~$390.5~~$160.2 million from ~~June~~September 30, 2022 to ~~June~~September 30, 2023, primarily due to growth in loan originations, net of paydowns, within commercial real estate – investor of ~~$245.7~~$105.2 million, leases of ~~$84.2~~$103.2 million and multifamily of ~~$72.5~~$49.2 million, offset by net reductions in commercial real estate – owner occupied of ~~$45.9~~$67.9 million and commercial of $53.2 million. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) is carried on a gross basis (rather than net of the associated credit loss estimate), and the expected credit losses for PCD loans are estimated and separately recognized as part of the allowance for credit losses, or ACL.

The quality of our loan portfolio is impacted not only by our credit decisions but also by the economic health of the communities in which we operate. Since we are located in a corridor with significant open space and undeveloped real estate, real estate lending (including commercial real estate, construction, residential, multifamily, and HELOCs) has been and continues to be a sizeable portion of our portfolio. These categories comprised ~~71.0%~~69.8% of the portfolio as of ~~June~~September 30, 2023, compared to 70.6% of the portfolio as of December 31, 2022. At ~~June~~September 30, 2023, our outstanding commercial real estate loans and undrawn commercial real estate commitments, excluding owner occupied real estate were equal to ~~311.0%~~288.9% of our Tier 1 capital plus allowance for credit losses, an increase from 304.2% at December 31, 2022. We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

Asset Quality
Nonperforming loans consist of nonaccrual loans and loans 90 days or greater past due. Prior to January 1, 2023, nonperforming loans also included performing troubled debt restructured loans accruing interest. Nonperforming loans increased by ~~$28.3~~$30.4 million to ~~$61.2~~$63.3 million at ~~June~~September 30, 2023 from $32.9 million at December 31, 2022 and increased ~~$19.1~~$10.4 million from ~~$42.1~~$52.9 million at ~~June~~September 30, 2022. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, we determined had experienced a more-than-insignificant deterioration in credit quality since origination. PCD loans and their related deferred loan costs are included in our nonperforming loan disclosures, if such loans otherwise meet the definition of a nonperforming loan. Management continues to carefully monitor loans considered to be in a classified status. Nonperforming loans as a percent of total loans were ~~1.5%~~1.6% as of ~~June~~September 30, 2023, 0.9% as of December 31, 2022, and ~~1.2%~~1.4% as of ~~June~~September 30, 2022. The distribution of our nonperforming loans is shown in the following table.

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							June 30, 2023								September 30, 2023
Nonperforming Loans	As of						Percent Change From		As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,	September 30,		December 31,		September 30,		December 31,	September 30,
	2023		2022		2022		2022	2022	2023		2022		2022		2022	2022
Commercial	$	1,544	$	7,649	$	11,600	(79.8)	(86.7)	$	3,146	$	7,649	$	8,821	(58.9)	(64.3)
Leases		758		1,876		2,005	(59.6)	(62.2)		377		1,876		235	(79.9)	60.4
Commercial real estate – investor		31,613		4,346		8,324	627.4	279.8		26,724		4,346		17,945	514.9	48.9
Commercial real estate – owner occupied		18,857		8,223		10,670	129.3	76.7		18,290		8,223		9,581	122.4	90.9
Construction		116		251		1,238	(53.8)	(90.6)		7,206		251		7,525	N/M	(4.2)
Residential real estate – investor		1,445		1,672		1,092	(13.6)	32.3		1,502		1,672		1,380	(10.2)	8.8
Residential real estate – owner occupied		3,660		4,198		3,642	(12.8)	0.5		3,627		4,198		3,787	(13.6)	(4.2)
Multifamily		1,191		2,538		907	(53.1)	31.3		1,141		2,538		1,559	(55.0)	(26.8)
HELOC		2,049		2,158		2,613	(5.1)	(21.6)		1,312		2,158		2,065	(39.2)	(36.5)
Other ¹		-		2		3	(100.0)	(100.0)		-		2		2	(100.0)	(100.0)
Total nonperforming loans	$	61,233	$	32,913	$	42,094	86.0	45.5	$	63,325	$	32,913	$	52,900	92.4	19.7

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

N/M – Not meaningful.

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


										June 30, 2023											September 30, 2023
Nonperforming Assets	As of									Percent Change From		As of									Percent Change From
(Dollars in thousands)	June 30,			December 31,			June 30,			December 31,	June 30,	September 30,			December 31,			September 30,			December 31,	September 30,
	2023			2022			2022			2022	2022	2023			2022			2022			2022	2022
Nonaccrual loans	$	60,925		$	31,602		$	35,712		92.8	70.6	$	62,116		$	31,602		$	32,126		96.6	93.4
Performing troubled debt restructured loans accruing interest ¹		N/A			49			1,108		N/A	N/A		N/A			49			22		N/A	N/A
Loans past due 90 days or more and still accruing interest		308			1,262			5,274		(75.6)	(94.2)		1,209			1,262			20,752		(4.2)	(94.2)
Total nonperforming loans		61,233			32,913			42,094		86.0	45.5		63,325			32,913			52,900		92.4	19.7
Other real estate owned		761			1,561			1,624		(51.2)	(53.1)		407			1,561			1,561		(73.9)	(73.9)
Total nonperforming assets	$	61,994		$	34,474		$	43,718		79.8	41.8	$	63,732		$	34,474		$	54,461		84.9	17.0


30-89 days past due loans and still accruing interest	$	12,449		$	7,508		$	24,681				$	28,486		$	7,508		$	8,197
Nonaccrual loans to total loans		1.5	%		0.8	%		1.0	%				1.5	%		0.8	%		0.8	%
Nonperforming loans to total loans		1.5	%		0.9	%		1.2	%				1.6	%		0.9	%		1.4	%
Nonperforming assets to total loans plus OREO		1.5	%		0.9	%		1.2	%				1.6	%		0.9	%		1.4	%

Allowance for credit losses	$	55,314		$	49,480		$	45,388				$	51,729		$	49,480		$	48,847
Allowance for credit losses to total loans		1.4	%		1.3	%		1.3	%				1.3	%		1.3	%		1.3	%
Allowance for credit losses to nonaccrual loans		90.8	%		156.6	%		127.1	%				83.3	%		156.6	%		152.1	%

N/A – Not applicable

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

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Loan charge-offs, net of recoveries, for the ~~current~~third quarter of 2023, prior linked quarter and year over year quarter are shown in the following table.


Loan Charge–offs, Net of Recoveries	Three Months Ended									Three Months Ended
(Dollars in thousands)	June 30,		% of	March 31,		% of	June 30,		% of	September 30,		% of	June 30,		% of	September 30,		% of
	2023		Total¹	2023		Total¹	2022		Total¹	2023		Total¹	2023		Total¹	2022		Total¹
Commercial	$	298	59.0	$	(124)	(16.8)	$	44	17.6	$	8	0.1	$	298	59.0	$	20	29.4
Leases		(7)	(1.4)		873	118.0		-	-		(95)	(1.4)		(7)	(1.4)		178	261.8
Commercial real estate – investor		51	10.1		(17)	(2.3)		225	90.0		6,754	102.4		51	10.1		105	154.4
Commercial real estate – owner occupied		198	39.2		(2)	(0.3)		(7)	(2.8)		23	0.3		198	39.2		(75)	(110.3)
Construction											(100)	(1.5)		-	-		-	-
Residential real estate – investor		(5)	(1.0)		(19)	(2.6)		(5)	(2.0)		(3)	-		(5)	(1.0)		(8)	(11.8)
Residential real estate – owner occupied		(36)	(7.1)		(10)	(1.4)		(22)	(8.8)		(25)	(0.4)		(36)	(7.1)		(113)	(166.2)
Multifamily											-	-		-	-		(63)	(92.6)
HELOC		(24)	(4.8)		(29)	(3.9)		(31)	(12.4)		(35)	(0.5)		(24)	(4.8)		(35)	(51.5)
Other ²		30	6.0		68	9.3		46	18.4		70	1.0		30	6.0		59	86.8
Net charge–offs	$	505	100.0	$	740	100.0	$	250	100.0	$	6,597	100.0	$	505	100.0	$	68	100.0

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

² The “Other” segment includes consumer and overdrafts.

Net charge-offs of ~~$505,000~~$6.6 million were recorded for the ~~second~~third quarter of 2023, compared to net charge-offs of ~~$740,000~~$505,000 for the ~~first~~second quarter of 2023, and net charge-offs of ~~$250,000~~$68,000 for the ~~second~~third quarter of 2022, reflecting continuing management attention to credit quality and remediation efforts. The net charge-offs for the ~~second~~third quarter of 2023 were primarily due to charge offs of ~~one~~three commercial real ~~estate-owner occupied loan and one~~estate-investor loans of $6.8 million in aggregate. These three commercial ~~loan totaling $598,000 in aggregate.~~real estate-investor credits had a reported reserve allocation of $4.7 million prior to the third quarter of 2023 charge-offs. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

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


							June 30, 2023								September 30, 2023
Classified Assets	As of						Percent Change From		As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,	September 30,		December 31,		September 30,		December 31,	September 30,
	2023		2022		2022		2022	2022	2023		2022		2022		2022	2022
Commercial	$	22,245	$	26,485	$	31,577	(16.0)	(29.6)	$	18,298	$	26,485	$	31,722	(30.9)	(42.3)
Leases		974		1,876		2,005	(48.1)	(51.4)		574		1,876		235	(69.4)	144.3
Commercial real estate – investor		57,041		27,410		30,407	108.1	87.6		54,126		27,410		28,252	97.5	91.6
Commercial real estate – owner occupied		38,495		40,890		28,715	(5.9)	34.1		55,292		40,890		42,698	35.2	29.5
Construction		116		1,333		1,238	(91.3)	(90.6)		17,263		1,333		1,347	N/M	N/M
Residential real estate – investor		1,714		1,714		1,246	-	37.6		1,502		1,714		1,285	(12.4)	16.9
Residential real estate – owner occupied		3,660		3,854		3,785	(5.0)	(3.3)		3,627		3,854		3,929	(5.9)	(7.7)
Multifamily		1,191		2,954		1,336	(59.7)	(10.9)		1,141		2,954		1,982	(61.4)	(42.4)
HELOC		2,152		2,411		2,853	(10.7)	(24.6)		1,434		2,411		2,278	(40.5)	(37.1)
Other ¹		-		2		2	(100.0)	(100.0)		-		2		2	(100.0)	(100.0)
Total classified loans		127,588		108,929		103,164	17.1	23.7		153,257		108,929		113,730	40.7	34.8
Other real estate owned		761		1,561		1,624	(51.2)	(53.1)		407		1,561		1,561	(73.9)	(73.9)
Total classified assets	$	128,349	$	110,490	$	104,788	16.2	22.5	$	153,664	$	110,490	$	115,291	39.1	33.3

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

N/M - Not meaningful

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Total classified loans increased ~~$18.7~~$44.3 million and classified assets increased ~~$17.9~~$43.2 million as of ~~June~~September 30, 2023 from December 31, 2022. The increase since December 31, 2022 is due to the addition of ~~$29.6~~$26.7 million of classified loans in commercial real estate – investor, primarily due to ~~three~~four large credits, two of which are office buildings, ~~and~~ one is an assisted living facility induring the first six months of 2023, and one office building in the third quarter of 2023. The increase is also due to the growth in construction, primarily due to two large credits. The increase from ~~June~~September 30, 2022 is primarily due to the same loan additions to commercial real estate – ~~investor.~~investor and construction. Management monitors a ratio of classified assets to the sum of Bank Tier 1 capital and the ACL on loans as another measure of overall change in loan related asset quality, which is referred to as the “classified assets ratio.” The classified assets ratio was ~~20.46%~~23.51% for the period ended ~~June~~September 30, 2023, compared to 18.36% as of December 31, 2022, and ~~17.79%~~19.23% as of ~~June~~September 30, 2022.

Allowance for Credit Losses on Loans

The provision for credit losses, which includes a provision for losses on unfunded commitments, is a charge to earnings to maintain the allowance for credit losses (“ACL”) at a level consistent with management’s assessment of expected losses in the loan portfolio at the balance sheet date.

At ~~June~~September 30, 2023, our ACL on loans totaled ~~$55.3~~$51.7 million, and our ACL on unfunded commitments, included in other liabilities, totaled ~~$3.1~~$2.9 million. In the ~~second~~third quarter of 2023, we recorded provision expense on loans of ~~$2.4~~$3.0 million, based on our assessment of nonperforming loan metrics and trends and estimated future credit losses, and a ~~$427,000 release~~$12,000 reversal of provision on unfunded commitments, primarily due to an adjustment of historical benchmark assumptions, such as funding rates and the period used to forecast those rates, within the ACL calculation. These adjustments resulted in a ~~$2.0~~$3.0 million net impact to the provision for credit losses for the ~~second~~third quarter of 2023.

Management estimates the amount of provision required on a quarterly basis and records the appropriate provision expense, or release of expense, to maintain an adequate reserve for all potential and estimated credit losses on loans, leases and unfunded commitments. The ACL on loans totaled ~~$55.3~~$51.7 million as of ~~June~~September 30, 2023, $49.5 million as of December 31, 2022, and ~~$45.4~~$48.8 million as of ~~June~~September 30, 2022. Our ACL on loans to total loans was ~~1.4%~~1.3% as of ~~June~~September 30, 2023, compared to 1.3% as of December 31, 2022 and ~~June~~September 30, 2022. See Item 7 – Critical Accounting Estimates in the Management Discussion and Analysis in our 2022 Annual Report in Form 10-K for discussion of our ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged-off.

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


		Three Months Ended								Six Months Ended							Three Months Ended								Nine Months Ended
	June 30,			March 31,			June 30,			June 30,			June 30,			September 30,			June 30,			September 30,			September 30,			September 30,
	2023			2023			2022			2023			2022			2023			2023			2022			2023			2022
Allowance at beginning of period	$	53,392		$	49,480		$	44,308		$	49,480		$	44,281		$	55,314		$	53,392		$	45,388		$	49,480		$	44,281
Charge–offs:
Commercial		380			27			52			407			82			20			380			67			427			149
Leases		-			882			-			882			-			-			-			178			882			178
Commercial real estate – investor		71			-			243			71			480			6,774			71			124			6,845			604
Commercial real estate – owner occupied		201			-			-			201			121			35			201			12			236			133
Construction		-			-			-			-			-			-			-			-			-			-
Residential real estate – investor		-			-			-			-			-			-			-			-			-			-
Residential real estate – owner occupied		-			-			-			-			-			-			-			-			-			-
Multifamily		-			-			-			-			-			-			-			-			-			-
HELOC		-			-			-			-			-			-			-			-			-			-
Other ¹		81			113			91			194			217			107			81			103			301			320
Total charge–offs		733			1,022			386			1,755			900			6,936			733			484			8,691			1,384
Recoveries:
Commercial		82			151			8			233			38			12			82			47			245			85
Leases		7			9			-			16			-			95			7			-			111			-
Commercial real estate – investor		20			17			18			37			41			20			20			19			57			60
Commercial real estate – owner occupied		3			2			7			5			15			12			3			87			17			102
Construction		-			-			-			-			-			100			-			-			100			-
Residential real estate – investor		5			19			5			24			15			3			5			8			27			23
Residential real estate – owner occupied		36			10			22			46			105			25			36			113			71			218
Multifamily		-			-			-			-			-			-			-			63			-			63
HELOC		24			29			31			53			67			35			24			35			88			102
Other ¹		51			45			45			96			76			37			51			44			133			120
Total recoveries		228			282			136			510			357			339			228			416			849			773
Net charge-offs		505			740			250			1,245			543			6,597			505			68			7,842			611
Provision for credit losses on loans		2,427			4,652			1,330			7,079			1,650			3,012			2,427			3,527			10,091			5,177
Allowance at end of period	$	55,314		$	53,392		$	45,388		$	55,314		$	45,388		$	51,729		$	55,314		$	48,847		$	51,729		$	48,847

Average total loans (exclusive of loans held–for–sale)	$	4,039,052		$	3,931,679		$	3,505,806		$	3,985,662		$	3,452,115		$	4,009,218		$	4,039,052		$	3,751,097		$	3,993,600		$	3,552,871
Net charge–offs to average loans		0.05	%		0.08	%		0.03	%		0.06	%		0.03	%		0.65	%		0.05	%		0.01	%		0.26	%		0.02	%
Allowance at period end to average loans		1.37	%		1.36	%		1.29	%		1.39	%		1.31	%		1.29	%		1.37	%		1.30	%		1.30	%		1.37	%

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

The coverage ratio of the ACL on loans to nonperforming loans was ~~90.3% June~~81.3% as of September 30, 2023, which was a decrease from the coverage ratio of ~~162.2%~~90.3% as of ~~March 31,~~June 30, 2023 and a decrease from ~~107.8%~~92.3% as of ~~June~~September 30, ~~2022.~~2023. When measured as a percentage of average loans, our total ACL on loans was ~~1.39%~~1.29% at September 30, 2023, 1.37% at June 30, 2023, and ~~1.31% for the like period of June~~1.30% at September 30, 2022.

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

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Deposits and Borrowings

June 30, 2023

September 30, 2023
Deposits
As of

Percent Change From
As of

Percent Change From
(Dollars in thousands)
June 30,

December 31,

June 30,

December 31,

June 30,
September 30,

December 31,

September 30,

December 31,

September 30,

2023

2022

2022

2022

2022
2023

2022

2022

2022

2022
Noninterest bearing demand
$
1,897,694

$
2,051,702

$
2,078,272

(7.5)

(8.7)
$
1,862,659

$
2,051,702

$
2,098,144

(9.2)

(11.2)
Savings

1,050,453

1,145,592

1,199,027

(8.3)

(12.4)

1,003,498

1,145,592

1,164,036

(12.4)

(13.8)
NOW accounts

586,121

609,338

609,558

(3.8)

(3.8)

567,997

609,338

630,747

(6.8)

(9.9)
Money market accounts

731,459

862,170

994,616

(15.2)

(26.5)

702,176

862,170

931,813

(18.6)

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

240,848

244,017

268,723

(1.3)

(10.4)

248,272

244,017

258,071

1.7

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

148,070

157,438

140,266

(6.0)

5.6

162,901

157,438

148,411

3.5

9.8
Certificates of deposit of more than $250,000

62,937

40,466

52,393

55.5

20.1

66,817

40,466

50,137

65.1

33.3
Total deposits
$
4,717,582

$
5,110,723

$
5,342,855

(7.7)

(11.7)
$
4,614,320

$
5,110,723

$
5,281,359

(9.7)

(12.6)

Total deposits were ~~$4.72~~$4.61 billion at ~~June~~September 30, 2023, which reflects a ~~$393.1~~$496.4 million decrease from total deposits of $5.11 billion at December 31, 2022, and a decrease of ~~$625.3~~$667.0 million from total deposits of ~~$5.34~~$5.28 billion at ~~June~~September 30, 2022. The decrease in deposits at ~~June~~September 30, 2023, compared to December 31, 2022, was primarily due to decreases in ~~non-interest bearing~~noninterest-bearing deposits of ~~$154.0~~$189.0 million, ~~savings accounts of $95.1 million and~~ money market accounts of ~~$130.7~~$160.0 million and savings accounts of $142.1 million. The decrease in deposits at ~~June~~September 30, 2023, compared to ~~June~~September 30, 2022, was primarily due to decreases in ~~non-interest bearing~~noninterest-bearing deposits of ~~$180.6~~$235.5 million, ~~savings accounts of $148.6 million, and~~ money market accounts of ~~$263.2~~$229.6 million, and savings accounts of $160.5 million. Total quarterly average deposits decreased ~~$667.2~~$659.4 million, or ~~12.2%~~12.4%, in the year over year period, driven by declines in our average demand deposits of ~~$199.2~~$225.1 million, and savings, NOW and money markets combined of ~~$435.5~~$440.7 million. In general, the bulk of the decline in deposits year over year can be characterized as rate sensitive with significant flows and transfers into investing activities, 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~~September 30, 2023 and December 31, 2022 by deposit type, as well as the weighted average rates for each ~~quarter~~year to date ending period.

(Dollars in thousands)
June 30, 2023

December 31, 2022
September 30, 2023

December 31, 2022

Total Deposits

Insured Deposits

Uninsured Deposits

Average Rate Paid

Total Deposits

Insured Deposits

Uninsured Deposits

Average Rate Paid
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

-
%
$
1,862,659

$
1,202,051

$
660,608

-
%

$
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

1,003,498

935,664

67,834

0.08

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

567,997

409,219

158,778

0.22

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

702,176

490,539

211,637

0.67

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

477,990

414,227

63,763

1.14

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
%
$
4,614,320

$
3,451,700

$
1,162,620

0.26
%

$
5,110,723

$
3,817,234

$
1,293,489

0.06
%

Collateralized public funds
$
279,360

$
15,841

$
263,519

$
262,318

$
15,880

$
246,439

$
264,322

$
15,410

$
248,912

$
262,318

$
15,879

$
246,439

Deposits declined ~~7.7%~~9.7% for the ~~six~~nine months ended ~~June~~September 30, 2023 ~~primarily~~ due to retail and commercial run ~~off, partially offset by a seasonal pick up in public fund deposits. Deposit~~off. Total deposit run off year to date has been very granular, and not necessarily attributable to ~~a few~~ large deposit accounts. ~~The largest component~~Our deposit retention efforts for commercial clients were more effective due to high touch relationships where we had a larger share of ~~deposit increases were seasonal funds from our public fund clients, while the~~wallet. The largest reduction in total deposits was ~~driven by~~from retail customers ~~stemming from tax payments, including~~due to personal ~~income as well as real estate taxes,~~ and real estate ~~transactions.~~tax payments, real estate transactions, investments, and consumer spending. In terms of product mix, we observed some migration into time deposits, ~~which was expected due to~~drawn by CD rate ~~specials offered.~~specials. Overall, our deposit level ~~has been~~remains stable ~~from observation of recent trends~~ and we ~~expect that~~continue to ~~continue going forward.~~monitor customer relationships and liquidity levels daily.

In addition to deposits, we used other liquidity sources for our funding needs in all periods presented, such as repurchase agreements and other short-term borrowings with the FHLBC. Securities sold under repurchase agreements totaled ~~$31.5~~$25.9 million at ~~June~~September 30, 2023, a

~~Tableof Contents~~

~~$624,000,~~ $6.3 million, or ~~1.9%~~19.5%, decrease from $32.2 million at December 31, 2022. Our excess liquidity on hand during much of 2022 allowed us to fund our short-term liquidity needs with cash on hand. During the third quarter of 2022, we began ~~utilizing~~re-utilizing short-term borrowings from the ~~FHLBC again.~~FHLBC. The outstanding balance of our short-term FHLBC borrowings was ~~$485.0~~$435.0 million as of ~~June~~September 30, 2023, ~~and~~ $90.0 million as of December 31, ~~2022; there were no short-term borrowings outstanding~~2022, and $25.0 million as of ~~June~~September 30, 2022.

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We are also indebted on $25.8 million, net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust II (“Trust II”). as of September 30, 2023. The Trust II issuance converted from fixed to floating rate at three month LIBOR, which is now three month Term SOFR, plus 150 basis points on June 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of ~~4.38%~~4.18% as of ~~June~~September 30, 2023, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017 rate reset.

In the second quarter of 2021, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers pursuant to which we issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). We sold the Notes to eligible purchasers in a private offering, and the proceeds of this issuance were used for general corporate purposes. The Notes bear interest at a fixed annual rate of 3.50% through April 14, 2026, payable semi-annually in arrears. As of April 15, 2026 forward, the interest rate on the Notes will generally reset quarterly to a rate equal to ~~Three-Month~~three-month Term SOFR (as defined by the Note) plus 273 basis points, payable quarterly in arrears. The Notes have a stated maturity of April 15, 2031, and are redeemable, in whole are in part, on April 15, 2026, or any interest payment date thereafter, and at any time upon the occurrence of certain events. As of ~~June~~September 30, 2023, we had ~~$59.3~~$59.4 million of subordinated debentures outstanding, net of deferred issuance costs.

In December 2016, we completed a $45.0 million senior note issuance. The notes had a ten-year term, and 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. On June 30, 2023, the senior notes were redeemed in full. The remaining balance of deferred debt issuance costs of $362,000 related to these senior 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 ~~June~~September 30, 2023, compared to $9.0 million as of December 31, 2022, and ~~$11.0~~$10.0 million as of ~~June~~September 30, 2022. The balance in notes payable was related to a $20.0 million dollar term note originated with a correspondent bank in the first quarter of 2020, to facilitate the redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures, completed on March 2, 2020.

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Capital

As of ~~June~~September 30, 2023, total stockholders’ equity was ~~$514.0~~$532.6 million, which was an increase of ~~$52.9~~$71.5 million from $461.1 million as of December 31, 2022. This increase is primarily attributable to an increase in retained earnings of ~~$44.7~~$66.8 million due to net income of ~~$49.2~~$73.5 million in the first ~~six~~nine months of 2023, partially offset by ~~$4.5~~$6.7 million of dividends paid to our common stockholders. In addition, total stockholders’ equity as of ~~June~~September 30, 2023 increased over December 31, 2022, due to a reduction in unrealized net losses on available-for-sale securities, which decreased accumulated other comprehensive loss by ~~$6.9~~$2.5 million in the first ~~six~~nine months of 2023, due to changes in market interest rates. Total stockholders’ equity as of ~~June~~September 30, 2023 increased ~~$65.1~~$98.8 million compared to ~~June~~September 30, 2022 due to net income year over year ~~less~~and the increase in accumulated other comprehensive loss of ~~$20.9~~$7.8 million year over year.

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


	Minimum Capital		Well Capitalized								Minimum Capital		Well Capitalized
	Adequacy with		Under Prompt								Adequacy with		Under Prompt
	Capital Conservation		Corrective Action		June 30,		December 31,		June 30,		Capital Conservation		Corrective Action		September 30,		December 31,		September 30,
	Buffer, if applicable¹		Provisions²		2023		2022		2022		Buffer, if applicable¹		Provisions²		2023		2022		2022
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		10.29	%	9.67	%	9.35	%	7.00	%	N/A		11.00	%	9.67	%	9.16	%
Total risk-based capital ratio	10.50	%	N/A		13.16	%	12.52	%	12.27	%	10.50	%	N/A		13.84	%	12.52	%	11.99	%
Tier 1 risk-based capital ratio	8.50	%	N/A		10.80	%	10.20	%	9.91	%	8.50	%	N/A		11.52	%	10.20	%	9.68	%
Tier 1 leverage ratio	4.00	%	N/A		8.96	%	8.14	%	7.24	%	4.00	%	N/A		9.62	%	8.14	%	7.70	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	11.70	%	11.70	%	12.24	%	7.00	%	6.50	%	12.49	%	11.70	%	11.60	%
Total risk-based capital ratio	10.50	%	10.00	%	12.83	%	12.75	%	13.25	%	10.50	%	10.00	%	13.57	%	12.75	%	12.64	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	11.70	%	11.70	%	12.24	%	8.50	%	8.00	%	12.49	%	11.70	%	11.60	%
Tier 1 leverage ratio	4.00	%	5.00	%	9.70	%	9.32	%	8.94	%	4.00	%	5.00	%	10.43	%	9.32	%	9.24	%

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

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

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As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopted CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition. As of ~~June~~September 30, 2023, our capital measures exclude $1.9 million, which is the modified CECL transition adjustment.

As of ~~June~~September 30, 2023, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the 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 ~~8.73%~~9.25% at ~~June~~September 30, 2023. Our GAAP tangible common equity to tangible assets ratio was ~~7.17%~~7.67% at ~~June~~September 30, 2023, compared to 6.24% as of December 31, 2022. Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, increased from 6.28% at December 31, 2022, to ~~7.21%~~7.71% at ~~June~~September 30, 2023, primarily due to an increase in tangible common equity in the ~~second~~third quarter of 2023. The increase in tangible common equity was due to an increase in retained earnings of ~~$44.7~~$66.8 million and ~~a decrease~~an increase in accumulated other comprehensive loss of ~~$6.9~~$2.5 million primarily related to ~~a decline in~~improved unrealized losses on available-for-sale securities stemming from the changes in market interest rates.

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

June 30, 2023

December 31, 2022

September 30, 2023

December 31, 2022

Tangible common equity
GAAP

Non-GAAP

GAAP

Non-GAAP

GAAP

Non-GAAP

GAAP

Non-GAAP

(Dollars in thousands)

Total Equity
$
513,955

$
513,955

$
461,141

$
461,141

$
532,558

$
532,558

$
461,141

$
461,141

Less: Goodwill and intangible assets

98,914

98,914

100,156

100,156

98,298

98,298

100,156

100,156

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

N/A

2,487

N/A

2,736

N/A

2,364

N/A

2,736

Adjusted goodwill and intangible assets

98,914

96,427

100,156

97,420

98,298

95,934

100,156

97,420

Tangible common equity
$
415,041

$
417,528

$
360,985

$
363,721

$
434,260

$
436,624

$
360,985

$
363,721

Tangible assets

Total assets
$
5,883,942

$
5,883,942

$
5,888,317

$
5,888,317

$
5,758,156

$
5,758,156

$
5,888,317

$
5,888,317

Less: Adjusted goodwill and intangible assets

98,914

96,427

100,156

97,420

98,298

95,934

100,156

97,420

Tangible assets
$
5,785,028

$
5,787,515

$
5,788,161

$
5,790,897

$
5,659,858

$
5,662,222

$
5,788,161

$
5,790,897

Common equity to total assets

8.73
%

8.73
%

7.83
%

7.83
%

9.25
%

9.25
%

7.83
%

7.83
%
Tangible common equity to tangible assets

7.17
%

7.21
%

6.24
%

6.28
%

7.67
%

7.71
%

6.24
%

6.28
%

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

Liquidity

Liquidity is our ability to fund operations, to meet depositor withdrawals, to provide for customers’ credit needs, and to meet maturing obligations and existing commitments. Our liquidity principally depends on our cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings, and our ability to borrow funds. In the ~~second~~third quarter of 2023, we continued to experience moderate loan growth, while deposits have trended down as clients moved balances to pursue higher yields as well as due to seasonal declines. We managed the change in our funding through borrowing from the Federal Home Loan Bank of Chicago (“FHLBC”) and 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 ~~June~~September 30, 2023, our cash on hand liquidity totaled ~~$112.6~~$109.0 million, a decrease of ~~$2.6~~$6.1 million over cash balances held as of December 31, 2022.

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Net cash inflows from operating activities were ~~$5.6~~$87.3 million during the first ~~six~~nine months of 2023, compared with net cash inflows of ~~$27.1~~$60.1 million in the same period of 2022. Proceeds from sales of loans held-for-sale, net of funds used to originate loans held-for-sale, were a source of outflows for the first ~~six~~nine months of 2023 compared to a 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 ~~six~~nine months ended ~~June~~September 30, 2023 and source of inflows for the like period of 2022. The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash inflows from investing activities were ~~$49.0~~$124.5 million in the ~~six~~nine months ended ~~June~~September 30, 2023, compared to net cash outflows of ~~$349.7~~$506.4 million in the same period in 2022. In the first ~~six~~nine months of 2023, securities transactions accounted for net inflows of ~~$210.0~~$306.0 million, and the principal change on loans accounted for net outflows of ~~$144.0~~$164.3 million. In the first ~~six~~nine months of 2022, securities transactions accounted for net outflows of ~~$149.4~~$66.9 million, and principal on loans funded, net of paydowns, accounted for net outflows of ~~$200.0~~$443.6 million.

Net cash outflows from financing activities in the ~~six~~nine months ended ~~June~~September 30, 2023, were ~~$57.1~~$218.0 million, compared with net cash outflows of ~~$148.2~~$189.7 million in the ~~six~~nine months ended ~~June~~September 30, 2022. Net deposit outflows in the first ~~six~~nine months of 2023 were ~~$392.4~~$495.4 million

~~Tableof Contents~~

compared to net deposit outflows of ~~$122.6~~$183.7 million in the first ~~six~~nine months of 2022. Other short-term borrowings had ~~$395.0~~$345.0 million of net cash inflows in the first ~~six~~nine months of 2023, compared to nonet cash inflows ~~or outflows~~of $25.0 million for other short-term borrowings in the first ~~six~~nine months of 2022. Changes in securities sold under repurchase agreements accounted for outflows of ~~$624,000~~$6.3 million and outflows of ~~$12.7~~$14.8 million for the ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, respectively. Dividends paid on our common stock totaled ~~$4.5~~$6.7 million infor both the ~~six~~nine months ended ~~June~~September 30, 2023 ~~compared to dividends paid of $4.4 million for the like 2022 period.~~and 2022. The purchase of treasury stock in the first ~~six~~nine months of 2023 due to shares acquired with equity award vestings resulted in outflows of $605,000, compared to cash outflows of ~~$400,000~~$447,000 in the first ~~six~~nine months of 2022.

Cash and cash equivalents for the ~~six~~nine months ended ~~June~~September 30, 2023, totaled ~~$112.6~~$109.0 million, as compared to $115.2 million as of December 31, 2022 and ~~$281.3~~$116.2 million as of ~~June~~September 30, 2022. The decrease in cash and cash equivalents for the ~~six~~nine months ended ~~June~~September 30, 2023 was mainly attributable to loan growth and the 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 ~~six~~nine months of 2023. The year over year decrease is again driven by loan growth, as well as increased customer use of deposits. In addition to cash and cash equivalents on hand or held as deposits with other financial institutions, we rely on funding sources from customer deposits, cash flows from securities available-for-sale and loans, and a line of credit with the FHLBC to meet potential liquidity needs. These sources of liquidity are immediately available to satisfy any funding requirements due to depositor or borrower demands through the ordinary course of our business. Additional sources of funding include a $30.0 million undrawn line of credit held by the Company with a third party financial institution, as well as unpledged securities available-for-sale.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As part of our normal operations, we are subject to interest-rate risk on the assets we invest in (primarily loans and securities) and the liabilities we fund (primarily customer deposits and borrowed funds). Fluctuations in interest rates may result in changes in the fair market values of our financial instruments, cash flows, and net interest income. Like most financial institutions, we have an exposure to changes in both short-term and long-term interest rates. A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in a volatile rate environment. We mitigate the impact of interest rate volatility to the Bank by managing our rate sensitivity under various scenarios.

~~The~~During the third quarter of 2023, the Federal Reserve ~~slowed its pace of aggressive rate hikes~~increased rates by 0.25% in ~~the second quarter of 2023. The Federal Reserve took a pause at its June 2023 meeting~~July and ~~have implemented a 0.25% hike~~held rates unchanged at the ~~July 2023 meeting, reaching a federal funds rate of 5.25%.~~September FOMC meeting. The ~~forward curve has shifted out from prior quarter expectations, as~~ current ~~indications reach a peak in July with flat~~market expectation is for rates ~~through~~to be unchanged for the remainder of 2023. The ~~curve also priced in interest~~projected level of rate cuts in 2024 have been reduced and moved to later in ~~anticipation of an economic slowdown.~~the year, framing a “higher rates for a longer period” outcome. The Federal ~~Reserve’s objective of shrinking~~Reserve managed to shrink its balance sheet ~~has been slower than planned due~~ to ~~slower prepayments on mortgage-backed securities~~$8.0 trillion by September 2023, down from ~~the lack~~its peak of ~~refinancing activity, its balance sheet remains large at $8.3 trillion.~~$8.7 trillion in March 2023.

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

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 SOFR and ~~prime)~~Prime), and balance sheet growth or contraction. Our asset-liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our on-balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 19 of our consolidated financial statements found in in our Annual Report on Form 10-K for the year ended December 31, 2022. We seek to monitor and manage interest rate risk within approved policy guidelines and limits. Asset and liability modeling and tracking is performed and presented to the ~~asset-liability~~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,~~composition, and the impact of interest rate movements on earnings and equity. Our current balance sheet is a moderately asset sensitive profile, as our variable rate assets reprice faster than our longer duration, low beta deposit base. Recent market events of failed liquidity management at other banks have been reviewed by the ~~asset-liability~~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~~deposits; and monitor the bank’s funding sources and uses on a regular basis.

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

We use simulation analysis to quantify the impact of various rate scenarios on our net interest income. Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by us are incorporated into the simulation model. Earnings at risk are calculated by comparing the net interest income of a stable interest rate environment to the net interest income of a different interest rate environment in order to determine the percentage change. As of ~~June~~September 30, 2023, our net interest income profile remained sensitive to earnings gains (in both dollars and percentage) should interest rates rise. However, we ~~continue~~have moved to ~~have~~ a less sensitive profile ~~relative~~compared to December 31, 2022, due to the impact of interest rate swaps and sales of variable rate 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	%
June 30, 2023
September 30, 2023
Dollar change	$	(37,532)		$	(18,699)		$	(9,266)		$	9,366		$	18,873		$	37,228		$	(37,003)		$	(18,371)		$	(9,055)		$	9,349		$	18,817		$	36,942
Percent change		(15.0)	%		(7.5)	%		(3.7)	%		3.7	%		7.5	%		14.9	%		(14.6)	%		(7.2)	%		(3.6)	%		3.7	%		7.4	%		14.5	%

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

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

Effects of Inflation

In management’s opinion, although changes in interest rates affect our financial condition to a far greater degree than changes in the inflation rate, we monitor both. The annual US inflation rate ~~slowed~~for September 2023 was 3.7%, a moderate increase quarter-over-quarter, while Core CPI eased to ~~3.0% relative to a peak of 9.1% in the year-over-year period ended June 30, 2022.~~4.1%. Management believes the inflation rate will continue to ~~notch~~come down, albeit at a much slower rate than ~~the first half~~experienced year-to-date as of September 2023. The downside risks of high inflation put upwards pressure to our expenses, which could impact our profits. Furthermore, higher costs of living weaken the financial condition of our borrowers which could affect our credit profile. A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in a volatile rate environment. We seek to mitigate the impact of interest rate volatility to the Bank by managing rate sensitive of both assets and liabilities respond to changes in interest rates in a similar time frame and to a similar degree. Overall, we expect the risk of high inflation has been contained with minimal impact to our results.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of ~~June~~September 30, 2023. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of ~~June~~September 30, 2023, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

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

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

6263

Table of Contents

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 1.A.  Risk Factors

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

There have been no material changes to the risk factors previously disclosed in the Company’s (i) Annual Report on Form 10-K for the fiscal year ended December 31, ~~2022 and~~2022; (ii) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023; and (iii) Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023.

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

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not ~~applicable~~applicable.

Item 5.  Other Information

None.

6364

Table of Contents

Item 6. Exhibits

Exhibits:

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

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

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

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

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

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

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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,
Chief Operating Officer and Chief Financial Officer

(principal financial and accounting officer)

DATE: ~~August~~November 8, 2023

6566


	PART I
		Page Number
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6162
Item 4.	Controls and Procedures	6263
	PART II

Item 1.	Legal Proceedings	6364
Item 1.A.	Risk Factors	6364
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6364
Item 3.	Defaults Upon Senior Securities	6364
Item 4.	Mine Safety Disclosure	6364
Item 5.	Other Information	6364
Item 6.	Exhibits	6465

	Signatures	6566


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

Noninterest expense	$	34,830		$	35,922		$	37,249		$	34,830		$	35,922		$	37,249
Less amortization of core deposit		618			624			659			618			624			659
Less other real estate expense, net		(98)			306			87			(98)			306			87
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	$	34,310		$	34,992		$	36,503		$	34,281		$	35,298		$	34,371

Net interest income	$	63,580		$	64,086		$	45,264		$	63,580		$	64,086		$	45,264
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			11			6			6
Securities		N/A			N/A			N/A			355			356			345
Net interest income including adjustments		63,580			64,086			45,264			63,946			64,448			45,615
Noninterest income		8,223			7,350			9,211			8,223			7,350			9,211
Less securities losses		(1,547)			(1,675)			(33)			(1,547)			(1,675)			(33)
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			111			64			19
Noninterest income (excluding) / including adjustments		9,674			9,550			9,162			9,785			9,614			9,181

Net interest income including adjustments plus noninterest income (excluding) / including adjustments	$	73,254		$	73,636		$	54,426		$	73,731		$	74,062		$	54,796
Efficiency ratio / Adjusted efficiency ratio		46.84	%		47.52	%		67.07	%		46.49	%		47.66	%		62.73	%


							June 30, 2023								September 30, 2023
Deposits	As of						Percent Change From		As of						Percent Change From
(Dollars in thousands)	June 30,		December 31,		June 30,		December 31,	June 30,	September 30,		December 31,		September 30,		December 31,	September 30,
	2023		2022		2022		2022	2022	2023		2022		2022		2022	2022
Noninterest bearing demand	$	1,897,694	$	2,051,702	$	2,078,272	(7.5)	(8.7)	$	1,862,659	$	2,051,702	$	2,098,144	(9.2)	(11.2)
Savings		1,050,453		1,145,592		1,199,027	(8.3)	(12.4)		1,003,498		1,145,592		1,164,036	(12.4)	(13.8)
NOW accounts		586,121		609,338		609,558	(3.8)	(3.8)		567,997		609,338		630,747	(6.8)	(9.9)
Money market accounts		731,459		862,170		994,616	(15.2)	(26.5)		702,176		862,170		931,813	(18.6)	(24.6)
Certificates of deposit of less than $100,000		240,848		244,017		268,723	(1.3)	(10.4)		248,272		244,017		258,071	1.7	(3.8)
Certificates of deposit of $100,000 through $250,000		148,070		157,438		140,266	(6.0)	5.6		162,901		157,438		148,411	3.5	9.8
Certificates of deposit of more than $250,000		62,937		40,466		52,393	55.5	20.1		66,817		40,466		50,137	65.1	33.3
Total deposits	$	4,717,582	$	5,110,723	$	5,342,855	(7.7)	(11.7)	$	4,614,320	$	5,110,723	$	5,281,359	(9.7)	(12.6)



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

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

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

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

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

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


	OLD SECOND BANCORP, INC.


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


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


DATE: ~~August~~November 8, 2023