OLD SECOND BANCORP INC - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2021


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

For transition period from to

Commission File Number 0-10537

(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)

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

Yes ☒ No ☐

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

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

Large accelerated filer☐Accelerated filer☒

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

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

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

Yes ☐ No ☒


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

As of May 4, 2021, the Registrant has 28,859,521 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


	PART I
		Page Number
Item 1.	Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	59
Item 4.	Controls and Procedures	60
	PART II

Item 1.	Legal Proceedings	60
Item 1.A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Mine Safety Disclosure	61
Item 5.	Other Information	61
Item 6.	Exhibits	62

	Signatures	63

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 with respect to management’s expectations regarding future plans, strategies and financial performance, including regulatory developments, industry and economic trends, and other matters. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company's management and on information currently available to management, can be identified by the inclusion of such qualifications as “expects,” “intends,” “believes,” “may,” “will,” “would,” “could,” “should,” “plan,” “anticipate,” “estimate,” “possible,” “likely” or other indications that the particular statements are not historical facts and refer to future periods. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and may be outside of the Company’s control. Actual events and results may differ materially from those described in such forward-looking statements due to numerous factors, including:

●

our ability to execute our growth strategy;

●

the impact of the outbreak of the novel coronavirus, or COVID-19, on our business, including the impact of the actions taken by governmental authorities to try and contain the virus or address the impact of the virus on the United States economy (including, without limitation, the Coronavirus Aid, Relief and Economic Security Act, or the CARES Act), and the resulting effect of these items on our operations, liquidity and capital position, and on the financial condition of our borrowers and other customers;

●

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

●

risks related to future acquisitions, if any, including execution and integration risks;

●

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

●

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

●

the transition away from LIBOR to an alternative reference rate;

●

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

●

any negative perception of our reputation or financial strength;

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

changes in accounting standards, rules and interpretations and the related impact on our financial statements, including assumptions surrounding the ongoing impact of CECL, which are subject to change based on a number of factors including changes in our macroeconomic forecasts, credit quality, loan composition and other factors;

●

our ability to receive dividends from our subsidiaries;

●

a decrease in our regulatory capital ratios;

●

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, including changes as a result of the new presidential administration and Democratic control of Congress;

●

negative changes in our capital position;

●

the adverse effects of events beyond our control that may have a destabilizing effect on financial markets and the economy, such as epidemics and pandemics (including COVID-19), war or terrorist activities, essential utility outages, deterioration in the global economy, instability in the credit markets, 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 2020 Annual Report on Form 10-K, in this Form 10-Q, and in subsequent filings we make with the SEC.

Table of Contents

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

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share data)


	(unaudited)
	March 31,		December 31,
	2021		2020
Assets
Cash and due from banks	$	25,448	$	24,306
Interest earning deposits with financial institutions		415,497		305,597
Cash and cash equivalents		440,945		329,903
Securities available-for-sale, at fair value		593,280		496,178
Federal Home Loan Bank Chicago ("FHLBC") and Federal Reserve Bank Chicago ("FRBC") stock		9,917		9,917
Loans held-for-sale		7,842		12,611
Loans		1,959,625		2,034,851
Less: allowance for credit losses on loans		30,967		33,855
Net loans		1,928,658		2,000,996
Premises and equipment, net		45,055		45,477
Other real estate owned		2,163		2,474
Mortgage servicing rights, at fair value		5,889		4,224
Goodwill and core deposit intangible		20,661		20,781
Bank-owned life insurance ("BOLI")		63,436		63,102
Deferred tax assets, net		8,067		8,121
Other assets		40,739		47,053
Total assets	$	3,166,652	$	3,040,837

Liabilities
Deposits:
Noninterest bearing demand	$	982,664	$	909,505
Interest bearing:
Savings, NOW, and money market		1,290,937		1,202,134
Time		382,941		425,434
Total deposits		2,656,542		2,537,073
Securities sold under repurchase agreements		77,321		66,980
Junior subordinated debentures		25,773		25,773
Senior notes		44,402		44,375
Notes payable and other borrowings		22,314		23,393
Other liabilities		29,187		36,156
Total liabilities		2,855,539		2,733,750

Stockholders’ Equity
Common stock		34,957		34,957
Additional paid-in capital		120,075		122,212
Retained earnings		248,165		236,579
Accumulated other comprehensive income		13,266		14,762
Treasury stock		(105,350)		(101,423)
Total stockholders’ equity		311,113		307,087
Total liabilities and stockholders’ equity	$	3,166,652	$	3,040,837


	March 31, 2021		December 31, 2020
	Common		Common
	Stock		Stock
Par value	$	1.00	$	1.00
Shares authorized		60,000,000		60,000,000
Shares issued		34,957,384		34,957,384
Shares outstanding		29,018,637		29,328,723
Treasury shares		5,938,747		5,628,661

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

(In thousands, except per share data)


		(unaudited)
	Three Months Ended March 31,
	2021		2020
Interest and dividend income
Loans, including fees	$	22,207	$	23,597
Loans held-for-sale		55		36
Securities:
Taxable		1,615		2,163
Tax exempt		1,307		1,455
Dividends from FHLBC and FRBC stock		115		125
Interest bearing deposits with financial institutions		92		75
Total interest and dividend income		25,391		27,451
Interest expense
Savings, NOW, and money market deposits		241		635
Time deposits		500		1,766
Securities sold under repurchase agreements		31		116
Other short-term borrowings		-		109
Junior subordinated debentures		280		1,364
Senior notes		673		673
Notes payable and other borrowings		123		130
Total interest expense		1,848		4,793
Net interest and dividend income		23,543		22,658
(Release of) provision for credit losses		(3,000)		7,984
Net interest and dividend income after (release of) provision for credit losses		26,543		14,674
Noninterest income
Wealth management		2,151		1,906
Service charges on deposits		1,195		1,726
Secondary mortgage fees		322		270
Mortgage servicing rights mark to market gain (loss)		1,113		(2,134)
Mortgage servicing income		567		468
Net gain on sales of mortgage loans		3,721		2,246
Securities losses, net		-		(24)
Change in cash surrender value of BOLI		334		(49)
Card related income		1,447		1,287
Other income		450		626
Total noninterest income		11,300		6,322
Noninterest expense
Salaries and employee benefits		13,506		12,918
Occupancy, furniture and equipment		2,467		2,301
Computer and data processing		1,298		1,335
FDIC insurance		201		57
General bank insurance		276		246
Amortization of core deposit intangible		120		128
Advertising expense		60		109
Card related expense		593		532
Legal fees		55		131
Other real estate expense, net		36		237
Other expense		3,126		3,008
Total noninterest expense		21,738		21,002
Income (loss) before income taxes		16,105		(6)
Provision (benefit) for income taxes		4,226		(281)
Net income	$	11,879	$	275

Basic earnings per share	$	0.41	$	0.01
Diluted earnings per share		0.40		0.01
Dividends declared per share		0.01		0.01

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)


	(unaudited)
	Three Months Ended March 31,
	2021		2020
Net Income	$	11,879	$	275

Unrealized holding losses on available-for-sale securities arising during the period		(4,813)		(6,376)
Related tax benefit		1,371		1,797
Holding losses after tax on available-for-sale securities		(3,442)		(4,579)

Less: Reclassification adjustment for the net losses realized during the period
Net realized losses		-		(24)
Related tax benefit		-		7
Net realized losses after tax		-		(17)
Other comprehensive loss on available-for-sale securities		(3,442)		(4,562)

Changes in fair value of derivatives used for cash flow hedges		2,703		(2,530)
Related tax (expense) benefit		(757)		711
Other comprehensive income (loss) on cash flow hedges		1,946		(1,819)

Total other comprehensive loss		(1,496)		(6,381)
Total comprehensive income	$	10,383	$	(6,106)


	Accumulated		Accumulated		Total
	Unrealized Gain		Unrealized Gain		Accumulated Other
	(Loss) on Securities		(Loss) on Derivative		Comprehensive
	Available-for -Sale		Instruments		Income/(Loss)
For the Three Months Ended
Balance, December 31, 2019	$	6,827	$	(2,265)	$	4,562
Other comprehensive loss, net of tax		(4,562)		(1,819)		(6,381)
Balance, March 31, 2020	$	2,265	$	(4,084)	$	(1,819)

Balance, December 31, 2020	$	17,413	$	(2,651)	$	14,762
Other comprehensive (loss) income, net of tax		(3,442)		1,946		(1,496)
Balance, March 31, 2021	$	13,971	$	(705)	$	13,266

See accompanying notes to consolidated financial statements.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


		(Unaudited)
	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities
Net income	$	11,879	$	275
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium / discount from amortization on securities		534		506
Securities losses , net		-		24
(Release of) provision for credit losses		(3,000)		7,984
Originations of loans held-for-sale		(78,284)		(50,418)
Proceeds from sales of loans held-for-sale		85,914		45,706
Net gains on sales of mortgage loans		(3,721)		(2,246)
Mortgage servicing rights mark to market (gain) loss		(1,113)		2,134
Net discount from accretion on loans		(520)		(409)
Net change in cash surrender value of BOLI		(334)		49
Net gains on sale of other real estate owned		(20)		(23)
Provision for other real estate owned valuation losses		6		158
Depreciation of fixed assets and amortization of leasehold improvements		765		662
Amortization of core deposit intangibles		120		128
Change in current income taxes receivable		3,557		(1,430)
Deferred tax expense (benefit)		668		(333)
Change in accrued interest receivable and other assets		2,200		(4,081)
Change in accrued interest payable and other liabilities		(3,375)		9,607
Stock based compensation		114		729
Net cash provided by operating activities		15,390		9,022
Cash flows from investing activities
Proceeds from maturities and calls, including pay down of securities available-for-sale		7,259		16,046
Proceeds from sales of securities available-for-sale		-		18,126
Purchases of securities available-for-sale		(109,708)		(6,100)
Net change in loans		75,858		(27,716)
Proceeds from sales of other real estate owned, net of participations and improvements		325		311
Net purchases of premises and equipment		(343)		(887)
Net cash used in investing activities		(26,609)		(220)
Cash flows from financing activities
Net change in deposits		119,469		68,893
Net change in securities sold under repurchase agreements		10,341		2,543
Net change in other short-term borrowings		-		(42,125)
Redemption of junior subordinated debentures		-		(32,604)
Issuance of term note		-		20,000
Repayment of term note		(1,000)		-
Net change in notes payable and other borrowings, excluding term note		(78)		(76)
Dividends paid on common stock		(293)		(300)
Purchase of treasury stock		(6,178)		(2,627)
Net cash provided by financing activities		122,261		13,704
Net change in cash and cash equivalents		111,042		22,506
Cash and cash equivalents at beginning of period		329,903		50,632
Cash and cash equivalents at end of period	$	440,945	$	73,138

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, December 31, 2019	$	34,854	$	120,657	$	213,723	$	4,562	$	(95,932)	$	277,864
Adoption of ASU 2016-13						(3,783)						(3,783)
Net income						275						275
Other comprehensive loss, net of tax								(6,381)				(6,381)
Dividends declared and paid, ($0.01 per share)						(300)						(300)
Vesting of restricted stock		103		(305)						202		-
Stock based compensation				729								729
Purchase of treasury stock from taxes withheld on stock awards										(411)		(411)
Purchase of treasury stock from stock repurchase program										(2,216)		(2,216)
Balance, March 31, 2020	$	34,957	$	121,081	$	209,915	$	(1,819)	$	(98,357)	$	265,777

Balance, December 31, 2020	$	34,957	$	122,212	$	236,579	$	14,762	$	(101,423)	$	307,087
Net income						11,879						11,879
Other comprehensive loss, net of tax								(1,496)				(1,496)
Dividends declared and paid, ($0.01 per share)						(293)						(293)
Vesting of restricted stock				(2,251)						2,251		-
Stock based compensation				114								114
Purchase of treasury stock from taxes withheld on stock awards										(577)		(577)
Purchase of treasury stock from stock repurchase program										(5,601)		(5,601)
Balance, March 31, 2021	$	34,957	$	120,075	$	248,165	$	13,266	$	(105,350)	$	311,113

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

The accounting policies followed in the preparation of the interim consolidated financial statements are consistent with those used in the preparation of the annual financial information. The interim consolidated financial statements reflect all normal and recurring adjustments that are necessary, in the opinion of management, for a fair statement of results for the interim period presented. Results for the period ended March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. These interim consolidated financial statements are unaudited and should be read in conjunction with the audited financial statements and notes included in Old Second Bancorp, Inc.’s (the “Company”) annual report on Form 10-K for the year ended December 31, 2020. 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

In June 2016, the Financial Standards Board, or FASB, issued Accounting Standards Update (ASU) No. 2016-13, “Financial Instruments – Measurement of Credit Losses on Financial Instruments (Topic 326),” also known as Current Expected Credit Losses, or CECL. ASU 2016-13 was issued to provide financial statement users with more useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date to enhance the decision making process. The new methodology reflects expected credit losses based on relevant vintage historical information, supported by reasonable forecasts of projected loss given defaults, which will affect the collectability of the reported amounts. This new methodology also requires available-for-sale debt securities to have a credit loss recorded through an allowance rather than write-downs through an other than temporary impairment analysis. In addition, an allowance must be established for the credit risk related to unfunded commitments. ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and was adopted as of January 1, 2020, by the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” and Note 1 – Summary of Significant Accounting Policies, both found in our Annual Report on Form 10-K for the year ended December 31, 2020 for further discussion of our Allowance for Credit Losses methodology and assessment as a critical accounting policy.

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, 2020. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the consolidated financial statements and how those values are determined. During the first quarter of 2021, the Company had no changes to significant accounting policies.

Risks and Uncertainties

The coronavirus (COVID-19) pandemic, which was declared a national emergency in the United States in March 2020, continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world. In particular, the COVID-19 pandemic has severely restricted the level of economic activity in the Company’s markets. Federal and state governments have taken, and may continue to take, unprecedented actions to contain the spread of the disease, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief to businesses and individuals impacted by the pandemic. Although in various locations certain activity restrictions have been relaxed and businesses and schools have reopened with some level of success, in many states and localities the

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

number of individuals diagnosed with COVID-19 has increased significantly, which may cause a freezing or, in certain cases, a reversal of previously announced relaxation of activity restrictions and may prompt the need for additional aid and other forms of relief.

The impact of the COVID-19 pandemic is fluid and continues to evolve. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower bank equity market valuations and significant volatility and disruption in financial markets. In addition, due to the COVID-19 pandemic, market interest rates declined significantly, with the 10-year Treasury bond falling to a low of 0.52% in early August 2020, but increasing significantly since that time to 1.75% at March 31, 2021. In March 2020, the Federal Open Market Committee reduced the targeted federal funds interest rate range to 0% to 0.25% percent, and this low rate was still in effect as of March 31, 2021. These reductions in interest rates and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on the Company’s business, financial condition and results of operations. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental, and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strains, and the ability for customers and businesses to return to their pre-pandemic routine.

As of March 31, 2021, our consolidated balance sheet included goodwill of $18.6 million. For each quarter end of 2020, we considered whether a quantitative assessment of goodwill was required as a result of the significant economic disruption caused by the COVID-19 pandemic. In addition, we performed the annual analysis to assess if any goodwill impairment existed as of November 30, 2020. Impacts of the economic disruptions were noted from the latter half of March through the remainder of 2020, specifically, the decline in the trading price of our common stock and an increase in the U.S. unemployment rate. After considering qualitative factors regarding the expected impacts of the pandemic on our business, operations and financial condition, we determined that these conditions did not indicate that it is more likely than not that the Company’s carrying value exceeded our fair value as of December 31, 2020. However, further delayed recovery or further deterioration in market conditions related to the general economy, financial markets, and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our results of operations and financial condition.

Subsequent Events

On April 6, 2021, we sold and issued $60.0 million in aggregate principal amount of our 3.50% Fixed-to-Floating Rate Subordinated Notes due April 15, 2031 (the “Notes”). The Notes were offered and sold to eligible purchasers in a private offering in reliance on the exemption from the registration requirements of Section 4(a)(2) of the Securities Act of 1933, as amended and the provisions of Regulation D promulgated thereunder. The Company intends to use the net proceeds from the offering for general corporate purposes, which may include, without limitation, the redemption of existing senior debt, common stock repurchases and strategic acquisitions. The Notes will bear interest at a fixed annual rate of 3.50%, from and including the date of issuance to but excluding April 15, 2026, payable semi-annually in arrears. From and including April 15, 2026 to, but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per annum equal to Three-Month Term SOFR (as defined in the Note) plus 273 basis points, payable quarterly in arrears.

On April 20, 2021, the Company’s Board of Directors declared a cash dividend of $0.05 per share payable on May 10, 2021, to stockholders of record as of April 30, 2021; dividends of $1.5 million are scheduled to be paid to stockholders on May 10, 2021.

Note 2 – 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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

liquidity, other parts of the portfolio may reflect funds invested pending future loan demand or to maximize interest income without undue interest rate risk.

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

Federal Home Loan Bank of Chicago (“FHLBC”) and Federal Reserve Bank of Chicago (“FRBC”) stock are considered nonmarketable equity investments. FHLBC stock was recorded at $3.7 million at March 31, 2021, and December 31, 2020. FRBC stock was recorded at $6.2 million at March 31, 2021, and December 31, 2020.

The following tables summarize the amortized cost and fair value of the securities portfolio at March 31, 2021, and December 31, 2020, and the corresponding amounts of gross unrealized gains and losses:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
March 31, 2021	Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,015	$	87	$	-	$	4,102
U.S. government agencies		6,506		-		(145)		6,361
U.S. government agencies mortgage-backed		69,427		1,476		(301)		70,602
States and political subdivisions		227,336		16,189		(1,379)		242,146
Corporate bonds		34,750		108		(15)		34,843
Collateralized mortgage obligations		72,801		2,386		(251)		74,936
Asset-backed securities		129,118		1,389		(139)		130,368
Collateralized loan obligations		29,923		71		(72)		29,922
Total securities available-for-sale	$	573,876	$	21,706	$	(2,302)	$	593,280


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
December 31, 2020	Cost¹		Gains		Losses		Value
Securities available-for-sale
U.S. Treasury	$	4,014	$	103	$	-	$	4,117
U.S. government agencies		6,811		-		(154)		6,657
U.S. government agencies mortgage-backed		16,098		1,112		(1)		17,209
States and political subdivisions		229,352		21,269		(1,362)		249,259
Collateralized mortgage obligations		53,999		2,866		(280)		56,585
Asset-backed securities		130,959		1,370		(511)		131,818
Collateralized loan obligations		30,728		15		(210)		30,533
Total securities available-for-sale	$	471,961	$	26,735	$	(2,518)	$	496,178

¹ Excludes accrued interest receivable of $2.6 million and $2.7 million at March 31, 2021 and December 31, 2020 respectively, that is recorded in other assets on the consolidated balance sheet.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The fair value, amortized cost and weighted average yield of debt securities at March 31, 2021, by contractual maturity, are listed in the table below. Securities not due at a single maturity date are shown separately.


			Weighted
	Amortized		Average		Fair
Securities available-for-sale	Cost		Yield		Value
Due in one year or less	$	420	2.09	%	$	422
Due after one year through five years		7,025	2.50			7,318
Due after five years through ten years		61,065	1.79			61,813
Due after ten years		204,097	3.02			217,899
		272,607	2.73			287,452
Mortgage-backed and collateralized mortgage obligations		142,228	2.08			145,538
Asset-backed securities		129,118	1.35			130,368
Collateralized loan obligations		29,923	1.93			29,922
Total securities available-for-sale	$	573,876	2.22	%	$	593,280

At March 31, 2021, the Company’s investments included $103.3 million of asset-backed securities that are backed by student loans originated under the Federal Family Education Loan program (“FFEL”). Under the FFEL, private lenders made federally guaranteed student loans to parents and students. While the program was modified several times before elimination in 2010, FFEL securities are generally guaranteed by the U.S Department of Education (“DOE”) at not less than 97% of the outstanding principal amount of the loans. The guarantee will reduce to 85% if the DOE receives reimbursement requests in excess of 5% of insured loans; reimbursement will drop to 75% if reimbursement requests exceed 9% of insured loans. In addition to the DOE guarantee, total added credit enhancement in the form of overcollateralization and/or subordination amounted to $9.7 million, or 9.26% of outstanding principal.

At March 31, 2021, the Company had invested in securities issued from two originators that individually amounted to over 10% of the Company’s stockholders’ equity. Information regarding these issuers and the value of the securities issued follows:


	March 31, 2021
	Amortized		Fair
Issuer	Cost		Value
Towd Point Mortgage Trust	$	33,107	$	34,955
Village Capital & Investment LLC		50,700		51,409

Securities with unrealized losses with no corresponding allowance for credit losses at March 31, 2021 and December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows (in thousands except for number of securities):


	Less than 12 months					12 months or more
March 31, 2021	in an unrealized loss position					in an unrealized loss position					Total
	Number of	Unrealized		Fair		Number of	Unrealized		Fair		Number of	Unrealized		Fair
Securities available-for-sale	Securities	Losses		Value		Securities	Losses		Value		Securities	Losses		Value
U.S. government agencies	-	$	-	$	-	4	$	145	$	6,361	4	$	145	$	6,361
U.S. government agencies mortgage-backed	5		301		5,912	-		-		-	5		301		5,912
States and political subdivisions	2		304		14,036	1		1,075		3,689	3		1,379		17,725
Corporate bonds	1		15		1,931	-		-		-	1		15		1,931
Collateralized mortgage obligations	2		52		17,988	1		199		7,397	3		251		25,385
Asset-backed securities	1		28		1,622	1		111		3,202	2		139		4,824
Collateralized loan obligations	-		-		-	2		72		10,601	2		72		10,601
Total securities available-for-sale	11	$	700	$	41,489	9	$	1,602	$	31,250	20	$	2,302	$	72,739

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


	Less than 12 months					12 months or more
December 31, 2020	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. government agencies	-	$	-	$	-	4	$	154	$	6,657	4	$	154	$	6,657
U.S. government agencies mortgage-backed	1		1		141	-		-		-	1		1		141
States and political subdivisions	-		-		-	1		1,362		3,433	1		1,362		3,433
Collateralized mortgage obligations	4		279		8,142	1		1		146	5		280		8,288
Asset-backed securities	1		2		251	3		509		49,572	4		511		49,823
Collateralized loan obligations	1		31		7,468	4		179		21,477	5		210		28,945
Total securities available-for-sale	7	$	313	$	16,002	13	$	2,205	$	81,285	20	$	2,518	$	97,287

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. No credit losses were determined to be present as of March 31, 2021, as there was no credit quality deterioration noted. Therefore, no provision for credit losses on securities was recognized for the first quarter of 2021.

The following table presents proceeds from sale and net realized gains (losses) on securities available-for-sale for the three months ended March 31, 2021 and 2020:


		Three Months Ended
		March 31,
Securities available-for-sale	2021			2020
Proceeds from sales of securities	$	-		$	18,126
Gross realized gains on securities	$	-		$	17
Gross realized losses on securities		-			(41)
Net realized losses	$	-		$	(24)
Income tax benefit on net realized losses	$	-		$	7
Effective tax rate applied		0.0	%		29.2	%

As of March 31, 2021, securities valued at $313.9 million were pledged to secure deposits and borrowings, and for other purposes, a decrease from $335.8 million of securities pledged at year-end 2020.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 3 – Loans and Allowance for Credit Losses on Loans

Major segments of loans were as follows:


	March 31, 2021		December 31, 2020
Commercial ¹	$	392,380	$	407,159
Leases		138,240		141,601
Commercial real estate - Investor		567,475		582,042
Commercial real estate - Owner occupied		326,857		333,070
Construction		93,745		98,486
Residential real estate - Investor		52,176		56,137
Residential real estate - Owner occupied		107,303		116,388
Multifamily		178,258		189,040
HELOC		75,604		80,908
HELOC - Purchased		17,078		19,487
Other ²		10,509		10,533
Total loans		1,959,625		2,034,851
Allowance for credit losses on loans		(30,967)		(33,855)
Net loans³	$	1,928,658	$	2,000,996

¹ Includes $104.5 million and $74.1 million of Paycheck Protection Program (“PPP”) loans at March 31, 2021 and December 31, 2020, respectively.

² The “Other” segment includes consumer and overdrafts in this table and in subsequent tables within Note 3 - Loans and Allowance for Credit Losses on Loans.

³ Excludes accrued interest receivable of $6.8 million and $7.0 million at March 31, 2021 and December 31, 2020, respectively, that is recorded in other assets on the consolidated balance sheet.

It is the policy of the Company to review each prospective credit prior to making a loan in order to determine if an adequate level of security or collateral has been obtained. The type of collateral, when required, will vary from liquid assets to real estate. The Company 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 72.4% and 72.5% of the portfolio at March 31, 2021, and December 31, 2020, respectively, and include a mix of owner and non-owner occupied, 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 months ended March 31, 2021 and March 31, 2020:


			Provision
			(Release)
	Beginning		for Credit						Ending
Allowance for credit losses	Balance		Losses		Charge-offs		Recoveries		Balance
Three months ended March 31, 2021
Commercial	$	2,812	$	446	$	2	$	20	$	3,276
Leases		3,888		(506)		-		-		3,382
Commercial real estate - Investor		9,205		(1,317)		-		20		7,908
Commercial real estate - Owner occupied		2,251		(734)		3		208		1,722
Construction		4,054		(335)		-		-		3,719
Real estate - Investor		1,740		(203)		-		266		1,803
Real estate - Owner occupied		2,714		(235)		-		49		2,528
Multifamily		3,625		640		-		-		4,265
HELOC		1,749		(48)		12		24		1,713
HELOC - Purchased		199		96		-		-		295
Other		1,618		(1,274)		25		37		356
	$	33,855	$	(3,470)	$	42	$	624	$	30,967

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


					Provision
			Impact of		(Release)
	Beginning		Adopting		for Loan						Ending
Allowance for credit losses	Balance		ASC 326		Losses		Charge-offs		Recoveries		Balance
Three months ended March 31, 2020
Commercial	$	3,015	$	(292)	$	539	$	97	$	12	$	3,177
Leases		1,262		501		127		-		-		1,890
Commercial real estate - Investor		6,218		(741)		536		13		21		6,021
Commercial real estate - Owner occupied		3,678		(848)		329		1,109		1		2,051
Construction		513		1,334		2,184		-		-		4,031
Real estate - Investor		601		740		534		-		21		1,896
Real estate - Owner occupied		1,257		1,320		769		1		23		3,368
Multifamily		1,444		1,732		674		-		-		3,850
HELOC		1,161		1,526		(485)		83		141		2,260
HELOC - Purchased		-		-		850		-		-		850
Other		640		607		(558)		98		60		651
	$	19,789	$	5,879	$	5,499	$	1,401	$	279	$	30,045

The ACL on loans excludes $3.5 million, $3.0 million and $4.2 million of allowance for unfunded commitments, recorded within Other Liabilities, as of March 31, 2021, December 31, 2020 and March 31, 2020, respectively.

The following tables presents the collateral dependent loans and the related ACL allocated by segment of loans as of March 31, 2021 and December 31, 2020:


			Accounts								ACL
March 31, 2021	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	1,646	$	-	$	2	$	1,648	$	300
Leases		-		-		2,380		307		2,687		791
Commercial real estate - Investor		4,085		-		-		-		4,085		39
Commercial real estate - Owner occupied		7,201		-		-		-		7,201		1
Construction		2,046		-		-		-		2,046		966
Residential real estate - Investor		855		-		-		-		855		-
Residential real estate - Owner occupied		4,412		-		-		50		4,462		36
Multifamily		3,790		-		-		-		3,790		513
HELOC		948		-		-		-		948		51
Other		-		-		-		402		402		209
Total	$	23,337	$	1,646	$	2,380	$	761	$	28,124	$	2,906


			Accounts								ACL
December 31, 2020	Real Estate		Receivable		Equipment		Other		Total		Allocation
Commercial	$	-	$	1,070	$	-	$	55	$	1,125	$	56
Leases		-		-		2,377		597		2,974		880
Commercial real estate - Investor		4,179		-		-		-		4,179		84
Commercial real estate - Owner occupied		9,726		-		-		-		9,726		195
Construction		1,891		-		-		-		1,891		952
Residential real estate - Investor		928		-		-		-		928		-
Residential real estate - Owner occupied		3,535		-		-		-		3,535		10
Multifamily		3,838		-		-		-		3,838		378
HELOC		1,053		-		-		-		1,053		78
Other		-		-		-		4		4		4
Total	$	25,150	$	1,070	$	2,377	$	656	$	29,253	$	2,637

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
March 31, 2021¹	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	2	$	207	$	-	$	209	$	392,171	$	392,380	$	-
Leases		603		50		96		749		137,491		138,240		-
Commercial real estate - Investor		996		-		1,545		2,541		564,934		567,475		366
Commercial real estate - Owner occupied		1,092		-		2,973		4,065		322,792		326,857		-
Construction		3,340		-		-		3,340		90,405		93,745		-
Residential real estate - Investor		495		-		724		1,219		50,957		52,176		-
Residential real estate - Owner occupied		903		137		574		1,614		105,689		107,303		147
Multifamily		2,731		2,660		69		5,460		172,798		178,258		-
HELOC		517		-		201		718		74,886		75,604		-
HELOC - Purchased		399		-		-		399		16,679		17,078		-
Other		467		2		-		469		10,040		10,509		-
Total	$	11,545	$	3,056	$	6,182	$	20,783	$	1,938,842	$	1,959,625	$	513


													90 days or
					90 Days or								Greater Past
	30-59 Days		60-89 Days		Greater Past		Total Past						Due and
December 31, 2020¹	Past Due		Past Due		Due		Due		Current		Total Loans		Accruing
Commercial	$	-	$	-	$	52	$	52	$	407,107	$	407,159	$	-
Leases		613		59		316		988		140,613		141,601		163
Commercial real estate - Investor		1,439		-		1,108		2,547		579,495		582,042		-
Commercial real estate - Owner occupied		1,848		958		7,309		10,115		322,955		333,070		-
Construction		1,237		-		-		1,237		97,249		98,486		-
Residential real estate - Investor		1,022		20		484		1,526		54,611		56,137		157
Residential real estate - Owner occupied		859		286		717		1,862		114,526		116,388		114
Multifamily		3,282		467		-		3,749		185,291		189,040		-
HELOC		549		50		206		805		80,103		80,908		-
HELOC - Purchased		47		-		-		47		19,440		19,487		-
Other		20		-		-		20		10,513		10,533		-
Total	$	10,916	$	1,840	$	10,192	$	22,948	$	2,011,903	$	2,034,851	$	434

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

There were 504 loans which totaled $237.7 million modified under the CARES Act. As of March 31, 2021, 40 loans of the original 504 loans deferred, or $19.2 million, had an active deferral request and were in compliance with modified terms; 464 loans which totaled $218.5 million had resumed payments or paid off. Details of loans in active deferral is below:


March 31, 2021	1st Deferral		2nd Deferral		3rd Deferral		Total
Loans modified under CARES Act, in deferral	$	5,782	$	8,927	$	4,526	$	19,235
Loans modified under CARES Act, in nonaccrual, within deferral above		183		1,731		2,416		4,330

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The table presents all nonaccrual loans as of March 31, 2021, and December 31, 2020:


Nonaccrual loan detail	March 31, 2021		December 31, 2020
Commercial	$	933	$	1,125
Leases		2,562		2,638
Commercial real estate - Investor		1,547		1,632
Commercial real estate - Owner occupied		7,427		9,262
Construction		128		-
Residential real estate - Investor		855		928
Residential real estate - Owner occupied		3,182		3,206
Multifamily		2,398		2,437
HELOC		948		1,052
HELOC - Purchased		-		-
Other		399		-
Total	$	20,379	$	22,280

The Company recognized $32,000 of interest on nonaccrual loans during the three months ended March 31, 2021.

Credit Quality Indicators

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

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

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

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

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

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


															Revolving
															Loans
															Converted
													Revolving		To Term
	2021		2020		2019		2018		2017		Prior		Loans		Loans		Total
Commercial
Pass	$	73,345	$	70,268		33,301		13,439		5,467		2,969	$	187,576	$	-	$	386,365
Special Mention		-		2,772		399		-		-		-		447		-		3,618
Substandard		-		260		-		1,344		-		-		793		-		2,397
Total commercial		73,345		73,300		33,700		14,783		5,467		2,969		188,816		-		392,380

Leases
Pass		9,407		53,691		47,433		14,305		5,542		4,541		-		-		134,919
Special Mention		-		174		-		-		-		-		-		-		174
Substandard		-		-		1,429		798		51		869		-		-		3,147
Total leases		9,407		53,865		48,862		15,103		5,593		5,410		-		-		138,240

Commercial real estate - Investor
Pass		24,011		169,705		149,475		86,518		63,401		56,733		1,110		151		551,104
Special Mention		-		1,804		9,437		-		-		-		-		-		11,241
Substandard		2,155		424		1,131		195		-		1,225		-		-		5,130
Total commercial real estate - investor		26,166		171,933		160,043		86,713		63,401		57,958		1,110		151		567,475

Commercial real estate - Owner occupied
Pass		17,923		68,497		51,974		68,105		44,122		65,217		1,308		461		317,607
Special Mention		-		598		-		-		-		-		-		-		598
Substandard		-		4,077		1,748		80		1,469		1,278		-		-		8,652
Total commercial real estate - owner occupied		17,923		73,172		53,722		68,185		45,591		66,495		1,308		461		326,857

Construction
Pass		11,019		51,091		16,576		1,398		532		1,455		5,139		81		87,291
Special Mention		-		-		1,088		-		-		-		-		-		1,088
Substandard		-		-		3,283		2,083		-		-		-		-		5,366
Total construction		11,019		51,091		20,947		3,481		532		1,455		5,139		81		93,745

Residential real estate - Investor
Pass		358		8,660		12,654		7,769		7,635		12,510		1,155		-		50,741
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		334		-		598		-		503		-		-		1,435
Total residential real estate - investor		358		8,994		12,654		8,367		7,635		13,013		1,155		-		52,176

Residential real estate - Owner occupied
Pass		895		17,859		21,165		9,116		14,088		37,800		2,232		-		103,155
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		47		-		412		218		3,471		-		-		4,148
Total residential real estate - owner occupied		895		17,906		21,165		9,528		14,306		41,271		2,232		-		107,303

Multifamily
Pass		4,692		40,077		29,772		42,259		30,499		16,021		191		-		163,511
Special Mention		-		-		6,901		-		-		-		-		-		6,901
Substandard		-		69		-		4,491		933		2,353		-		-		7,846
Total multifamily		4,692		40,146		36,673		46,750		31,432		18,374		191		-		178,258

HELOC
Pass		-		2,403		2,138		1,241		1,652		1,268		65,586		-		74,288
Special Mention		-		-		-		-		-		-		13		-		13
Substandard		-		98		-		85		36		287		797		-		1,303
Total HELOC		-		2,501		2,138		1,326		1,688		1,555		66,396		-		75,604

HELOC - Purchased

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Pass		-		-		-		-		-		17,078		-		-		17,078
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total HELOC - purchased		-		-		-		-		-		17,078		-		-		17,078

Other
Pass		685		1,197		533		240		164		535		6,753		-		10,107
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		399		-		3		-		-		-		-		402
Total other		685		1,596		533		243		164		535		6,753		-		10,509

Total loans
Pass		142,335		483,448		365,021		244,390		173,102		216,127		271,050		693		1,896,166
Special Mention		-		5,348		17,825		-		-		-		460		-		23,633
Substandard		2,155		5,708		7,591		10,089		2,707		9,986		1,590		-		39,826
Total loans	$	144,490	$	494,504	$	390,437	$	254,479	$	175,809	$	226,113	$	273,100	$	693	$	1,959,625

Credit quality indicators by loan segment and loan origination date at December 31, 2020 were as follows:


															Revolving
															Loans
															Converted
													Revolving		To Term
	2020		2019		2018		2017		2016		Prior		Loans		Loans		Total
Commercial
Pass	$	101,796	$	42,294	$	14,519	$	6,265	$	1,825	$	1,691	$	230,388	$	-	$	398,778
Special Mention		5,130		425		68		-		3		-		76		-		5,702
Substandard		273		52		1,524		-		-		-		830		-		2,679
Total commercial		107,199		42,771		16,111		6,265		1,828		1,691		231,294		-		407,159

Leases
Pass		56,605		52,168		16,830		6,545		5,242		651		-		-		138,041
Special Mention		175		163		-		-		-		-		-		-		338
Substandard		-		1,434		798		59		450		481		-		-		3,222
Total leases		56,780		53,765		17,628		6,604		5,692		1,132		-		-		141,601

Commercial real estate - Investor
Pass		173,781		158,677		92,156		66,762		55,963		15,966		1,319		-		564,624
Special Mention		2,394		9,592		220		-		95		-		-		-		12,301
Substandard		2,709		1,126		71		-		340		871		-		-		5,117
Total commercial real estate - investor		178,884		169,395		92,447		66,762		56,398		16,837		1,319		-		582,042

Commercial real estate - Owner occupied
Pass		72,605		52,809		73,719		45,315		50,000		25,507		1,324		-		321,279
Special Mention		604		-		-		-		-		-		-		-		604
Substandard		1,564		2,154		1,780		1,664		501		3,524		-		-		11,187
Total commercial real estate - owner occupied		74,773		54,963		75,499		46,979		50,501		29,031		1,324		-		333,070

Construction
Pass		50,170		24,163		7,203		539		218		1,261		9,702		-		93,256
Special Mention		38		-		-		-		-		-		-		-		38
Substandard		-		3,135		2,057		-		-		-		-		-		5,192
Total construction		50,208		27,298		9,260		539		218		1,261		9,702		-		98,486

Residential real estate - Investor
Pass		9,371		14,194		8,522		7,775		2,431		11,184		1,144		-		54,621
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		349		-		610		-		91		466		-		-		1,516
Total residential real estate - investor		9,720		14,194		9,132		7,775		2,522		11,650		1,144		-		56,137

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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


Residential real estate - Owner occupied
Pass		18,308		23,450		10,808		15,409		10,394		31,325		2,654		-		112,348
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		47		-		412		219		526		2,836		-		-		4,040
Total residential real estate - owner occupied		18,355		23,450		11,220		15,628		10,920		34,161		2,654		-		116,388

Multifamily
Pass		40,671		30,849		44,301		38,133		12,147		7,735		197		-		174,033
Special Mention		-		6,901		-		548		-		-		-		-		7,449
Substandard		69		-		4,254		927		118		2,190		-		-		7,558
Total multifamily		40,740		37,750		48,555		39,608		12,265		9,925		197		-		189,040

HELOC
Pass		2,511		2,174		1,679		2,120		504		803		69,483		-		79,274
Special Mention		-		-		-		-		-		-		94		-		94
Substandard		-		-		86		37		271		91		1,055		-		1,540
Total HELOC		2,511		2,174		1,765		2,157		775		894		70,632		-		80,908

HELOC - Purchased
Pass		-		-		-		-		-		19,487		-		-		19,487
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		-		-		-		-		-		-		-
Total HELOC - purchased		-		-		-		-		-		19,487		-		-		19,487

Other
Pass		1,555		574		569		229		559		341		6,702		-		10,529
Special Mention		-		-		-		-		-		-		-		-		-
Substandard		-		-		4		-		-		-		-		-		4
Total other		1,555		574		573		229		559		341		6,702		-		10,533

Total loans
Pass		527,373		401,352		270,306		189,092		139,283		115,951		322,913		-		1,966,270
Special Mention		8,341		17,081		288		548		98		-		170		-		26,526
Substandard		5,011		7,901		11,596		2,906		2,297		10,459		1,885		-		42,055
Total loans	$	540,725	$	426,334	$	282,190	$	192,546	$	141,678	$	126,410	$	324,968	$	-	$	2,034,851

The Company had $624,000 and $546,000 in residential real estate loans in the process of foreclosure as of March 31, 2021, and December 31, 2020, respectively.

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

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

There was no TDR activity for the period ended March 31, 2021 and March 31, 2020. TDRs are classified as being in default on a case-by-case basis when they fail to be in compliance with the modified terms. There was no TDR default activity for the periods ended March 31, 2021, and March 31, 2020, for loans that were restructured within the prior 12 month period.

Note 4 – Other Real Estate Owned

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


	Three Months Ended
	March 31,
Other real estate owned	2021		2020
Balance at beginning of period	$	2,474	$	5,004
Property additions, net of acquisition adjustments		-		491
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		305		288
Period valuation adjustments		6		158
Balance at end of period	$	2,163	$	5,049

Activity in the valuation allowance was as follows:


	Three Months Ended
	March 31,
	2021		2020
Balance at beginning of period	$	1,643	$	6,712
Provision for unrealized losses		6		158
Reductions taken on sales		-		(466)
Balance at end of period	$	1,649	$	6,404

Expenses related to OREO, net of lease revenue includes:


	Three Months Ended
	March 31,
	2021		2020
Gain on sales, net	$	(20)	$	(23)
Provision for unrealized losses		6		158
Operating expenses		54		102
Less:
Lease revenue		4		-
Net OREO expense	$	36	$	237

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 5 – Deposits

Major classifications of deposits were as follows:


	March 31, 2021		December 31, 2020
Noninterest bearing demand	$	982,664	$	909,505
Savings		429,256		399,057
NOW accounts		522,760		486,612
Money market accounts		338,921		316,465
Certificates of deposit of less than $100,000		193,291		200,107
Certificates of deposit of $100,000 through $250,000		132,514		164,982
Certificates of deposit of more than $250,000		57,136		60,345
Total deposits	$	2,656,542	$	2,537,073

Note 6 – Borrowings

The following table is a summary of borrowings as of March 31, 2021, and December 31, 2020. Junior subordinated debentures are discussed in more detail in Note 7:


	March 31, 2021		December 31, 2020
Securities sold under repurchase agreements	$	77,321	$	66,980
Junior subordinated debentures		25,773		25,773
Senior notes		44,402		44,375
Notes payable and other borrowings		22,314		23,393
Total borrowings	$	169,810	$	160,521

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 $77.3 million at March 31, 2021, and $67.0 million at December 31, 2020. The fair value of the pledged collateral was $114.8 million at March 31, 2021, and $94.4 million at December 31, 2020. At March 31, 2021, there were no customers with secured balances exceeding 10% of stockholders’ equity.

The Company’s borrowings at the FHLBC require the Bank to be a member and invest in the stock of the FHLBC. Total borrowings are generally limited to the lower of 35% of total assets or 60% of the book value of certain mortgage loans. As of March 31, 2021 and December 31, 2020 the Bank had no short-term advances outstanding under the FHLBC. The Bank also assumed $23.4 million of long-term FHLBC advances with the ABC Bank acquisition in 2018. At March 31, 2021, one advance remains in long-term status, with a total outstanding balance of $6.3 million, at a 2.83% interest rate, and is scheduled to mature on February 2, 2026. FHLBC stock as of March 31, 2021, was valued at $3.7 million, and any potential FHLBC advances were collateralized by loans with a principal balance of $631.4 million, which carried a FHLBC-calculated combined collateral value of $457.7 million. The Company had excess collateral of $330.2 million available to secure borrowings at March 31, 2021.

The Company also has $44.4 million of senior notes outstanding, net of deferred issuance costs, as of March 31, 2021 and December 31, 2020. The senior notes were issued in December 2016 with a ten year maturity, and terms include interest payable semiannually at 5.75% for five years. Beginning December 2021, the senior debt will pay interest at a floating rate, with interest payable quarterly at three month LIBOR plus 385 basis points. The notes are redeemable, in whole or in part, at the option of the Company, beginning with the interest payment date on December 31, 2021, and on any floating rate interest payment date thereafter, at a redemption price equal to 100% of the principal amount of the notes plus accrued and unpaid interest. As of March 31, 2021, and December 31, 2020, unamortized debt issuance costs related to the senior notes were $598,000 and $625,000, respectively, and are included as a reduction of the balance of the senior notes on the Consolidated Balance Sheet. These deferred issuance costs will be amortized to interest expense over the ten year term of the notes and are included in the Consolidated Statements of Income.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

On February 24, 2020, the Company originated a $20.0 million term note, of which $16.0 million is outstanding as of March 31, 2021, with a correspondent bank related to the Company’s redemption of the 7.80% cumulative trust preferred securities issued by Old Second Capital Trust I and related junior subordinated debentures. See the discussion in Note 7 – Junior Subordinated Debentures. The term note was issued for a three year term at one-month Libor plus 175 basis points, requires principal and interest payments quarterly, and the balance of this note is included within Notes Payable and Other Borrowings on the Consolidated Balance Sheet. The Company also has an undrawn line of credit of $20.0 million with a correspondent bank to be used for short-term funding needs; advances under this line can be outstanding up to 360 days from the date of issuance. This line of credit has not been utilized since early 2019.

Note 7 – Junior Subordinated Debentures

On March 2, 2020, the Company redeemed the 7.80% cumulative trust preferred securities issued by Old Second Capital Trust I (“OSBCP”) and related junior subordinated debentures, which totaled $32.6 million. These debentures were originally issued in 2003 for a term of 30 years at 7.80%, and subject to regulatory approval, were able to be called in whole or in part by the Company after June 30, 2008. The Company received regulatory approval to redeem the debentures in early 2020, and notified OSBCP stockholders of the redemption in late January 2020. Cash disbursed for the redemption, including accrued interest on the debentures, totaled $33.0 million, or $10.13 per OSBCP share. The OSBCP redemption was funded by cash on hand and the $20 million term note discussed in Note 6 – Borrowings. Upon redemption of the junior subordinated debentures related to OSBCP in March 2020, the Company recognized the remaining unamortized debt issuance costs of $635,000.

The Company issued $25.0 million of cumulative trust preferred securities through a private placement completed by another unconsolidated subsidiary, Old Second Capital Trust II, in April 2007. These trust preferred securities also mature in 30 years, but subject to the aforementioned regulatory approval, can be called in whole or in part on a quarterly basis commencing June 15, 2017. The quarterly cash distributions on the securities were fixed at 6.77% through June 15, 2017, and float at 150 basis points over three-month LIBOR thereafter. Upon conversion to a floating rate, a cash flow hedge was initiated which resulted in the total interest rate paid on the debt of 4.41% for the quarter ended March 31, 2021, compared to the rate paid for the quarter ended March 31, 2020, of 4.40%. The Company issued a new $25.8 million subordinated debenture to Old Second Capital Trust II in return for the aggregate net proceeds of this trust preferred offering. The interest rate and payment frequency on the debenture are equivalent to the cash distribution basis on the trust preferred securities.

The junior subordinated debentures issued by the Company are disclosed on the Consolidated Balance Sheet, and the related interest expense for each issuance is included in the Consolidated Statements of Income. As of March 31, 2021, and December 31, 2020, the remaining unamortized debt issuance costs related to the junior subordinated debentures were $1,000 and are included as a reduction to the balance of the junior subordinated debentures on the Consolidated Balance Sheet. 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 (the “2019 Plan”). The 2019 Plan was approved at the May 2019 annual stockholders’ meeting and the number of authorized shares under the 2019 Plan was fixed at 600,000. Following approval of the 2019 Plan, no further awards were to be granted under any other prior Company equity compensation plan. The 2019 Plan authorizes the granting of qualified stock options, non-qualified stock options, restricted stock, restricted stock units, and stock appreciation rights (“SARs”). Awards may be granted to selected directors, officers, employees or eligible service providers under the 2019 Plan at the discretion of the Compensation Committee of the Company’s Board of Directors. As of March 31, 2021, 225,020 shares remained available for issuance under the 2019 Plan.

Under the 2019 Plan, unless otherwise provided in an award agreement, upon the occurrence of a change in control, all stock options and SARs then held by the participant will become fully exercisable immediately if, and all stock awards and cash incentive awards will become fully earned and vested immediately if, (i) the 2019 Plan is not an obligation of the successor entity following a change in control or (ii) the 2019 Plan is an obligation of the successor entity following a change in control and the participant incurs a termination of service without cause or for good reason following the change in control. Notwithstanding the immediately preceding sentence, if the

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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. Generally, restricted stock and restricted stock units granted under the Plans vest three years from the grant date, but the Compensation Committee of the Company’s Board of Directors has discretionary authority to change some terms including the amount of time until the vest date.

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

There were 217,964 and 137,944 restricted stock units issued under the 2019 Plan during the three months ended March 31, 2021 and March 31, 2020, 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 Plan was $125,000 in the first three months of 2021 and $735,000 for the first three months of 2020.

A summary of changes in the Company’s unvested restricted awards for the three months ended March 31, 2021, is as follows:


	March 31, 2021
		Weighted
	Restricted	Average
	Stock Shares	Grant Date
	and Units	Fair Value
Unvested at January 1	532,609	$	13.15
Granted	217,964		11.32
Vested	(191,653)		13.95
Forfeited	(42,111)		14.15
Unvested at March 31	516,809	$	11.99

Total unrecognized compensation cost of restricted awards was $4.0 million as of March 31, 2021, which is expected to be recognized over a weighted-average period of 2.27 years.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Note 9 – Earnings Per Share

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


	Three Months Ended March 31,
	2021		2020
Basic earnings per share:
Weighted-average common shares outstanding		29,225,775		29,929,763
Net income	$	11,879	$	275
Basic earnings per share	$	0.41	$	0.01

Diluted earnings per share:
Weighted-average common shares outstanding		29,225,775		29,929,763
Dilutive effect of unvested restricted awards ¹		558,982		560,842
Diluted average common shares outstanding		29,784,757		30,490,605

Net Income	$	11,879	$	275
Diluted earnings per share	$	0.40	$	0.01


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

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 March 31, 2021, the Bank exceeded those thresholds.

At March 31, 2021, the Bank’s Tier 1 capital leverage ratio was 10.78%, an increase of 4 basis points from December 31, 2020, and is well above the 8.00% objective. The Bank’s total capital ratio was 15.80%, an increase of 80 basis points from December 31, 2020, and also well above the objective of 12.00%.

Bank holding companies are generally required to maintain minimum levels of capital in accordance with capital guidelines implemented by the Board of Governors of the Federal Reserve System. The general bank and holding company capital adequacy guidelines are shown in the accompanying table, as are the capital ratios of the Company and the Bank, as of March 31, 2021, and December 31, 2020.

In July 2013, the U.S. federal banking authorities issued final rules (the “Basel III Rules”) establishing more stringent regulatory capital requirements for U.S. banking institutions, which went into effect on January 1, 2015. The Basel III Rules are applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” generally holding companies with consolidated assets of less than $3 billion. The Company is currently considered a “small bank holding company.” If we have total assets in excess of $3.0 billion as of June 30, 2021, we will no longer be considered a small bank holding company in March of 2022. 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, 2020, under the heading “Supervision and Regulation.”

At March 31, 2021, and December 31, 2020, 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
				Adequacy with Capital				Under Prompt Corrective
	Actual			Conservation Buffer, if applicable¹				Action Provisions²
	Amount		Ratio	Amount		Ratio		Amount		Ratio
March 31, 2021
Common equity tier 1 capital to risk weighted assets
Consolidated	$	282,302	12.43	$	158,979	7.000	%		N/A	N/A
Old Second Bank		331,118	14.59		158,864	7.000		$	147,517	6.50	%
Total capital to risk weighted assets
Consolidated		334,614	14.73		238,523	10.500			N/A	N/A
Old Second Bank		358,430	15.80		238,197	10.500			226,854	10.00
Tier 1 capital to risk weighted assets
Consolidated		307,302	13.53		193,057	8.500			N/A	N/A
Old Second Bank		331,118	14.59		192,906	8.500			181,559	8.00
Tier 1 capital to average assets
Consolidated		307,302	10.02		122,675	4.00			N/A	N/A
Old Second Bank		331,118	10.78		122,864	4.00			153,580	5.00

December 31, 2020
Common equity tier 1 capital to risk weighted assets
Consolidated	$	277,199	11.94	$	162,512	7.000	%		N/A	N/A
Old Second Bank		318,466	13.75		162,128	7.000		$	150,548	6.50	%
Total capital to risk weighted assets
Consolidated		331,178	14.26		243,855	10.500			N/A	N/A
Old Second Bank		347,408	15.00		243,186	10.500			231,605	10.00
Tier 1 capital to risk weighted assets
Consolidated		302,199	13.01		197,440	8.500			N/A	N/A
Old Second Bank		318,466	13.75		196,870	8.500			185,289	8.00
Tier 1 capital to average assets
Consolidated		302,199	10.21		118,393	4.00			N/A	N/A
Old Second Bank		318,466	10.74		118,609	4.00			148,262	5.00

¹Amounts are shown inclusive of a capital conservation buffer of 2.50%. Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes.

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. The cumulative amount that is not recognized in regulatory capital, in addition to the $3.8 million

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Day 1 impact of CECL adoption, will be phased in at 25% per year beginning January 1, 2022. As of March 31, 2021, the capital measures of the Company exclude $5.1 million, which is the modified CECL transition adjustment.

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. Pursuant to the Basel III rules that came into effect January 1, 2015, and were fully phased in as of January 1, 2019, the Bank must keep a capital conservation buffer of 2.50% above the new regulatory minimum capital requirements, which must consist entirely of Common Equity Tier 1 capital in order to avoid additional limitations on capital distributions and certain other payments.

Stock Repurchase Program

In September 2019, our board of directors authorized the repurchase of up to 1,494,826 shares of our common stock (the “Repurchase Program”). The Repurchase Program expired on September 19, 2020, however, on October 20, 2020, the Company received notice of non-objection from the Federal Reserve Bank of Chicago to extend the Repurchase Program through October 20, 2021. Repurchases by us under the Repurchase Program may be made from time to time through open market purchases, trading plans established in accordance with SEC rules, privately negotiated transactions, or by other means. During the first quarter of 2021, we repurchased 455,134 shares of our common stock at a weighted average price of $12.31 per share, pursuant to the Repurchase Program. As of March 31, 2021, 1.2 million shares have been repurchased since the program’s inception, and 320,419 shares remain available for repurchase under the Repurchase Program.

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.

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.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

●

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.

●

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

●

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

●

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

●

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

●

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

●

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

The tables below present the balance of assets and liabilities at March 31, 2021, and December 31, 2020, respectively, measured by the Company at fair value on a recurring basis:


	March 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	4,102	$	-	$	-	$	4,102
U.S. government agencies		-		6,361		-		6,361
U.S. government agencies mortgage-backed		-		70,602		-		70,602
States and political subdivisions		-		237,505		4,641		242,146
Corporate bonds		-		34,843		-		34,843
Collateralized mortgage obligations		-		74,936		-		74,936
Asset-backed securities		-		130,368		-		130,368
Collateralized loan obligations		-		29,922		-		29,922
Loans held-for-sale		-		7,842		-		7,842
Mortgage servicing rights		-		-		5,889		5,889
Interest rate swap agreements		-		6,126		-		6,126
Mortgage banking derivatives		-		1,234		-		1,234
Total	$	4,102	$	599,739	$	10,530	$	614,371

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	7,147	$	-	$	7,147
Total	$	-	$	7,147	$	-	$	7,147


	December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Securities available-for-sale
U.S. Treasury	$	4,117	$	-	$	-	$	4,117
U.S. government agencies		-		6,657		-		6,657
U.S. government agencies mortgage-backed		-		17,209		-		17,209
States and political subdivisions		-		244,940		4,319		249,259
Collateralized mortgage obligations		-		56,585		-		56,585
Asset-backed securities		-		131,818		-		131,818
Collateralized loan obligations		-		30,533		-		30,533
Loans held-for-sale		-		12,611		-		12,611
Mortgage servicing rights		-		-		4,224		4,224
Interest rate swap agreements		-		9,388		-		9,388
Mortgage banking derivatives		-		840		-		840
Total	$	4,117	$	510,581	$	8,543	$	523,241

Liabilities:
Interest rate swap agreements, including risk participation agreements	$	-	$	13,159	$	-	$	13,159
Total	$	-	$	13,159	$	-	$	13,159

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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


	Three Months Ended March 31, 2021
	Securities available-for-sale
	States and		Mortgage
	Political		Servicing
	Subdivisions		Rights
Beginning balance January 1, 2021	$	4,319	$	4,224
Total gains or losses
Included in earnings		(3)		1,485
Included in other comprehensive income		299		-
Purchases, issuances, sales, and settlements
Purchases		58		-
Issuances		-		552
Settlements		(32)		(372)
Ending balance March 31, 2021	$	4,641	$	5,889


	Three Months Ended March 31, 2020
	Securities available-for-sale
	States and		Mortgage
	Political		Servicing
	Subdivisions		Rights
Beginning balance January 1, 2020	$	5,419	$	5,935
Total gains or losses
Included in earnings		(6)		(1,859)
Included in other comprehensive income		(325)		-
Purchases, issuances, sales, and settlements
Purchases		6,100		-
Issuances		-		307
Settlements		(31)		(275)
Ending balance March 31, 2020	$	11,157	$	4,108

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

Weighted

Measured at fair value

Unobservable

Average

on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Mortgage servicing rights

5,889

Discounted Cash Flow

Discount Rate

11.0 - 15.0%

11.0

Prepayment Speed

4.7 - 41.7%

13.5

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

The following table and commentary presents quantitative and qualitative information about Level 3 fair value measurements as of December 31, 2020:

Weighted

Measured at fair value

Unobservable

Average

on a recurring basis:

Fair Value

Valuation Methodology

Inputs

Range of Input

of Inputs

Mortgage servicing rights

4,224

Discounted Cash Flow

Discount Rate

11.0 - 15.0%

11.0

Prepayment Speed

5.5 - 59.1

19.5

In addition to the above, Level 3 fair value measurement included $4.6 million for state and political subdivisions representing various local municipality securities at March 31, 2021. This was classified as securities available-for-sale, and was valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input. The state and political subdivisions securities balance in Level 3 fair value at March 31, 2020, was $11.2 million. These securities were classified as securities available-for-sale, and were valued using a discount based on market spreads of similar assets, but the liquidity premium was an unobservable input.

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

The Company may be required, from time to time, to measure certain other assets at fair value on a nonrecurring basis in accordance with GAAP. These assets consist of individually evaluated (formerly, impaired) loans and OREO. For assets measured at fair value on a nonrecurring basis at March 31, 2021, and December 31, 2020, respectively, the following tables provide the level of valuation assumptions used to determine each valuation and the carrying value of the related assets:


	March 31, 2021
	Level 1		Level 2		Level 3		Total
Individually evaluated loans¹	$	-	$	-	$	7,542	$	7,542
Other real estate owned, net²		-		-		2,163		2,163
Total	$	-	$	-	$	9,705	$	9,705

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; had a carrying amount of $10.4 million and a valuation allowance of $2.9 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $269,000 for the three months ended March 31, 2021.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $2.2 million at March 31, 2021, which is made up of the outstanding balance of $3.8 million, net of a valuation allowance of $1.6 million.


	December 31, 2020
	Level 1		Level 2		Level 3		Total
Individually evaluated loans¹	$	-	$	-	$	9,675	$	9,675
Other real estate owned, net²		-		-		2,474		2,474
Total	$	-	$	-	$	12,149	$	12,149

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; had a carrying amount of $12.3 million and a valuation allowance of $2.6 million resulting in an increase of specific allocations within the allowance for credit losses on loans of $1.4 million for the year ended December 31, 2020.

² OREO is measured at fair value, less costs to sell, and had a net carrying amount of $2.5 million at December 31, 2020, which is made up of the outstanding balance of $4.1 million, net of a valuation allowance of $1.6 million.

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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. March 31, 2021 and December 31, 2020, the fair values of loans and leases are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. The fair value of time deposits is 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 is not considered material.

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


	March 31, 2021
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	25,448	$	25,448	$	25,448	$	-	$	-
Interest earning deposits with financial institutions		415,497		415,497		415,497		-		-
Securities available-for-sale		593,280		593,280		4,102		584,537		4,641
FHLBC and FRBC stock		9,917		9,917		-		9,917		-
Loans held-for-sale		7,842		7,842		-		7,842		-
Net loans		1,928,658		1,920,676		-		-		1,920,676
Interest rate swap agreements		6,126		6,126		-		6,126		-
Interest rate lock commitments and forward contracts		1,234		1,234		-		1,234		-
Interest receivable on securities and loans		9,476		9,476		-		9,476		-

Financial liabilities:
Noninterest bearing deposits	$	982,664	$	982,664	$	982,664	$	-	$	-
Interest bearing deposits		1,673,878		1,675,943		-		1,675,943		-
Securities sold under repurchase agreements		77,321		77,321		-		77,321		-
Junior subordinated debentures		25,773		19,511		-		19,511		-
Senior notes		44,402		44,837		44,837		-		-
Note payable and other borrowings		22,314		22,815		-		22,815		-
Interest rate swap agreements		7,106		7,106		-		7,106		-
Interest payable on deposits and borrowings		999		999		-		999		-

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, 2020
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	24,306	$	24,306	$	24,306	$	-	$	-
Interest earning deposits with financial institutions		305,597		305,597		305,597		-		-
Securities available-for-sale		496,178		496,178		4,117		487,742		4,319
FHLBC and FRBC stock		9,917		9,917		-		9,917		-
Loans held-for-sale		12,611		12,611		-		12,611		-
Net loans		2,000,996		2,009,773		-		-		2,009,773
Interest rate swap agreements		9,388		9,388		-		9,388		-
Interest rate lock commitments and forward contracts		840		840		-		840		-
Interest receivable on securities and loans		9,698		9,698		-		9,698		-

Financial liabilities:
Noninterest bearing deposits	$	909,505	$	909,505	$	909,505	$	-	$	-
Interest bearing deposits		1,627,568		1,630,109		-		1,630,109		-
Securities sold under repurchase agreements		66,980		66,980		-		66,980		-
Junior subordinated debentures		25,773		14,658		-		14,658		-
Senior notes		44,375		44,600		44,600		-		-
Note payable and other borrowings		23,393		24,043		-		24,043		-
Interest rate swap agreements		13,071		13,071		-		13,071		-
Interest payable on deposits and borrowings		418		418		-		418		-

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 expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In December of 2019, the Company also executed a loan pool hedge of $50 million to convert variable rate loans to a fixed rate index for a five year term.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest income/expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are received on the Company’s variable-rate borrowings. During the next twelve

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

months, the Company estimates that an additional $181,000 will be reclassified as an increase to interest income and an additional $169,000 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. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives with financial counterparties are recognized directly in earnings.

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. Commitments to originate residential mortgage loans held-for-sale and forward commitments to sell residential mortgage loans or forward MBS contracts are considered derivative instruments and changes in the fair value are recorded to mortgage banking revenue. Fair values are estimated based on observable changes in mortgage interest rates including mortgage-backed securities prices from the date of the commitment.

Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The Company entered into a forward starting interest rate swap on August 18, 2015, with an effective date of June 15, 2017. This transaction had a notional amount totaling $25.8 million as of March 31, 2021, was designated as a cash flow hedge of certain junior subordinated debentures and was determined to be fully effective during the period presented. As such, no amount of ineffectiveness has been included in net income. Therefore, the aggregate fair value of the swap is recorded in other liabilities with changes in fair value recorded in other comprehensive income, net of tax. The amount included in other comprehensive income would be reclassified to current earnings should all or a portion of the hedge no longer be considered effective. The Company expects the hedge to remain fully effective during the remaining term of the swap. The Bank will pay the counterparty a fixed rate and receive a floating rate based on three month LIBOR. The trust preferred securities changed from fixed rate to floating rate on June 15, 2017. The cash flow hedge has a maturity date of June 15, 2037.

In December 2019, the Company also executed a loan pool hedge of $50.0 million to convert variable rate loans to a fixed rate index for a five year term. This transaction falls under hedge accounting standards and is paired against a pool of the Bank’s Libor-based loans. Overall, the new swap only bolsters income in down rate scenarios by a modest degree. We consider the current level of interest rate risk to be moderate but intend to continue looking for market opportunities to hedge further. The Bank held $1.0 million and $1.4 million of cash collateral related to one correspondent financial institution to cover the loan pool hedge mark to market valuation at March 31, 2021, and December 31, 2020, respectively.

The Bank also has interest rate derivative positions to assist with risk management that are not designated as hedging instruments. These derivative positions relate to transactions in which the Bank enters an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. The Bank had $17.2 million of cash collateral held by one correspondent financial institution to support interest rate swap activity and no investment securities were required to be pledged to any correspondent financial institution at March 31, 2021 and December 31, 2020. At March 31, 2021, the notional amount of non-hedging interest rate swaps was $177.7 million with a weighted average maturity of 5.6 years. At December 31, 2020, the notional amount of non-hedging interest rate swaps was $189.1 million with a weighted average maturity of 4.7 years. The Bank offsets derivative assets and liabilities that are subject to a master netting arrangement.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2021 and December 31, 2020.

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

Fair Value of Derivative Instruments


			March 31, 2021
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	2	75,774	Other Assets	1,832	Other Liabilities	2,812
Total derivatives designated as hedging instruments				1,832		2,812

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	27	177,709	Other Assets	4,294	Other Liabilities	4,294
Interest rate lock commitments and forward contracts	150	57,494	Other Assets	1,234	Other Liabilities	-
Other contracts	3	18,857	Other Assets	-	Other Liabilities	41
Total derivatives not designated as hedging instruments				5,528		4,335


			December 31, 2020
	No. of Trans.	Notional Amount $	Balance Sheet Location	Fair Value $	Balance Sheet Location	Fair Value $
Derivatives designated as hedging instruments
Interest rate swap agreements	2	75,774	Other Assets	2,697	Other Liabilities	6,380
Total derivatives designated as hedging instruments				2,697		6,380

Derivatives not designated as hedging instruments
Interest rate swaps with commercial loan customers	28	189,126	Other Assets	6,691	Other Liabilities	6,691
Interest rate lock commitments and forward contracts	205	84,472	Other Assets	840	Other Liabilities	-
Other contracts	4	26,523	Other Assets	-	Other Liabilities	88
Total derivatives not designated as hedging instruments				7,531		6,779

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 $705,000 as of March 31, 2021, and $4.1 million as of March 31, 2020. The amount of the gain or (loss) reclassified from AOCI to interest income or interest expense on the income statement totaled $12,000 and ($86,000) for the three months ended March 31, 2021, and March 31, 2020, respectively.

Credit-risk-related Contingent Features

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

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

Table of Contents

Old Second Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

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

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

●

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

●

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

●

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

The Bank also issues letters of credit, which are conditional commitments that guarantee the performance of a customer to a third party. The credit risk involved and collateral obtained in issuing letters of credit are essentially the same as that involved in extending loan commitments to our customers. In addition to customer related commitments, the Company is responsible for letters of credit commitments that relate to properties held in OREO. The following table represents the Company’s contractual commitments due to letters of credit as of March 31, 2021, and December 31, 2020.

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


	March 31, 2021						December 31, 2020
	Fixed		Variable		Total		Fixed		Variable		Total
Letters of credit:
Borrower:
Financial standby	$	329	$	8,979	$	9,308	$	329	$	9,051	$	9,380
Commercial standby		-		-		-		-		-		-
Performance standby		356		6,514		6,870		356		4,517		4,873
		685		15,493		16,178		685		13,568		14,253
Non-borrower:
Performance standby		-		67		67		-		67		67
Total letters of credit	$	685	$	15,560	$	16,245	$	685	$	13,635	$	14,320

Unused loan commitments:	$	124,118	$	320,101	$	444,219	$	88,883	$	316,298	$	405,181

As of March 31, 2021, the Company evaluated current market conditions, including the impacts related to COVID-19 and market interest rates during the first quarter of 2021, and based on that analysis under the CECL methodology, the Company determined credit losses related to unfunded commitments totaled $3.5 million. The increase in the ACL for unfunded commitments of $470,000 for the first quarter of 2021, compared to the prior quarter end, is primarily related to an increase in the commercial unfunded commitments funding rate assumptions based on our analysis of the last 12 months of utilization. The Company will continue to assess the credit risk at least quarterly, and adjust the allowance for unfunded commitments, which is carried within other liabilities on our Consolidated Balance Sheet, as needed, with the appropriate offsetting entry to the provision for credit losses on our Consolidated Statements of Income.

Table of Contents

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 months ended March 31, 2021, compared to the three months ended March 31, 2020, and our financial condition at March 31, 2021, compared to December 31, 2020. 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, 2020. The results of operations for the three months ended March 31, 2021, are not necessarily indicative of future results. Dollar amounts presented in the following tables are in thousands, except per share data, and March 2021 and 2020 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 29 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.

Recent Events—COVID-19

The COVID-19 pandemic continues to create extensive disruptions to the global economy and financial markets and to businesses and the lives of individuals throughout the world.

The impact of the COVID-19 pandemic is fluid and continues to evolve, adversely affecting many of our clients. The unprecedented and rapid spread of COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity, unemployment, consumer spending, and other economic activities has resulted in less economic activity, lower equity market valuations and significant volatility and disruption in financial markets. Market interest rates, after falling to historically low levels due to the COVID-19 pandemic through the second quarter of 2020, have generally stabilized, while intermediate and longer-term Treasury rates have begun to rise. The low interest rate environment, and the other effects of the COVID-19 pandemic have had, and are expected to continue to have, possibly materially, an adverse effect on our business, financial condition and results of operations. For instance, the pandemic has had negative effects on our interest income, ACL, and certain transaction-based line items of noninterest income. The ultimate extent of the impact of the COVID-19 pandemic on our business, financial condition and results of operations is currently uncertain and will depend on various developments and other factors, including the effect of governmental and private sector initiatives, the effect of the recent rollout of vaccinations for the virus, whether such vaccinations will be effective against any resurgence of the virus, including any new strain, and the ability for customers and businesses to return to their pre-pandemic routine.

Results of Operation and Financial Condition

We are monitoring the impact of the COVID-19 pandemic on our results of operation and financial condition. To date, the COVID-19 pandemic has not significantly impacted the health of the overall real estate industry in our markets, which have reflected relative stability over the past three years. In addition, we have not experienced significant incurred losses on loans or received communications from our borrowers that significant losses are imminent. While management does not currently expect the next year to result in the precipitous decline in the value of certain real estate assets similar to the declines seen in 2009 to 2010, our forecast includes assumptions for certain

Table of Contents

loss scenarios that may occur due to the exhaustion of federal stimulus funds or a decrease in market valuations. Accordingly, we determined it prudent to increase our allowance for credit losses to $33.9 million as of December 31, 2020, driven by both our adoption of the new CECL methodology and the expected impact of the COVID-19 pandemic and market interest rate reductions in anticipation of continued market risk and uncertainty. During the first quarter of 2021, unemployment expectations and other market indicators reflected an improving economic outlook, which resulted in a net benefit of $3.0 million in our provision for credit losses, comprised of a $3.5 million reserve release on loans and an additional $470,000 of expense in our provision for credit losses on unfunded commitments.

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

As of March 31, 2021 and December 31, 2020, we had $18.6 million of goodwill. At November 30, 2020, we performed our recurring annual review for any goodwill impairment. We determined no goodwill impairment existed, however, continued delayed recovery or further deterioration in market conditions related to the general economy, financial markets, and the associated impacts on our customers, employees and vendors, among other factors, could significantly impact the impairment analysis and may result in future goodwill impairment charges that, if incurred, could have a material adverse effect on our results of operations and financial condition.

Lending Operations and Accommodations to Borrowers

To more fully support our customers during the pandemic, we established client assistance programs, including offering commercial, consumer, and mortgage loan payment deferrals for certain clients. As of March 31, 2021, we have executed 504 of these deferrals on loan balances of $237.7 million since March 31, 2020. In accordance with interagency guidance issued in March 2020, these short term deferrals were not considered troubled debt restructurings. As of March 31, 2021, 464 loans previously in deferral status, representing loan balances of $218.5 million, had resumed payments or paid off, and 40 loans totaling $19.2 million remained in active deferral status, of which only $4.3 million were in nonaccrual status. We also suspended late fees for consumer loans through June 30, 2020, and, although consumer late fees have been reinstated, we will continue to evaluate any late fee suspension based on the borrower’s financial situation and prior payment history. In addition, we paused new foreclosure and repossession actions through March 31, 2021, and will continue to re-evaluate these activities based on the ongoing COVID-19 pandemic. These programs may negatively impact our revenue and other results of operations in the near term and, if not effective in mitigating the effect of COVID-19 on our customers, may adversely affect our business and results of operations more substantially over a longer period of time. Future governmental actions may require these and other types of customer-related responses.

We are also participating in the CARES Act. During 2020, as part of the first round of the SBA PPP program, we processed 746 PPP loan applications, representing a total of $136.7 million. In early October, we started the application process for PPP loan forgiveness, and have received $90.8 million of funds from payment forgiveness as of March 31, 2021. We expect this application process to continue through the second quarter of 2021, with funds to be received from the SBA for the forgiven loans into the third quarter of 2021. Due to the governmental authorization of the second round of the SBA PPP in late 2020, we originated an additional $58.3 million on 481 PPP loans in the first quarter of 2021, and anticipate filing for forgiveness of these loans with the SBA in the latter half of 2021. We recorded $504,000 of net fee income on PPP loans in the first quarter of 2021, and as of March 31, 2021, unearned net fee income on both first and second round PPP loans totaled $2.5 million. In addition, as of March 31, 2021, we had originated two loans for $305,000 under the Main Street Lending Program.

Capital and Liquidity

As of March 31, 2021, all of our capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by credit losses.

We believe there could be potential stresses on liquidity management as a result of the COVID-19 pandemic. For instance, as customers manage their own liquidity stress, we could experience an increase in the utilization of existing lines of credit.

We have developed new processes to monitor our liquidity on a daily basis, and have run stress testing based on various economic assumptions under stress and severe stress scenarios. In addition, management continues to communicate bi-weekly in structured meetings with key staff to ensure all current events related to the COVID-19 pandemic, such as federal government stimulus check receipt, PPP loan fundings and the forgiveness application process, are managed appropriately.

Table of Contents

Financial Overview

Our community-focused banking franchise experienced a decrease in total loans in the first quarter of 2021, compared to the year ended December 31, 2020, but an increase in total loans compared to the first quarter of 2020, and we believe we are positioned for moderate loan growth as we continue to serve our customers’ needs in a competitive economic environment. Given the ongoing, dynamic and unprecedented nature of the COVID-19 pandemic, it is difficult to predict the full impact the pandemic will have on our business; however, we expect the pandemic will make it challenging for us to attain the levels of profitability and growth we have experienced in the past five years. We are continuing to seek to provide value to our customers and the communities in which we operate, by executing on growth opportunities in our local markets and developing new banking relationships, while ensuring the safety and soundness of our Bank, our customers and our employees during the COVID-19 pandemic.

The following provides an overview of some of the factors impacting our financial performance for the three month period ended March 31, 2021, compared to the like period ended March 31, 2020:

●

Net income for the first quarter of 2021 was $11.9 million, or $0.40 per diluted share, compared to $275,000, or $0.01 per diluted share, for the first quarter of 2020.

●

Net interest and dividend income was $23.5 million for the first quarter of 2021, compared to $22.7 million for the first quarter of 2020. The increase in 2021 was primarily due to the year over year decline in interest expense, due to the acceleration of debt issuance costs of $635,000 stemming from our redemption of the trust preferred securities issued by Old Second Capital Trust I and related junior subordinated debentures, which totaled $32.6 million, in March 2020, as well as a decline in market interest rates, which negatively impacted loan and security income, but also reduced time deposit interest expense year over year.

●

The provision for credit losses resulted in a $3.0 million net benefit driven by a reserve release in the first quarter of 2021, consisting of a $3.5 million reserve release related to loans and a provision for credit loss expense of $470,000 related to unfunded commitments, compared to a provision for credit losses of $8.0 million recorded in the first quarter of 2020. We adopted the new current expected credit losses accounting standard, or CECL, effective January 1, 2020, which measures the allowance based on management’s best estimate of lifetime expected credit losses inherent in our lending activities, which resulted in a $5.9 million allowance for credit losses related to loans and a $1.7 million allowance for credit losses related to unfunded commitments as of January 1, 2020. The provision expense recorded in 2020 was impacted by both our adoption of the new CECL methodology and the expected impact, as of March 31, 2020, of the COVID-19 pandemic on future losses.

●

Noninterest income was $11.3 million for the first quarter of 2021, compared to $6.3 million for the first quarter of 2020. The increase in 2021 was primarily due to a $4.9 million increase in mortgage banking revenue, primarily stemming from a more favorable mark to market adjustments on MSRs of $3.2 million, and a $1.5 million increase in net gain on sales of mortgage loans. In addition, a net increase of $383,000 was recorded related to the cash surrender value of bank owned life insurance (“BOLI”) for the first quarter of 2021, compared the first quarter of 2020, as market interest rates have partially recovered from the lows experienced at the end of the first quarter of 2020. Partially offsetting these increases was a reduction of $531,000 in service charges on deposits due to a reduction in overdraft fees stemming from COVID-19 related commercial and consumer spending declines.

●

Noninterest expense was $21.7 million for the first quarter of 2021, compared to $21.0 million for the first quarter of 2020, an increase of $736,000, or 3.5%. The increase in 2021 was primarily due to an increase in salaries and employee benefits expense driven by an increase in annual officer incentive expense and related payroll taxes and Company 401K match, increases in occupancy, furniture and equipment expense and an increase in FDIC insurance expense related to assessment credits received in 2020.

●

The provision for income taxes was $4.2 million for the first quarter of 2021, compared to a tax benefit of $281,000 for the first quarter of 2020. Pretax income was $16.1 million in the first quarter of 2021, compared to a $6,000 pretax loss for the first quarter of 2020.

●

Asset quality remained consistent with nonperforming loans as a percent of total loans remaining steady at 1.1% as of March 31, 2021, December 31, 2020, and March 31, 2020.

●

During the first quarter of 2021, we repurchased 455,134 shares of our common stock at a weighted average price of $12.31 per share pursuant to our stock repurchase program.

Table of Contents

Critical Accounting Policies

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

Of the significant accounting policies used in the preparation of our consolidated financial statements, we have identified certain items as critical accounting policies based on the associated estimates, assumptions, judgments and complexity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2020. 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 2020 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, our adjusted efficiency ratio, our tangible common equity to tangible assets ratio, and our core net interest margin on a TE basis. Management believes that the presentation of these non-GAAP financial measures (a) provides important supplemental information that contributes to a proper understanding of our operating performance, (b) enables a more complete understanding of factors and trends affecting our business, and (c) allows investors to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP measures as follows: in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. However, we acknowledge that these non-GAAP financial measures have a number of limitations. Limitations associated with non-GAAP financial measures include the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. These disclosures should not be considered an alternative to our GAAP results. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP financial measures is presented below or alongside the first instance where each non-GAAP financial measure is used.

Results of Operations

Overview

Three months ended March 31, 2021 and 2020

Our income before taxes was $16.1 million in the first quarter of 2021 compared to a pretax loss of $6,000 in the first quarter of 2020. This increase in pretax income was primarily due to a net benefit of $3.0 million related to the provision for credit losses driven primarily by a reserve release on loans in the first quarter of 2021, compared to provision expense of $8.0 million in the first quarter of 2020. In addition, noninterest income increased $5.0 million in the first quarter of 2021, compared to the first quarter of 2020, primarily due to growth in mortgage banking revenue, which increased $4.9 million due to more favorable mark to market adjustments on MSRs and an increase in net gain on sales of mortgage loans due to higher origination volumes in the low rate environment. Net interest income also increased $885,000 in the first quarter of 2021, compared to the first quarter of 2020. Partially offsetting these increases to net income was a $736,000 increase in noninterest expense in the first quarter of 2021, compared to the first quarter of 2020, primarily due to growth in salaries and employee benefits expenses, occupancy, furniture and equipment, and FDIC insurance costs. Our net income was $11.9 million, or $0.40 per diluted share, for the first quarter of 2021, compared to net income of $275,000, or $0.01 per diluted share, for the first quarter of 2020.

Net interest and dividend income was $23.5 million in the first quarter of 2021, compared to $22.7 million in the first quarter of 2020. The $885,000 increase was primarily driven by a $2.9 million reduction in interest expense, due to the redemption of the Old Second Capital Trust I trust preferred securities and related subordinated debentures in the first quarter of 2020, as well as the market interest rate reductions year over year, which contributed to the decrease in the cost of deposit interest expense related to time deposits of $1.3 million, and savings, NOW and money market accounts of $394,000. Interest and dividend income also decreased in the first quarter of 2021 compared to the first quarter of 2020, but at a lesser rate than the decline in interest expense. A $2.1 million decrease in interest and

Table of Contents

dividend income in the first quarter of 2021, compared to the first quarter of 2020, was driven by the reduction in market interest rates on loans and securities. Loan growth of $2.4 million was recorded in the year over year period, but interest income on loans declined $1.4 million in the first quarter of 2021, compared to the like period in 2020. Securities available-for-sale increased $143.6 million as of March 31, 2021, compared to March 31, 2020, but interest income recorded on securities available-for-sale decreased $696,000 in the year over year period.

Management has remained diligent in reviewing our loan portfolio to analyze and determine if charge-offs are required. Average loan growth, including loans held for sale, in the first quarter of 2021, compared to the first quarter of 2020, totaled $64.4 million, stemming primarily from 481 PPP loans originated in the first quarters of 2021 totaling $58.3 million, as well organic growth primarily in our commercial, leases, commercial real estate-investor and construction portfolios.

Net Interest Income

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

Three months ended March 31, 2021 and 2020

Our net interest and dividend income increased by $885,000 to $23.5 million, for the first quarter of 2021, from $22.7 million for the first quarter of 2020. This increase was attributable to a $2.9 million, or 61.4%, decrease in interest expense for the first quarter of 2021 compared to the first quarter of 2020, partially offset by a $2.1 million decrease in interest and dividend income. The decline in interest expense was due to lower rates for all interest earning deposits in the first quarter of 2021, as well as the redemption of the Old Second Capital Trust I preferred securities and related subordinated debentures in the first quarter of 2020, which increased interest expense by $635,000 due to the acceleration of unamortized debt issuance costs. Net interest and dividend income for the first quarter of 2021 reflected a decrease of $334,000, or 1.4%, compared to the fourth quarter of 2020.

Average earning assets for the first quarter of 2021 were $2.92 billion, reflecting an increase of $116.8 million, or 4.2%, compared to the fourth quarter of 2020, and an increase of $457.5 million, or 18.6%, compared to the first quarter of 2020. Average interest earning deposits with financial institutions totaled $359.6 million for the first quarter of 2021, which reflected an increase of $84.5 million compared to the fourth quarter of 2020, and an increase of $331.6 million compared to the first quarter of 2020. The yield on average interest earning deposits decreased to ten basis points for the first quarter of 2020, from 108 basis points for the first quarter of 2020, which drove the overall reduction in the yield on interest earning assets year over year. Total average loans, including loans held-for-sale, totaled $2.01 billion in the first quarter of 2020, which reflected a decrease of $18.0 million compared to the fourth quarter of 2020, but an increase of $69.4 million compared to the first quarter of 2020. The growth in average loan balances year over year was primarily due to an increase in commercial loans related to PPP loan originations, and organic growth in our leases, commercial real estate-investor, and construction loan portfolios. This growth in loan volumes was offset by the reduction in market interest rates over the past year, which resulted in a decrease in interest income of $1.4 million related to loans in the year over year period. For the first quarter of 2021, the yield on average loans decreased to 4.48%, compared to the yield on average loans of 4.51% for the fourth quarter of 2020, and 4.89% for the first quarter of 2020. Securities also reflected a reduction in interest income year over year, due to decreases in market interest rates over the past year, partially offset by growth in volumes. Total average securities for the first quarter of 2021 increased $50.3 million from the fourth quarter of 2020, and increased $56.5 million from the first quarter of 2020. The yield on average securities declined to 2.49% for the first quarter of 2021, compared to 2.55% for the fourth quarter of 2020 and 3.39% for first quarter of 2020.

Average interest bearing liabilities increased $68.0 million, or 3.9%, in the first quarter of 2021, compared to the fourth quarter of 2020, and increased $161.0 million, or 9.8%, compared to the first quarter of 2020. The growth in average interest bearing deposits of $59.0 million from the prior linked quarter and $162.2 million from the first quarter of 2020 was primarily due to federal stimulus funds received by depositors and growth in depositor liquidity due to market uncertainty related to the COVID-19 pandemic. In addition, we experienced growth in average noninterest bearing deposits of $33.7 million from the prior linked quarter, and $260.3 million from the year over year period, as reductions in market interest rates over the past year have provided less incentive to maintain funds in interest bearing deposits.

Table of Contents

Due to the significant increase in cash and due from banks stemming from federal stimulus funds received and PPP loan forgiveness, we had no average other short-term borrowings, which consist of FHLBC advances, in the first quarter of 2021, compared to the $5.4 million in the fourth quarter of 2020 and $23.1 million in the first quarter of 2020. The average rate paid on short-term FHLBC advances was impacted by the reduction in interest rates in 2020, resulting in an average rate of 0.88% for the fourth quarter of 2020, compared to 1.90% for the first quarter of 2020. As of March 31, 2021, notes payable and other borrowings consisted of one long-term FHLBC advance of $6.3 million, and $16.0 million outstanding on a term note with a correspondent bank originated in the first quarter of 2020 to fund our redemption of the Old Second Capital Trust I trust preferred securities and related junior subordinated debentures of $32.6 million. This redemption occurred in March 2020 and was the primary cause of the decrease of 721 basis points in the cost of the average junior subordinated debentures for the first quarter of 2021 compared to the first quarter of 2020. The rate paid on the redeemed junior subordinated debentures was 7.8%, in comparison to the rate to be paid going forward on the newly executed $20.0 million term note of one month Libor plus 175 basis points.

Our net interest margin, expressed as a percentage of average earning assets, was 3.27% for the first quarter of 2021, reflecting a 12 basis point decrease from the fourth quarter of 2020, and a 44 basis point decrease from the first quarter of 2020. Our net interest margin, on a tax-equivalent (TE) basis, expressed as a percentage of average earning assets, was 3.32% for the first quarter of 2021, reflecting a 12 basis point decrease from the fourth quarter of 2020, and a 45 basis point decrease from the first quarter of 2020. The average tax-equivalent yield on earning assets decreased to 3.58% for the first quarter of 2021, compared to 3.74% for the fourth quarter of 2020, and 4.55% for the first quarter of 2020. The decreases in net interest margin and the yield on average earning assets for the first quarter of 2021, compared to the fourth quarter of 2020, was primarily attributable to growth in lower yielding interest earning deposits with financial institutions, as well as a decline in loan volumes and interest rate reductions which impacted loans and securities in the first quarter of 2021. Average PPP loans for the first quarter of 2021 totaled $94.1 million, which resulted in an increase to our net interest margin (TE) of one basis point for the quarter as $27.8 million of these loans were forgiven in the first quarter of 2021, which accelerated the unamortized fee recognition on these loans. The cost of funds on interest bearing liabilities was 0.41% for the first quarter of 2021, 0.49% for the fourth quarter of 2020, and 1.17% for the first quarter of 2020. The decrease in our cost of funds in the first quarter of 2021 compared to the fourth quarter of 2020 and the first quarter of 2020 was primarily driven by a decline in the rates paid on deposits, a decline in volume and rates paid on short-term borrowings, and the redemption of our junior subordinated debentures in the first quarter of 2020 which resulted in the average yield on our junior subordinated debentures of 4.41% for the first quarter of 2021, compared to 11.62% in the prior year like quarter.

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 table sets forth certain information relating to our average consolidated balance sheet and reflect the yield on average earning assets and cost of average interest bearing liabilities for the periods indicated. These yields reflect the related interest, on an annualized basis, divided by the average balance of assets or liabilities over the applicable period. Average balances are derived from daily balances. For purposes of discussion, net interest income and net interest income to total earning assets in the following tables have been adjusted to a non-GAAP TE basis using a marginal rate of 21% in 2021 and 2020 to more appropriately compare returns on tax-exempt loans and securities to other earning assets.

Table of Contents


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

	Quarters Ended
	March 31, 2021						December 31, 2020						March 31, 2020
	Average			Income /		Rate	Average			Income /		Rate	Average			Income /		Rate
	Balance			Expense		%	Balance			Expense		%	Balance			Expense		%
Assets
Interest earning deposits with financial institutions	$	359,576		$	92	0.10	$	275,087		$	73	0.11	$	27,989		$	75	1.08
Securities:
Taxable		340,873			1,615	1.92		288,089			1,458	2.01		273,429			2,163	3.18
Non-taxable (TE)¹		191,357			1,655	3.51		193,859			1,637	3.36		202,289			1,842	3.66
Total securities (TE)¹		532,230			3,270	2.49		481,948			3,095	2.55		475,718			4,005	3.39
Dividends from FHLBC and FRBC		9,917			115	4.70		9,917			118	4.73		9,917			125	5.07
Loans and loans held-for-sale^{1, 2}		2,014,773			22,266	4.48		2,032,741			23,067	4.51		1,945,383			23,636	4.89
Total interest earning assets		2,916,496			25,743	3.58		2,799,693			26,353	3.74		2,459,007			27,841	4.55
Cash and due from banks		28,461			-	-		30,086			-	-		32,549			-	-
Allowance for credit losses on loans		(34,540)			-	-		(33,255)			-	-		(23,507)			-	-
Other noninterest bearing assets		187,488			-	-		192,421			-	-		172,712			-	-
Total assets	$	3,097,905					$	2,988,945					$	2,640,761

Liabilities and Stockholders' Equity
NOW accounts	$	495,384		$	95	0.08	$	474,470		$	96	0.08	$	422,065		$	233	0.22
Money market accounts		329,050			77	0.09		317,780			85	0.11		280,828			236	0.34
Savings accounts		412,743			69	0.07		391,904			69	0.07		322,618			166	0.21
Time deposits		399,310			500	0.51		393,297			741	0.75		448,763			1,766	1.58
Interest bearing deposits		1,636,487			741	0.18		1,577,451			991	0.25		1,474,274			2,401	0.66
Securities sold under repurchase agreements		82,475			31	0.15		67,059			35	0.21		47,825			116	0.98
Other short-term borrowings		-			-	-		5,448			12	0.88		23,069			109	1.90
Junior subordinated debentures		25,773			280	4.41		25,773			283	4.37		47,200			1,364	11.62
Senior notes		44,389			673	6.15		44,363			673	6.04		44,284			673	6.11
Notes payable and other borrowings		23,330			123	2.14		24,407			135	2.20		14,762			130	3.54
Total interest bearing liabilities		1,812,454			1,848	0.41		1,744,501			2,129	0.49		1,651,414			4,793	1.17
Noninterest bearing deposits		937,039			-	-		903,383			-	-		676,755			-	-
Other liabilities		37,801			-	-		39,281			-	-		28,490			-	-
Stockholders' equity		310,611			-	-		301,780			-	-		284,102			-	-
Total liabilities and stockholders' equity	$	3,097,905					$	2,988,945					$	2,640,761
Net interest income (GAAP)				$	23,543					$	23,877					$	22,658
Net interest margin (GAAP)						3.27						3.39						3.71

Net interest income (TE)¹				$	23,895					$	24,224					$	23,048
Net interest margin (TE)¹						3.32						3.44						3.77
Core net interest margin (TE - excluding PPP loans)¹						3.33						3.32						3.77
Interest bearing liabilities to earning assets		62.14	%					62.31	%					67.16	%

¹Represents a non-GAAP financial measure. See the discussion entitled “Non-GAAP Presentations” 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 2021 and 2020.

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 50, and includes fees of $1.3 million, $2.3 million, and $294,000 for the first quarter of 2021, the fourth quarter of 2020, and the first quarter of 2020, respectively. Nonaccrual loans are included in the above-stated average balances.

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 2021 and 2020 to more appropriately compare returns 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:

Table of Contents


	Three Months Ended
	March 31,			December 31,			March 31,
Net Interest Margin	2021			2020			2020


Interest income (GAAP)	$	25,391		$	26,006		$	27,451
Taxable-equivalent adjustment:
Loans		4			3			3
Securities		348			344			387
Interest and dividend income (TE)		25,743			26,353			27,841
Interest expense (GAAP)		1,848			2,129			4,793
Net interest income (TE)	$	23,895		$	24,224		$	23,048
Paycheck Protection Program ("PPP") loan - interest and net fee income		741			1,777			NA
Net interest income (TE) - excluding PPP loans	$	23,154			22,447			23,048
Net interest income (GAAP)	$	23,543		$	23,877		$	22,658
Average interest earning assets	$	2,916,496		$	2,799,693		$	2,459,007
Average PPP loans	$	94,149		$	111,491			N/A
Average interest earning assets, excluding PPP loans	$	2,822,347			2,688,202			2,459,007
Net interest margin (GAAP)		3.27	%		3.39	%		3.71	%
Net interest margin (TE)		3.32	%		3.44	%		3.77	%
Core net interest margin (TE - excluding PPP loans)		3.33	%		3.32	%		3.77	%

Table of Contents

Noninterest Income

Three months ended March 31, 2021 and 2020

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


							1st Quarter 2021
Noninterest Income	Three Months Ended						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Wealth management	$	2,151	$	2,112	$	1,906	1.8	12.9
Service charges on deposits		1,195		1,344		1,726	(11.1)	(30.8)
Residential mortgage banking revenue
Secondary mortgage fees		322		387		270	(16.8)	19.3
Mortgage servicing rights mark to market gain (loss)		1,113		(1,260)		(2,134)	188.3	152.2
Mortgage servicing income		567		503		468	12.7	21.2
Net gain on sales of mortgage loans		3,721		3,396		2,246	9.6	65.7
Total residential mortgage banking revenue		5,723		3,026		850	89.1	573.3
Securities losses, net		-		-		(24)	-	100.0
Change in cash surrender value of BOLI		334		291		(49)	14.8	781.6
Card related income		1,447		1,435		1,287	0.8	12.4
Other income		450		577		626	(22.0)	(28.1)
Total noninterest income	$	11,300	$	8,785	$	6,322	28.6	78.7

Noninterest income increased $2.5 million, or 28.6%, in the first quarter of 2021, compared to the fourth quarter of 2020, and increased $5.0 million, or 78.7%, compared to the first quarter of 2020. The increase from both the linked quarter and the prior year quarter was primarily driven by an increase in residential mortgage banking revenue, primarily due to favorable adjustments on the mark to market valuation of MSRs and net gain on sales of mortgage loans, both stemming from the low market interest rate environment over the past year. In addition, the change in cash surrender value of BOLI increased from both the linked quarter and the year over year period due to market interest rate growth since March 31, 2020. Wealth management income also increased from both the linked quarter and year over year, as the valuation of assets under management increased due to market interest rate growth, which impacted fees assessed.

Partially offsetting these increases was a $149,000 decrease in service charges on deposits in the first quarter of 2021 compared to the linked quarter and a $531,000 decrease year over year, as federal stimulus funds were received by many of our depositors over the past year, and customer spending decreased due to uncertainty stemming from the COVID-19 pandemic, causing overdraft fees to decrease commensurately. Other income also decreased $127,000 for the first quarter of 2021, compared to the linked quarter due to various miscellaneous recoveries recorded in the fourth quarter of 2020, and decreased $176,000 compared to the prior year period, primarily due to a reduction in commercial interest rate swap fees.

Table of Contents

Noninterest Expense

Three months ended March 31, 2021 and 2020

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


										1st Quarter 2021
Noninterest Expense	Three Months Ended									Percent Change From
(Dollars in thousands)	March 31,			December 31,			March 31,			December 31,	March 31,
	2021			2020			2020			2020	2020
Salaries	$	9,216		$	9,978		$	9,761		(7.6)	(5.6)
Officers incentive		1,653			680			958		143.1	72.5
Benefits and other		2,637			2,043			2,199		29.1	19.9
Total salaries and employee benefits		13,506			12,701			12,918		6.3	4.6
Occupancy, furniture and equipment expense		2,467			2,259			2,301		9.2	7.2
Computer and data processing		1,298			1,335			1,335		(2.8)	(2.8)
FDIC insurance		201			194			57		3.6	252.6
General bank insurance		276			266			246		3.8	12.2
Amortization of core deposit intangible asset		120			120			128		-	(6.3)
Advertising expense		60			70			109		(14.3)	(45.0)
Card related expense		593			583			532		1.7	11.5
Legal fees		55			285			131		(80.7)	(58.0)
Other real estate owned expense, net		36			146			237		(75.3)	(84.8)
Other expense		3,126			3,294			3,008		(5.1)	3.9
Total noninterest expense	$	21,738		$	21,253		$	21,002		2.3	3.5
Efficiency ratio (GAAP)¹		63.98	%		61.87	%		66.28	%
Adjusted efficiency ratio (non-GAAP)²		63.16	%		61.10	%		65.48	%

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 and OREO expenses, divided by the sum of net interest income on a fully tax equivalent basis, total noninterest income less net gains or losses on securities and mark to market gains or losses on MSRs, and includes a tax equivalent adjustment on the change in cash surrender value of BOLI.

See the section entitled “Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures” on page 48 for a reconciliation of this non-GAAP measure to the most comparable GAAP equivalent.

Noninterest expense for the first quarter of 2021 increased $485,000, or 2.3%, compared to the fourth quarter of 2020, and increased $736,000, or 3.5%, compared to the first quarter of 2020. The linked quarter increase is primarily attributable to an $805,000 increase in salaries and employee benefits in the first quarter of 2021 and a $588,000 increase in salaries and employee benefits from the first quarter of 2020, driven by an increase in officer incentive expense and related increases in payroll taxes and company 401K matching expense. These increases to officer incentive and benefits expense were partially offset by an increase in deferrals of new loan origination costs related to PPP loans in the first quarter of 2021, which reduced salary expense in the first quarter of 2021 by $1.1 million, compared to new loan origination cost deferrals of $705,000 in the fourth quarter of 2020 and $733,000 in the first quarter of 2020.

The increase in noninterest expense for the first quarter of 2021 compared to the linked quarter and prior year quarter was also due to an increase in occupancy, furniture and equipment expense, FDIC insurance expense and general bank insurance expense. FDIC insurance expense increased $144,000 year over year due to assessment credits received in the first quarter of 2020, and general bank insurance expense increased year over year due to an increase in policy costs. These increases were partially offset by decreases in legal fees of $230,000 and $76,000 for the linked quarter and year over year, respectively, due to a decline in loan volumes and related legal fees, as

Table of Contents

well as reductions in other real estate owned expense, net, of $110,000 and $201,000 for the linked quarter and year over year, respectively, due to a reduction in other real estate held.

Reconciliation of Adjusted Efficiency Ratio Non-GAAP Financial Measures


	GAAP									Non-GAAP
		Three Months Ended									Three Months Ended
	March 31,			December 31,			March 31,			March 31,			December 31,			March 31,
	2021			2020			2020			2021			2020			2020
Efficiency Ratio / Adjusted Efficiency Ratio


Noninterest expense	$	21,738		$	21,253		$	21,002		$	21,738		$	21,253		$	21,002
Less amortization of core deposit		120			120			128			120			120			128
Less other real estate expense, net		36			146			237			36			146			237
Noninterest expense less adjustments	$	21,582		$	20,987		$	20,637		$	21,582		$	20,987		$	20,637

Net interest income	$	23,543		$	23,877		$	22,658		$	23,543		$	23,877		$	22,658
Taxable-equivalent adjustment:
Loans		N/A			N/A			N/A			4			3			3
Securities		N/A			N/A			N/A			348			344			387
Net interest income including adjustments		23,543			23,877			22,658			23,895			24,224			23,048
Noninterest income		11,300			8,785			6,322			11,300			8,785			6,322
Less death benefit related to BOLI		-			-			-			-			-			-
Less securities losses, net		-			-			(24)			-			-			(24)
Less MSRs mark to market gains (losses)		1,113			(1,260)			(2,134)			1,113			(1,260)			(2,134)
Taxable-equivalent adjustment:
Change in cash surrender value of BOLI		N/A			N/A			N/A			89			77			(13)
Noninterest income (less) / including adjustments		10,187			10,045			8,480			10,276			10,122			8,467

Net interest income including adjustments plus noninterest income (less) / including adjustments	$	33,730		$	33,922		$	31,138		$	34,171		$	34,346		$	31,515
Efficiency ratio / Adjusted efficiency ratio		63.98	%		61.87	%		66.28	%		63.16	%		61.10	%		65.48	%

Table of Contents

Income Taxes

We recorded income tax expense of $4.2 million for the first quarter of 2021 on $16.1 million of pretax income, compared to income tax expense of $3.4 million on $11.4 million of pretax income in the fourth quarter of 2020, and an income tax benefit of $281,000 on $6,000 of pretax loss in the first quarter of 2020. The effective tax rate was 26.2% for the first quarter of 2021 and 29.5% for the fourth quarter of 2020; the effective tax rate was not meaningful for the first quarter of 2020, due to the pretax loss.

Income tax expense reflected all relevant statutory tax rates and GAAP accounting. There were no significant changes in our ability to utilize our deferred tax assets during the quarter ended March 31, 2021. We had no valuation reserve on the deferred tax assets as of March 31, 2021.

Financial Condition

Total assets increased $125.8 million to $3.17 billion at March 31, 2021, from $3.04 billion at December 31, 2020, due primarily to an increase in cash and cash equivalents of $111.0 million and securities available-for-sale of $97.1 million, partially offset by a reduction in loans of $75.2 million. We continue to actively assess potential investment opportunities for this excess liquidity. Total deposits were $2.66 billion at March 31, 2021, an increase of $119.5 million from December 31, 2020, primarily due to increases in noninterest bearing demand accounts, savings, money market and NOW accounts due to a decrease in consumer spending during the COVID-19 pandemic, and federal stimulus funds received by many depositors.


							March 31, 2021
Securities	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Securities available-for-sale, at fair value
U.S. Treasuries	$	4,102	$	4,117	$	4,152	(0.4)	(1.2)
U.S. government agencies		6,361		6,657		7,723	(4.4)	(17.6)
U.S. government agencies mortgage-backed		70,602		17,209		17,255	310.3	309.2
States and political subdivisions		242,146		249,259		255,095	(2.9)	(5.1)
Corporate bonds		34,843		-		-	100.0	100.0
Collateralized mortgage obligations		74,936		56,585		53,403	32.4	40.3
Asset-backed securities		130,368		131,818		77,727	(1.1)	67.7
Collateralized loan obligations		29,922		30,533		34,339	(2.0)	(12.9)
Total securities	$	593,280	$	496,178	$	449,694	19.6	31.9

Securities available-for-sale increased $97.1 million as of March 31, 2021, compared to December 31, 2020, and increased $143.6 million compared to March 31, 2020. Available-for-sale security purchases during the quarter ended March 31, 2021, totaled $109.8 million and consisted of $55.2 million of U.S. agency mortgage backed securities, $34.8 million of corporate bonds, and $19.8 million of collateralized mortgage–backed securities. These purchases were partially offset by $7.3 million of calls, maturities and paydowns during the first quarter of 2021, as well as an unrealized mark to market loss of $4.8 million and net premium amortization of $535,000. During the first quarter of 2021 and the fourth quarter of 2020, no security gains or losses were recorded, compared to $24,000 of security losses, net, in the first quarter of 2020.

Table of Contents


							March 31, 2021
Loans	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Commercial	$	392,380	$	407,159	$	364,626	(3.6)	7.6
Leases		138,240		141,601		126,237	(2.4)	9.5
Commercial real estate - Investor		567,475		582,042		503,905	(2.5)	12.6
Commercial real estate - Owner occupied		326,857		333,070		349,595	(1.9)	(6.5)
Construction		93,745		98,486		78,159	(4.8)	19.9
Residential real estate - Investor		52,176		56,137		69,429	(7.1)	(24.8)
Residential real estate - Owner occupied		107,303		116,388		129,982	(7.8)	(17.4)
Multifamily		178,258		189,040		195,297	(5.7)	(8.7)
HELOC		75,604		80,908		93,165	(6.6)	(18.8)
HELOC - Purchased		17,078		19,487		30,880	(12.4)	(44.7)
Other ⁽¹⁾		10,509		10,533		15,929	(0.2)	(34.0)
Total loans	$	1,959,625	$	2,034,851	$	1,957,204	(3.7)	0.1

¹The “Other” segment includes consumer and overdrafts.

Total loans were $1.96 billion as of March 31, 2021, a decrease of $75.2 million from December 31, 2020. The decrease in total loans in the first quarter of 2021 was due primarily to forgiveness of 294 PPP loans that totaled $27.8 million within commercial loans, as well as reduction in all loan segments due to paydowns as commercial and consumer liquidity increased primarily due to the receipt of federal stimulus funds and decreases in capital expenditures during the COVID-19 pandemic. Total loans increased $2.4 million from March 31, 2020 to March 31, 2021, primarily due to loan growth in our commercial loans related to PPP loan originations and organic growth in our leases, commercial real estate-investor, and construction loan portfolios, partially offset by reductions in our commercial real estate-owner occupied, residential real estate-investor, residential real estate-owner occupied, HELOC, and HELOC-purchased portfolios. As required by CECL, the balance (or amortized cost basis) of purchased credit deteriorated loans, or PCD loans (discussed below) are 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 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 72.4% of the portfolio as of March 31, 2021, compared to 72.5% of the portfolio as of December 31, 2020. We continue to oversee and seek to manage our loan portfolio in accordance with interagency guidance on risk management.

Asset Quality

Nonperforming loans consist of nonaccrual loans, performing restructured accruing loans and loans 90 days or greater past due. Remediation work continues in all segments. Nonperforming loans decreased by $1.8 million to $21.2 million at March 31, 2021 from $23.0 million at December 31, 2020. Purchased credit deteriorated loans, or PCD loans, are purchased loans that, as of the date of acquisition, the Company 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. Credit metrics continue to be relatively stable regarding nonperforming loan levels, and management is carefully monitoring loans considered to be in a classified status. Nonperforming loans as a percent of total loans were 1.1% as of March 31, 2021, December 31, 2020, and March 31, 2020. The distribution of our nonperforming loans is shown in the following table.

Table of Contents


							March 31, 2021
Nonperforming Loans	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Commercial	$	933	$	1,125	$	2,418	(17.1)	(61.4)
Leases		2,562		2,801		187	(8.5)	N/M
Commercial real estate - Investor		1,913		1,632		1,809	17.2	5.7
Commercial real estate - Owner occupied		7,427		9,262		7,436	(19.8)	(0.1)
Construction		128		-		2,800	N/M	(95.4)
Residential real estate - Investor		855		1,085		859	(21.2)	(0.5)
Residential real estate - Owner occupied		3,567		3,561		4,736	0.2	(24.7)
Multifamily		2,398		2,437		69	(1.6)	N/M
HELOC		1,000		1,142		1,400	(12.4)	(28.6)
HELOC - Purchased		-		-		114	-	(100.0)
Other ¹		399		-		9	N/M	N/M
Total nonperforming loans	$	21,182	$	23,045	$	21,837	(8.1)	(3.0)

N/M - Not meaningful

¹ The “Other” segment includes consumer and overdrafts.

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


										March 31, 2021
Nonperforming Assets	As of									Percent Change From
(Dollars in Thousands)	March 31,			December 31,			March 31,			December 31,	March 31,
	2021			2020			2020			2020	2020
Nonaccrual loans	$	20,379		$	22,280		$	19,497		(8.5)	4.5
Performing troubled debt restructured loans accruing interest		290			331			934		(12.4)	(69.0)
Loans past due 90 days or more and still accruing interest		513			434			1,406		18.2	(63.5)
Total nonperforming loans		21,182			23,045			21,837		(8.1)	(3.0)
Other real estate owned		2,163			2,474			5,049		(12.6)	(57.2)
Total nonperforming assets	$	23,345		$	25,519		$	26,886		(8.5)	(13.2)


30-89 days past due loans and still accruing interest	$	13,506		$	11,326		$	16,173
Nonaccrual loans to total loans		1.0	%		1.1	%		1.0	%
Nonperforming loans to total loans		1.1	%		1.1	%		1.1	%
Nonperforming assets to total loans plus OREO		1.2	%		1.3	%		1.4	%

Allowance for credit losses	$	30,967		$	33,855		$	30,045
Allowance for credit losses to total loans		1.6	%		1.7	%		1.6	%
Allowance for credit losses to nonaccrual loans		152.0	%		152.0	%		154.1	%

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

Table of Contents


Loan Charge-offs, Net of Recoveries	Three Months Ended
(Dollars in thousands)	March 31,		% of	December 31,		% of	March 31,		% of
	2021		Total¹	2020		Total¹	2020		Total¹
Commercial	$	(18)	3.1	$	(93)	(169.1)	$	85	7.6
Leases		-	-		(11)	(20.0)		-	-
Commercial real estate - Investor		(20)	3.4		471	856.4		(8)	(0.7)
Commercial real estate - Owner occupied		(205)	35.2		86	156.4		1,108	98.8
Construction		-	-		(171)	(310.9)		-	-
Residential real estate - Investor		(266)	45.7		(12)	(21.8)		(21)	(1.9)
Residential real estate - Owner occupied		(49)	8.4		(130)	(236.4)		(22)	(2.0)
Multifamily		-	-		-	-		-	-
HELOC		(12)	2.1		(97)	(176.4)		(58)	(5.2)
HELOC - Purchased		-	-		-	-		-	-
Other ²		(12)	2.1		12	21.8		38	3.4
Net (recoveries) charge-offs	$	(582)	100.0	$	55	100.0	$	1,122	100.0

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

² The “Other” segment includes consumer and overdrafts.

Net recoveries of $582,000 were recorded for the first quarter of 2021, compared to net charge-offs of $55,000 for the fourth quarter of 2020, and net charge-offs $1.1 million for the first quarter of 2020, reflecting continuing management attention to credit quality and remediation efforts. The net recoveries for the first quarter of 2021 were primarily due to recoveries on two large charge-offs recorded prior to 2021. We have continued our conservative loan valuations and aggressive recovery efforts on prior charge-offs.

Classified loans include nonaccrual, performing troubled debt restructurings and all other loans considered substandard. Classified assets include both classified loans and OREO. Loans classified as substandard are inadequately protected by either the current net worth and ability to meet payment obligations of the obligor, or by the collateral pledged to secure the loan, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and carry the distinct possibility that we will sustain some loss if deficiencies remain uncorrected.

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


							March 31, 2021
Classified Assets	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Commercial	$	2,397	$	2,679	$	11,260	(10.5)	(78.7)
Leases		3,147		3,222		264	(2.3)	N/M
Commercial real estate - Investor		5,130		5,117		6,073	0.3	(15.5)
Commercial real estate - Owner occupied		8,652		11,187		10,504	(22.7)	(17.6)
Construction		5,366		5,192		2,414	3.4	122.3
Residential real estate - Investor		1,435		1,516		1,452	(5.3)	(1.2)
Residential real estate - Owner occupied		4,148		4,040		4,568	2.7	(9.2)
Multifamily		7,846		7,558		5,374	3.8	46.0
HELOC		1,303		1,540		1,628	(15.4)	(20.0)
HELOC - Purchased		-		-		114	-	(100.0)
Other ¹		402		4		349	N/M	15.2
Total classified loans		39,826		42,055		44,000	(5.3)	(9.5)
Other real estate owned		2,163		2,474		5,049	(12.6)	(57.2)
Total classified assets	$	41,989	$	44,529	$	49,049	(5.7)	(14.4)

N/M - Not meaningful

¹ The “Other” segment includes consumer and overdrafts.

Table of Contents

Total classified loans and classified assets decreased as of March 31, 2021, from the levels at both December 31, 2020 and March 31, 2020, primarily due to continued remediation efforts and the high level of paydowns and payoffs we have experienced due to increased borrower liquidity stemming from federal stimulus funds received by borrowers and other COVID-19 relief funding, such as PPP loans. 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 11.60% for the period ended March 31, 2021, compared to 12.64% as of December 31, 2020, and 15.26% as of March 31, 2020. The decrease in the classified assets ratio for the period ended March 31, 2021, compared to March 31, 2020, is also due to the remediation efforts and borrower liquidity noted above, as well as growth in our capital level over the past year.

Allowance for Credit Losses on Loans

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

We recorded a net benefit of $3.0 million in our provision for credit losses due to a reserve release for the first quarter of 2021, comprised of a $3.5 million reserve release to loans and $470,000 of additional provision expense for credit losses on unfunded commitments, compared to no provision for credit losses recorded in the fourth quarter of 2020, and an $8.0 million provision for credit losses recorded for the first quarter of 2020, due to both our adoption of the CECL accounting standard on January 1, 2020 and the potential impact of the COVID-19 pandemic. In the first quarter of 2021, we determined a reserve release on loans was appropriate, after considering our net recoveries for the quarter of $582,000, as well as the impact of changes to our future loss rate assumptions based on a decrease to the unemployment factor projected for the life of the loans over the one year forecast period. In addition, we recorded a $470,000 provision for credit losses on unfunded commitments in the first quarter of 2021, primarily due to an updated analysis of line utilization rates over the past twelve months, as well as the roll off of prior historical periods with lower losses within the CECL model.

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 loan, leases and unfunded commitments. Our ACL on loans to total loans was 1.6% as of March 31, 2021, compared to 1.7% and 1.6% at December 31, 2020, and March 31, 2020, respectively. See Item 2 – Critical Accounting Policies in the Management Discussion and Analysis in this report 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.

Table of Contents

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


		Three Months Ended
	March 31,			December 31,			March 31,
	2021			2020			2020
Allowance at beginning of period	$	33,855		$	32,918		$	19,789
Charge-offs:
Commercial		2			(85)			97
Leases		-			87			-
Commercial real estate - Investor		-			497			13
Commercial real estate - Owner occupied		3			217			1,109
Construction		-			-			-
Residential real estate - Investor		-			-			-
Residential real estate - Owner occupied		-			-			1
Multifamily		-			-			-
HELOC		12			42			83
Other ¹		25			52			98
Total charge-offs		42			810			1,401
Recoveries:
Commercial		20			8			12
Leases		-			98			-
Commercial real estate - Investor		20			26			21
Commercial real estate - Owner occupied		208			131			1
Construction		-			171			-
Residential real estate - Investor		266			12			21
Residential real estate - Owner occupied		49			130			23
Multifamily		-			-			-
HELOC		24			139			141
Other ¹		37			40			60
Total recoveries		624			755			279
Net (recoveries) charge-offs		(582)			55			1,122
Adoption of ASC 326		-			-			5,879
Provision for credit losses on loans		(3,470)			992			5,499
Allowance at end of period	$	30,967		$	33,855		$	30,045

Average total loans (exclusive of loans held-for-sale)	$	2,006,157		$	2,023,238		$	1,941,760
Net charge-offs / (recoveries) to average loans		(0.03)	%		0.00	%		0.06	%
Allowance at period end to average loans		1.54	%		1.67	%		1.55	%

¹ The “Other” segment includes consumer and overdrafts.

The coverage ratio of the ACL on loans to nonperforming loans was 146.2% as of March 31, 2021, which was a decrease from the coverage ratio of 146.9% as of December 31, 2020, but an increase from 137.6% as of March 31, 2020. When measured as a percentage of average loans, our total ACL on loans was 1.54% for the three months ended March 31, 2021, and 1.55% for the like period of March 31, 2020, reflecting minimal change year over year.

In management’s judgment, an adequate ACL has been established to encompass the current lifetime expected credit losses at March 31, 2021, and general changes in lending policy, procedures and staffing, as well as other external factors, such as the impacts of the COVID-19 pandemic. However, there can be no assurance that actual losses will not exceed the estimated amounts in the future, based on unforeseen economic events, changes in business climates and the condition of collateral at the time of default and repossession. Further delayed recovery or further deterioration in market conditions related to COVID-19 and the associated impacts on our customers, 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.

Table of Contents

Other Real Estate Owned

As of March 31, 2021, OREO totaled $2.2 million, reflecting a $311,000 reduction from the $2.5 million at December 31, 2020, and a $2.9 million reduction from the $5.0 million at March 31, 2020. One property sale of $305,000 net book value and no transfers to OREO from loans were recorded in the first quarter of 2021. There were two property additions totaling $491,000 in the first quarter of 2020. The net book value of four property disposals in the first quarter of 2020 totaled $288,000. Valuation write-downs occurred in the first quarter of 2021 which totaled $6,000, compared to $93,000 of OREO valuation write-downs in the fourth quarter of 2020, and $158,000 of valuation write-downs recorded in the first quarter of 2020.


							March 31, 2021
OREO	Three Months Ended						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Balance at beginning of period	$	2,474	$	2,686	$	5,004	(7.9)	(50.6)
Property additions, net of acquisition adjustments		-		-		491	-	(100.0)
Less:
Proceeds from property disposals, net of participation purchase and of gains/losses		305		119		288	156.3	5.9
Period valuation adjustments		6		93		158	(93.5)	(96.2)
Balance at end of period	$	2,163	$	2,474	$	5,049	(12.6)	(57.2)

In management’s judgment, the property valuation allowance as established presents OREO at current estimates of fair value less estimated costs to sell; however, there can be no assurance that additional losses will not be incurred on disposals or upon updates to valuations in the future. Of note, properties valued in total at $1.4 million, or approximately 65.8% of total OREO at March 31, 2021, have been in OREO for five years or more. The appropriate regulatory approval has been obtained for any OREO properties held in excess of five years.



OREO Properties by Type
(Dollars in thousands)	March 31, 2021				December 31, 2020				March 31, 2020
		Amount	% of Total			Amount	% of Total			Amount	% of Total
Single family residence	$	430	20	%	$	430	17	%	$	450	9	%
Lots (single family and commercial)		1,381	64	%		1,387	57	%		3,747	74	%
Vacant land		352	16	%		352	14	%		41	1	%
Commercial property		-	0	%		305	12	%		811	16	%
Total other real estate owned	$	2,163	100	%	$	2,474	100	%	$	5,049	100	%

Deposits and Borrowings


							March 31, 2021
Deposits	As of						Percent Change From
(Dollars in thousands)	March 31,		December 31,		March 31,		December 31,	March 31,
	2021		2020		2020		2020	2020
Noninterest bearing demand	$	982,664	$	909,505	$	702,598	8.0	39.9
Savings		429,256		399,057		338,134	7.6	26.9
NOW accounts		522,760		486,612		428,419	7.4	22.0
Money market accounts		338,921		316,465		277,018	7.1	22.3
Certificates of deposit of less than $100,000		193,291		200,107		231,704	(3.4)	(16.6)
Certificates of deposit of $100,000 through $250,000		132,514		164,982		150,185	(19.7)	(11.8)
Certificates of deposit of more than $250,000		57,136		60,345		67,584	(5.3)	(15.5)
Total deposits	$	2,656,542	$	2,537,073	$	2,195,642	4.7	21.0

Total deposits were $2.66 billion at March 31, 2021, which reflects a $119.5 million increase from total deposits of $2.54 billion at December 31, 2020, and an increase of $460.9 million from total deposits of $2.20 billion at March 31, 2020. The increase in deposits at March 31, 2021, compared to both December 31, 2020, and March 31, 2020, was due to increases in noninterest bearing demand,

Table of Contents

savings, NOW, and money market accounts, with decreases noted in all maturity categories of certificates of deposit. These total deposit increases in the linked quarter as well as the year over year periods were primarily due to federal stimulus funds received by depositors and a decrease in consumer spending due to the COVID-19 pandemic.

In addition to deposits, we obtained funding from other sources in all periods presented. Securities sold under repurchase agreements totaled $77.3 million at March 31, 2021, a $10.3 million, or 15.4%, increase from $67.0 million at December 31, 2020, and a $51.2 million increase from March 31, 2020. Our notes payable and other borrowings is comprised of one remaining $6.3 million long-term FHLBC advance, which matures on February 2, 2026, and $16.0 million outstanding on a $20.0 million term note originated with a correspondent bank in the first quarter of 2020, to facilitate the redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures, completed on March 2, 2020. Notes payable and other borrowings of $22.3 million as of March 31, 2021, decreased $1.1 million from December 31, 2020, and decreased $4.3 million from March 31, 2020.

The Company is indebted on senior notes originated in December 2016, totaling $44.4 million, net of deferred issuance costs, as of March 31, 2021. These notes mature in December 2026, and include interest payable semi-annually at 5.75% for five years. Beginning December 2021, the interest becomes payable quarterly at three month LIBOR plus 385 basis points. The Company is also indebted on $25.8 million, net of deferred issuance costs, of junior subordinated debentures, which are related to the trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust II (“Trust II”). The Trust II issuance converted from fixed to floating rate at three month LIBOR plus 150 basis points on June 15, 2017. Upon conversion to a floating rate, we initiated a cash flow hedge which resulted in the total interest rate paid on this debt of 4.41% as of March 31, 2021, as compared to 6.77%, which was the rate paid during the period prior to the June 15, 2017, rate reset. The Company also redeemed $32.6 million of trust preferred securities issued by its statutory trust subsidiary, Old Second Capital Trust I, on March 2, 2020, as noted above. The cash paid at redemption of $33.0 million included accrued interest of $438,000 on the debentures, and resulted in a payment of $10.13 per preferred share.

Capital

As of March 31, 2021, total stockholders’ equity was $311.1 million, which was an increase of $4.0 million from $307.1 million as of December 31, 2020. This increase is attributable to an increase in retained earnings of $11.6 million, comprised of net income year to date of $11.9 million, less a reduction to retained earnings $300,000 for payment of dividends to our common stockholders in the first quarter of 2021. In addition, a decrease to accumulated other comprehensive income of $1.5 million was recorded due to a net decrease in unrealized gains on available-for-sale securities, net of unrealized losses on swaps. Total stockholders’ equity was reduced by an increase of $3.9 million to our treasury stock in the first quarter of 2021, primarily due to repurchases of our common shares pursuant to our stock repurchase program.

In the third quarter of 2019, our Board of Directors authorized a stock repurchase program, under which we were authorized to repurchase up to approximately 1.5 million shares (or approximately 5%) of our outstanding common stock through open market purchases, trading plans established in accordance with U.S. Securities and Exchange Commission rules, privately negotiated transactions, or by other means. The stock repurchase program expired on September 19, 2020; however, we received a notice of non-objection from the Federal Reserve Bank of Chicago to extend the previously authorized stock repurchase program through October 20, 2021. The actual means and timing of any repurchases, quantity of purchased shares and prices will be, subject to certain limitations, at the discretion of management and will depend on a number of factors, including, without limitation, market prices of our common stock, general market and economic condition, and applicable legal and regulatory requirements. These share purchases are anticipated to be funded by our cash on hand. During the first quarter of 2021, we repurchased 455,134 shares of our common stock at a weighted average price of $12.31 per share pursuant to our stock repurchase program. To date, we have repurchased 1,174,407 shares of our common stock at a weighted average price of $9.45 per share, under our stock repurchase program.

Table of Contents

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


	Minimum Capital		Well Capitalized
	Adequacy with		Under Prompt
	Capital Conservation		Corrective Action		March 31,		December 31,		March 31,
	Buffer, if applicable¹		Provisions²		2021		2020		2020
The Company
Common equity tier 1 capital ratio	7.00	%	N/A		12.43	%	11.94	%	10.85	%
Total risk-based capital ratio	10.50	%	N/A		14.73	%	14.26	%	13.09	%
Tier 1 risk-based capital ratio	8.50	%	N/A		13.53	%	13.01	%	11.93	%
Tier 1 leverage ratio	4.00	%	N/A		10.02	%	10.21	%	10.57	%

The Bank
Common equity tier 1 capital ratio	7.00	%	6.50	%	14.59	%	13.75	%	12.89	%
Total risk-based capital ratio	10.50	%	10.00	%	15.80	%	15.00	%	14.07	%
Tier 1 risk-based capital ratio	8.50	%	8.00	%	14.59	%	13.75	%	12.89	%
Tier 1 leverage ratio	4.00	%	5.00	%	10.78	%	10.74	%	11.36	%

¹ Amounts are shown inclusive of a capital conservation buffer of 2.50%. Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is not subject to the minimum capital adequacy and capital conservation buffer capital requirements at the holding company level, unless otherwise advised by the Federal Reserve (such capital requirements are applicable only at the Bank level). Although the minimum regulatory capital requirements are not applicable to the Company, we calculate these ratios for our own planning and monitoring purposes.

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

As part of its response to the impact of the COVID-19 pandemic, in the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provided banking organizations that adopt 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. The cumulative amount that is not recognized in regulatory capital, in addition to the $3.8 million Day One impact of CECL adoption, will be phased in at 25% per year beginning January 1, 2022. As of March 31, 2021, the capital measures of the Company exclude $5.1 million, which is the modified CECL transition adjustment.

As of March 31, 2021, the Company, on a consolidated basis, exceeded the minimum capital ratios to be deemed “well capitalized” and met the now fully phased-in capital conservation buffer requirements. In addition to the above regulatory ratios, our GAAP common equity to total assets ratio, which is used as a performance measurement for capital analysis and peer comparisons, decreased from 10.10% at December 31, 2020, to 9.82% at March 31, 2021. Our GAAP tangible common equity to tangible assets ratio was 9.23% at March 31, 2021, compared to 9.48% as of December 31, 2020. Our non-GAAP tangible common equity to tangible assets ratio, which management also considers a valuable performance measurement for capital analysis, decreased from 9.49% at December 31, 2020, to 9.24% at March 31, 2021, due to the growth in total tangible assets.

In November 2019, the federal banking agencies published final rules to provide an optional simplified measure of capital adequacy for qualifying community banking organizations, which we refer to as the community bank leverage ratio (“CBLR”) framework. Generally, under the CBLR framework, qualifying community banking organizations with total assets of less than $10 billion, and limited amounts of off-balance-sheet exposures and trading assets and liabilities, may elect whether to be subject to the CBLR framework if they have a CBLR of greater than 9%. Qualifying community banking organizations that elect to be subject to the CBLR framework and continue to meet all requirements under the framework would not be subject to risk-based or other leverage capital requirements and, in the case of an insured depository institution, would be considered to have met the well capitalized ratio requirements for purposes of the FDIC’s Prompt Corrective Action framework. The final rule became effective on January 1, 2020. We do not have any immediate plans to elect to use the community bank leverage ratio framework, but may make such an election in the future.

Table of Contents

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


	March 31, 2021						December 31, 2020
Tangible common equity	GAAP			Non-GAAP			GAAP			Non-GAAP
(Dollars in thousands)

Total Equity	$	311,113		$	311,113		$	307,087		$	307,087
Less: Goodwill and intangible assets		20,661			20,661			20,781			20,781
Add: Limitation of exclusion of core deposit intangible (80%)		N/A			411			N/A			435
Adjusted goodwill and intangible assets		20,661			20,250			20,781			20,346
Tangible common equity	$	290,452		$	290,863		$	286,306		$	286,741
Tangible assets
Total assets	$	3,166,652		$	3,166,652		$	3,040,837		$	3,040,837
Less: Adjusted goodwill and intangible assets		20,661			20,250			20,781			20,346
Tangible assets	$	3,145,991		$	3,146,402		$	3,020,056		$	3,020,491

Common equity to total assets		9.82	%		9.82	%		10.10	%		10.10	%
Tangible common equity to tangible assets		9.23	%		9.24	%		9.48	%		9.49	%

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. We monitor our borrowing capacity at the FHLBC as part of our liquidity management process as supervised by our Asset and Liability Committee (“ALCO”) and reviewed by our Board of Directors. In addition, due to the potential impacts on our liquidity stemming from the COVID-19 pandemic, our senior management team monitors cash balances daily to ensure we have adequate liquidity to meet our operational and financing needs. As of March 31 2021, our cash on hand liquidity totaled $440.9 million, an increase of $111.0 million over cash balances held as of December 31, 2020.

Net cash inflows from operating activities were $15.4 million during the first three months of 2021, compared with net cash inflows of $9.0 million in the same period of 2020. Funds used to originate loans held-for-sale, net of proceeds from sales of loans held-for-sale, were a source of inflows for the first three months of 2021 and outflows for the like period of 2020. Interest paid, net of interest received, combined with changes in other assets and liabilities were a source of outflows for the three months ended March 31, 2021, but were a source of inflows for the like period of 2020. The management of investing and financing activities, as well as market conditions, determines the level and the stability of net interest cash flows. Management’s policy is to mitigate the impact of changes in market interest rates to the extent possible, as part of the balance sheet management process.

Net cash outflows from investing activities were $26.6 million in the three months ended March 31, 2021, compared to net cash outflows of $220,000 in the same period in 2020. In the first three months of 2021, securities transactions accounted for net outflows of $102.4 million, and the principal change on loans accounted for net inflows of $75.9 million. In the first three months of 2020, securities transactions accounted for net inflows of $28.1 million, and net principal on loans funded accounted for net outflows of $27.7 million. Proceeds from sales of OREO accounted for $325,000 and $311,000 in investing cash inflows for the three months ended March 31, 2021 and 2020, respectively.

Net cash inflows from financing activities in the three months ended March 31, 2021 were $122.3 million, compared with net cash inflows of $13.7 million in the three months ended March 31, 2020. Net deposit inflows in the first three months of 2021 were $119.5 million compared to net deposit inflows of $68.9 million in the first three months of 2020. Other short-term borrowings had no net cash outflows in the first three months of 2021, compared to $42.1 million in the first three months of 2020. Changes in securities sold under repurchase agreements accounted for $10.3 million and $2.5 million in net inflows for the three months ended March 31, 2021 and 2020, respectively. The redemption of our Old Second Capital Trust I trust preferred securities and related junior subordinated debentures resulted in cash outflows of $32.6 million in the first quarter of 2020, which was partially offset by a $20.0 million term note cash inflow which was originated to partially fund this trust preferred redemption; $16.0 million of this term note remains outstanding as of March 31, 2021.

Table of Contents

Cash and cash equivalents for the three months ended March 31, 2021, totaled $440.9 million, as compared to $73.1 million as of March 31, 2020. 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 $20 million undrawn line of credit held by the Company with a third party financial institution, as well as unpledged securities available-for-sale.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

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

In the first quarter of 2020 the Federal Reserve cut the Fed Funds rate three times down to a target range of 0% to 0.25%. Additionally, the Federal Reserve has been aggressively purchasing various assets since March 2020 in an effort to stabilize the economy from the continuing effects of COVID-19. Overall, the Federal Reserve’s balance sheet has increased from about $4.2 trillion in early March 2020 to about $7.7 trillion as of March 31, 2021, the current pace of asset purchases is expected to continue. Despite the market pricing in a rate hike in late 2022, the Federal Reserve maintained the statement that the Fed Funds rate will remain in the 0% to 0.25% range through 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 well within our guidelines so that such exposure does not pose a material risk to our future earnings.

We seek to manage various market risks in the normal course of our operations, including credit, liquidity risk, and interest-rate risk. Other types of market risk, such as foreign currency exchange risk and commodity price risk, do not arise in the normal course of our business activities and operations. In addition, since we do not hold a trading portfolio, we are not exposed to significant market risk from trading activities. Our interest rate risk exposures at March 31, 2021 and December 31, 2020 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 LIBOR and prime), and balance sheet growth or contraction. Our asset-liability committee seeks to manage interest rate risk under a variety of rate environments by structuring our balance sheet and off-balance sheet positions, which includes interest rate swap derivatives as discussed in Note 20 of our consolidated financial statements included in this annual report. We seek to monitor and manage interest rate risk within approved policy guidelines and limits.

We use simulation analysis to quantify the impact of various rate scenarios on our net interest income. Specific cash flows, repricing characteristics, and embedded options of the assets and liabilities held by us are incorporated into the simulation model. Earnings at risk are calculated by comparing the net interest income of a stable interest rate environment to the net interest income of a different interest rate environment in order to determine the percentage change. As of December 31, 2020, we had notable amounts of earnings gains (in both dollars and percentage) should interest rates rise. Due to relatively low current market interest rates, it was not possible to calculate any down rate scenarios because many of the market interest rates would fall below zero in that scenario. The projected increases in income across all up rate interest rate shock scenarios as of March 31, 2021 were moderately lower than December 31, 2020. This was primarily the result of a second round of PPP loans.

The following table summarizes the effect on annual income before income taxes based upon an immediate increase or decrease in interest rates of 0.5%, 1%, and 2% and no change in the slope of the yield curve. Due to the low interest rate environment, it was not possible to calculate any down rate scenarios because rates would fall below zero in all down rate scenarios.

Table of Contents

Analysis of Net Interest Income Sensitivity

(Dollars in thousands)


	Analysis of Net Interest Income Sensitivity
	Immediate Changes in Rates
		(2.0)	%	(1.0)	%	(0.5)	%		0.5	%		1.0	%		2.0	%
March 31, 2021
Dollar change		N/M		N/M		N/M		$	2,793		$	5,985		$	12,200
Percent change		N/M		N/M		N/M			3.2	%		6.9	%		14.1	%

December 31, 2020
Dollar change		N/M		N/M		N/M		$	3,405		$	6,879		$	13,145
Percent change		N/M		N/M		N/M			3.9	%		7.8	%		14.9	%

N/M - Not meaningful

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended, as of March 31, 2021. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2021, the Company’s internal controls were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2021, 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.

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, 2020, 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” and in our other filings with the SEC.

Table of Contents

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

Stock Repurchases

The actual means and timing of any repurchases, quantity of purchased shares and prices will be, subject to certain limitations, at the discretion of management and will depend on a number of factors, including, without limitation, market prices of our common stock, general market and economic conditions, and applicable legal and regulatory requirements. Repurchases under the Repurchase Program may be initiated, discontinued, suspended or restarted at any time provided that repurchases under the Repurchase Program after October 20, 2021, would require Federal Reserve non-objection or approval. We are not obligated to repurchase any shares under the Repurchase Program.

The following table presents our stock repurchases for the quarter ended March 31, 2021.


				Total Number of	Maximum Number
	Total			Shares Purchased	of Shares that May
	Number of		Average	as Part of Publicly	Yet Be
(Dollars in thousands, except for per share	Shares		Price Paid	Announced Plans	Purchased Under
amounts)	Purchased (a)		per Share (b)	or Programs (c)(1)	the Plans or Programs (d)
January 1, 2021 - January 31, 2021	-		-	-	775,553
February 1, 2021 - February 28, 2021	249,557		11.44	249,557	525,996
March 1, 2021 - March 31, 2021	205,577		13.35	205,577	320,419
Total	455,134	$	12.31	455,134	320,419

(1)

We publicly announced the extension of our Repurchase Program, which will expire on October 20, 2021 unless further extended as described above, in our Current Report on Form 8-K filed on October 21, 2020, and 898,415 shares remained available for repurchase under the Repurchase Program as of October 20, 2020.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

Table of Contents

Item 6. Exhibits

Exhibits:



10.1	Compensation and Benefits Assurance Agreement dated as of March 16, 2021, between Old Second Bancorp, Inc. and Richard A. Gartelmann, Jr., Executive Vice President (incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on March 19, 2021).

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

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

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

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

101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at March 31, 2021, and December 31, 2020; (ii) Consolidated Statements of Income for the three months ended March 31, 2021 and 2020; (iii) Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2021 and 2020; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*

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

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

Table of Contents

SIGNATURES

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


	OLD SECOND BANCORP, INC.


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


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


DATE: May 7, 2021

Table of Contents